In response to concerns over the equity of diagnosis-related group (DRG)-based prospective payment, the New Jersey Department of Health conducted a Severity of Illness evaluation study in which severity of illness, DRG, and uniform cost information were collected for 76,798 patients in 25 hospitals. Severity of illness was measured using the Computerized Severity Index (CSI) and was found to be a significant determinant of hospital cost in 76 DRGs that accounted for 41.4 percent of the total direct hospital patient care costs and 27 percent of the patients. The addition of CSI severity levels to the 76 DRGs reduced the coefficient of variation of cost in these DRGs by 17.4 percent and improved the overall reduction in variance of cost within the 76 DRGs by 38.2 percent. The change in total hospital payments due to the addition of severity for the 76 DRGs varied from a positive 5.71 percent to a negative 5.48 percent. These results demonstrate that a severity adjustment to this subset of DRGs would result in a more equitable DRG-based prospective payment system.