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New energy is injected into DRG-based hospital payments

22 March 2016 Tania Rodrigues

First developed in the United States in the 1980s, Diagnosis Related Groups (DRGs) have been gaining momentum as a prospective payment system for reimbursing hospitals in the majority of developed markets. But they have also been used by payers to obtain information on hospital cost structures, such as in Denmark.

One prevailing issue with DRGs is that they tend to be driven by estimations of average costs from previous years and thus are often out of date because the cost structures reported are at least 1-2 years old. Healthcare systems with DRGs survey these cost structures in various hospitals at several time points to ascertain historical costs of providing care. In terms of the revision of DRGs, most high-income European countries are updating them on an annual basis, such as France or Germany, because they have timely availability of data. But the significant time lag in accessing data prevents many other countries from doing more regular updates, such as the United Kingdom, where minor revisions occur yearly whilst a major revision only takes place every 5-6 years

As DRGs are determined retrospectively and because a sizeable amount of healthcare expenditure growth at country level is attributable to new technologies, there appears to be a concomitant rise in the establishment of HTA agencies. These have been playing an increasingly important role in producing clinical guidance, protocols and standards of care as well as conducting economic evaluations to ascertain if new technologies provide value for money and can be incorporated within a set DRG structure. This in turn has helped alter the DRG contract between payers and providers from implicit to gradually more explicit. Through standards of care available for different diseases and treatment pathways, with DRGs there is a push of the provision of care consistent with the reimbursement of the average cost of these treatment- disease condition pairings.

The retrospective calculations that push DRGs towards average costs have resulted in hospital providers of many developed countries asking for additional funding to diffuse newly launched innovative and/or expensive pharmaceuticals. If regarded as value for money by an HTA agency, a new pharmaceutical tends to be funded as part of an uplift to the DRG system. Although hospitals in most developed European countries are financed per DRG, they can apply for additional budget to pay for innovative drugs whose impact cannot be initially adequately reflected in hospital budgets. In France, until the Groupes Homogènes de Séjour (GHS) system is updated, innovative drugs eligible for separate funding are included in the liste en sus. In Germany, this is done on a case-by-case basis by submitting an application to the National Institute for Payments in Hospital, but there is no pre-established list defining diseases outside the country's G-DRG system.

As part of our in-depth multi-client study, "Pathways to precision medicine: Navigating payer needs and healthcare systems through molecular diagnostics," we found that for new companion diagnostics to be contemplated by the G-DRG, a procedure code has to be created and used, whilst usage statistics have to be calculated by certain hospitals. According to German stakeholders, hospital committees play a key role in selecting new diagnostic tests based on a more efficient use of resources within the G-DRG, which is based on the Australian DRG (AR-DRG). In Italy, the regionalisation of the national DRG system reflecting local hospital resource consumption can result in the use of different codes for the same procedure and varied funding levels for the same code. But our research confirmed that the regions are responsible for communicating to the Italian Ministry of Health if local tariffs exceed the national level threshold.

Middle-income countries embrace DRGs

In the meantime, more and more middle-income countries have adopted the DRG model, such as Poland, Hungary, Mexico, Thailand and Indonesia, amongst others. Many emerging economies are also piloting or exploring a DRG system, most notably including China, which is in the process of developing its own country-based model. Other Asian countries have also started to introduce DRGs, including private sector payers, to get better quality information on hospital cost structures under the belief they are better than a retrospective payment model. South Africa is also dabbling with DRG initiatives and a movement had begun to evolve in North African countries (like Tunisia), but it is now likely to be impacted by the region's political turmoil. Several Latin American countries exploring DRGs (including Argentina, Uruguay and Costa Rica, amongst others) have so far used it mainly for case classification and not for payment of hospitals.

However, the Chilean Ministry of Health continues its DRG implementation project, initiated in 2009 with the objective of improving hospital financing. As such, Chile's National Health Fund (FONASA) constitutes a recent case of DRG piloting aimed at optimising healthcare procurement through its contracted private and public providers. FONASA launched a pilot case related to the management of critical beds involving 14 public hospitals during 2015, which is expected to increase to 25 in 2016. According to FONASA, DRGs allow the alignment of payer and provider incentives whilst promoting efficiency and stimulating healthcare provision quality. But more crucially this aligns with the methodology adopted by Organisation for Economic Cooperation and Development (OECD) countries, according to the Chilean public insurer.

In fact, the OECD recommended in December 2015 that Colombia should start piloting prospective, patient-based reimbursement mechanisms (such as DRGs) to reward quality and outcomes instead of activity. A September 2015 study emphasized that an absence of a public policy promoting DRGs has resulted in only 8 out of 50 high complexity hospitals in Colombia implementing the model. The hospital directors surveyed had a positive attitude about DRGs in reducing medical practice variability, as well as helping to enforce clinical practice guidelines, amongst other reasons. But the study highlighted other barriers of an institutional nature (including lack of competition in the healthcare market, as well as negotiation between insurers and providers based on procedures rather than diagnosis) and organisational nature (such as the culture of doctor autonomy, limited diagnosis recording, and the emphasis of process instead of results in Colombian hospitals).

Although there is a need for heightened regulation to ensure there is no gaming, DRGs appear to represent a relatively inexpensive mechanism of passing the financial risk of expenditure from payers onto hospital providers. Even though a few countries have designed their own DRG system, there are multiple issues to be considered, including an implementation that is very country-specific and largely dependent on its institutional structure. However, the AR-DRG is the most commonly adopted by many countries, with its success relying on modifications to take into account local differences in the underlying cost structures. With many middle-income countries contemplating the introduction of DRGs on their pathway to universal healthcare coverage, the pharmaceutical industry should expect a drive towards an average cost of care. This is more than likely to be accompanied by a proliferation of HTA agencies evaluating the budget impact of innovative technologies before DRGs are next updated.

Tania Rodrigues is a consultant in the IHS Life Sciences consulting team specializing in healthcare policy, market access, pricing and reimbursement and corporate strategies.
Posted 22 March 2016

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