Diagnosis Related Groups (DRGs) and the Medicare Program: Implications for Medical Technology

Preface The increase in the cost of hospital care has been a persistent and growing problem for both the Medicare program and the general public for more than iS years. A substantial portion of the increase in hospital costs has been attributed to an increase in the use of new and existing medical technologies. Congress recently legislated a new prospective per-case payment system for the Medicare program. Hospitals will be paid a specific, predetermined amount for each patient treated, regardless of the number or types of services provided. The amount paid will depend primarily on the Diagnosis Related Group (DRG) into which the patient is classified. The implementation of per-case payment has rested on the availability of an acceptable method of measuring a hospital's case mix. DRGs are just one of several approaches to measuring hospital case mix. Their importance is heightened by their adoption in the new national Medicare prospective payment system. The House Committee on Energy and Commerce and its Subcommittee on Health and the Environment requested that OTA examine DRGs and their implications for use in the Medicare program as part of a larger assessment on Medical Technology and Costs of the Medicare Program. This technical memorandum presents the results of that examination. It reviews the development of DRGs and compares them to alternative case-mix measures. It examines the validity and reliability of the DRG classification system and the accuracy of DRG coding. It provides examples of proposed and actual uses of DRGs in hospital payment. Finally, and most important, the technical memorandum includes a thorough analysis of the implications for medical technology use and adoption of using DRGs as an integral part of a per-case payment system. A principal finding is that while DRGs are ready for use in a per case payment system, their implementation needs to be closely monitored, because there is little experience with their use in this context. In the long run, the success of DRG payment will rest on its flexibility and aptability to changing costs and technologies. Four findings concern this need for periodic adjustment: 1. the requirement for regular reestimation of relative DRG prices implies a need for continued collection of hospital cost and charge data; 2. procedures allowing for the adjustment of DRG rates conditional on a hospital's adoption of a technology maybe important to stimulate adoption of desirable but cost-raising technologies; 3. the DRG adjustment process requires …