In March 1986, the Health Care Financing Administration (HCFA) released ten lists of death-rate "outlier" hospitals, one for all 1984 Medicare discharges and nine for specific DRGs. Recent Medicare hospital discharge abstracts have substantially undercounted in-hospital deaths, with large variations by state. Apart from the proportion of a hospital's cases in 80 DRGs, the predictive models had no measures of case severity based on diagnosis or procedure. Having DRG 123 (all deaths from acute myocardial infarction) as an independent variable in the all-death regression model probably accounted for much of its high r2. Inclusion of an independent variable for average length of stay (ALOS) favored hospitals in higher ALOS states by higher predicted death rates. Model bias also favored lower-risk hospitals. Small numbers of predicted deaths for specific DRGs limited low-volume hospitals on these outlier lists to those with high ratios of actual to predicted deaths. On six of the nine DRG-specific outlier lists, a total 1,222 hospitals had unfavorable residuals, while only 8 were favorable. Ten recommendations are given to increase reliability of future outcome analyses.