Cost-containment pressures and changes in traditional patient-care patterns are altering the process of graduate medical education. A thorough understanding of this process is a prerequisite to implementing changes that preserve the function of graduate medical education. This report describes the structure of the graduate medical education system and analyzes possible responses to the changes that are affecting it. The decision-making process within academic health centers is described, including an assessment of the roles of hospital directors, deans and faculty, as well as external regulatory agencies such as residency review committees, medical specialty boards and state licensing agencies. The activities of these participants are analyzed within the framework of the teaching hospital's service and education functions, and potential conflicts are described and illustrated by recent examples. Understanding the complex structure and functions of graduate medical education is a first step toward responding effectively to a changing environment.