The use of Diagnosis Related Groups (DRG) as a mechanism for hospital financing is a currently debated topic in Portugal. The DRG system was scheduled to be initiated by the Health Ministry of Portugal on January 1, 1990 as an instrument for the allocation of public hospital budgets funded by the National Health Service (NHS), and as a method of payment for other third party payers (e.g., Public Employees (ADSE), private insurers, etc.). Based on experience from other countries such as the United States, it was expected that implementation of this system would result in more efficient hospital resource utilisation and a more equitable distribution of hospital budgets. However, in order to minimise the potentially adverse financial impact on hospitals, the Portuguese Health Ministry decided to gradually phase in the use of the DRG system for budget allocation by using blended hospital‐specific and national DRG case‐mix rates. Since implementation in 1990, the percentage of each hospital’s budget based on hospital specific costs was to decrease, while the percentage based on DRG case‐mix was to increase. This was scheduled to continue until 1995 when the plan called for allocating yearly budgets on a 50% national and 50% hospital‐specific cost basis. While all other non‐NHS third party payers are currently paying based on DRGs, the adoption of DRG case‐mix as a National Health Service budget setting tool has been slower than anticipated. There is now some argument in both the political and academic communities as to the appropriateness of DRGs as a budget setting criterion as well as to their impact on hospital efficiency in Portugal. This paper uses a two‐stage procedure to assess the impact of actual DRG payment on the productivity (through its components, i.e., technological change and technical efficiency change) of diagnostic technology in Portuguese hospitals during the years 1992–1994, using both parametric and non‐parametric frontier models. We find evidence that the DRG payment system does appear to have had a positive impact on productivity and technical efficiency of some commonly employed diagnostic technologies in Portugal during this time span.