20/20 vision
Milan Korcok, a medical writer who extensively covered the introduction of diagnosis-related groups (DRGs) in the early 1980s, asks if US-inspired DRGs are the solution for global hospital pricing transparency
Milan Korcok, a medical writer who extensively covered the introduction of diagnosis-related groups (DRGs) in the early 1980s, asks if US-inspired DRGs are the solution for global hospital pricing transparency
As reviled as US healthcare has become to critics who claim it overcharges and underserves, it is highly ironic that a nation as tidy as Switzerland should be the latest to adopt an US-inspired system for paying hospitals for the services they provide patients. Can it be that the US, which have the highest healthcare costs in the world, had it right all along?
Pre-set prices
By choosing to replace per diem-based hospital billing with a German variant of the US DRG methodology, Switzerland joins a growing list of developed nations intent on paying hospitals pre-determined fees according to the diagnostic classification of their patients: in effect, paying X dollars, euros or pounds for a definable healthcare ‘product’, give or take a little for any accessories.
Fees for service, cost-plus, capitation, global budgets, per diems—all have been tried and reworked and none have achieved the formulae hospitals and payers need to adequately quantify what a hospital stay is worth in real terms for any individual patient, given that the admission for a coronary bypass without cardiac catheterisation must bear a different price tag from a laparoscopic cholecystectomy without common duct exploration (CDE). And given the increasing movement of patients across borders, a transurethral prostatectomy without complications or co-morbidities done in Italy should bear some price resemblance to one done in Sweden.
Certainly, one would think that when insurers from the UK or Spain have to pay a client’s hospital bill for a broken hip in Estonia, they should have some clearer indication of what a reasonable charge for that might be before they decide on either surgery or business-class flight home.
a transurethral prostatectomy without complications or co-morbidities done in Italy should bear some price resemblance to one done in Sweden
Why did the Swiss join the queue?
According to an article in the European Hospital publication, Dr Carlo Ponti, president of Swiss DRG-AG (the organisation in charge of implementing the new hospital classification and reimbursement system nationally), characterised what healthcare experts in many other countries have seen as reasons to find more rational ways of paying for healthcare services: “Switzerland’s hospital system is highly complicated because the 26 cantons each have different regulations. Nonetheless, they all have one common feature, i.e. billing calculated on a per diem basis, which means that medical insurers simply pay an agreed amount per day in hospital – independent of a patient’s diagnosis.”
Says Dr Ponti: “National standardised tariffs would … make it easier to achieve comparability and … promote the exchange of healthcare services between different geographical areas within Switzerland.” In addition: “The introduction of DRG case-based lump sums is to achieve two things: more transparency of all medical services offered and provided in a hospital and ideally a performance-based kind of remuneration. In our federal structure, the DRGs will provide a requisite for more competition between the service providers because services and products delivered by hospitals can be compared, regarding cost as well as quality.”
Standardisation, comparability, transparency: characteristics hospitals have never had in abundance.
“National standardised tariffs would … make it easier to achieve comparability"
How did DRGs evolve?
The first DRGs were developed by Robert B. Fetter, PhD, and John D. Thompson, MPH, at Yale in the 1970s, and were tested out for a time in New Jersey, before they became the building blocks for Medicare’s new Prospective Payment System (PPS) in 1983. Up until then, federal government expenditures for Medicare (covering the elderly), were rising an average 19 per cent annually and showing no signs of abatement under cost-based retrospectively determined payments. Whatever hospitals charged, Medicare paid on a cost-plus basis. But since hospitals remained free to ‘determine’ their cost base, the payments were anything but predictable.
At the prodding of President Ronald Reagan, Congress legislated the new PPS system for the Medicare programme covering the nation’s elderly, and with this single revolutionary stroke overturned the payment applecart and allowed the federal government to seize control of the payment equation and tell the hospitals what they would be paid. It was a radical change in America’s healthcare system, and even though the DRGs initially pertained only to Medicare patient services, over the next couple of decades they spawned several supplemental versions to cover all patients in all hospitals, refinements for severity factors, the inclusion of complications and co-morbidities, and along with that came a full stable of acronyms: MDRGs, AP-DRGs, RDRGs, SDRGs, APR-DRGs, most of which went on to be absorbed into the diagnostic classification programmes of dozens of nations abroad.
But they also became benchmarks for all payers, including insurers – domestic and international – who could consequently determine what hospitals were getting for any given service and use that as their bargaining leverage in PPO/HMO and employee coverage contracts. The DRG system and prospective payment was the beginning – the cornerstone – of managed care in that it was designed to provide a somewhat standardised and comprehensible format by which to assess the goods, services, quality levels and prices of healthcare providers. It would give insurers a chance to bid on healthcare ‘products’ rather than roll the dice on retrospective cost-based indemnity plans. Certainly most insurers were not going to get the Medicare DRG basic rates – they would have to go better than that in negotiating contracts covering thousands, or millions, of members – but at least they knew what the hospitals’ bottom lines were.
