This column is a continuation of the one on diagnosis-related groups (DRGs) a fortnight ago.
The previous column addressed Malaysian private hospitals’ fee for service (FFS) model, case mix complexities, the beginning and formation of DRGs, and examples of payment calculations.
Lessons from experience
The World Bank addressed the introduction of DRG payments with a review of DRGs in the United States (i.e. Medicare), the state of Victoria in Australia, Thailand, the Kyrgyz Republic, Germany, Estonia, Croatia, Beijing in China, and the Russian Federation.
These systems were selected because they represented various different approaches to, and experiences with, the transition to a DRG system.
Its 2020 publication, Transition to Diagnosis Related Group (DRG) Payments for Health: Lessons From Case Studies, addressed issues like specific technical design choices, pertinent enabling investments, and the political and institutional issues that needed to be considered.
The World Bank stated: “The focus on the strategies used to phase in DRG payment is an important complement to the existing literature on DRG design and implementation.”
The summary of the lessons learnt are:
Be clear about the objective of implementing a DRG payment system and what it is expected to achieve.
Otherwise, DRG payments risk becoming an objective in and of itself, when in fact it is a means to an end.
Establish a DRG unit (or at least a team) early to drive its development.
This unit needs to have the correct skill composition, ability and authority to effectively convene representatives across agencies and stakeholder groups to ensure the DRG system is both technically coherent and politically acceptable.
Adopting a grouper, rather than developing a new one from scratch, may make good sense.
Providers must be actively involved from the beginning, so that consensus can be reached such that incentives created by the relative cost weights are compatible with health system objectives.
Adjustments can be made over time as technologies and practices change.
Use of close-ended hospital payments, e.g. hard budget or volume ceilings, are exceptionally important if efficiency goals of DRGs are to be attained.
Successfully phasing in takes time and a systematic stepwise approach.
A period of learning, preparation and adjustment is necessary to reduce risk of technical problems, to manage the financial risks of providers and give them time to adjust, and to manage opposition that may thwart the efforts.
Most phase-in approaches contained measures to reduce short-term financial risks, e.g. budget- neutral period, phased base rate convergence, and part-FFS, part-DRG payments.
All relevant stakeholders should be involved early and close partnerships should be forged with hospitals.
Stakeholder involvement will become particularly important at later stages in the transition pathway whenever simulations reveal inefficiencies in certain hospitals or specialisations, and hard decisions need to be made about payments.
Effort should also be put into training and capacity-building to ensure widespread understanding of DRGs across a broad range of stakeholders.
Transparency in all processes and decisions regarding DRG development and adjustment is crucial.
DRG payment systems require continuous fine-tuning of classifications and monitoring of data quality and integrity.
The grouper needs updating and maintenance; the coding quality needs monitoring and improvement; primary classifications need revisions; and changes in cost of services and development of new diagnostics and treatments will affect cost weights.
Creating a DRG unit or centre, and institutionalising processes for regular and transparent evaluation, updating and fine-tuning will be critical for the DRG payment system to achieve the goals to which it aspires.
Pros and cons
DRG payment systems reward hospitals for their activities.
They are clear incentives to increase the volume of care provided, productivity and efficiency.
Each country that introduced DRG-based payment systems had their own objectives, depending on their original payment system.
Countries that used FFS systems previously, hoped to reduce lengths of stay and overall expenditures without compromising on quality.
Countries that had used global budgets before, hoped to increase their hospitals’ activity, efficiency and transparency.
In general, DRG payment systems have largely increased transparency and activity, and reduced lengths of stay in many countries.
However, the negative effects of the DRG payment system have also become apparent.
They include insufficient cost control, an oversupply of care, and a lack of integration with other services, while its effect on quality of care seems mixed.
In past decades, policymakers have tried to counterbalance the negative effects of DRG payment systems with additional policies, but with mixed success.
What does the negative effects of DRG payment mean to patients?
The reported effects include:
DRGs prioritise financial margins over clinical necessity.
