Economic Incentives and Organizational Realities: Managing Hospitals under DRGs

Diagnosis-related Groups (DRGs) offer hospitals financial incentives to improve efficiency. To be effective, DRGs require a realignment of management so that physicians' use of resources can be disciplined by administrators. The constituency for altering power relationships within hospitals, however, is, at best, a weak one: administrators see their primary task as the protection of physicians' clinical autonomy. Constraints imposed on hospitals by regulators can be accommodated by minor adjustments in behavior that ensure neither gains in efficiency nor changes in decision-making authority.