DRG Creep

Similarly, because no national health care system controls the number or distribution of doctors in the United States, most of the country (other than poor and rural areas) has far too many doctors, especially specialists. To protect their incomes in the face of this competition, doctors may increase either the number of services they recommend to patients or their fees for those services. This largely explains why U.S. doctors are excep- tionally likely to adopt new, expensive, and often unproven technologies such as full-body scans and bone-marrow transplants (Bodenheimer, 2005b). In addition, U.S. doctors increasingly are trying to raise their incomes by purchasing surgical centers, CT scan machines, and other expensive technologies—actions that would likely not be permitted in a single-payer health care system. It is no surprise that doctors who do so are considerably more likely to recommend those services to their patients. For all these reasons, Americans living in areas with many doctors per capita receive more medical tests, surgeries, and other pro- cedures; pay more for those services; and have worse health outcomes than those living in areas with fewer doctors.

Finally, the for-profit basis of the U.S. health care system, combined with its fragmented nature and the power it gives to health care providers, has made it difficult for reform efforts to succeed. For example, since the 1980s the U.S. has tried to reduce Medicaid and Medicare costs through a system of diagnosis- related groups (DRGs). Under this system, the government calculates the average cost of inpatient treatment for each possible DRG and then reimburses hospitals for treatment based on those averages rather than on the actual costs per patient. If the hospital spends less than this amount, it earns money; if it spends more, it loses money. Theoretically, then, the DRG system should have limited the costs of providing care under Medicaid and Medicare. Instead, hospitals developed sophisticated computer software to identify the most remunerative but still plausible diagnosis for a given patient—a process known as “DRG creep.” In addition, hospitals increasingly shifted services to outpatient units, where the DRG system does not apply. As a result, the DRG system only marginally reduced government costs for hospital care. Similarly, when the government restricted the fees it would pay health care providers for treating Medicaid patients, many providers either stopped accepting such patients or increased the fees they charged patients who had other forms of insurance.