Provider behavior from FFS to DRGs payment: experimental evidence from real physicians

Controlling the escalation of healthcare costs is a critical issue in China, which has led to a shift in the health insurance payment system from Fee-for-Service (FFS) to Diagnosis-Related Groups (DRGs). While DRGs contribute to cost containment, they also introduce moral hazards such as upcoding and undertreatment, which threaten the sustainability of insurance funds and public health.

This study conducted a lab-in-the-field experiment with real physicians to simulate the operation of FFS and DRGs payments, incorporating the uncertainty of medical outcomes.

The results indicate that DRGs reduce overtreatment but increase the risks of upcoding and undertreatment, particularly under conditions of uncertainty, leading to greater losses for insurance funds. Most physicians demonstrated a strong altruistic inclination, prioritizing case severity over fairness and efficiency. However, the conflict between financial incentives and professional ethics creates a dilemma where adherence to medical norms may compromise patient welfare under the DRGs system.

This research underscores the necessity of regulatory interventions to address these moral hazards, thereby safeguarding our healthcare system and public health.