It’s no secret: health insurance has made everything more complicated and more expensive. Most of the time, we just pay our deductibles and our co-pays and let the insurance take care of the rest. But behind the scenes, a whole host of tricks and tactics take place between health insurers and providers that most of us don’t even think about.
One such arrangement is the use of the contractual DRG, or the “Diagnosis Related Group.” The DRG was originally developed by Medicare in an effort to simplify payments and – supposedly – to make reimbursement more fair. It works like this: instead of counting up all of the individual pieces of treatment, equipment used, and medication administered to a patient, Medicare figured out the average cost to treat each patient with the same condition. For instance, for any patient with the flu, Medicare figured out the average amount of money it costs to take care of a flu patient. Then, it decided to pay hospitals that same amount for each flu patient it treated – regardless of how much the hospital actually spent on that patient’s care. This means that, if a hospital could take care of a flu patient for less than the average cost, it made a profit. On the flip side, if the patient was “more expensive” than the average patient – that is, if he or she required more advanced treatment or a longer hospital stay – then the hospital had to eat any extra cost above and beyond the payment it received.
There are two problems with this model. The first is obvious: it encourages hospital to devote as few resources as possible to any given patient. If the hospital is getting paid $3,000.00 to take care of a patient, but can get away with releasing her after only $1,500.00 worth of treatment – why wouldn’t it take advantage of that? Under this model, it’s easy to see how hospitals can become too intent on maximizing profit in exchange for doing the bare minimum to treat their patients.
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