Chapter 13, Problem 1QAP

To determine

The favorable and adverse effects of diagnosis-related groups over fee-for-service payment.

Explanation of Solution

Fee-for-service payments have been the key means where resources were allocated to the hospitals in the United States. According to this method, the sum of the payment is the actual cost spent on a patient. This method was considered fair by medical service providers to the extent it was sufficient to cover at least the cost they incur. Diagnosis-related groups or commonly known as DRG is a mechanism that classifies patient into groups. It is a cost containment strategy that encourages increasing the number of cases treated and reducing the cost per each treatment. A key advantage of this method over the former is that it encourages hospitals to restrict their treatment options to extremely necessary ones. The efficiency as well as the transparency of DRG is higher than that of fee-for-service payments. Further, the average time a patient stays in hospital would ideally be shorter. On the contrary, the mechanism creates financial incentives for discharges that are early. This however is not in line with the priorities of clinical benefits.

Economics Concept Introduction

Introduction:

Fee-for-service and diagnosis-related groups are two means by which payments for medical services provided by physicians are being made. Fee-for service payments have been in the scene since a longer time whereas diagnosis-related groups have been adopted since 1983. This basis of making payments to hospitals in the United States of America was first adopted by Medicare, which is the national health care insurance program in America.