This U.S. General Accounting Office report discusses the Medicaid management controls needed to assure that mentally retarded residents of nursing homes receive the services they need to help them function independently. Medicaid's involvement with the retarded in institutions and nursing homes includes financing active treatment services, such as speech, occupational, and physical therapy; training in personal care skills; and training in community living skills. Medicaid services for the mentally retarded were reviewed in 15 nursing homes in Connecticut, Massachusetts, and Rhode Island, and similar reviews by the Health Care Financing Administration in Illinois and Indiana were analyzed. The report found that management controls were inadequate, plans of care did not adequately address active treatment, and inspections were inadequate. The General Accounting Office's recommendations to the Secretary of Health and Human Services and the comments from involved state agencies are provided. Recommendations included the revision of Medicaid regulations to require nursing homes to specifically address active treatment in plans of care for their retarded residents, and to require states to include a staff member trained in mental retardation on inspection of care teams. (JDD)