The General Accounting Office (GAO) reviewed selected aspects of Kane Hospital's 1974 Medicaid cost report compared with its Medicare cost report, sources of income, and January 1976 disbursements. Numerous violations were found in the hospital's handling of patients' funds. From 1972 to 1974 the hospital's duplicate billing of Medicaid and Medicare for the same services resulted in substantial overpayments by the Federal Government which could have been prevented by an exchange of audit information between Medicare and Medicaid. GAO recommended that the Department of Health, Education, and Welfare (HEW) take corrective action to stop Medicare/Medicaid abuses, protect the patients' financial interests, and recover the Federal share of overpayments to the hospital. However, Pennsylvania did not agree that the accumulation of patients' funds conflicted with Federal regulations, and Kane Hospital disputed the allegation concerning duplicate payments. The appendixes contain correspondence from the responsible officials of Kane Hospital, the Pennsylvania Department of Public Welfare, and HEW and lists of related GAO reports issued since 1972, along with the principal HEW officials responsible for administering the activities discussed in the report. (Author abstract modified)