The Medicare program, enacted in 1965, is a federally funded health care coverage plan for people aged 65 years and older, for those who are disabled, and for those needing renal dialysis or kidney transplants for the treatment of end-stage renal disease. Today, nearly 40 million Americans rely on Medicare for their health care services. The purpose of the Medicare program is to increase access to quality care for the elderly while maintaining a financially viable federal fund from which health care reimbursements can be appropriately and efficiently allocated to health care providers. This paper has three main objectives: (1) introduce the functioning of the Medicare payment system, (2) explain in more detail how the program currently reimburses physicians, and (3) discuss the current challenges facing the physician reimbursement system.