Transitioning into the DRG world

The impending DRG system of payments is set to become a reality soon in Dubai. This will change more than a few things for everyone involved in the healthcare delivery in this region. I believe that hospitals have a unique opportunity at hand to create a position of advantage for themselves as this new era emerges.

Getting Ahead Early

The window will not last long. The hospitals that are quick to adapt to the change can get a head start. Yes, shadow billing was an important step towards preparation. But there is much more to it. For example, coding correctly will make a big difference. Since the number of codes are much lesser in the DRG system, the monetary value of each code is much higher. Lack of clarity or missing out on Outliers/add ons, M C/C or C/C codes, can cost dearly.

A hospital needs to reinvent itself in many ways to make the most of the DRG system. Erstwhile costs plus margin thinking does not work anymore when every in-patient encounter is paid as a package to the hospital. The transition from cost-based pricing to price-based costing changes a lot of things. Working backwards from the revenue that a hospital will make from a procedure will necessitate, over a period of time, the need to accurately calculate and optimize costs for that procedure. Early starters in the costing exercise will gain quickly, as the others are still guessing their margins. Activity Based Costing for in-patient procedure has proven to be effective in the markets where price based costing drives healthcare delivery. Over a period of time, hospitals will find that the same procedure has a different margin, if an activity around it [e.g. the doctor performing it] changes.

What is included in each package will need to be articulated and adhered to. Medical Directors will play a crucial role. The fine balance between great patient outcomes and restrictions on seemingly unnecessary investigations and/or medications will need to be struck. An inclusive approach, where physicians are on board with creating various packages will be a must have. Pre-operative investigations, Intra-operative consumables, Post-operative antibiotics and more, will have to defined as much as possible for at least the DRG's without complications and co-morbidity, to start with.

Clinical pathways will have to be revisited in a new light. Whereas, clinical excellence and outcomes are non-negotiable and must be achieved, there will be conversations around what indications should prompt a particular line of treatment or a particular investigation.

Strategic Implications

Strategically, healthcare providers need to bear in mind, that it is the bottom-line, that determines the overall value of an organization. Hence, they cannot overlook efficiencies and stay oblivious about procedure level margins, thus endangering the bottom-line. Moreover, they cannot compromise on the quality of care either. Providers who can strike this balance earlier in the game will create a unique advantage for themselves.

Over the long run, there will be a need to benchmark cost drivers with similar hospitals. This can lead to renegotiating vendor contracts and re-engineering supply chains. I will not be surprised to even see new physician compensation models that are in line with margins rather than revenues.

Some hospitals may even look at tinkering their service mix to suit their cost structures. Arriving a winning service-mix will be crucial to growth.

Overall, the hospitals with better margins will have the ability to drive the market. They will have deeper pockets to employ better resources and buy better equipment.

In summary, healthcare players who create an early advantage in the DRG world can stand to gain in the mid to long term.

?Vivek Shukla is a Board and CXO Advisor for growth in the healthcare industry. Over the past two decades, he has carried out numerous mandates for organic and inorganic growth advisory. He is prompt on LinkedIn messages.