MOST MEDICARE BENEFITS ARE ADMINISTERED BY THE DEPARTMENT OF HEALTH, EDUCATION, AND WELFARE (HEW) THROUGH REIMBURSABLE CONTRACTS WITH PRIVATE INSURANCE COMPANIES. CONTRACTORS WHO PAY BILLS FOR HOSPITAL, NURSING HOME, AND HOME HEALTH CARE SERVICES ARE TERMED 'INTERMEDIARIES,' WHILE THOSE WHO PAY DOCTORS AND SUPPLIERS ARE CALLED 'CARRIERS.' THE GAO STUDY FOUND THAT SUBSTANTIAL SAVINGS COULD BE REALIZED BY DISTRIBUTING LARGER WORKLOADS TO FEWER CONTRACTORS AND BY CONSOLIDATING INTERMEDIARIES AND CARRIERS INTO AN INTEGRATED CLAIMS PROCESSING SYSTEM. ALTHOUGH PRELIMINARY ESTIMATES INDICATED THAT A CHANGE TO COMPETITIVE FIXED-PRICE CONTRACTING WOULD REDUCE ADMINISTRATIVE COSTS, THE EFFECTS ON QUALITY OF SERVICES ARE UNKNOWN. ALL CONTRACTS CONTAIN SPECIFIC PERFORMANCE STANDARDS SO THAT CONTRACTORS WHO PERFORM POORLY COULD BE TERMINATED. EXPERIMENTS SHOULD BE CONDUCTED ON INCENTIVE CONTRACTS. IN EXAMINING CLAIMS PROCESSED BY THE TRAVELERS INSURANCE COMPANY FOR THE RAILROAD RETIREMENT BOARD, GAO FOUND THIS CONTRACT TO BE UNECONOMICAL AND RECOMMENDED ITS TERMINATION. ADMINISTRATIVE COSTS AND PAYROLL DELAYS COULD BE REDUCED IF CONTRACTORS USED INTEGRATED SYSTEMS TO PROCESS CROSSOVER FOR WHICH MEDICARE AND MEDICAID AND JOINTLY LIABLE. GAO ALSO SUGGESTED THAT HEW BE GIVEN CONTINGENCY AUTHORITY TO TRY COMPETIVE FIXED-PRICE CONTRACTING RATHER THAN NEW LEGISLATION. THE APPENDIXES CONTAIN INFORMATION ON THE HISTORY OF MEDICARE CONTRACTING, MEDICARE'S COMPETITIVE FIXED-PRICE EXPERIMENTS, CARRIER AND INTERMEDIATE OPERATORS, AND CORRESPONDENCE CONCERNING THE REPORT'S RECOMMENDATIONS. (MJM)