In recent years, states have increasingly turned to managed care arrangements for financing and delivering health services to Medicaid beneficiaries. In 1996, approximately 40% of all Medicaid recipients were enrolled in some form of managed care. The rapid escalation of managed care in this population has been fueled by states' desire to slow the growth of Medicaid expenditures and by the trend toward managed care enrollment in the private health insurance industry. The effect of managed care on cost containment in the Medicaid program may be limited, however, because 85% to 90% of Medicaid managed care enrollees are women of childbearing age and children, who together account for 69% of Medicaid recipients, but only 26% of program costs. Nonetheless, the increase in managed care enrollment in this population may have a profound impact on health service delivery and health outcomes for U.S. children, approximately 20% of whom received health benefits through the Medicaid program in 1995. In the future, the proportion of Medicaid-eligible children enrolled in managed care will likely increase as a result of recent legislation that relaxed the requirement that states seek federal approval prior to mandating managed care enrollment for Medicaid beneficiaries. More states are relying on fully capitated arrangements as the preferred type of managed care for Medicaid recipients, despite the relative lack of experience many of these plans have in serving this low-income population. Moreover, managed care organizations have few incentives to enroll chronically or disabled children with higher-than-average expected costs. Without mechanisms in place that adequately adjust capitated rates to account for these higher-cost enrollees, managed care organizations may lose money, and children with the greatest health care needs may be underserved. As mandatory managed care enrollment for Medicaid recipients increases nationwide, states should carefully monitor changes in program costs and quality as well as implications for the delivery of pediatric health services and health outcomes.