Background: Diffuse reflectance spectroscopy (DRS) uses the steady-state diffuse reflectance measured from the tissue surface to determine absorption and scattering properties of sampled tissue. Many inverse models used to determine absorber properties have assumed a homogeneous distribution of blood. However, blood in tissue is confined to blood vessels that occupy a small fraction of the overall volume. This simplified assumption can lead to large errors when measuring optical properties. The objective of this study was to examine the effect of confining absorbers to small volumes, such as the microvasculature, on in vivo DRS. Study Design: We fabricated multi-layer microfluidic devices to mimic blood vessels with a size similar to skin microvasculature. We studied the effect of varying channel size (diameter = 22 and 44 mu m) and absorber concentration (10-80% food color dye in water) on diffuse reflectance measurements. We also examined the in vivo reflectance from normal skin and non-melanoma skin cancer on 14 patients. Results: Our results demonstrate that both absorption coefficient and vessel diameter affect the diffuse reflectance spectra. An empirically calculated packaging correction factor based on our experiments shows good agreement with previous theoretical derivations of the same factor. In vivo measurements on normal skin and basal cell carcinoma show that incorporating a correction factor greatly improves the fit of the inverse model to the spectra. In addition, there were statistically significant differences in measured mean vessel diameter and blood volume fraction between normal skin and basal cell carcinoma. Conclusion: We have demonstrated experimentally the effect of pigment packaging in blood vessels over a physiologically relevant range of blood vessel size and absorption. The correction factors implemented to account for the packaging effect could potentially be used as diagnostic parameters for diagnosing skin cancers. Lasers Surg. Med. 42:680-688, 2010. (C) 2010 Wiley-Liss, Inc.