The original DRGs were designed to pay a fixed pre-determined amount based on a classification of 467 illness categories identified by the International Classification of Diseases, Ninth Revision. Each of the DRGs was designed to bundle the various services (labour and non-labour) required to treat a patient in a particular disease category. The rates would cover most routine operating costs attributable to patient care, including routine nursing services, room and board, and diagnostic and ancillary services, and they would be factored for age of the patient, discharge outcome, co-morbidities and other modifying factors.
The payment rate for each DRG was based on the ‘average’ cost to deliver care to that patient in a particular disease category, but, as is the case with averages, the actual rate fluctuated greatly from region to region, within regions, within discrete communities and even within hospitals in given communities – depending on their infrastructure, their functions, their teaching responsibilities, and the case mix they normally handled.
The DRGs were also designed to account for ‘outliers’ – cases that involved unexpected complications, and were weighted to account for regional cost of living and wage differentials, services to low income patients and other functional differences between institutions. Thus, the rate for MS DRG 293 05 (heart failure and shock without complications or co-morbidities) at a teaching hospital in midtown Manhattan, would not be the same as the rate paid to a rural hospital with little or no medical teaching responsibilities in mid Kansas.
The incentives were clear: by paying hospitals pre-determined fixed amounts to treat patients based on their diagnostic classification, hospitals would be rewarded for treating and releasing patients in a shorter time and expending fewer resources doing it. There would be no incentive to increase length of stay to bulk up the final bill. And if they couldn’t meet the targets and they lost money per each case, they would soon enough learn to be more efficient.
by paying hospitals pre-determined fixed amounts to treat patients based on their diagnostic classification, hospitals would be rewarded for treating and releasing patients in a shorter time
The DRG concept – which in the US has been expanded and adapted to virtually all clinical services, outpatient, home care, etc. – was quick to catch on, with Australia adopting a similar system in 1992 (and adapting it for local use) and Germany instituting its own variant (G DRGs) in 2000, and applying it to all patient care, in all hospitals, public or private. The G DRG system was initially based on the Australian one, but as one might expect, German precision and attention to detail have expanded the original 650 G-DRG groupings to double that number.
In the UK, Healthcare Resource Groups (HRGs), a locally produced version of America’s DRGs, was instituted for some NHS hospitals in the 1980s, but have been used only marginally to provide information for hospital service benchmarking purposes. They have never taken hold system-wide as an integral hospital funding mechanism the way they have in the US or other European countries.
Still, more than a dozen other European countries have firmly integrated some form of DRGs or similar groupings into their healthcare systems, not only for defining prices per admission classification, but for budgeting, resource allocation, and funding.
Other countries, including Denmark, Finland, Estonia, Iceland and Sweden, have their versions in the NorDRG systems; Spain and Portugal have stuck closely to the US classifications; France’s Groupe Homogene des Malades (GHM) was inspired by the US DRGs, but adapted to national needs; Poland’s recently introduced Jednorodne Grupy Pacjentow (JGP), was strongly influenced by the UK’s HRGs; Austria’s Leistungsorientierte Krankenanstaltenfinanzierung (LKF) system was installed for all public and private hospitals as early as 1997, but the Austrians like to point out that is was neither an adoption or a further refinement of any other systems; The Netherland’s Diagnosis Treatment Combination (DBC in Dutch) was instituted in 2005 to replace a block grant system that was doing nothing to reduce hospital stays and the cost inflation that went with it; Hungary implemented its HBCS (Homogén Betegségcsoportok, Homogeneous Disease Groups) in 1993, influenced by America’s DRGs; Italy implemented its Raggruppamenti Omogenei di Diagnosi based on the original US DRG system in 1995.
achieving any semblance of uniformity among classification guidelines, let alone pricing, still has a long way to go
Australia was an early adopter of the US (all-patient) AR-DRG, which it implemented in 1992, refined into the Australian National DRG Classification (AN-DRG) and which it has continued to update annually since. Australia’s system has also influenced many other national systems in the past 20 years.
But as committed as these nations are to evolving and absorbing DRG-type methodologies to more accurately describe what it takes to treat any individual patient, achieving any semblance of uniformity among classification guidelines, let alone pricing, still has a long way to go.
In a recent publication authored by Wilm Quentin, David Scheller-Kreinsen, Alexander Geissler, and Reinhard Busse on behalf of the EuroDRG group (a European DRG consortium), it is evident that even when given a relatively simple patient model by which to compare resource allocation across boundaries, uniformity is elusive. In the Quentin et al paper, the authors cite research data comparing DRG-type classifications in 11 countries as they apply to a simple uncomplicated appendectomy, one of the most common procedures performed at any general hospital. In some countries they found but one classification grouping for all uncomplicated appendectomies, in others, as many as 11 groupings.
