OBJECTIVE: Validate risk-adjusted readmission rates as a measure of inpatient quality of care after accounting for outpatient facilities, using premature infants as a test case. STUDY SETTING: Surviving infants born between January 1, 1998 and December 12, 2001 at five Northern California Kaiser Permanente neonatal intensive care units (NICU) with 1-year follow-up at 32 outpatient facilities. STUDY DESIGN: Using a retrospective cohort of premature infants (N=898), Poisson’s regression models determined the risk-adjusted variation in unplanned readmissions between 0-1 month, 0-3 months, 3-6 months, and 3-12 months after discharge attributable to patient factors, NICUs, and outpatient facilities. DATA COLLECTION: Prospectively collected maternal and infant hospital data were linked to inpatient, outpatient, and pharmacy databases. PRINCIPAL RESULTS: Medical and sociodemographic factors explained the largest amount of variation in risk-adjusted readmission rates. NICU facilities were significantly associated with readmission rates up to 1 year after discharge, but the outpatient facility where patients received outpatient care can explain much of this variation. Characteristics of outpatient facilities, not the NICUs, were associated with variations in readmission rates. CONCLUSION: Ignoring outpatient facilities leads to an overstatement of the effect of NICUs on readmissions and ignores a significant cause of variations in readmissions.