Evaluating financial viability of clinical programs under prospective pricing

The new financial incentives created by prospective pricing for hospital inpatient services--especially by Medicare's diagnosis-related group (DRG) system--make it important for hospitals to evaluate the financial viability of individual clinical programs. For the purposes of such evaluations, however, DRGs are likely to be poor definitions of the services or products delivered by any given hospital. This article examines the implications of the concept of "product lines" in hospitals, three criteria for useful product definitions, ways in which DRGs fail to meet these criteria, the need for hospital-specific product definitions, and technical difficulties that hospitals may encounter in defining their products. A case study of the orthopedic service at a large, urban, teaching hospital, using both DRGs and the hospitals own product definitions, illustrates the process of evaluating the financial viability of clinical programs.