Why You Should Care About Diagnostic Related Groups


The greatest cost in hospitals comes from delivering clinical care, while the costs can easily be seen (in the financial system), the services provided to patients are recorded in various hospital information systems (HIS), patient administration systems (PAS), Electronic Medical Records and paper records.

The divide between ‘financial management’ and ‘clinical service delivery’ can be managed to some extent in emergency departments (one department, short length of stay) and outpatient clinics (short visits for specific services). But inpatient departments are much more complex because of the length of stay and the number of hospital services involved in patient care.

Since there is an almost infinite combination of patient registration variables (e.g., age, gender), primary/secondary diagnoses, co-morbidities, and interventions (e.g., surgical, or medical procedures), it is very difficult for a financial reporting system to derive an indicative cost for a given episode of care without an electronic medical record (EMR) or HIS in place because almost every episode of care would be unique.

To solve this costing problem (and bridge the gap between hospital billing management and clinical service delivery), most OECD countries have adopted Diagnostic Related Groups (DRGs). A DRG is a clinically meaningful group of patients that have the same treatment cost, the program is based on ICD’s (International Classification of Diseases).

Jurisdictions have between 700-900 DRGs. Here are two examples:

  • DRG E01B: Major Chest Procedure – CCC
  • DRG 165: Major Chest Procedure without CC/MCC

The principle is quite simple: when you factor in the costs of the hospital bed, diagnostic tests, medications, surgical and medical consultations, operating theatre, recovery room, surgeons, and anaesthetists, it doesn’t really matter what procedure is actually performed on the patient because many procedures will have similar costs.

DRGs are mostly used by government health departments to calculate funding that hospitals will receive. Every hospital will receive the same amount of money for a DRG (subject to some caveats). In theory this promotes efficiencies because hospitals have an incentive to reduce costs below what they expect to receive from the government for that DRG. Subjects to those caveats, there should be no reason why one hospital’s costs to treat a E01B DRG patient should be different from another.

Why should any of this be of interest to hospital administrators?

Grouping all a hospital’s activity into a manageable number of service ‘codes’ will allow hospital information management to:

  • Correlate clinical services and costs: hospital accounting services need to know the cost of a pathology test, an Xray or a pack of medications, but it is also important to know the cost of performing a hip replacement or appendectomy. Costing at the ‘service level’ rather than at the individual line-item level improves communications between administrators and clinicians.
  • Make cost comparisons between facilities: subject to some caveats (e.g., wages levels in different parts of a country), the cost of providing a service should be the same at every hospital. There is no reason why an appendectomy shouldn’t cost the same everywhere.
  • Track cost trends over time: if hospital running costs are increasing but the DRG (service) mix is not, then the cost increases are not due to changes in clinical service delivery. If the cost of one particular service is going up but there hasn’t been a change to clinical practice in that service, then it’s worth looking into.

The best part is that the DRG lists and rules for calculating them are readily available. A license fee may be payable, but it is much cheaper than trying to invent these from scratch.


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