The Evolution of DRGs

Brandon D. Bushnell, MD

This year (2013) marks the 30th anniversary of the introduction of the concept of diagnosis-related groups (DRG) into the national healthcare financial lexicon. First popularized by Yale University colleagues R. B. Fetter, MD, and J.D. Thompson, MD, DRGs are an application of industrial management theory in health care. The DRG framework enables hospitals to monitor the utilization of resources and quality of service by relating patients’ demographics and diagnoses to the costs involved in their care.

Although DRGs were not initially designed as a reimbursement management system, the idea of using them to guide reimbursement quickly gained traction after the state of New Jersey implemented a DRG-based hospital reimbursement system. Prior to this, hospital reimbursement operated on a cost-based system in which hospitals retrospectively billed for the actual costs of an episode of care. The use of DRGs enabled a prospective model in which hospitals received a set amount based on the patient’s diagnosis.

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