The purpose of this article is to determine whether a widely implement ed method of severity adjustment underestimated the risk of death and other outcomes among interhospital transfers (ie, patients transferred from other acute care hospitals) and to examine the impact of this potential bias on hospital outcomes profiles. The retrospective cohort study was conducted at a midwestern academic medical center with 40,820 adult medical and surgical patients from 1988 to 1991, of whom 38,946 were direct admissions and 1,874 were interhospital transfers. Hospital mortality, length of stay, and total charges in interhospital transfers and direct admissions were compared using multivariable regression methods that adjusted for admission severity of illness and other potential covariates (age, type of health insurance, diagnosis, emergent admission). Severity of illness was measured using the Medis-Groups methodology. Admission severity of illness was directly related (P<0.001) to rates of in-hospital death, length of stay, and charges, and was higher among interhospital transfers; 49% of transfers had moderate to high severity, compared with 35% of direct admissions (P<0.001) However, in a logistic regression model adjusting for severity and other covariates, the risk of in-hospital death was nearly two times (multivariable odds ratio, 1.99; 95% confidence interval [CI], 1.64-2.42) higher in transfers than in direct admissions. In linear regression models, length of stay and charges were 1.47 (95% CI, 1.42-1.53) and 1.40 (95% CI, 1.35-1.44) times higher, respectively, in transfers. Results were consistent in medical and surgical admissions, when examined separately, and among individual diagnostic categories. Based on their findings, the authors estimate that, independent of quality of care, severity adjusted mortality and length of stay would appear 17% and 8% higher, respectively, for hospitals in which 20% of patients were interhospital transfers than for hospitals in which 2% of patients were transfers. In an academic medical center, interhospital transfers had poorer severity adjusted outcomes than patients admitted directly. Failure to account for transfer status may produce biased performance profiles and, therefore, may create disincentives for hospitals to accept transfers from other acute care facilities.