Understanding China's Dual-Track DRG DIP Provider Payment Reform
China has undergone a significant transformation in its healthcare system in recent years. One central area of reform has been the payment system for public hospitals. Many misaligned incentives, particularly a fee-for-service (FFS) model, drove Chinese hospitals and physicians to overprescribe expensive drugs and imaging services, leading to a double-digit escalation of health expenditure for more than two decades.
In response to growing concerns about soaring out-of-pocket expenses for Chinese patients and the long-term sustainability of public insurance funds, the Chinese government has been piloting alternative payment methods to rein in medical costs at public hospitals since 2009. In 2019, the National Healthcare Security Administration (NHSA) officially launched the national Diagnosis Related Group (DRG) pilot program, and in 2021, the national Diagnosis Intervention Packet (DIP) pilot program. As of early 2022, the actual payment of DRG pilot cities has covered more than 900 medical institutions, with a coverage rate of 43.5% for tertiary hospitals. In a November 2021 policy directive, “Three-Year Action Plan for DRG/DIP Payment Reform,” the NHSA envisions that the twin payment mechanisms will scale up to the entire country by the end of 2025.
These reforms have significant implications for the healthcare industry and its key stakeholders in China.
In the first part of this comprehensive series, we will delve into the unique challenges that the implementation of Diagnosis Related Group (DRG) faces in China, the key differentiators between the DRG and Diagnosis Intervention Packet (DIP) systems, and the rationale behind China's decision to adopt a twin-payment method instead of a single DRG rollout.
Part two will examine how the payment reform aligns with China’s broader healthcare goals and its immediate and long-term impact on public hospitals, commercial health insurers, and innovative drug and device manufacturers.
DRG Background
What is a DRG system?
First introduced in the US in 1983 to control hospital spending under the Medicare program, DRGs classify inpatients into groups that are clinically coherent and financially similar based on their principal and secondary diagnoses, the procedures performed, and other factors that may affect the cost of care such as age, sex, the presence of co-morbidities and complications.
Each DRG group is then assigned a weight representing the average cost of treating a patient in that group relative to the average cost of treating all patients. This weight is used to calculate a pre-determined payment amount hospitals will receive for treating a patient in that DRG, regardless of the actual cost incurred by hospitals. Thus, the DRG model shifts the financial risk to hospitals and encourages the efficient use of medical resources.
Pre-requisites for implementing an effective DRG system
Three factors influence the quality of a DRG system implementation.
First, the availability of quality clinical and cost data. To approximate DRG payments to the actual costs of care, quality clinical and cost data for a broad spectrum of services must be collected across a large sample size of hospitals. This makes standardized treatment patterns and adequate electronic medical record (EMR) systems critical to establishing DRGs.
Second, building the right incentives into the DRG system is crucial in inducing the desired provider behavior. For instance, DRG payments must cover all costs, including adequate compensation for physicians and nurses. Otherwise, hospitals and doctors will find other avenues to charge patients for services not covered under DRG payments.
Third, an effective governance structure must be in place to monitor how providers respond to the system incentives and spot unexpected provider behavior, often supported by a robust digital infrastructure and analytical capabilities.
Challenges for DRG Implementation in China
The establishment of NHSA in 2018 has put into place a powerful regulatory apparatus overseeing China’s provider payment reform. In contrast to the earlier reform pilots in the last decade, NHSA now owns a powerful information system – connected to its local offices and all social medical insurance designated hospitals. This big data platform enables policymakers to monitor local implementation for learning and evaluation closely.
Despite this strong governance apparatus, China faces two challenges to a national-wide DRG rollout.
