Impact of an All-Inclusive Diagnosis-Related Group Payment System on Inpatient Utilization

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Abstract
Although case-based payment is one of the main reimbursement mechanisms for hospitals, little is known about its effects in the general population. Prior studies have focused on Medicare or on all-payer systems in particular states. This study estimates the effect of a prospective payment system based on diagnosis-related groups (DRGs) nationwide in the Department of Veterans Affairs. Multiple regression analysis was used to estimate the effect of Department of Veterans Affairs's diagnosis-related group system separately for 22 diagnoses. The dependent variables were length of stay, inpatient days per patient, and discharges per patient. Covariates included patient, hospital, and area characteristics. Department of Veterans Affairs's diagnosis-related group system reduced lengths of stay and inpatient days per patient. The largest impacts were for the psychiatric diagnoses and several surgical procedures. The magnitudes of the effects were generally moderate. Department of Veterans Affairs's case-based system had a negligible effect on discharges per patient. Per case reimbursement is a potentially useful tool for improving the efficiency of inpatient care for all types of diagnoses and age groups. The effect may be larger than estimated here because of institutional barriers and caps on financial impact.