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Technological innovation and transparency in DRG

Every week during a summer you might find a summary from a book called Diagnosis Related Groups in Europe, available HERE.


Technological innovation in health care is highly valued by patients, clinicians and politicians, as advances in medical technology have greatly improved the ability to prevent, diagnose and treat a large number of diseases and conditions, leading to reduced mortality and better quality of life in many countries. At the same time, technological innovation is a major driver of increasing health care costs, and policies have been devised with the aim of balancing technological innovation and affordability. Technological innovation may be incremental – consisting of small improvements of existing services, or it may comprise radical changes (e. g. replacing surgical therapy with new medical therapy.) They may also occur as a transfer or adaptation of existing technology from one setting to another (e. g. the shift of certain procedures from inpatient settings to day care.) Quality in health care can be defined as any aspect of health services that benefits patients during the process of treatment or improves health outcome after treatment. Whether or not the incentives of DRG-based hospital payment systems produce socially desirable effects depends on the specific combination of costs and quality. The effects (especially long-term effects) of technological  innovation on quality (and on costs) are often difficult to identify at the time, when innovations are first introduced into hospital practice. A variety of technologies have been found to be ineffective or even harmful after having been widely adopted and used.

The dominant incentives of a basic DRG-based hospital payment system encourage hospitals to reduce cost per admission and increase the number of admissions. Hospitals are likely to make use of economic evaluations before introducing certain technological innovations. They are mainly required in cases in which cost-decreasing technological innovations are accompanied by decreases in quality, as it should be determined whether the decrease in quality outweighs the reduction in costs. Problems with DRG-based hospital payment occur when technological innovations improve quality but are associated with increased costs per admission. When technological innovations are introduced, hospitals are paid according to historical cost patterns that do not reflect the higher costs of using technological  innovations. Several countries provide additional funding for capital costs, thus exempting a significant proportion of hospital costs (particularly relevant in the context of innovations that increase capital costs) from the incentives of DRG-based hospital payment. The availability of funding from sources other than the DRG-based hospital payment system may modify the incentives of DRG-based hospital payment systems (e. g. extra funding for teaching or research.)

Long-term mechanisms ensure that technological innovations are eventually formally incorporated into the DRG-based hospital payment system, either through updates of the DRG system, or through updates of the payment rate. The hospital payment systems in most countries are updated at regular intervals. Almost all countries have developed certain short-term payment instruments that encourage the use of quality-increasing technological innovations that also increase costs, within the time period during which the DRG-based hospital payment system does not yet account for the technological innovation. All extra payments provide strong incentives to hospitals to apply technological innovations, as they exempt the selected technologies from the incentives of DRG-based hospital payment. Countries with frequent updates of their DRG system and of the payment rate – and with a short time-lag between data collection and using the information collected for DRG-based hospital payment — are clearly in a better position to incorporate technological innovations into their systems.


Transparency of hospital services and costs has substantially improved in all countries. Today, the vast majority of hospitals in all countries are required to prepare detailed activity reports that specify the number and type of DRGs provided. Prior to the introduction of DRGs, hospital activity was reported either on the basis of highly aggregated measures  or on the basis of very detailed measure. None of these measures could meaningfully reflect hospital activity. DRGs aggregate large number of patients treated by hospitals into a small number of groups of patients with similar clinical characteristics and similar resource-consumption patterns. Regulators, payers and hospital managers in most countries are starting to use DRGs for hospital performance comparisons. Hospitals receive higher DRG-based payments if they "code" (input) all relevant diagnoses and procedures. Almost all countries find that information about diagnoses and procedures in hospitals has improved considerably since the introduction of DRGs.

Improving hospital efficiency is generally a key motivation for introducing DRG-based hospital payment systems. There are relatively few studies that have explicitly identified and quantified the impact of these systems on efficiency using established data-driven methods. The studies reported that the introduction of DRG-based hospital payment was associated with improved technical efficiency in Portugal, Sweden and Norway, but that no positive impact was observed in the United States and in an Austrian study. Most research has concentrated on indicators of efficiency – such as activity and length of stay – which are more easily measured, but by definition provide only a partial picture of efficiency. There is generally agreement in the literature that the introduction of DRGbased hospital payment systems has led to increased activity and reduced length of stay, and it is consequently often assumed that hospital efficiency has improved.

There have been major concerns on the part of health professionals in many countries that DRG-based hospital payment systems might compromise quality of care because hospitals are incentivized to reduce costs. Pro-ponents of the use of DRGs have argued that quality of care could in fact be improved, because DRGs contribute to increased transparency in the quality of care and because hospitals are incentivized to invest in quality improvements that lead to reduced costs. Some studies found that processes of care (e. g. as measured by physician and nurse cognitive performance) improved, but at the same time, a larger proportion of patients were found to have been discharged in unstable conditions after the implementation of DRG-based payment. In Europe, the available research evaluating the impact on care quality and patient outcomes is too limited to draw any firm conclusions, in particular because evidence is available only from a limited number of countries.

Countries planning to introduce DRG systems have two options. They can either develop a new DRG system from scratch or they can import one of the already-existing DRG systems fromabroad. Historically, most countries that introduced DRG systems initially did so for the classification of acute hospital inpatients. The reason for excluding outpatients, day cases, rehabilitation and psychiatric care from DRGs was that diagnoses were found to be a bad predictor of resource consumption. In recent years many countries have extended their DRG systems to account for day cases and sometimes have even included outpatient activity. Because the goals of European countries and the problems they face are highly similar, it is at least worth considering the benefits of increased cooperation, coordination and harmonization of DRG systems in Europe. The benefits of European DRG system would include avoiding duplication of work, improving knowledge exchange in the refinement of DRG systems, increasing transparency of hospital services across countries and also facilitating cross-border movements of patients and payments.