Diagnosis Related Groups: Understanding Hospital Performance

Diagnosis related groups (DRGs) were originally developed to provide product definitions for the output of hospitals. They can serve as a basis for budgeting, cost control, and quality control in hospitals. They were adopted by Medicare in 1983 to serve as a basis for a prospective payment system (PPS) for US hospitals. This system has resulted in savings of more than $50 billion in Medicare hospital payments through 1990 and extended the solvency of the Medicare Hospital Trust Fund well into the next century. Many other payers for hospital care have adopted DRG systems, including state Medicaid programs and private insurers, such as Blue Cross. More than 20 countries are currently developing or have adopted DRG-based systems for managing and financing hospital care.