Diagnosis Related Groups

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I. Introduction

The rising cost of medical care in the United States has been a concern for quite some time. Beginning in the 1960s with the advent of Medicare, a system has been needed that will balance cost with services provided within acceptable parameters. In 1982, the US Congress placed a cap on operating expenses for each Medicare case treated in a hospital, as a protective measure to insure adequate payment within reasonable limits. A prospective payment system (PPS) was initiated as a result of the cap, whereby hospitals receive a flat rate for each admission based on a calculation of rates determined by the diagnosis (Kahn, et al, 1990). A system whereby the diagnosis is grouped according to services, estimated length of stay and type of technology required for treatment was developed by Robert B. Fetter and John D. Thompson in the early 1980s (Burke, 1992). The diagnostic related groups (DRGs) form the basis for the payment system. This system was originally set up for use with Medicare but has been refined and expanded to include non-Medicare situations in the United States and abroad. Some form of DRGs has been adopted in more than 20 countries, including the United Kingdom, France, Finland, Norway, Taiwan, Spain, Australia and Ireland (Burke, 1992).
While the prospective payment system has reduced the rate of cost increase, the concern has been that it also encourages hospitals to send patients home prematurely and to deliver lower-cost care to them (Kahn, et al, 1990). “The formula used to calculate payment for a single Medicare hospital inpatient case takes an average Payment rate for a typical case and multiplies it by the relative weight of the DRG to which it is assigned. Thus, it is easy to see that the DRG relative weights have a large impact on the payment a hospital receives” (Edwards, et al, 1994,
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pp. 45).
II. Historical Overview
In the prospective payment system the basic units of payment are the standardized amounts and the relative weights assigned to the DRG. The Diagnostic Related Groups are
determined by resource consumption and clinical patterns, and also incorporate other pertinent factors, such as: the principal diagnosis; up to eight additional (secondary) diagnoses; up to six procedures performed during the stay; and the age, gender, and discharge status of the patient. “A weight is calculated for each DRG which represents the average resources necessary to care for cases in that DRG relative to the average resources used to treat all cases in all other DRGs. Services provided to the patient during the course of treatment are not addressed specifically, but are included in the total charges, which are used as the measure of resource consumption. Each year, the relative weights assigned to DRGs are recalibrated based on the latest available discharge data for Medicare discharges” (Edwards, et al, 1994, pp. 45).
Since the cost is based on the standardized amount multiplied by the weight of the DRG and not on each individual episode, resource expenditure or procedure; in some cases the
cost will be less than the expenditure, while, in other cases, it will exceed the amount billed. Through the averaging process, and given the normal distribution, cost will be balanced, over time, with expenditures. “The initial set of DRG weights was published in the September 1, 1983 Federal Register (Besdine, 1998). The weights have since been updated in response to legislation mandating periodic recalibration. They were first recalibrated in 1986 as a result of Public Law 98-21, which required the weighting factors to be adjusted for discharges occurring in fiscal year
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1986 and at least every 4 years thereafter. Subsequently, Public Law 99-509 was passed, requiring the DRG weights to be adjusted annually beginning with fiscal year 1988” (Rogowski and Byrne, 1990, pp. 87). The recalibration in 1986 included the change from calculating weights from operating costs to the use of actual hospital charges. This resulted in a simpler computation and extinguished the need to update the calibration as the cost of
resources increased. Data from patient bills is available for payment computation in a more timely manner (Rogowski and Byrne, 1990). Charge based weights have a bias in that the weights are reflective of the pricing strategies of hospitals, and may not be