The Medicare Transaction System (MTS) is intended to be a single, integrated claims processing system to be phased in by the Health Care Financing Administration (HCFA) beginning in 1997 with full implementation before the end of 1999. Our review of the work done on the system to date indicates that HCFA has taken a number of steps to include a broad range of functions related to Medicare benefits administration within the scope of the new system. Also, HCFA is making a concerted effort under MTS to improve internal and financial management controls over Medicare benefits payments. Our final report points out additional steps HCFA can take to maximize the operating effectiveness of the new system. Recommendations call for actions HCFA can take to (1) assure flexibility and adaptability of the MTS design for meeting future program requirements, and (2) cover certain weaknesses and limitations in current Medicare claims processing that have not yet been addressed so that these conditions are not carried over into the new system.