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Since its introduction in 1977, the national health insurance programme in Korea has paid health care providers on a fee-for-service basis. Regulated fee-for-service payment has resulted in an increased volume and intensity of medical care. It has also distorted the input mix of treatment because physicians have substituted more profitable and uninsured (no coverage) medical services for those with lower margins, as is evidenced by the sharp increase in the caesarean delivery rate. This paper examines two recent supply-side reforms in Korea: Diagnosis Related Group (DRG) and Resource-based Relative Value (RBRV). Since 1997, through a pilot programme covering a selected group of diseases for voluntarily participating health care institutions, the DRG-based prospective payment system has proven to be effective in containing cost with little negative effect on quality. RBRV-based payment was implemented in 2001, but led to an almost uniform increase in fees for physician services without a mechanism to control the volume and expenditure. Challenges and future issues in the reform of the payment system in Korea include the expansion of benefit coverage, quality monitoring and improvement, strategic plans to overcome the strong opposition of providers and the introduction of global budgeting.