A common method for paying hospitals, generally for inpatient care they provide is what we call a DRG system. DRG is an acronym, of course, that stands for Diagnosis Related Group. So let's talk about what these DRGs are and how a DRG payment system works. In a DRG system, hospitals are paid a flat payment for each discharge, and by discharge here we mean the end of a hospital stay. The terminology would be that patients are admitted at the beginning of their stay when they enter the hospital and then discharged at the end when they leave. So you can think of payment in a DRG system as payment per patient hospital stay. Each time a patient stays in the hospital, it generates a DRG payment. In the most straightforward versions of DRG systems, the classic DRG system, the amount of payment is determined only by the patient's diagnosis at the time of admission. We'd operationalize this around a structure that groups patients with similar diagnoses together in a common group called, can you guess? A Diagnosis Related Group. In practice, these structures would have hundreds of different groups. The first ones created, I believe, had four or 500 groups. Systems have evolved since then, so that now some have many more than that. There might, for example, be a group for patients with pneumonia, a group for patients with heart failure, one for patients with a hip fracture, or a group for a normal newborn. DRG systems have to have a method for assigning patients to groups based on their diagnoses. This grouping is generally done by an algorithm, often some software these days, that's sometimes referred to as the grouper. So the grouper takes patient information and assigns each patient to a DRG. For payment, each DRG is then associated with an allowed payment amount. One common way to do this is to associate each DRG with a weight reflecting something about the complexity or expected cost to the hospital of caring for patients in that group. So you might hear the term DRG weights sometimes, these are the weights attached to each DRG. Where and how these weights come from and how they're set can be an interesting thing, but unfortunately, it's beyond what we have time for. You can investigate that yourself if you want. Then, once you have the weight, you can use a conversion factor to get from the weights to the amount of money to be paid, like $500 per point, just making up a number. Each DRG weight point then would be worth $500. So tracing it all the way through for clarity. A patient comes to the hospital, is admitted and their diagnoses are recorded, maybe using a coding system like ICD-10. Then these diagnoses are fed into the grouper and the patient is assigned to one of the DRGs. Based on that assignment, the DRG weight and the DRG payment can be looked up and that will determine the amount the hospital will be paid for that patient's entire stay. The important thing to note is that the payment doesn't vary with the amount of time the patient spends in the hospital, and classically, it doesn't vary with the services that are performed. The payment rate is entirely determined by the conditions the patient has at the time they're admitted to the hospital. This is payment per episode for a hospital. Hospitals don't get paid more for doing more things for each patient. It's a main idea of DRGs in fact. They were created to have a payment system that moves away from fee for service payment for hospitals. Over time, there's been a lot of evolution in DRG systems. Two particular lines are worth noting. One is that the systems have grown to include more groups to more finely delineate groups of patients with different conditions or level of severity in their condition. It's an interesting trade-off. The more groups you make, the more cumbersome and tricky the system becomes to manage, but the better the DRGs can do capturing differences and the needs of different types of patients, which can be good. A second line of evolution involves accounting for care that the patients get in the hospitalization. Many systems now have come to take account not just of the diagnosis, but also whether or not the patient got certain procedures, generally focusing on major and costly procedures. For example, there might be one DRG for patients with a basic heart attack, and then another one for patients who had a heart attack and then got a bypass surgery for their heart condition. This is interesting in that it moves away from the core idea of payment not based on treatments, but on the other hand, it might allow the system to more fairly compensate hospitals for different groups of patients they have to take care of. One other thing that can be an issue in a DRG system is patients who end up needing much more care generally than the average for the DRG to which they're assigned. The weights or the payment amounts for any DRG generally are designed to be related to the average amount of care a patient in the group would need. On a patient by patient basis there will always be some variation around that mean. But what about a patient who needs a lot more care than the mean? To accommodate this, to help the hospital manage and to prevent problematic incentives from forming, DRG systems often provide for special extra payments when cases meet certain standards. We often call these outlier payments for these cases, and the cases are called outlier cases. DRG systems sometimes come under the terminology of prospective payment systems, because the amount of money that a hospital gets paid is a function of the patient's condition, not the treatments given. Of course, as systems have evolved, many are not entirely prospective in this way anymore, though they all retain a good deal of prospectivity. You'll find DRG payment systems all over the world. One of the original systems was developed in the US and first used by Medicare dating back to the 1970s and '80s. But many other countries have developed systems as well, sometimes borrowing from Medicare or other countries, sometimes doing it on their own. You'll now find quite a variety of systems out there. Mainly they have DRG in their name somewhere, though sometimes they have other names like health resource groups in England. So there are some important things about DRG systems, a very common way of paying hospitals.
