The impact of DRGs on the cost and quality of health care in the United States

Carolyne K. Davis, Deborah J. Rhodes

Research output: Contribution to journalArticlepeer-review

41 Scopus citations


The Prospective Payment System (PPS) represents a fundamental change in the way the United States government reimburses hospitals for medical services covered under Medicare, a federal health care insurance program for the elderly and disabled. PPS replaced the retrospective cost-based system of payment for Medicare services with a prospective payment system. Under PPS, a predetermined, specific rate for each discharge dictates payment according to the diagnosis related group (DRG) in which the discharge is classified. The PPS was intended to create financial incentives that encourage hospitals to restrain the use of resources while providing high-quality inpatient care. Both objectives appear to have been met under PPS. Hospital utilization has declined, average length of stay has fallen, and the locus of care has shifted from the inpatient setting to less costly outpatient settings. The growth in inpatient hospital benefits has slowed and the impending insolvency of the Medicare trust fund has been forestalled. Studies have found no deterioration in the quality of care rendered to Medicare beneficiaries. Neither the mortality rate nor the rate of re-admission (presumably related to premature discharge) increased under PPS. Indeed, PPS appears the have enhanced the quality of inpatient care by discouraging unnecessary and potentially harmful procedures, and by encouraging the concentration of complex procedures in facilities in which the high frequency of these procedures promotes efficiency. Incentive-based reimbursement also appears to have contributed to the growth in alternative delivery systems, such as HMOs and PPOs, which contain costs by maintaining a high volume of a limited range of services. The success of the PPS/DRG system in controlling costs and promoting quality in this country suggests its application in other countries, either as a method of reimbursement or as a product line management tool.

Original languageEnglish (US)
Pages (from-to)117-131
Number of pages15
JournalHealth policy
Issue number2
StatePublished - Apr 1988


  • Cost containment
  • Diagnosis-related groups
  • Prospective payment system
  • Quality of care
  • United States health care system

ASJC Scopus subject areas

  • Health Policy


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