Objectives. This study examined variations in Medicare expenditures across states. Methods. 1992 data on average Medicare expenditures per enrollee, users of services per 1000 enrollees, service use per user, and payment per unit of service were compared across stales for various services. Weighted least squares regression analysis was employed to examine total Medicare expenditures per enrollee by state. Results. Variation in Medicare expenditures across states is driven more by average number of service users per 1000 enrollees and average service units per user than by average payment per service unit. Medicare expenditures per enrollee by state are primarily a function of Medicare HMO penetration rate (P = .000), urban area (P = .001), hospital bed supply (P = .005), elderly mortality rate (P = .012), Medicare physician assignment rate (P = .026), percentage of primary care practitioners (P = .042), and interactions between urban elderly and percentage of primary care physicians (P = .005) and Black elderly and nursing home bed supply (P = .012). Conclusions. Before sweeping Medicare cuts are undertaken or excessive reliance on managed care occurs, attention should be focused on the current disproportionate distribution of expenditures across states.