OBJECTIVES: Quality improvement is one mechanism for reducing health care expenditure. Therefore there is a need for ranking providers according to their performance. By characterizing hospital quality by our previously validated composite measure, to compare the high vs low quality hosptals and their associated outlier payments. METHODS: Using the national Medicare claims database for 2006, we examined outlier payments in patients undergoing coronary artery bypass grafting (CABG) (n=104,329). We then categorized hospitals performing these procedures according to their outlier payment rates. Using multiple logistic regression, we explored the relationships between hospital outlier payment rates and hospital quality, as reflected by previously validated composite quality score. RESULTS: The proportion of patients associated with outlier payments was 9% (CABG). Average outlier payments were considerable: $19,000 per patient, costing Medicare more than $175 million. Risk adjusted outlier rates for 5-Star Hospitals was only 6.7% whereas low quality hospitals had outlier rates have more than 11%. CONCLUSIONS: Outlier payments in CABG are an important component of medical costs with inpatient surgery. Although persistent differences in billing and accounting practices maybe an important factor, this differences explained in part by quality.