This could result in:
- Premature hospital discharges before patients are clinically stable
- Skimping on care in which necessary, but expensive, diagnostics and treatments, high-end consumables or specialised consultations are not provided
- Possible increase in readmission rates as DRGs aim to reduce lengths of stay.
Hospitals might protect their revenues through:
- DRG creep – a patient’s condition may be documented as more severe than it actually is to qualify for a higher DRG payment
- Case splitting – dividing a single episode of care into multiple admissions that would lead to several DRG payments instead of one
- Cherry picking and dumping – hospitals may favour low risk patients who cost less than the DRG payment (i.e. cherry picking) and/or avoid or transfer high risk complex cases that could lead to financial loss (i.e. dumping).
The DRG payment system requires a complex infrastructure, the administrative costs of which the hospital will pass on to patients.
Hospitals may shift services to outpatient settings that operate under different payment systems.
Some hospitals may also off-set lower margins by increasing the volume of admissions for minor conditions, which could have been managed in an out-patient setting.
DRGs for Malaysia?
The perception created by the Malaysian policymakers’ narrative is that the DRG payment system will address the problem of the steep increases in private health insurance premiums following the furore last year (2025).
This writer and some of his colleagues interested in healthcare financing have searched the global medical literature and found no publication of successful use of the DRG payment system in private healthcare.
It is pertinent to note that no such information has been provided to the public by the proponents of DRGs.
It is useful to be mindful of the following facts:
- Malaysians can access healthcare delivered by the public and/or private sector.
- Public healthcare is paid for by taxpayers.
- As the private sector receives neither incentives nor subsidies, it has to be paid for by patients, employers, third party administrators and/or insurance companies.
- In general, DRGs have been utilised for hospital payments.
- The public have not been informed of global publications of successful use of DRGs in private healthcare.
It took years for various countries to implement DRG payments, e.g. Thailand took 10 years (1993-2003).
Over the past 18 months, statements from policymakers have listed shifting target dates on DRG implementation in Malaysia.
The latest is next January (2027) for Tier 1 private hospitals.
The media reports that ProtectHealth Corporation Sdn Bhd is the operational and training lead for the Health Ministry’s rollout of DRGs in the private sector.
The fundamental question of whether a private company has the statutory authority to collect, verify and analyse data, and administer government policies has not been addressed.
Dr Ricarda Milstein and Prof Dr Jonas Schreyogg of Germany’s Hamburg University Centre for Health Economics, reviewed DRGs extensively in their 2024 paper published in the journal Health Policy.
They covered 10 countries: Australia, Austria, Canada (the province of Ontario), Denmark, France, Germany, Norway, Poland, England and the US.
The authors concluded: “... we have shown that countries are moving away from DRGs as their dominant payment system for hospitals towards more diversified approaches.
“These reforms can be seen as a transformation towards value-based payments, with differing degrees of intensity.
“We noticed a lack of evaluations of payment programmes and reforms, particularly outside of the US.
“We encourage policymakers to make evaluations a mandatory part of reform initiatives so that the lessons learned can be used to make better-informed policy choices in the future.
“When doing so, it would be of great importance to pilot policies in select areas and define control groups (e.g. hospitals, provider networks or regions) for each reform initiative to be able to draw more robust conclusions and thus allow for evidence-based policymaking.”
The reader can decide whether Malaysia should move towards the DRG payment system when other countries that have more experience are moving away from it.
Dr Milton Lum is a past president of the Federation of Private Medical Practitioners Associations and the Malaysian Medical Association. For more information, email starhealth@thestar.com.my. The views expressed do not represent that of organisations that the writer is associated with. The information provided is for educational and communication purposes only, and it should not be construed as personal medical advice. Information published in this article is not intended to replace, supplant or augment a consultation with a health professional regarding the reader’s own medical care. The Star disclaims all responsibility for any losses, damage to property or personal injury suffered directly or indirectly from reliance on such information.
