By 1974, numerous allegations of fraud and abuse in Illinois' Medicaid program had resulted in investigations conducted by various Federal, State, and private organizations. GAO evaluated these investigations, Federal and State administration of Medicaid, the Medicaid claims processing system used in Illinois, and its conduct of utilization reviews. Information on other States' administration of Medicaid was obtained from Indiana and Michigan. The Department of Health, Education, and Welfare (DHEW) can withhold all Federal Medicaid funds from States if they do not comply with Federal requirements. Although 2,300 instances of noncompliance were reported between 1969 and 1974, DHEW did not impose monetary penalties on any States. An Illinois Medicaid Task Force established in 1974 has referred three cases of potential fraud to the U.S. Attorney. DHEW's Social and Rehabilitation Service (SRS) knew since 1971 that Illinois had problems with Medicaid fraud and abuse but took no steps to ensure the State's compliance with Federal regulations. SRS has no special department at headquarters or in regional offices to assist States with Medicaid fraud and abuse investigations or monitor compliance with relevant regulations. The SRS needs to improve the coordination of Medicare and Medicaid abuse investigations and assess State operations through mandatory financial reports and audits. Recommendations from the DHEW Audit Agency for correcting program deficiencies have been ignored by SRS. Overall, the Illinois system for paying Medicaid claims suffers from lack of accountability, unnecessary manual processing, ineffective use of computers, inaccurate records, and insufficient training for staff and providers. All States are required to have utilization review systems to determine the appropriate use of medical care provided and to prevent overutilization. Illinois' system for reviewing noninstitutional services did not continually evaluate Medicaid services or routinely generate needed profiles of services received by beneficiaries and services furnished by providers. The SRS should increase its technical assistance to States regarding the development of utilization systems. In addition to suggestions concerning better coordination and monitoring procedures, GAO recommended that States who fail to take adequate steps to meet Medicaid requirements be penalized. DHEW and State officials generally agreed with GAO's findings and have initiated corrective actions. Principal DHEW officials responsible for administering actions discussed in this report are identified.