DRGs — Five Years Later

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Abstract
IN fiscal 1983, amid much fanfare and not a little anxiety among providers, the Medicare program abandoned cost reimbursement for hospitals and moved to a prospective payment system. Fixed rates were established for each of 468 diagnosis-related groups (DRGs). The goal was control of government Medicare expenditures through built-in incentives to providers to contain costs. The question today is whether either the fanfare or the anxiety in 1983 was warranted. The evidence suggests both were.Before DRGs, dire warnings were sounded about a tottering Hospital Insurance Trust Fund. Government actuaries calculated an average annual deficit of $20 billion, or nearly . . .

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