The purpose of this study is to demonstrate the usefulness of the computer-based quality assurance (QA) system for achieving a quality-cost trade-off and to demonstrate the validity of the Medical illness Severity Grouping System (MEDISGRPS) for hospital quality assurance. MEDISGRPS stratifies hospital admissions into severity groups according to key clinical findings, a series of laboratory, pathology, radiology, and physical exam results that indicate an abnormal situation. All 16,428 patients admitted to a large teaching hospital during a nine month period were included in the study. The statistical validity of MEDlSGRPS is demonstrated by the direct positive corelation between admission severity and in-hospital mortality and 10th day morbidity rates, as well as between admission severity and total charges, ancillary charges, and length of stay. Empirical examples show how the computer-based QA system provides the information base to establish effectiveness, efficiency, and appropriateness standards, and to identify situations where these standards are not met. The system accurately describes medical practice pattern variations and provides the basis for hospitals to define standards and perform quality assurance.