The effect of prospective payment system (PPS) on reducing cost and quality of care is still unknown. Fifty-two patients (mean +/- SD, 82.0 +/- 6.5 years) with hip fracture classified as DRG 210 (hip and femur procedures except major joint, age greater than 69 years and/or complication and/or comorbidity), treated by compression nail were separated into four groups: Group I--no comorbidity, no complications; Group II--no comorbidity but had complications; Group III--with comorbidity but no complications; and Group IV--with both comorbidity and complications. Compared to length of stay (LOS) in Groups I, II and III (mean 26 days), Group IV had significantly increased LOS (mean, 61.5 days) and 81% of the 16 who were day outliers (L.O.S. greater than 40 days). Patients without comorbidity (I & II) even if they did develop complications were not financial losers. Those with comorbidity appear to be high-cost patients as they invariably end up with complications (78%), and reimbursement for Group IV was significantly less, resulting in net loss of this DRG. Our finding demonstrates the importance of preventing complications in patients with comorbidity. Present DRG reimbursement guidelines do not provide sufficient attention to LOS implications of both comorbidity and complications. Ideally, they should be considered as separate factors within the DRG category.