To assess the effect of areawide peer review (such as that conducted by Professional Standards Review Organizations [PSROs]) on use, cost and quality of medical services, we evaluated 4 years of data on the efforts of the New Mexico Experimental Medical Care Review Organization in reviewing medical services for the Medicaid population. Utilization review had no demonstrable impact on hospital use; hospital days per 100 eligible persons rose 5.0% and 43.4% for persons enrolled all 4 years in Aid to Families with Dependent Children (AFDC) and Aid to the Permanently and Totally Disabled, respectively. Peer review produced no net dollar savings; over 4 years, the amount paid for all services per AFDC-eligible person rose 85%. Peer review improved the quality of ambulatory care through large reductions (75%) in medically unnecessary injections. If these findings are replicated elsewhere, they suggest that the goal of the PSRO program to control costs by curtailing utilization may be difficult to achieve, the quality of care goal may be pursued successfully, and the PSRO mission should be focused more on the latter.