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Diagnosis-related groups have been revised through more refined uses of secondary diagnoses. Under the refined diagnosis-related groups, patients are distinguished with respect to classes of secondary diagnoses that are disease- and procedure-specific. Each class represents a different level of utilization for a given principal diagnosis or surgical procedure. The refined system was evaluated with national data from the Medicare program. Estimates of hospital costs and utilization based on refined diagnosis-related groups were more precise than those based on unrefined diagnosis-related groups. This approach to diagnosis-related group refinement does not represent a radical departure from the current diagnosis-related group framework and does not require new data collection efforts. Moreover, a payment system based on the refined model is less affected by the ordering of the diagnoses than under the existing diagnosis-related group system. How the refined diagnosis-related group framework can accommodate future refinements at all levels of the classification scheme is also discussed.