Refinement of Diagnosis Related Groups Needed To Insure Payment Equity

HRD-88-41: Published: Apr 22, 1988. Publicly Released: Apr 22, 1988.

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GAO evaluated the Health Care Financing Administration's (HCFA) diagnosis-related groups (DRG) classification system's effectiveness as a means of grouping patients for Medicare payment purposes.

GAO found that: (1) the Medicare Prospective Payment System (PPS) bases reimbursement on the average cost to treat certain conditions nationally, rather than on the resources required to treat a specific patient; (2) wide variations in treatment resource requirements affected payment equity and resulted in hospitals profiting or losing based more on the mix of the patients they treated than on the efficiency of their operations; (3) wide variations in treatment costs gave hospitals financial incentives to seek patients with diagnoses in the low-expected-treatment-cost range; (4) larger urban hospitals were more likely to receive patients with higher-than-average treatment costs; and (5) although the DRG classification system provided a good basis for determining hospital payments under PPS, the system needed adjustments to reduce the variations in resource requirements within many DRG.

Recommendation for Executive Action

  1. Status: Closed - Implemented

    Comments: The Department of Health and Human Services (HHS) stated that it did not plan to take any special action in response to this recommendation. HHS has revised some DRG and added some DRG, which should reduce variation in selected DRG. HHS says it plans to continue refining DRG.

    Recommendation: The Secretary of Health and Human Services should direct the Administrator, HCFA, to review DRG that GAO identified as having wide variations in patient resource requirements and change the DRG classification system to reduce the variations within DRG.

    Agency Affected: Department of Health and Human Services


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