Cost-effective care for chronic conditions is a growing concern of health plans enrolling increasing numbers of the elderly and disabled under Medicare risk contracts. This study provides evidence of the prevalence, patterns of care, and costs of chronic illnesses among new Medicare HMO enrollees. The results provide a foundation for estimates of the cost-effectiveness of drug therapy and care management programs that serve this group. METHODS: We use national Medicare claims data to examine chronic care services and associated costs for a sample of 19,084 beneficiaries who enrolled in an HMO in 1995. We constructed three measures of cost: the total Medicare-covered cost, the cost of medical claims with the chronic condition coded as a diagnosis, and the regression-estimated effect of the chronic condition on cost. RESULTS: Fifty-eight percent of the new Medicare HMO enrollees in our sample were treated for at least one of the selected chronic conditions in the six months before enrollment. One-third of the new enrollees had multiple conditions represented by diagnoses in more than one of eighteen chronic-condition groups. Persons with chronic conditions accounted for 93 percent of pre-enrollment Medicare costs among new HMO enrollees. Per 1000 enrollees, pre-enrollment Medicare costs were greatest for those with hypertensive disease, coronary heart disease, heart failure, and diabetes. CONCLUSIONS: The concentration of utilization and costs in those with chronic conditions suggests that appropriate drug therapy and care management for those with chronic conditions should be a top priority for HMOs with Medicare risk contracts. These estimates of prevalence suggest a need for HMOs to screen new Medicare HMO enrollees for chronic conditions immediately upon enrollment to ensure continuity of care.