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Objective: Pneumonia is the most common healthcare-associated infection following cardiac surgery, and associated with poorer clinical outcomes and substantially higher hospital costs. Less understood is the role that the care and treatment of post-operative pneumonia may have on a hospital’s 90-day episode payments. We hypothesize that expenditures associated with pneumonia may significantly impact a hospital’s 90-day episode payments for coronary artery bypass graft (CABG) surgery.Methods and Results: Using Medicare Part A and B claims data, we identified 49,573 patients undergoing isolated CABG in 1,001 hospitals with greater than 10 cases (2014-15). We applied an established claims-based algorithm to identify 3,135 (6.3%) patients as having a new onset of pneumonia during their index admission and after their surgical procedure. Using hierarchical logistic regression models, we estimated risk-adjusted hospital-level pneumonia rates, adjusted for age, sex, race, Medicaid eligibility, Elixhauser comorbidities, and hospital-random effect. There was weak correlation (r=0.20, p<0.001) between observed and predicted (adjusting for only patient factors) hospital-level pneumonia rates, indicating patient factors explained little of the variation between hospitals. We placed patients into quartiles based on rank-order of hospital risk-adjusted pneumonia rates; the pneumonia rate in the lowest and highest quartile was 3.4% and 13.9% (p<0.001), respectively (Table). Average risk-adjusted 90-day episode expenditures were 10% higher for patients in the highest quartile hospitals compared to the lowest quartile ($41,936 vs. $46,095 vs., p<0.001). Payments for outlier hospitalizations were 100% greater in the highest quartile hospitals compared to the lowest quartile, and accounted for 28.5% of the total difference between high and low spending hospitals.Conclusion: New onset pneumonia after cardiac surgery varies widely across hospitals, and counter to conventional wisdom, is not driven by patient risk. Cardiac surgical programs should consider the prevention and management post-operative pneumonia as a component of their overall strategy for reducing 90-day episode payments.