Impact of DRG payments on the quality of health care
Diagnostic and therapeutic groups (DRGs) were first used to pay hospitals in 1983 under the US Medicare program. The development of this programme was born out of the need to move away from a fee-for-service approach to hospital financing, which was considered inherently inefficient and increasingly expensive. Since then, DRG-based payment for hospital admissions has been widely adopted internationally with the explicit aim of improving efficiency, primarily due to three main advantages, which are:
"Efficiency" is a widely used term that can have different meanings. Economists distinguish between technical, cost and allocative efficiency.
Technical efficiency is defined as maximizing performance for given entry levels or, in this context, treating the largest number of patients given the available resources. Hospitals are cost-effective when they minimize costs for any given level of performance. Allocative efficiency can be defined for both outputs and inputs. The optimal mix of outputs (casemix) depends on the value of each output, which requires consideration of the relative values of surgery and all other health care interventions. The optimal mix of inputs depends on the relative value of each type of input, for example, the salaries of doctors and nurses.
Parameters influencing efficient hospital behaviour may include, for example, the number and type of patients treated, unit costs and length of stay. The extent to which DRGs contribute to achieving these forms of efficiency depends on how they are used for payment purposes.
The competitive theory of the Yard Stick is designed to encourage providers to reduce costs in contexts where they face limited competitive pressure. Thus, it is effective when regulated prices are virtually independent of individual providers' costs. Ideally, prices should reflect the costs of efficient providers set for all.
Payment models for inpatient healthcare providers
For DRG-based hospital payments, we compare the three primary forms of provider payment used in the hospital setting:
With cost-based reimbursement, payments to hospitals are based on the cost of each individual patient. The main method of cost control is to specify a fee schedule detailing unit payments, of each "item of service" (e.g., medication, x-ray, procedure). Hospitals must therefore provide itemized bills for each patient treated, but there is no incentive to limit what treatments they provide per insured patient.
Cost control is one of the key advantages of global budgeting arrangements, which are used in many European healthcare systems, at least when the budget constraint is credible and binding and there is a separation between the payer and the hospital as a provider of care. This separation has traditionally been present in social health insurance systems and, since the 1990s, increasingly in tax-financed systems. A fixed payment is agreed in advance for a target level of activity - often specified at specialty level.
DRG-based inpatient payments have two key characteristics. (1) Activity is described by DRG rather than by specialty. (2) DRG reimbursement is largely predetermined because it is determined by patient characteristics (especially principal diagnosis), a DRG category with a fixed "price."
The three models offer different incentives to achieve goals related to activity levels, cost control, quality of care, and the three types of efficiency.
When it comes to controlling spending, DRG-based hospital payments work better than cost-based reimbursement, but not as well as global budgets. The potential for quality improvement under a DRG-based hospital payment system may depend on whether payments are aligned with the quality of care. Where DRG-based hospital payments provide a fixed price per unit of activity, hospitals are incentivized to increase activity and minimize costs, and thus improve technical efficiency. Although cost-based reimbursement also encourages increased activity, there is no incentive to minimize costs. DRG-based hospital payments may offer incentives to improve allocative and cost efficiency by encouraging providers to consider prices and the quantity of inputs they use. It can also encourage efficient allocation of outputs if prices reflect their relative value, but in practice most jurisdictions still base prices on costs.
Still, overall, DRG-based inpatient payments may provide stronger efficiency incentives compared to either alternative.
DRG-based hospital payment systems have the potential to increase the efficiency of hospital service delivery, more so than other hospital payment models. This is because there are clear incentives for hospitals to work harder, because they are paid according to the number of patients they treat, and also because of cost control, since the prices they face are set independently of their own costs. These payment characteristics encourage providers to improve their technical and cost efficiency and seek allocative efficiency in their input mix choices. In theory, DRG-based inpatient payments can be used to promote allocative efficiency in the overall mix of outputs produced by the hospital sector as a whole. This requires a price attached to each DRG to reflect its social value. In practice, however, DRG prices are cost-based in almost all countries, so seeking allocative efficiency in this sense is not part of DRG-based hospital payment policy.
The empirical evidence is mixed as to the extent to which the effectiveness of DRG-based hospital payments has improved. This is partly due to heterogeneity across countries in the way DRG-based hospital payment systems operate.
It is generally agreed that DRG-based inpatient payments affect efficiency indicators such as activity and length of stay, although the same caveats apply. Unintended consequences may include savings (on quality), cost shifting, patient choice, or coding a higher DRG code at a higher price.
Potential impact of DRG-based hospital payments on quality of care
Quality of care is a multidimensional concept that covers effectiveness, safety, accessibility and responsiveness of care, but there is no consensus on how these measures should be measured. A useful and widely used approach is that conceptualized by Donabedian, which describes that quality measures are by their nature either structure, process, or outcome focused.
Structural measures - such as the qualification of health personnel or the level of equipment - may provide the conditions for delivering a given quality of care, but are not sufficient to ensure an appropriate process of care.
Procedural measures should be based on clinical evidence of the effectiveness of the process in question and should be consistent with current expertise. Process indicators may be more vulnerable than outcome or structure measures.
The way prices are set will have a significant impact on providers' drive for cost-effectiveness and consequently on quality.
In most countries where a DRG-based hospital payment system is in place, monitoring and reporting of quality of care appears to remain inadequate.
The unintended adverse effects of DRG-based hospital payment systems on quality of care could potentially be avoided by modifying payment system incentives. If the payer/buyer wants to improve quality of care, payments need to be adjusted to reward hospitals for the additional cost/effort associated with quality improvement. There are various options for adjusting DRG-based hospital payment systems based on quality of care. Simplistically, there are three options:
Of course, it is also possible to have a system that combines different approaches, for example: patient-level quality adjustment with global payment/hospital-level quality adjustment. However, a fundamental prerequisite for any quality-based payment adjustment in a hospital payment system is the availability of information on the quality of care.
DRG-based payment systems may pose risks to quality of care, but they may also provide opportunities for quality improvement. The introduction of DRGs has increased transparency and facilitated comparison and standardisation of care. The efficiency pressures introduced by DRG-based payment systems can help to improve the organisation of care, accelerate technology adoption and thereby improve quality. However, hospitals may skimp on quality as a way to save costs by manipulating the services/care provided to patients. Technology adoption rates may slow if new technologies do not result in cost savings. At the same time, these potential adverse effects are not inevitable consequences of DRG-based inpatient payments and can be addressed through careful payment scheme design.
Despite the widespread implementation of DRG-based hospital payment systems since the early 2000s, the available research evaluating the impact of the systems on quality of care and patient outcomes is too limited to draw any firm conclusions. The limited evidence to date does not suggest that the introduction of DRG-based inpatient payment has had a significant impact on patient outcomes.
DRG-basedhospital payments provide an opportunity to better measure the quality of care in hospitals. Thus, it may be possible to improve quality by providing explicit incentives for higher quality procedures/treatments, penalizing "poor quality care," or providing funding to improve patient outcomes. This requires continuous improvement of data and indicators to monitor quality of care. In many countries, information on patient outcomes and process quality is not routinely collected. However, if financing mechanisms become more sophisticated, the demand for and supply of information on quality of care will certainly increase.