The Medicare program is the nation’s largest single source of funds for graduate medical education. The program pays teaching hospitals for the direct costs of their residency programs and, since 1983, has paid for some of the indirect costs of graduate medical education. The rationale for, and extent of, the payments for indirect costs have been debated for years; recently, Congress has reduced the payments as it attempts to rein in Medicare costs. This Issue Brief reviews the status and recent history behind indirect medical education (IME) payments, and summarizes research that investigates how hospitals have responded to the incentives created by these and other supplemental payments.