Abstract
Introduction In 1983, DRGs became the price-setting system for the Medicare program in the United States. Why did the United States choose DRGs? The idea of setting 518 diagnostic payment rates for 4,800 hospitals seemed unimaginably complicated, too technical and an exercise in formula-driven cost control to some observers – an ambitious endeavor unlikely to succeed. Nevertheless, since its inception, the DRG system has been called the single most significant post-war innovation in medical financing in the history of the United States (Mayes 2006), and may be the most influential health care management research project ever developed. As the chapters in this volume attest, worldwide adoption of DRGs followed in the wake of this American experiment. Other competing patient classification systems could have been selected (Pettingill and Vertrees 1982). The range of policy options included flat rates per discharge, capitation, expenditure caps, negotiated rates, and competitive bidding (Smith 1992). Although researchers continue to experiment with alternative patient classification systems, a critical mass has formed around DRGs as the dominant design for measuring a hospital's casemix. A dominant policy design not only obtains legitimacy from the relevant community, future innovations must adhere to its basic features (Utterback 1996). A dominant design does not have to outperform other innovations; it merely has to balance the stakeholder interests. Though the control of rising health costs is a major policy issue, American hospitals had come to expect “pass-throughs, bail-outs, and hold-harmless clauses” from the political system (Smith 1992, p 44).