This paper examines the effects of introducing competitive contracting into the Medicare Part B program. The administrative costs of contractors (carriers) who process Medicare claims for medical services are examined to determine relative efficiencies of firms operating under either competitive or non-competitive contracts. Pooled time-series cross-sectional data are used to estimate an average total cost function. Findings are that (1) appreciable cost reductions were obtained by the introduction of competition, (2) economies of scale are present in Medicare claims processing, and (3) carriers who are non-profit organizations (i.e.,Blue Shield plans) do not exhibit higher costs than comparable commercial insurance companies. © 1984.