Lessons of the New Jersey DRG Payment System

Abstract

Prologue: In many respects, New Jersey's state-regulated hospital payment scheme served as a prototype for Medicares prospective payment system. New Jersey';s model served, in the political realm, as evidence that prospective payment could he implemented without causing an upheaval in the hospital world. At the time of congressional enactment, of course, there was not a lot of empirical evidence regarding the impact that prospective payments based on diagnosis-related groups (DRGs) would have on the cost of medical care. In this essay, the authors report for the first time the initial phase of an extensive evaluation of New Jersey's experience with reimbursing hospitals based on DRGs. William Hsiao is a professor of economics at the Harvard School of Public Health. An actuary who has a deep understanding of how insurance works and how the insurance industry operates, Hsiao is a frequent congressional witness and consultant. Hsiao currently is engaged in a closely watched exercise that is funded by the Health Care Financing Administration to develop a relative fee scale for possible use in reforming Medicares current physician payment method. Harvey Sapolsky is a professor of public policy and organization at the Massachusetts Institute of Technology (MIT). Sapolsky, whose interest in health policy issues evolved from a fascination with technology (he served on the National Heart and Lung Institutes committee on the artificial heart in the early 1970s), has delved into a wide variety of subjects over the last decade, including the medical care system of the Veterans Administration, private employer attitudes on health care costs, blood banking, and, most recently, the health effects of common consumer products, which is the subject of a soon-to-be-released book he has authored. Daniel Dunn is an economist who works with Hsiao at the Harvard School of Public Health. Sanford Weiner, a political scientist, is a research associate at MIT's Whitaker College of Health Science, Technology, and Management.

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