Case-mix-based payment was developed for hospital chronic care units in Japan to replace the flat per diem rate and encourage the admission of patients with higher medical acuity and was part of a policy initiative to make the tariff more evidence based. However, although the criteria for grouping patients were developed from a statistical analysis of resource use, the tariff was subsequently set below costs, particularly for the groups with the lowest medical acuity, both because of the prime minister's decision to decrease total health expenditures and because of the health ministry's decision to target the reductions on chronic care units. Providers quickly adapted to the new payment system mainly by reclassifying their patients to higher medical acuity groups. Some hospitals reported high prevalence rates of urinary tract infections and pressure ulcers. The government responded by issuing directives to providers to calculate the prevalence rates and document the care that has been mandated for the patients at risk. However, in order to monitor compliance and to evaluate whether the patient is being billed for the appropriate case-mix group, the government must invest in developing a comprehensive patient-level database and in training staff for making on-site inspections.