Effective October 1, 2007, the Centers for Medicare and Medicaid Services has changed its methodology for determining the diagnosis-related group for hospitalized patients. In an effort to more accurately reflect severity of illness, the 538 diagnosis-related groups have been converted to 745 new Medicare severity diagnosis-related groups. In addition, selected hospital-acquired complications not identified as present on admission will no longer be reimbursed. The changes will have profound effects on reimbursement for hospitalizations. To minimize financial losses under the new rules, hospitals and physicians will have to devote significant resources and attention to improved documentation. This article will discuss the new payment system, the physician's role in ensuring that all clinically important diagnoses are captured by coding specialists, and strategies that can be employed to respond proactively to the challenge.