Pricing Medicare's diagnosis-related groups: charges versus estimated costs

Hospital payments under Medicare's prospective payment system (PPS) are based on prices established for 474 diagnosis-related groups (DRG's). Previous analyses using 1981 data demonstrated that DRG prices based on charges alone were not that different from prices calculated from estimated costs. Data for 1986 were used in this study to show that the differences between the two sets of DRG prices are much larger than previously reported. If DRG prices were once again based on estimated costs instead of the current charge-based prices, payments would be significantly redistributed.