Question

In: Economics

Hospitals are paid in various ways. When it comes to how Medicare has paid hospitals, there...

Hospitals are paid in various ways. When it comes to how Medicare has paid hospitals, there

have been both cost-plus and DRG methods of payment. Please explain these two payment

systems and discuss what the advantages and disadvantages of each are. Remember, this is an

economics class, so you should also think about incentives and efficiency. There has been talk of

moving toward episode based payment. What is episode based payment? How would it differ

from cost-plus and DRG payment (include incentives and efficiency here to)?

Solutions

Expert Solution

Cost plus system of payments : The retrospective reimbursement system is also called a cost-plus system under which reimbursement is paid to hospitals for an amount equal to their costs for treating the patient, plus a certain percentage above cost for profit and overhead.

Advantages :  This system enable health care providers to provide more than enough services for the patients as they are not concerned with cutting costs. Extra services may include longer stays and medically unnecessary medical services.

Disadvantages : intricacy, volatility, and lack of incentives for providers to try and maximize efficiency and contain costs

DRG method of payment :
In this systems a patient is put in one of over 500 different payment catergories based on thier original diagnosis, secondary diagnoses, surgical procedures, other treatments, age, gender, and if they were treated, transfered, or died. The managers of the system assign a prospective payment for each group, which the hospitals receive.

Advantages : Under this system, hospitals have to be be effiecent in diagnosing the patient at the very begininng and also must be able to manage their resources well

Disadvanatges : Some doctors have found ways around this system to perserve their profitability. This is accomplished by "upcoding" a patient upon their arrival to the hospital. Upcoding means diagnosing a paitient to a more extreme DRG group, in which they will recieve more money for that patient.

Rahul Sunny answered 2 years ago
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