Debate persists about the most effective way to pay hospitals to limit health care cost inflation. New Jersey, the first state to adopt the DRG payment system, has accumulated sufficient experience to allow a comparison of the relative efficacy of two reimbursement methods. Regression results, using a time trend specification, indicate that per case payment based on diagnosis related groups was no more successful in controlling hospital costs per capita than a previous per diem payment system. There were, however, significant changes in costs per case and length of stay. But the increase in admission rates neutralized the reduction in costs per case. There were no significant overall cost savings.