Diagnosis-Related Groups, Severity of Illness, and Equitable Reimbursement Under Medicare

The art and science of case-mix severity of illness measures has recently been forced into the forefront of health service policy and reimbursement discussions by enactment and implementation of Public Law 98-21, the Prospective Payment System for Hospitals. This law and its accompanying proposed regulations, released by the Health Care Financing Administration (HCFA) on Sept 1, 1983, instituted the diagnosis-related group (DRG) classification and reimbursement system for payment of inpatient hospital care for Medicare beneficiaries.¹,²The DRG system is, essentially, a case-mix reimbursement system that, theoretically, reimburses hospitals for treating patients based on the average amount of hospital resources used in treating a patient within a particular diagnostic category. While the DRG regulations recognize that there will be variations in severity within each of the 467 diagnostic categories, it is reasoned that as long as hospitals are reimbursed on a "meaningful" average and enough cases within each DRG category