This study estimates effects of undergraduate and graduate medical education on hospital costs, using a national sample of 367 U.S. community hospitals observed in 1974 and 1977. Data on other cost determinants, such as casemix, allow us to isolate the influence of teaching with greater precision than most previous studies. Non-physician expense in major teaching hospitals is at most 20 percent higher than in non-teaching hospitals; the teaching effect is about half this for hospitals with more limited teaching programs. Results for ancillary service departments are consistent with those for the hospital as a whole.