Hospital response to DRG refinements: the impact of multiple reimbursement incentives on inpatient length of stay

Recent research has warned that the introduction of Diagnosis Related Groups (DRGs) based on hospital treatment decisions will lead to an increase in the rate of marginal procedures and to a resumption of high medical expenditure growth rates. This paper explores the often contradictory effects of the multiple reimbursement incentives created by refinements to the Prospective Payment System (PPS) (principally, the introduction of procedure-based DRGs) on hospital resource allocation. Three effects are examined in the paper: (i) the change in primary or payment-related procedures owing to marginal reimbursement incentives; (ii) the change in secondary or non-payment-related services owing to average price incentives; and (iii) the change in average severity of both medical and surgical admissions. The model suggests that the anticipated positive effect of marginal reimbursement incentives on overall hospital resource use may be offset by several factors, most notably the lower average payment incentives of non-procedural DRGs.