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Beyond DRGs: shifting the risk to providers.

The future of Medicare and the entire health care system will be determined, in large part, by whether diagnosis-related groups (DRGs) lead us from prospective fixed prices to regulatory rate setting and allpayer systems, or whether they will be one step in an evolutionary process of creating incentives for increased efficiencies by appropriately shifting the financial risk from purchaser to provider. Should the former occur, we will end up with a system with little financial risk for providers, but at a cost of locking in current inefficiencies, frustrating new entrepreneurs and innovations, and preventing an overdue market shakedown to weed out wasteful practices. In order to prevent this development, we must recognize DRGs as an important first step in shifting the financial risk to providers–but only a first step. Although DRGs begin to shift some of the financial risk involved in health care delivery from the federal government to hospitals, they do not extend the risk to other providers in the health care delivery spectrum. The creativity latent at the grassroots level of health care delivery will not be unleashed until we apply economic incentives to all providers of medical care. This policy direction would offer the best hope of achieving our ultimate goal: more services delivered at a reduced unit price. One clear direction is to encourage the development of comprehensive, organized, competitive, and multiple health care delivery systems, financed by locally negotiated capitated rates. Such a reform would incorporate significant local provider involvement. In order to work, the purchaser, whether government, employer, or individual, must be free to negotiate aggressively and cost-consciously the price of care. And the system must be free from excessive government controls which distort medical behavior according to arbitrary or uniform reimbursement decisions. In a capitated system, the financial risk is shifted from the purchaser to a provider organization responsible for comprehensive health care who, in turn, shares the risk with all providers associated with the organization. While health maintenance organizations (HMOs) are clearly one remarkably successful demonstration of the vast cost-saving potential of capitated systems, we must avoid trying to reform the health care system through one organizational vehicle. Instead, we must seek to create an environment where constant innovation is possible through all sorts of new hybrids and varieties of delivery systems fashioned by physicians and