The diagnosis-related group (DRG)-based Medicare prospective payment system pays hospitals a fixed amount for the care of similar patients. The DRG definitions serve as the modifier of payment for Medicare patients. The dependence on these patient definitions raises many questions, among them the reason(s) for observed resource variability within a DRG. Various severity-of-illness measures have been shown to account for some of the resource variability noted within the DRGs. Most severity-of-illness studies to date, however, have not attempted to assess the effect of other known sources of resource variation, such as differing physician practice patterns. The authors examined the ability of severity of illness, as defined by disease staging, and physician practice variation to explain residual intra-DRG variability in length of stay. They demonstrate that physician practice variation accounts for more variance reduction than does severity of illness.