The Medicare prospective payment system represents a fundamental change in hospital payment. The diagnosis-related group (DRG) patient classification scheme serves as the modifier of payment for this system. The DRG definitions are, in turn, based on the International Classification of Disease, 9th Revision, Clinical Modification (ICD-9-CM). Deficiencies in the ICD-9-CM coding system directly affect the equity of the Medicare payment system. A review of the ICD-9-CM system identifies three principal problems: the inability of the system to reflect clinically important patient attributes adequately; the use of outcome, rather than approach, to code surgical procedures; and the blurring of clinical specificity by the adoption of certain coding rules. If these deficits in coding specificity are not corrected, it is unlikely that DRGs will adequately distinguish clinically unique types of patients. This inability to differentiate among patients threatens to undermine the equity of Medicare payments. Physicians must become more aware of disease coding and more involved in its development and implementation.