To determine whether basing payments on diagnosis related groups (DRGs) results in mispayment for certain classes of patients, we examined the relation between total Medicare charges per hospitalization and eight beneficiary characteristics (including admission from a nursing home, extreme age, Medicaid enrollment, and disability). We controlled for the hospital in which care was given and the DRG to which the discharge was assigned. The largest effects were that average charges were 6.7% higher for beneficiaries who were disabled before the age of 65 years, and 6.2% higher for patients admitted from a nursing home; charges were 1.5% lower for Medicare beneficiaries who were also enrolled in Medicaid, 3.8% higher for those older than 80 years, and 1.3% lower for those older than 85 years compared with those aged from 80 to 84 years. Because these differences are very small compared with the average variation within DRGs, we conclude that using these beneficiary characteristics in the DRG classification system would only slightly improve DRGs. Medicare's DRG-based payments seem to be substantially equitable with regard to these beneficiary characteristics.