China's DRG/DIP Reform: Bridging Medical Service Pricing and Supporting Tech Innovation

The DRG/DIP payment reform has curtailed the rapid expansion of China's public hospitals, shifting focus to quality and efficiency. By December 2023, 71% of 395 BMI pooling areas had embraced this model, aiming for nationwide coverage by 2025.

However, DRG/DIP reform in China uniquely preceded a comprehensive revamp of medical service pricing. Consequently, the core of the next phase of the payment reform will center on refining DRG weights and rates, aligned with supply-side reform efforts.

Additionally, fostering technological innovation is essential in the progression of China's public hospitals, with the development of supportive policies playing a crucial role in the upcoming stages of DRG/DIP implementation.

Refining DRG Weights and Rates alongside Medical Service Pricing Overhaul

Overview of DRG Rates, Weights, and DIP Relations

DRGs (Diagnosis Related Groups) categorize hospital patients into medically and financially similar groups based on diagnoses, procedures, and factors like age and comorbidities. They impose strict, top-down guidelines to regulate clinical practices.

In contrast, DIP (Diagnosis Intervention Packet) is rooted in big data analysis with more relaxed guidelines. It adopts clinical practices passively in a bottom-up fashion without prior validation.

In the DRG system, each group's relative use of resources is indicated by a weight. Payments for DRGs are determined by multiplying these weights by the city's average hospitalization costs, termed as rates. Conversely, DIP assigns points to each group to represent its resource consumption relative to other groups within the prefecture. The worth of these points varies with the prefecture's total medical insurance budget and the total points of all hospital admissions.

Essentially, the concepts of weights and rates in DRGs are akin to points and their monetary values in DIP, performing comparable functions in resource allocation and cost management.

Phased Weights and Rates Adjustments

China's early adoption of DRG/DIP payment reform, before major medical service pricing updates, resulted in inherited issues like regional price disparities, under-developed cost accounting, and inadequate compensation structures that fail to fully account for service delivery costs. Furthermore, insufficient price differentiation across medical institutions at different levels is stalling the country's progression towards a primary care-based, tiered healthcare system.

These challenges limit DRG/DIP's capacity to effectively shape provider behavior, a central aim of the payment reform. Consequently, the crux of China's DRG/DIP reform is in the recalibration of weights and rates, redistributing resources and payments among various specialties and hospitals in sync with the current medical service pricing overhaul.

The weights and rates adjustments are expected to progress in stages in concert with DRG grouping upgrades:

1. Current stage: initial payments are set based on historical costs.
2. Transition stage: payments for identical diagnoses are unified across the city by standardizing clinical practices and associated costs, narrowing regional disparities.
3. Stable stage: differentiated rates emphasize tiered care, supporting primary facilities for common diseases and boosting rates for specialty disciplines in top hospitals.

Companion Policy Development to Encourage Technology Innovation

Various regions are employing multiple methods to support the development of new technologies, pharmaceuticals, and medical devices within the DRG/DIP payment framework. Similar to international practices, these strategies are primarily categorized into two groups: (1) separate payment for new technology add-ons and (2) inclusion of new technologies into the current DRG/DIP groupings by modifying weights, rates, or group structures.

Separate Payment for New Technology Add-Ons

In regions such as Beijing, Fujian, and Hebei, separate payment mechanisms are in place when new drugs or technologies significantly affect overall treatment expenses.

For example, in Beijing, new drugs and technologies can be temporarily exempted from DRG/DIP payments upon approval. Payments for these exclusions are made based on actual costs for a period of three years, followed by a reassessment and establishment of new grouping schemes and payment standards.

Inclusion of New Technologies in Existing DRG/DIP Groups

Another approach is to include new technologies into the current DRG/DIP groups by modifying weights, rates, or group structures. These include:

a. Adjusting existing disease group weights and rates, as practiced in Hangzhou, Ningbo, Nanjing, Wuzhou, and others.

b. Incorporating new medical technologies by creating new disease groups, for instance, Fujian's approach for certain cancer patients involves sub-grouping based on treatment plans, addressing issues of inadequate grouping precision and high variability in outcomes, particularly for patients undergoing radiotherapy, chemotherapy, or suffering from malignant blood diseases.

c. Tiered payment systems, like Fujian's C-DRG with 825 standard groupings, where each group has up to five fixed charge tiers to accommodate new technologies and drugs, thus forming a tiered payment structure.

