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The first DRG: lessons from the end stage renal disease program for the prospective payment system

J H Maxwell, H M Sapolsky

    Inquiry : a Journal of Medical Care Organization, Provision and Financing
    |January 1, 1987
    PubMed

    Insights

    Medicare's early prospective payment system for end-stage renal disease (ESRD) encouraged cost savings but failed to fully benefit the government due to unadjusted prices. Lessons learned from ESRD reimbursement inform hospital payment strategies.

    Area of Science:

    • Health economics
    • Healthcare policy
    • Medical reimbursement systems

    Background:

    • Medicare implemented Diagnosis Related Groups (DRG) for hospital reimbursement in 1983.
    • A decade of prior experience with prospective payment existed for the End-Stage Renal Disease (ESRD) program.

    Purpose of the Study:

    • To review Medicare's ESRD prospective payment experience.
    • To identify lessons applicable to Medicare's hospital services reimbursement.

    Main Methods:

    • Review of Medicare's historical reimbursement data and program outcomes for ESRD.
    • Analysis of the impact of fixed-price reimbursement on provider behavior and cost-saving initiatives.

    Main Results:

    • Prospective payment for renal dialysis incentivized cost-saving techniques by providers.
    • Failure to adjust dialysis prices in line with cost reductions limited government savings.
    • Independent changes in medical practice also influenced program outcomes.

    Conclusions:

    • Prospective payment systems can drive efficiency but require price adjustments to maximize benefits.
    • Lessons from ESRD reimbursement are relevant for understanding the impact of DRG-based hospital payments.
    • External factors, such as medical practice evolution, significantly affect prospective payment system outcomes.

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