OBJECTIVES: To estimate inappropriate use of medical services, determine the role of continuing physician medical education (CME) in inappropriate use, define effective physician education techniques and recommend effective policies to reduce inappropriate use. METHODS: Review of the literature 1995-2002 on amount of, and reasons for inappropriate service use. A further literature review between of effects of specific types of education programs yielded 290 randomized control trials and 23 meta analyses. These studies clearly defined effective education methods that change physician care processes and patient outcomes. RESULTS: There is substantial over- and underuse across all diagnoses, by generalists and specialists, and across all countries, often by the same physician with the same patient. There is substantial evidence as to CME techniques that change physician care and patient outcomes. These include interactive education, audit and feedback, reminders, academic detailing and other outreach programs, and clinical practice guidelines are clearly effective. The most commonly used methods, lectures and distributing printed materials alone. CONCLUSIONS: A combination of reordering CME away from ineffective to effective techniques is paramount. Use of various known effective incentives coupled with known effective physician education techniques by payers, insurers and government is the first policy step to improving physician care and patient outcomes. Costs may moderate, or even decline in the mid-term, but at the least more cost-effective care likely will be provided.