This report describes how the cost of services provided during Medicare hospital stays varies throughout the stay. The research also examines how incremental costs vary with clinical characteristics, hospital characteristics, and types of services provided. The atypically long-staying patients were more expensive than typical patients from the very beginning of their stay. This was true for almost all the medical diagnosis-related groups (DRGs). In contrast, in many surgical DRGs, the long-staying patients cost less in the first few days of stay and then began to cost more per day than the typical patients who were still in the hospital. Hospitals located in the West have daily costs that are usually substantially greater than hospitals in other regions. To the extent that cost per admission is greater in major teaching hospitals, length of stay is the primary cause, not the intensity of services delivered each day. Medicare outlier cases appear to result more from inherent patient conditions than from inefficiencies or other practice patterns of hospitals.