Objectives. To classify general hospitals into homogeneous systematic-risk groups in order to compare cost efficiency and propose peer-group-classification criteria. Data Sources. Health care institution registration data and inpatient-episode-based claims data submitted by the Korea National Health Insurance system to the Health Insurance Review and Assessment Service from July 2007 to December 2009. Study Design. Cluster analysis was performed to classify general hospitals into peer groups based on similarities in hospital characteristics, case mix complexity, and service-distribution characteristics. Classification criteria reflecting clustering were developed. To test whether the new peer groups better adjusted for differences in systematic risks among peer groups, we compared the R 2 statistics of the current and proposed peer groups according to total variations in medical costs per episode and case mix indices influencing the cost efficiency. Data Collection. A total of 1,236,471 inpatient episodes were constructed for 222 general hospitals in 2008. Principal Findings. New criteria were developed to classify general hospitals into three peer groups (large general hospitals, small and medium general hospitals treating severe cases, and small and medium general hospitals) according to size and case mix index.Conclusions. This study provides information about using peer grouping to enhance fairness in the performance assessment of health care providers. Key Words. Cost efficiency, peer group, cluster analysis Policy makers in many health insurance systems experiencing rapidly escalating health care expenditures have focused on developing tools to hold physicians accountable for their decisions (Bindman 1999;Austin et al. 2004).Several strategies have been developed, including utilization review and practice guidelines, to induce physicians to choose more rational, less expensive behavior (Bindman 1999). Many insurance programs have employed utilization review to foster more appropriate payment, but case-by-case utilization review is time consuming, and a more efficient methodology is required to complete the review of a large number of claims within the legally
