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• Prospective hospital payment systems using the federal Medicare DRG payment model are changing hospital reimbursement. Currently, many states have adopted diagnosis related group (DRG) prospective "all payer systems" using the federal model. All payer systems, where-by Medicaid, Blue Cross, and other commercial insurers pay by the DRG mode, prevent cost shifting between payers. New York state has used an all payer system since Jan 1, 1988. This study simulated DRG all payer methods for a large sample (N = 16 084) of pediatric patients for a three-year period using the New York DRG all payer reimbursement system now in effect. Medicaid pediatric patients had (adjusted for DRG weight index) a longer hospital stay and greater total hospital cost compared with pediatric patients from Blue Cross and other commercial payers. Medicaid pediatric patients also had a greater severity of illness compared with patients from Blue Cross and other payers. Pediatric patients in all payment groups (ie, Medicaid, Blue Cross, and other commercial insurers) generated financial risk under the DRG all payer scheme. Medicaid pediatric patients generated the greatest financial risk, however. These data suggest that state and private payers may be under-reimbursing for the care of the hospitalized pediatric patient using the DRG prospective hospital payment scheme. Health care financing policy for pediatric patients may limit both access and quality of care. (AJDC. 1989;143:312-315)