INTRODUCTION: Medicare is required to set outlier threshold so that outlier payments are between 5 and 6 percent of total DRG payments to offset extraordinarily high-cost cases. Severe sepsis (SS) is a condition affecting patients in many DRGs. High mortality and resource use in SS patients increases the likelihood of reimbursement under the outlier mechanism. We explore the role of outlier payments for SS in Medicare. METHODS: We examined all 1999 Medicare discharges age 65+ in prospective payment hospitals. Cost, reimbursement, and outlier payments were identified for each discharge. SS was identified by the presence of ICD-9-CM codes for acute organ failure and bacterial or fungal infection. DRGs were classified into six groups by post-operative status (medical and surgical) and by frequency of SS (high risk, high volume, remaining). RESULTS: Of 9,248,277 records, 384,680 (4%) were reimbursed through the outlier mechanism, reflecting 6% of total payments. SS patients represent 25% of all outliers, with an average cost per outlier case of $44,724. The average cost for non-sepsis outliers per case is $35,098. Twenty-two percent of all sepsis cases are reimbursed as outliers. While overall cases are reimbursed at 95% of reported costs, SS cases are reimbursed at only 85% of costs. SS outliers are reimbursed at only 70% of reported costs with especially low reimbursements for high volume medical SS outlier cases (54%). Overall, SS high risk medical and surgical cases are reimbursed at higher levels (103% and 78% respectively). CONCLUSIONS: While severe sepsis cases are only 4.7% of all Medicare discharges, almost one in four are outliers. Current outlier payments do not adequately compensate for the cost of care of most SS patients.