Currently, the existing policy documents suggest that these pilot policies across various regions of China are still fairly basic. The specific eligibility criteria for new technologies are unclear, lacking well-defined evaluation criteria, highlighting the need for in-depth development.

Accelerating New Technology Adoption via Medical Service Pricing Overhaul

The NHSA has embarked on a 3 to 5-year exploration to modernize the country's outdated medical service pricing system since 2021. Their goals include reducing regional disparities through a service output-focused pricing model that separates pricing from technical specifics. This new framework will also decouple pricing for technical services from medical technologies, encouraging genuine innovation.

Furthermore, to address the lengthy process of adding new service items to the national medical service catalog, a pre-requisite for public hospitals to provide diagnoses and treatments in China, the NHSA will collaborate with local authorities to simplify the application process, accelerate reviews, and introduce health technology assessments to evaluate innovation and cost-effectiveness for new services.

Final Thoughts

China's provider payment and supply-side reforms are making headway in addressing key challenges, including the vast disparities in the health systems' financial, clinical, technological, and managerial capabilities across regions, the lack of alignment with technology innovations, and the inadequate compensation for technical labor.

At the same time, it's important to recognize that both DRG/DIP and medical service pricing reforms aim to redistribute income among hospitals and specialties without significantly altering the total hospital revenue or physician compensation.

This leaves a notable shortfall as the recalibration of medical service pricing is expected to address about 70% to 80% of the financial gap in public hospitals following the removal of markups on pharmaceuticals and medical consumables. Public hospitals depend on maximizing patient volume to maintain operations. Issues such as siphoning and profit-driven motives persist, undermining the fundamental goals of the DRG/DIP payment reform.

This gap highlights the critical need to align medical service pricing with DRG/DIP payments to fully cover the costs of service delivery.

References:

1. 郑杰：医保支付改革进展与展望, Peking University School of Continuing Medical Education, 2023-7-5, https://scme.bjmu.edu.cn/jchg/a70124b79603439483fda71a89a25c8a.htm
2. DRG/DIP下，国家、地方如何"借"政策助力医药技术创新？医药经济报前沿观察, 赖诗卿, 2023-6-26 https://www.cn-healthcare.com/articlewm/20230626/content-1570186.html
3. Understanding China’s Dual-Track DRG/DIP Provider Payment Reform, NRDL+ Newsletter, 2023-5-3, https://nrdlplus.com/en/nrdlplus-newsletter-archive/china-drg-dip-provider-payment-reform
4. China’s Medical Service Pricing Reform: Current State and Future Development, NRDL+ Newsletter, 2023-11-22, https://nrdlplus.com/en/nrdlplus-newsletter-archive/chinas-medical-service-pricing-reform-current-state-and-future-development
5. DRG/DIP医保支付改革 撬动百亿级信息化系统建设需求, 新浪新闻, 2024-1-5, https://finance.sina.cn/7x24/2024-01-05/detail-inaamksi5413590.d.html
6. DRG/DIP体系下新医药技术的医保支付机制研究, 王芳旭, 陶立波, 北京大学医学部卫生政策与技术评估中心, 2023-2-15
7. DRG付费下医疗新技术补偿支付设计探讨, 李慧榕, 中南财经政法大学公共管理学院, 《中国医疗保险》 2023.4
8. 山东日照：六大举措支持临床创新, 中国卫生, 2023-12-10, https://mp.weixin.qq.com/s?__biz=MzA5OTgxODAzOA==&mid=2650633747&idx=1&sn=674ea2d93adc621e6c5fe5f944819ded&chksm=88f5594abf82d05c3d03eb4ff6881e226e7488414703e997aec2fcc73c8a2299e6703616715a&scene=27