Patient safety advocates argue that the high costs of medical errors and adverse events create a financial incentive for hospitals to invest in technologies and systems improvements that will reduce preventable medical injuries. However, if hospitals themselves do not actually incur much of these costs, their incentives for safety improvement may be inadequate. To determine the amounts that hospitals incur in medical-injury-related expenses and the amounts they externalize to other payers, we analyzed previously collected data on 465 adverse events derived from medical record reviews of 12,514 patients discharged from 24 acute care hospitals in Utah and Colorado hospitals. We calculated the total societal costs of adverse events and negligent adverse events, the injury-related costs absorbed by hospitals, and the costs that were externalized to other payers. On average, for every patient treated, the sampled hospitals generated injury-related total costs of $4,434 and negligent-injury-related costs of $3,811 in 1992 dollars. Total costs varied substantially across hospitals, from $40 to nearly $15,000 per admission. A very high proportion (91%) of the total costs of hospital adverse events was borne by parties other than the hospital. On average, hospitals externalized injury-related costs in the amount of $4,252 per admission ($3,673 per admission for negligent injuries). In order to give hospitals strong incentives for safety improvement, legal reforms or market or policy interventions may be required to address the problem of externalization of injury costs.