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Page 2 I Introduction The rising cost of medical care in the United States has been a concern for quite some time Beginning in the 1960s with the advent of Medicare a system has been needed that will balance cost with services provided within acceptable parameters In 1982 the US Congress placed a cap on operating expenses for each Medicare case treated in a hospital as a protective measure to insure adequate payment within reasonable limits A prospective payment system PPS was initiated as a result of the cap whereby hospitals receive a flat rate for each admission based on a calculation of rates determined by the diagnosis Kahn et al 1990 A system whereby the diagnosis is grouped according to services estimated length of stay and type of technology required for treatment was developed by Robert B Fetter and John D Thompson in the early 1980s Burke 1992 The diagnostic related groups DRGs form the basis for the payment system This system was originally set up for use with Medicare but has been refined and expanded to include non-Medicare situations in the United States and abroad Some form of DRGs has been adopted in more than 20 countries including the United Kingdom France Finland Norway Taiwan Spain Australia and Ireland Burke 1992 While the prospective payment system has reduced the rate of cost increase the concern has been that it also encourages hospitals to send patients home prematurely and to deliver lower-cost care to them Kahn et al 1990 The formula used to calculate payment for a single Medicare hospital inpatient case takes an average Payment rate for a typical case and multiplies it by the relative weight of the DRG to which it is assigned Thus it is easy to see that the DRG relative weights have a large impact on the payment a hospital receives Edwards et al 1994 Page 3 pp 45
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