The Health Care Financing Administration (HCFA) initiated the Medicare Competition Demonstration in 1982 in anticipation of congressional intent to establish a national program. Interim results on the 1984 service use and cost experience of the health maintenance organizations (HMOs) and competitive medical plans (CMPs) participating in the demonstrations indicate that Medicare enrollees in the demonstration experienced a median of 1,951 hospital days per 1,000 person years, 57 per cent of the median of 3,432 days per 1,000 in the local markets from which the plans drew enrollment. Independent practice association (IPA) HMOs experienced higher hospital use rates than staff and group model HMOs. These comparisons are not adjusted for various risk factors, the absence of which were likely to favor the demonstration plans. Plans with lower hospital service use were federally qualified and had been operating for more than five years. The median total annual revenue per enrollee across all plans was $2,312, compared to median annual expenses per enrollee of $2,250. The distribution of median annual expenses per enrollee by major category of expense was: institutional expenses ($1,038/enrollee), medical expenses ($720/enrollee), supplemental services expenses ($154/enrollee), and administrative and other expenses ($295/enrollee). Future analysis, using beneficiary-level data, will examine the impact of the demonstration and the nature and extent of evident biased selection and will compare the quality of care in the demonstrations to that in the fee-for-service sector.