Bureau of National Health Insurance announced the second edition of the framework for categorizing Diagnosis Related Groups in Nov. 2004 which is expected to have great impact on the medical industry. With 976 categories, this framework is to invite opinions from the medical industry before its official inclusion in the payment system. The purpose to amend the payment system is to provide different incentive mechanism which shifts the risk from the insurance company to the medical service providers by making the latter be responsible for financial duties, changing medical practices and reducing inadequate medical services. In addition to reimbursement, the design of the incentive mechanism implicitly includes measures for control, i.e. a direction towards behavior-based rather than outcome-based payment system. We intend to explore how this mechanism operates. Furthermore, the insurance company is empowered with direction to do what is most beneficial for them since it is obligatory to join the insurance system. Based on the contingency perspective, medical service providers should adapt to the changing medical environment and adjust their organizational structure and practices for the fitness between organization and environment. Furthermore, medical service providers should gain the institutional legitimacy to acquire the resources for survival. By mimicking the organizational practices with each other, the medical service providers would be able to adapt to different environmental pressure. At the end, we present the related practices for preparing DRGs/PPS of a hospital for your reference.