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Health services were always referred to as retrospective payments earlier because payment was always made after the service given. This was then convenient as the payment was made by the insurance companies. The 1980s saw the introduction of cost limiting programs. One such program was the prospective payment system initiated by Medicare and other payer groups. Here each disease is assigned a Diagnosis Related Group (DRG) where the doctor/hospital received a fixed payment and calculation was done considering average parameters like stay, treatment etc. DRGs may be further grouped into Major Diagnostic Categories (MDCs).

In the early days, most health care was on a fee-for-service basis. It was referred to as retrospective payment because the fee for health care services was paid after all the needed services were provided. During the 1970s, a period of high inflation, health care costs skyrocketed. Most Americans had health insurance and were not worried about costs because the insurance company or Medicare and Medicaid would pay for all services provided.

As healthcare became more and more specialized the old system could not continue. Several cost limiting programs were introduced in the 1980s. Since 1983 CMS has taken over and focus of modifications instituted by CMS has been primarily on the elderly population. As of October 1, 2007 with version 25, the DRG system has changed a lot. This version has resequenced the groups, for example the category “Ungroupable” is no longer 470 but is now 999. Some of the different DRGs developed in the US include,

  • Medicare DRG Refined DRGs (RDRG)
  • All Patient DRGs (APDRG)
  • Severity DRGs (SDRG)
  • All Patient Refined DRGs (APRDRG)
  • International-Refined DRGs (IRDRG)

Thus today we have software like the Medicare Severity Diagnosis Related Groups (MS-DRGs) Grouper software that classifies hospital case types into groups expected to have similar hospital resource use. Medicare uses this classification to pay for inpatient hospital care. It is a crucial part of Medicare’s medical billing and claim process.

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