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Scotland's four-time world champion Higgins, 40, was beaten 4-1 by 24-year-old Welshman Michael White.
Englishman O'Sullivan, 40, had little trouble beating China's Yu Delu by the same score.
"I'm pleased to still be in the tournament. No matches here are a gimme," said O'Sullivan.
"John Higgins, the second greatest player I have ever seen, has been beaten. It takes a top player to have a slightly off day and you are going out."
O'Sullivan lost the opening frame when Yu fluked a re-spotted black.
"Yu Delu is a brilliant player so I was a bit nervous at the start," said O'Sullivan.
"I maybe was giving him a little bit too much respect. I lost the first frame but got some momentum going after."
O'Sullivan will play Mark Selby in the last eight after the world number one beat Welshman Mark Williams 4-2.
World number six Judd Trump missed a potential match-winning black in frame six, allowing Joe Perry to take the match into a decider, which he won.
Perry next faces Ben Woollaston, who won another all-English match, beating Martin Gould 4-1.
Northern Ireland's Mark Allen won a final-frame decider to beat Barry Hawkins of England 4-3 to set up a match against White.
Australia's Neil Robertson and Ding Junhui complete the quarter-final line-up. Robertson beat Hong Kong's Marco Fu 4-2 while Ding defeated Belgium's Luca Brecel by the same margin.
Defending champion John Higgins went out of the Welsh Open in the fourth round, but Ronnie O'Sullivan is through to the quarter-finals in Cardiff.