Context The quality of health care and the financial costs affected by receiving care represent two fundamental dimensions for judging health care performance. No existing conceptual framework appears to have described how quality influences costs. Methods We developed the Quality‐Cost Framework, drawing from the work of Donabedian, the RAND/UCLA Appropriateness Method, reports by the Institute of Medicine, and other sources. Findings The Quality‐Cost Framework describes how health‐related quality of care (aspects of quality that influence health status) affects health care and other costs. Structure influences process, which, in turn, affects proximate and ultimate outcomes. Within structure, subdomains include general structural characteristics, circumstance‐specific (e.g., disease‐specific) structural characteristics, and quality‐improvement systems. Process subdomains include appropriateness of care and medical errors. Proximate outcomes consist of disease progression, disease complications, and care complications. Each of the preceding subdomains influences health care costs. For example, quality improvement systems often create costs associated with monitoring and feedback. Providing appropriate care frequently requires additional physician visits and medications. Care complications may result in costly hospitalizations or procedures. Ultimate outcomes include functional status as well as length and quality of life; the economic value of these outcomes can be measured in terms of health utility or health‐status‐related costs. We illustrate our framework using examples related to glycemic control for type 2 diabetes mellitus or the appropriateness of care for low back pain. Conclusions The Quality‐Cost Framework describes the mechanisms by which health‐related quality of care affects health care and health status–related costs. Additional work will need to validate the framework by applying it to multiple clinical conditions. Applicability could be assessed by using the framework to classify the measures of quality and cost reported in published studies. Usefulness could be demonstrated by employing the framework to identify design flaws in published cost analyses, such as omitting the costs attributable to a relevant subdomain of quality.