The report states that Medicare investigations usually begin as the result of complaints; little work is self-initiated. Further, no system of priorities has been developed for directing the investigations. Remedies include establishing the Office of Inspector General and the Health Care Financing Administration within DHEW. The report also states that most fraud complaints appeared to result from misunderstandings of honest mistakes. However, some fraud complaints at the Bureau's San Francisco and Kansas City regional offices were closed prematurely because of inadequate sampling, inadequate investigations, lack of skilled personnel, and a burdensome administrative system. Finally, limited reviews of Medicaid investigations in two States show a variance in investigatory emphasis. It is recommended that the Secretary of DHEW strengthen investigation monitoring, establish improved statistical sampling procedures, reduce the paperwork connected with investigating complaints, and discuss prosecutorial procedures with the Department of Justice. The Secretary should also develop investigative priorities, acquire skilled personnel for fraud and abuse investigations, and work more closely with State officials in cases of Medicare and Medicaid fraud and abuse. Comments from DHEW are included. Appendixes include a letter from the Chairman of the Subcommittee on Health of the Committee on Finance and comments on the GAO report from the Assistance Secretary, Comptroller, of DHEW, and from the Assistant Attorney General for Administration of the Department of Justice. (Author abstract modified)