There is a burgeoning interest in selective contracting for specialized hospital services based on volume, price, and quality. The systematic exclusion or inclusion of particular institutions has been extolled by some as an arrangement to reduce costs and by others as a means to increase quality of care. However, little is known about the issues and problems associated with selective contracting based on objective criteria rather than negotiations. Identification of individual institutions with performance significantly better or poorer than expected based on statistical norms is difficult and should be viewed as no more than a first step in evaluating quality and price performance. Actual data on 37 hospitals that provide coronary artery bypass graft surgery in a metropolitan region are used to illustrate some major prospects, problems, and situations arising when certain institutions are considered for exclusion from or inclusion in third-party payment programs. Selective contracting in local areas can potentially decrease duplication of services, reduce cost to purchasers, and lower expected mortality and morbidity for some patient groups. However, these gains must be evaluated against reductions in continuity of care and access to care, potential increases in mortality and morbidity for certain segments of the population, and substantial political problems.