Medicare costs have grown rapidly during the 1990s, & are estimated to increase an average of 8.4% a year through FY 2002. To slow this growth rate, proposals have been made to encourage beneficiaries to join managed care plans. This report examines the inconsistency between the expectation that HMOs would save Medicare money & research findings that HMOs increase the program's costs. It identifies conditions under which Medicare's method can yield payment rates that are too high & suggests improvement directed at problems fostering excess payments. Charts & tables.