In this study hospital admissions are categorized into admission severity groups based on key clinical findings. Severity of illness is determined again later in the hospital stay after treatment has been initiated. High severity on this second review is labeled major morbidity or morbidity, depending on the severity level, and these rates serve as a health outcome indicator along with in-hospital mortality. This study's findings show, for ten hospitals randomly selected from MedisGroups users, considerable interhospital variation in standardized mortality and morbidity ratios for ten frequently occurring DRGs on the adult medical service. After adjusting for admission severity and case mix, three of the ten study hospitals have a statistically significant (p less than .01) difference between the hospital's standardized mortality ratio and 1.0. Such a significant difference exists for the standardized major morbidity ratio of four hospitals and for the standardized morbidity ratio of three hospitals. At the DRG-specific level, our results show that 8.9 percent, 4.4 percent, and 15.0 percent of the hospital-specific mortality, major morbidity, and morbidity ratios, respectively, are statistically significant. Most hospital outliers have fewer deaths or morbid cases than expected. We caution that the study hospitals may not be representative of a larger group of U.S. hospitals.