The distributional implications of using relative prices in DRG payment systems

Decisions by state Medicaid programs and other third-party payers to use DRGs as the basis of hospital payment require the resolution of numerous technical design issues, including determining relative price schedules, that are likely to have important distributional implications for payers and hospitals. At issue is the development of price schedules that reflect average resource use in the populations using DRG reimbursement. An examination of differences between the Medicare relative prices and other relative prices based on different populations in New York State revealed that significant cross-subsidies among payers and hospitals would occur if Medicare relative prices were used as the basis of payment for patients outside the Medicare program. Such unintended cross-subsidies would compromise a major goal of DRG payment: to reduce "inequitable" charge and cost differentials among third-party payers.