And they found that of all the countries in the study, only the All-Patient (AP)-DRG system in use in Spain, and the Dutch (DBC) system, differentiated between laparoscopic and open appendectomies: procedures that could account for a big difference in a patient’s expected length of stay. Furthermore, in four of the 11 countries surveyed, the classification systems failed to differentiate between patients with a primary diagnosis for complicated appendicitis (with generalised peritonitis or peritoneal abscess) and those without.
Consequently, when it comes to pricing DRGs, the differences between, and even within, countries can still be vast. As the Quentin paper reported, a JGP rate for a Polish patient’s appendectomy could run to as little as €685, compared to €2,657 for a similar patient under UK’s HRGs, and €4,645 under Ireland’s DRG system.
They note further that in their study examples, the most complex DRG was valued 5.1 times more resource-intensive than an index case in France, but only 1.1 times more resource-intensive than an index case in Finland. And when it comes to prices, the authors note that hypothetical payments for the most complex cases they studied in their samplings could amount to 12 times more in France than in Poland.
Though standardisation within any one nation or across borders is a useful paradigm to pursue, none of the DRG architects in the various nations that have adopted the system truly believe that one standard fee per case can, or should, ever be achieved. This is not an attempt to ensure that an uncomplicated appendicitis in Lisbon costs the patient, insurer, or government the same as it would in Bonn. Neither should the expansion of DRG-type classifications be thought of as price monitors. They have a function far beyond that in terms of their ability to contain all healthcare costs: help the various healthcare system components plan budgets, allocate finances and resources, increase service efficiency, and do all of that while optimising healthcare service quality to publics that have increasingly high expectations.
Neither should the expansion of DRG-type classifications be thought of as price monitors
Radical measures for soaring costs
Certainly, since the DRG system and its progeny were introduced in the 1980s, healthcare costs in developed countries have soared, and it’s no coincidence that the countries with the highest healthcare costs are the ones that have most enthusiastically embraced the various DRG methodologies: the US, Netherlands, France, Germany Denmark, Switzerland and Austria all spend more than 11 per cent of their GDP on healthcare, and all are struggling to find ways to find new sources of revenue to pay for their healthcare demands – in public institutions or private – and to get more value for the money they do pay.
Rick Mayes, Ph.D, and Dr. Robert A. Berenson, authors of the landmark book Medicare: Prospective Payment and the Shaping of U.S. Healthcare, have described Medicare’s prospective payment system using DRG’s as ‘the single most influential postwar innovation in medical financing’.
The change, they wrote, was “nothing short of revolutionary. For the first time, the federal government gained the upper hand in its financial relationship with the hospital industry. Medicare’s new prospective payment system with DRGs triggered a shift in the balance of political and economic power between the providers of medical care (hospitals and physicians) and those who paid for it – power that providers had successfully accumulated for more than half a century.”
(It should be noted that Medicare (for the elderly and disabled), accounts for approximately 45 million people and makes the federal government the single largest health insurer in the US –giving it huge leverage over all hospitals in the US, non-profit or for-profit.)
A rationalisation of healthcare fees within or across nations can clearly be of great benefit to international health insurers, even if all they do is provide benchmarks. But as experts in the field have noted, fixed price prospective payments can also encourage hospitals and doctors to release patients too early, up-code them to more severe (and expensive) DRG classifications, or otherwise game the system. As several analysts have already seen, the DRG methods have already lead to ‘certain forms of corruption in several European nations’. The international consulting firm Frost and Sullivan notes in its advisories that up-coding (assigning higher-than-warranted severity DRG classifications so as to gain higher fixed prices) have been detected in Germany, Hungary and Italy; and in some areas of Germany and Finland the length of stay in acute care hospitals has dropped substantially ‘which is expected to draw substantial amount of suspicion in future’.
But overall, the embrace of the DRG model among so many of the world’s wealthiest nations clearly substantiates the need to develop a better way to classify patients being admitted to hospital and to pay the hospitals accordingly. It has been a long time in coming.
In an address to the Philadelphia Medical Society, Dr Eugene Codman, a surgeon at Massachusetts General Hospital made the following remarked: “Really the whole hospital problem rests on one question: What happens to the cases? ... We must formulate some method of hospital report showing as nearly as possible what are the results of the treatment obtained at different institutions. This report must be made out and published by each hospital in a uniform manner, so that comparison will be possible. With such a report as a starting-point, those interested can begin to ask questions as to management and efficiency.”
Dr Codman delivered his address in 1913.