The authors examined the impact of costs of education on the overall expenses of two major teaching hospitals during a period of rapid growth and change in the Minneapolis and St. Paul, Minnesota, health care environment. By using a retrospective faculty-time study and the two hospitals' estimated costs for education, education costs of each hospital were compared–within and across facilities–with annual hospital operating expenses, with inflation, and by educational program. Unit costs were estimated for undergraduate and graduate medical students. Over the study period, allocated education costs averaged 13–14% of the hospitals' operating budgets. The combined mean allocated cost per medical student and resident was approximately +73,000 in 1983–84. During this period, allocated education costs were in line with medical inflationary trends and did not drive hospital expense increases. These findings suggest that policymakers wishing to restrain the rise in health care costs should look beyond cutting the costs of education programs and find other solutions.