Hospital utilisation before and after the implementation of DRGs for hospital payment: US, 1979–1984

In October 1983, a new hospital payment system was introduced in the United States which was a radical departure from traditional methods of reimbursement. Concern over continuing increases in expenditures for hospital care caused Medicare to replace its ‘cost based’ reimbursement system, in which hospital payments were based on the actual costs incurred in treating patients, with a system that pays hospitals a fixed price per case. If a patient's treatment plan costs less than the fixed rate, the hospital may keep the difference; but if its costs in providing services exceed the rate, the hospital must absorb the loss.