This article discusses the Severity of Illness case-mix groups, and suggests a refinement to diagnosis-related groups (DRG's) designed to accommodate the important element of patient severity. An application of the suggested refinement is presented in a discussion of the efficient production of hospital services. The following areas are addressed. A brief summary of the goals and development of the Severity of Illness Index, and the methodology used to collect severity of illness data on hospital inpatients. Comparative analyses of the resulting case-mix groups within hospitals, and an application of severity-adjusted diagnosis-related groups case-mix definitions. The contribution of the variation in physician practice patterns to the variation in resource use per patient within a hospital. Cross-hospital comparisons. Some of the consequences of incorporating a patient severity refinement into the prospective payment system.