Although Canadian health care reform has constrained costs and improved efficiency, it has had a profound and mixed effect on Canadian academic medicine. Teaching hospitals have been reduced in number and size, and in patient programs have shifted to ambulatory and community settings. Specialized care programs are now multi-institutional and multidisciplinary. Furthermore, the influence of regional planning bodies has grown markedly. Although these changes have likely improved clinical service, their impact on the quality of clinical education is uncertain. Within the academic clinical department, recruitment of young faculty has been greatly complicated by constraints on licensing, billing numbers, fee-for-service income and research funding. The departmental practice plan based on university funds and fee-for-service income is being replaced by less favourable funding arrangements. However, emphasis on multidisciplinary programs has rendered these departments more flexible in structure. The future of Canadian academic medicine depends on an effective alliance with government. Academia and government must agree, particularly on human-resource requirements, research objectives and the delivery of clinical and academic programs in regional and community settings. The establishment of focal points for academic health sciences planning within academic health sciences centres and within governments would assist in these developments. Finally, government and the academic health sciences sector must work together to remove the current impediments to the recruitment of highly qualified young faculty.