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BACKGROUND: By accepting and caring for patients transferred from other institutions, academic medical centers have been able to develop comprehensive training and research programs. Whether academic institutions can continue to do this in the future is questionable. To the extent that transfer patients are more complex and severely ill than non-transfer patients, they are likely to consume more resources, and in managed care payment systems, they could place accepting hospitals in financial jeopardy. METHOD: Between July 1989 and December 1993, the internal medicine, surgery, and pediatrics services of the 880-bed University Hospital of the University of Michigan accepted 8,740 patients from other hospitals. The hospitalizations of these patients were compared with those of the 76,047 non-transfer patients on these services. The statistical methods used were Student's t-test, chi-square, Cochran-Mantel-Haenszel chi-square, and analysis of variance. RESULTS: The hospitalizations of the transfer patients were more complex and resource-use intensive. The transfer patients were more likely (p<.0000) to be length-of-stay outliers as defined by Medicare standards (28% vs 10%) and to suffer in-hospital death (9.4% vs 2.5%). After case-mix adjustment and exclusion of length-of-stay outliers, transfer patients on the three services (surgery, medicine, and pediatrics) remained in the hospital 1.62, 1.15, and 0.84 days longer (p<.0001) than non-transfer patients. Ancillary-service resource use was assessed using a relative-value-unit (RVU) scale based on direct-cost dollars. The transfer patients' case-mix-adjusted resource use exceeded that of the non-transfer patients by 1,155,850 and 957 RVUs for surgery, pediatrics, and medicine (p<.0001). Although the transfer patients were more likely to have Medicaid insurance, the differences in lengths of stay and use of ancillary services persisted throughout all insurance groups. Indeed, transfer status, compared with age, sex, and insurance status, was the best predictor of high resource use. CONCLUSION: The transfer patients stayed longer and consumed more hospital resources than did the non-transfer patients. Age, sex, case-mix, and insurance status did not account for these differences. To limit the financial liability that transfer patients pose, academic medical centers could be forced to abandon their traditional role of caring for such patients. The consequences of this possibility should be explored.