Power, Politics, and Universal Health Care by Altman Stuart

Author:Altman, Stuart.
Language: eng
Format: epub
Publisher: Random House Publisher Services

The Birth of DRGs

The HEW team had three goals in designing the new Medicare hospital payment system. It wanted to end cost-based payments, create an annual budget for hospital spending, and provide a financial incentive for hospitals to lower the cost of care. Similar to TEFRA and Nixon's wage and price controls, the plan incorporated per-case expenses as the unit of payment. Rather than the imprecise case mix adjustment used in TEFRA, the HEW plan used the DRG system developed by Thompson and Fetter at Yale University.

As the name implies, patients would be assigned to a DRG based on their diagnosis when they entered the hospital.44 Each DRG was assigned an index number based on the expected cost of the resources needed to treat that diagnosis. The expected resources needed per DRG were determined by analyzing actual patient usage throughout the country in the years prior to implementing the program. The more resources needed, the higher the index. An important component was the average number of days required for treatment. A different DRG for the same diagnosis was assigned if the patient required surgery. In order to make the system manageable, the thousands of potential diagnoses were combined into 467 DRGs. Each DRG included diagnoses that were similar in terms of medical characteristics and patterns of resource use.

The index was structured such that a base rate of 1.0 was assigned to a normal hernia repair. Diagnostic groups would receive more or less than the base, according to estimated resource use. For example, kidney transplants had one of the highest DRG indexes.45 The final step in the process was for the government to determine what it would pay for the base DRG with a weight of 1.0. This was called the “standardized amount” and was derived such that total Medicare spending for inpatient hospital care would be consistent with the budget set by Congress each year.46 However, Medicare was an entitlement, and if total spending for Medicare exceeded the budget, the government would still pay the difference.

For each hospital, an average DRG weight was established based on the types of patients it treated. Thus, hospitals that treated more complex patients received a higher average weight and, therefore, more revenue.

Fortunately for the planners of this new system, a version of the DRG system had been used in New Jersey since 1976. It was developed with the cooperation of the New Jersey Hospital Association and Blue Cross and covered all payers. To gain the acceptance of the hospitals and private insurers, the state agreed to build in payments to hospitals for charity care and bad debt.47 The president of the New Jersey Hospital Association, Jack Owen, became a strong supporter of the DRG system and later advised the HEW team.48 The original DRG system was intended to be a management tool and needed to be modified to be used as a payment system. Although many of the changes were made during the New Jersey experiment, the HEW group created modifications so that the system could be used for the entire nation.

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