DRGs: My last article was not quite right

In a previous article, I wrote: “DRGs were implemented to support insurance companies”. Upon reading this, a new friend encouraged me to look into the origins of DRGs and why they were originally established. Here is what I found out and what I would like to correct:

Reason for implementation

I thought: To help insurance companies

New opinion: Originally, DRGs were not implemented for reimbursement, they were implemented to support standardization and enhance quality at the individual DRG level, what you want to do is make sure that the hospital is paid fairly. I am sure insurance companies look at their spending per ICD diagnosis, but to my knowledge as a person outside the system, there is no standardized mechanism that monitors and tracks this under the current billing system. Consequently, you cannot improve quality for the sector with a systematic and standardized approach. You could theoretically contrive something that links spending per ICD diagnosis that considers patient characteristics and complications, but that is exactly what the humble DRG does. We don’t need to reinvent the wheel. To this point, this is what the CHI mean when they talk about transparency, not that we, the public, will know what each hospital is being paid for each code, rather the mechanism used to derive the price of care. Assuming you had the base rate of the code and the multipliers that apply at the hospital level, you could calculate the value of reimbursement in your living room, while watching Friends.

However, in recent years, the primary purpose of DRG utilization is for payment or related to payment (from CHI 2022 DRG white paper, p12):

In KSA, insurance reimbursement will be an important application of DRGs. As for quality improvement, we wait and see.

Profit vs quality

I thought: Hospitals will simply cut services to increase their margin

New opinion: Nuance and detail are important. First of all, each DRG is already split by severity, for example, there are three levels of reimbursement for Major Chest Procedures; Major, intermediate and minor:

According to a credible source, the hospital in KSA is not simply paid the DRG rate per severity code. There are modifiers that elevate the rate to match the hospital’s class. Abroad there are also modifiers for outliers and expensive therapies. Perhaps a similar system will be implemented in KSA?

Bottom line: If you are a premium hospital, you will likely be paid more than a standard hospital for the same patient presenting with the same condition. If you are treating more difficult cases, you will be paid more than simple cases. I am sure there is more, but that is beyond my current level of understanding.

However, the incentive to cut activity is still present. As I said before, the CHI hope that this will push the sector towards greater allocative efficiency and reducing waste. Ideally, the services that are cut are ones that do not generate value