Economic Analysis of DRG System

DRG SYSTEM AND LENGTH-OF-STAY: AN ECONOMIC ANALYSIS

This examination investigated the effects of DRG pricing on hospital length-of-stay for Medicare patients and for commercial health insurance patients. The examination found that hospital length-of-stay decreased for both patient groups subsequent to the implementation of the DRG system.

The findings were consistent with the economic incentives created for hospitals by the DRG system; however, hospital length-of-stay for both patient groups also declined from 1978 through 1982 prior to the implementation of the DRG system. Thus, it should not be concluded that all of the reductions in hospital length-of-stay were attributable to the implementation of the DRG system.

This research examines the relationship between the Diagnosis Related Groups (DRGs) health care reimbursement protocol used by the United States government and the length-of-stay of patients in hospitals. This question is analyzed with data for the 1978-1995 period, as this period (1) reflects the length-of-stay experience both prior to and subsequent to the implementation of the DRG system and (2) provides complete data for each of the variables prior to the time that managed care became the dominant force in health care delivery in the United States. As a major objective of managed care is a reduction in the cost of health care services, and as hospital length-of-stay is a major factor in health care cost determinations, the inclu

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995). A refinement to the DRG protocol is the All Patient Refined Diagnosis Related Groups (APR-DRGs) approach. The APR-DRGs use four severity categories to measure patient illness for each DRG, since sicker patients require more resources and have a higher risk of mortality" ("Information Adds Value," 1995, p. 34). The implementation of the DRG procedures had significant impacts on hospital budgeting. DRG procedures, with respect to funding, are, as noted above, prospective in character. The various cost-based reimbursement procedures, which the DRG procedures replaced, were retrospective in character. Prospective procedures establish the amount of reimbursement prior to the delivery of health care services, while retrospective procedures establish the amount of reimbursement subsequent to the delivery of health care services (Moble & Magnussen, 1998). The introduction of DRG procedures for use in provider reimbursement created severe budgetary problems for hospitals, regardless of the type of budgeting process employed. With a prospective reimbursement system, hospital administrators must somehow be able to forecast maximum expenditures with a high degree of precision. If they fail to make such precise estimates, the so

Category: Economics - E