The Medicare end-stage renal disease program has received considerable attention as a model of government funding for high-cost medical treatment. This paper examines how the program has been influenced by renal transplantation. In the past decade, the number of kidney transplantations has increased substantially, and the success rate of these procedures has improved. From 1980 to 1985, the number of transplantations increased by 10 percent per year. During that time, the survival rates for grafts from cadavers and living related donors increased by 7 and 3 percent, respectively, in part because of the introduction of cyclosporine. As a result, the fastest-growing group of beneficiaries of the Medicare end-stage renal disease program are those with functioning grafts. As of the end of 1985, these patients accounted for 18 percent of all beneficiaries and 32 percent of all beneficiaries less than 55 years of age. In the youngest groups, transplantation has reached a level sufficient to reduce the absolute numbers of patients on dialysis, beginning in 1983. Increases in transplantation are not evenly distributed among subgroups of beneficiaries. Relatively few patients 65 years of age and older receive transplants; blacks receive transplants at a rate roughly half that among whites, but the rate is increasing. Because the costs of maintaining patients with functioning grafts are only one third of those for patients on dialysis and because the quality of life is usually much better, renal transplantation is causing a convergence of the best clinical and economic outcomes for patients with end-stage renal disease.