With expanded and extended coverage of the national medical insurance and fast growing health care expenditures, appropriateness of health service utilization and quality of care are concerns of both health care providers and insurers as well as patients. An accurate patient classification system is a basic tool for effective health care policies and efficient health services management. A classification system applicable to Korean medical information-Korean Diagnosis Related Groups (K-DRGs)-was developed based on the U.S. Refined DRGs, and the performance of the developed system was assessed in this study. In the process of the development, first the Korean coding systems for diagnoses and procedures were converted to the systems used in the definition of the U.S. Refined DRGs using the mapping tables formulated by physician panels. Then physician panels reviewed the group definition, and identified medical practice patterns different in two countries. The definition was modified for the differences in K-DRGs. The process resulted in 1,199 groups in the system. Several groups in Refined DRGs could not be differentiated in K-DRGs due to insufficient medical information, and several groups could not be defined due to procedures which were not practiced in Korea. However, the classification structure of Refined DRGs was retained in K-DRGs. The developed system was evaluated fur its performance in explaining variations in resource use as measured by charges and length of stay(LOS), for both all and non-extreme discharges. The data base used in this evaluation included 373,322 discharges which was a random sample of discharges reviewed and payed by the medical insurance during the five-month period from September 1990. The proportion of variance in resource use which was reduced by classifying patients into K-DRGs-r-square-was comparable to the performance of the U.S. Refined DRGs: .39 for charges and .25 for LOS for all discharges, and .53 for charges and .31 for LOS for non-extreme discharges. Another measure analyzed to assess the performance was the coefficient of variation of charges within individual K-DRGs. A total of 966 K-DRGs (87.7%) showed a coefficient below 100%, and the highest coefficient among K-DRGs with more than 30 discharges was 159%.