Medicare

Refinement of Diagnosis Related Groups Needed To Insure Payment Equity Gao ID: HRD-88-41 April 22, 1988

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.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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