All Theses, Dissertations, and Capstone Projects

Year of Award



Master of Business Administration (MBA)


College of Business & Professional Studies

Degree Program



Business Administration


hospital, insurance, DRG, medical, incentive


The use of DRGs for hospital reimbursement signals an important conceptual shift away from cost-based reimbursement, in which hospitals are financed for their activities regardless of efficiency, to a competitive prospective reimbursement system. The use of DRGs stems from the recognition that hospitals' efficiency vary considerably and therefore must be measured by a tool (DRGs) that accounts for such variances across hospitals. Under such a system, the payer of hospital care will reward those facilities that produce the same or a higher quality product while consuming fewer resources and costing less than comparable facilities.

Such a system represents a fundamental change in the entire system of hospital operations by virtue of how facilities' incentives will change. Physicians, long thought to be partially responsible for hospitals' inability to significantly contain costs, will certainly become much more involved in hospitals' cost containment efforts by virtue of the effect their practices have on the hospitals efforts. Decisions' on capital expenditures will have to be made based on the potential for efficient return of invested dollars.

Whether or not a hospital sustains a loss or enjoys a profit will depend on the relationship between its costs of providing care for DRGs on an aggregate basis and the amount it is prospectively reimbursed for its DRGs on an aggregate basis. Simply put, if it costs more for the hospital to care for its case mix than what the payer thinks it should cost for that hospital's particular case mix, the hospital loses money. This "efficiency incentive" means that medical center administrators will be pursuing cost savings and more efficient means of providing health care more than ever before.

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