Module Components

• Overview
• Assignments

Topics

• MD: The ONLY State without DRGs
• Current Challenges
• Moving Forward

NDNP 803 - Executive Leadership and Healthcare Economics

Module 12: Reforming Health Care in Maryland

Overview

When we talk about paying for health care, the conversation quickly turns to talking about “fee for service” and DRGs. Fee for service (FFS) is a payment model where services are paid for as itemized in the hospitals invoice. It is much like shopping in a grocery store, for each item you put in your cart, there is a cost to that item. In the health insurance and the health care industries, FFS occurs when doctors and other care provides receive a fee for each service such as an office visit, test, procedure, or other health care service. Payments are issued retrospectively, after the services are provided. It has been demonstrated that this method is inflationary and creates a potential financial conflict of interest with patients, as it incentivizes (rewards) overutilization – the more services in the “patient’s basket”, the more reimbursement the provider or organization receives. It gives an incentive for physicians to provide more treatments because payment is dependent on the quantity of care, rather than quality of care. Similarly, patients are incentivized to welcome any medical service that might not be necessary as insurance companies reimburse for each individual service.

Historically, to help minimize the cost of care and streamline reimbursement, Robert Barclay Fetter and John D. Thompson of Yale University with the assistance of HCFA (Health Care Financing Administration), now called the Centers for Medicare and Medicaid Services (CMS) created a system to operationalize hospital services into “like services” to which prices could be attached. The purpose was to help control the FFS system across providers. These services were categorized into diagnostic-related groups (DRGs) and were first implemented in New Jersey in 1980 with a small number of hospitals.

2023 marked the 40th anniversary of the introduction of the concept of diagnosis-related groups (DRG) into the national healthcare financial lexicon. Although DRGs were not initially designed as a reimbursement management system, the idea of using them to guide reimbursement quickly gained traction after the state of New Jersey implemented a DRG-based hospital reimbursement system. Prior to this, hospital reimbursement operated on a cost-based system in which hospitals retrospectively billed for the actual costs of an episode of care. The use of DRGs enabled a prospective model in which hospitals received a set amount based on the patient’s diagnosis.

Based on the success in New Jersey, Congress incorporated a DRG-based system for Medicare (CMS-DRG) when it created the Inpatient Prospective Payment System in 1983. When it was implemented on a national level, the CMS-DRG system represented a “revolutionary shift in the balance of political and economic power” between the payers (mostly the government) and the providers (hospitals and physicians).

The core of the DRG system is the healthcare “product” supplied by a hospital—care of a patient. The initial architects of the DRG system established 23 major diagnostic categories (MDCs) as the first level of categorizing these products. The MDCs were then subdivided into DRGs based on factors such as surgical status, organ system, age, symptoms, comorbidities, and discharge status. Once the DRGs had been defined, every single diagnosis code from the International Classification of Diseases, Ninth Edition, Clinical Modification (ICD-9-CM) system was categorized. To make the system manageable and statistically meaningful, the number of DRGs was initially intentionally limited to just under 500 codes—a significant reduction in overall code-numbers from the voluminous ICD-9 list. Each DRG was specifically designed to reflect the “resource intensity,” or the extent and amount of resource utilization required to provide the care represented by the products within the group. ICD-10 codes became effective October 1, 2015.

Today, our health care system is changing again as we move towards pay for performance. "Pay-for-performance" is an umbrella term for initiatives aimed at improving the quality, efficiency, and overall value of health care. These arrangements provide financial incentives to hospitals, physicians, and other health care providers to carry out such improvements and achieve optimal outcomes for patients.

Pay-for-performance has become popular among policy makers and private and public payers, including Medicare and Medicaid. The Affordable Care Act expanded the use of pay-for-performance approaches in Medicare in particular and encourages experimentation to identify designs and programs that are most effective.