Prospective payment for hospital costs using diagnosis-related groups: will cost inflation be reduced?

Abstract

In response to rapidly rising costs in the medical care industry, especially for inpatient hospital charges, the Reagan administration has sent the first component of a plan for prospective payment of medical care to Congress. This first phase would involve changing reimbursement for hospital charges under Medicare using a system of predetermined rates for particular illnesses. Reimbursement rates have been set for 467 patient-illness categories, or diagnosis-related groups (DRGs), in an attempt to eliminate the variance in hospital costs and stem inflation under Medicare for patients with similar illnesses. But such a system is still subject to manipulation by hospitals that seek to increase reimbursement either to meet costs not covered by the appropriate DRG or to increase profit. The DRG reimbursement system does not prevent cost shifting to private insurance patients and does not involve physicians in efforts to improve cost efficiency. Although the DRG approach may seem conceptually appropriate, implementation will be difficult and the dampening effect on rapidly rising medical care costs may be overestimated. An alteration in the reimbursement mechanism for all medical care may be indicated to reduce significantly the inflation in medical care costs.