Medicare: Refinement of Diagnosis Related Groups Needed to Insure Payment Equity.

In fiscal year 1986, Medicare paid hospitals about 45.6 billion for inpatient hospital services. About 35 billion was paid under the Medicare prospective payment system PPS. PPS pays hospitals a fixed, predetermined amount for each Medicare beneficiary discharged from a hospital. The amount of the payment for a beneficiary depends upon the diagnosis related group DRG that the patient is classified under. For PPS to work as intended it is essential that DRGs group patients with similar resource needs. Because of the importance of DRGs to PPS, GAO evaluated the DRG case classification system as a means of grouping patients for payment purposes. Specifically, GAOs objectives were to 1 measure the variations in the level of resources required to treat patients within the DRGs, 2 determine if hospitals get an equal mix of high- and low-cost patients in DRGs where a wide variation in resource requirements exists, and 3 determine if hospital characteristics, such as bed size and rural or urban location, are systematically related to whether a hospital receives patients with higher- or lower-than-average treatment costs within the DRGs.