This research examined the hypothesis that greater severity of illness explains the higher costs of hospitalizations at teaching compared with nonteaching hospitals. Medical records of 4439 cases within eight common conditions were reviewed at five tertiary teaching, five other teaching, and five nonteaching hospitals in metropolitan Boston, Mass. We assessed acute physiologic status, severity of the principal diagnosis, comorbidities, and functional status. The principal diagnosis was more severe for teaching hospital patients in four conditions, but few significant differences were found for the other severity dimensions by condition. Across all conditions combined, except for functional status, severity was significantly higher at teaching hospitals, but the absolute differences were small. After adjusting for diagnosis related groups, costs were higher at tertiary teaching compared with other teaching and nonteaching hospitals. Further adjusting for severity and other patient characteristics explained 18% (90% confidence interval, 4 to 33) of the higher costs at tertiary compared with nonteaching hospitals.