This paper describes the development of a claim review and payment model utilizing the diagnosis related groups (DRGs) for the fee for service-based payment system of the Korean health insurance. The present review process, which examines all claims manually on a case-by-case basis, has been considered to be inefficient, costly, and time-consuming. Differences in case mix among hospitals are controlled in the proposed model using the Korean DRGs. They were developed by modifying the US-DRG system. An empirical test of the model indicated that it can enhance the efficiency as well as the credibility and objectivity of the claim review. Furthermore, it is expected that it can contribute effectively to medical cost containments and to optimal practice pattern of hospitals by establishing a useful mechanism in monitoring the performance of hospitals. However, the performance of this model needs to be upgraded by refining the Korean DRGs which play a key role in the model.