The purpose of this study was to evaluate the impact of quality of care on costs in nursing homes. The sample consisted of 749 nursing homes in 5 states in 1996. Nursing home cost functions were estimated using weighted 2-stage least-squares regression analysis. Costs are measured as the facility's total patient care costs. Two outcome measures are used as quality indicators: pressure ulcers worsening and mood decline. Nonmonotonic relationships are observed between quality and costs for nursing homes in the sample. However, the pattern of the relationship is different depending on the quality indicator. For pressure ulcers, the authors observe an inverted U-shaped curve with increasing costs at the lower range of quality but decreasing costs associated with higher quality after a threshold. The opposite pattern is observed for mood decline, with a relatively flat curve at the lower range of quality but increasing costs after a threshold. Copyright © 2006 by the American College of Medical Quality.