OBJECTIVE: To determine if a widely used proprietary risk-adjustment system, APR-DRGs, misadjusts for severity of illness and misclassifies provider performance. DATA SOURCES: (1) Discharge abstracts for 116,174 noninstitutionalized adults with acute myocardial infarction (AMI) admitted to nonfederal California hospitals in 1991-1993; (2) inpatient medical records for a stratified probability sample of 974 patients with AMIs admitted to 30 California hospitals between July 31, 1990 and May 31, 1991. STUDY DESIGN: Using the 1991-1993 data set, we evaluated the predictive performance of APR-DRGs Version 12. Using the 1990/1991 validation sample, we assessed the effect of assigning APR-DRGs based on different sources of ICD-9-CM data. DATA COLLECTION/EXTRACTION METHODS: Trained, blinded coders reabstracted all ICD-9-CM diagnoses and procedures, and established the timing of each diagnosis. APR-DRG Risk of Mortality and Severity of Illness classes were assigned based on (1) all hospital-reported diagnoses, (2) all reabstracted diagnoses, and (3) reabstracted diagnoses present at admission. The outcome variables were 30-day mortality in the 1991-1993 data set and 30-day inpatient mortality in the 1990/1991 validation sample. PRINCIPAL FINDINGS: The APR-DRG Risk of Mortality class was a strong predictor of death (c = .831-.847), but was further enhanced by adding age and sex. Reabstracting diagnoses improved the apparent performance of APR-DRGs (c = .93 versus c = .87), while using only the diagnoses present at admission decreased apparent performance (c = .74). Reabstracting diagnoses had less effect on hospitals' expected mortality rates (r = .83-.85) than using diagnoses present at admission instead of all reabstracted diagnoses (r = .72-.77). There was fair agreement in classifying hospital performance based on these three sets of diagnostic data (K = 0.35-0.38). CONCUSIONS: The APR-DRG Risk of Mortality system is a powerful risk-adjustment tool, largely because it includes all relevant diagnoses, regardless of timing. Although some late diagnoses may not be preventable, APR-DRGs appear suitable only if one assumes that none is preventable.