Impact of diagnosis related groups on medical practice

This report discusses the incentives that a payment system based on diagnosis related groups (DRGs) imposes on hospitals and physicians and presents the author's view of current trends with respect to the extension of DRG-based payment to areas of medical and institutional care beyond the acute general hospital. It examines the impact of prospective payment based on DRGs in New Jersey, a state with more than 4 years of experience with this payment approach. In New Jersey, the system includes all payors, not just Medicare, and as a result, responses to the system in the form of organizational change, modifications in the practice of medicine and hospital/physician interactions have been unusually visible and marked. The report also examines some of the changes that have occurred and are occurring in the way medical records are kept, the internal strictures placed on physicians by hospitals and other factors which relate to the observed trends. Empirical data on changes in length of stay, number of admissions, and so forth, are presented and preliminary explanations of the changes are offered, relating them to both payment rates and to organizational strategies on the part of hospitals.