Medicare hospital payment by diagnosis-related groups

On 1 October 1983, the Medicare system began a phased transition to a new payment method for hospitals based on uniform payments by diagnosis-related group (DRG). This article reviews the rationale for DRG-based reimbursement, describes the new Medicare system, and discusses its implications for hospitals, physicians, and hospital-physician relations. Although it is too early to evaluate its impact, this payment system will probably encourage more operational interaction between hospital administrators and organized medical staffs, and accelerate trends towards salaried service chiefs in community hospitals and greater external scrutiny of physicians' activities.