The Australian National Non-Acute Inpatient Project has produced a casemix classification system for non-acute inpatients (NAIP). The daily classification has 19 final classes which bring together descriptions of a patient's clinical type (from admission diagnosis) and functional ability (from automated nursing care plans). Data on salary cost relating to care of 786 patients were collected at three large metropolitan teaching hospitals for six months during 1991, yielding a total sample of 15,013 non-acute bed-days. The NAIP classification was built from first principles, combining clinician input and statistical testing using an analysis of variance model (PC Grouper). Overall variance reduction on the full set of 15,013 records was 26.15 per cent.