We calculate the hydration free energy of liquid TIP3P water at 298 K and 1 bar using a quasi-chemical theory framework in which interactions between a distinguished water molecule and the surrounding water molecules are partitioned into chemical associations with proximal (inner-shell) waters and classical electrostatic-dispersion interactions with the remaining (outer-shell) waters. The calculated free energy is found to be independent of this partitioning, as expected, and in excellent agreement with values derived from the literature. An analysis of the spatial distribution of inner-shell water molecules as a function of the inner-shell volume reveals that water molecules are preferentially excluded from the interior of large volumes as the occupancy number decreases. The driving force for water exclusion is formulated in terms of a free energy for rearranging inner-shell water molecules under the influence of the field exerted by outer-shell waters in order to accommodate one water molecule at the center. The results indicate a balance between chemical association and molecular packing in liquid water that becomes increasingly important as the inner-shell volume grows in size.