On October 1, 1983, Medicare began paying general hospitals by a prospective payment system based on DRGs. Psychiatric settings are exempted automatically or by request. By January 1985, however, a decision is required on how to integrate psychiatric settings into this system. This article provides an empirical analysis of the current DHHS DRGs categories for mental disorders. Current mental disorder DRGs and alternate DRGs examined here explain less than 3-12% of the variation in psychiatric length of stay. This is in contrast to 30-50% explained variation for other disorders. Alternatives and policy implications are discussed.