This study, conducted for the Maryland legislature, evaluated the current method for financing graduate medical education in hospital rates, particularly whether the costs of graduate education at the state's two academic medical centers are too high. The study involved discussions with the Health Services Cost Review Commission (HSCRC), monitoring briefings to and deliberations of the HSCRC Advisory Committee on Graduate Medical Education, meetings with stakeholders, and a literature review. The study found that direct costs for residents at the two academic medical centers rose by almost 70 percent between 1989 and 1994; that health care delivery trends are away from inpatient care though medical training has not yet shifted to non-hospital settings; and that the nation and Maryland in particular has an oversupply of physicians but an undersupply of general practitioners. The HSCRC has considered seven alternative funding strategies, and the Advisory Committee has made three recommendations for change. This study concluded, however, that the current financing system is preferable to any of the proposed alternatives; that if the state should intervene to meet physician workforce goals, the all-payer system might provide a source for financial incentives; and that training and financing should move toward ambulatory care settings. (JB)