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10 Yale J. on Reg. 273 (1993)
The Medicare DRGs: Efficiency and Organizational Rationality

handle is hein.journals/yjor10 and id is 279 raw text is: The Medicare DRGs: Efficiency and Organizational Rationality David M. Frankfordt In fiscal year 1984, the United States' Medicare program began reimbursing inpatient hospital services under a system known as the Prospective Payment System (PPS). This system is a per-case reimbursement scheme in which cases are divided into relatively homogeneous categories called diagnosis-related groups (DRGs), and each DRG is paid a unique price set in advance of treatment. The great promise of PPS was that it would merge, into aframework of unified organizational rationality, physicians' orientations toward individual patients and administrators' and regulators' orientation toward the common good. Processes of hospital care would thus be made efficient in that judgments regarding diagnosis and treatment would embody both the particularistic interests of patients and the social interest in the use of resources. In this Article, the author claims that this normatively attractive framework is conceptually and empirically flawed because it ignores the complex interactions that occur within hospitals and the distinctiveness of each organization. Because the framework is therefore not operating as conceived, there appears to be no linkage between the goal of efficiency and the use of the DRGs as a per-case payment system. The author concludes that PPS should be abandoned in favor of a system in which hospitals would be paid under locally administered prospective budgets. Introduction: Efficiency Through Organizational Rationality ...... 275 1. The Evaluative Framework: Merging the Clinical Management of the Individual Case with the Social Management of Organizations ................................... 278 A. Conceptualizing the Hospital as a Multiproduct Firm ...... 278 B. The DRGs: A Linguistic Medium to Link Clinicians with Administrators and Regulators ................... 286 tDavid M. Frankf6rd, Associate Professor, Rutgers University School of Law, Camden. This work has been supported by Rutgers University's program for faculty leave, which I gratefully acknowledge. John Shaffer provided excellent research assistance. David Batista, Linda Bove, and Marion Townend provided essential bibliographical help. Constructive comments, suggestions, and conversation were provided by Donde Ashmos, Carol Carter, Marty Gaynor, Ann Hendricks, Nancy Kane, Bob Konrad, Dennis Patterson, Jeremy Paul, Robert Rosen, and Steve Zuckerman. I am especially grateful to Kevin Delaney, Fred Hafferty, Arnold Kaluzny, and David Mechanic. Finally, this Article has benefitted from comments provided by William Glaser on my other work concerning Medicare's prospective payment system.

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