Original Research
Health Systems & Financing
Key Takeaways
- The Diagnosis-Related Group (DRG) system pays hospitals a predetermined fixed amount for each patient episode based on the patient’s diagnosis, procedures performed, age, and complications — replacing the traditional fee-for-service model where hospitals are paid for each individual test, procedure, and bed day.
- Healthcare providers’ knowledge of DRG systems was often inadequate — many clinicians understood that a new payment system existed but did not understand how it worked, how it affected their hospital’s revenue, or how their clinical decisions influenced payment.
- Attitudes toward DRG were mixed: administrators tended to view DRG positively as a tool for efficiency, while clinicians worried about pressure to discharge patients prematurely, reduce necessary tests, or compromise care quality to stay within budget.
- Successful DRG implementation requires clinician education and engagement — when providers understand the system, they can work within it effectively without compromising patient care.
How Hospitals Get Paid: Why It Matters to Patients
The way hospitals are paid might seem like a purely administrative concern — a matter for accountants and health economists rather than patients and clinicians. In reality, hospital payment methods profoundly influence clinical decisions, length of hospital stays, the tests and procedures patients receive, and ultimately the quality and cost of care.
Under the traditional fee-for-service model, hospitals are paid for each service they provide — every blood test, every X-ray, every day the patient occupies a bed, every procedure performed. This creates a financial incentive to do more: more tests, more procedures, longer stays. While this ensures that no service goes unreimbursed, it can also lead to unnecessary care, inflated costs, and healthcare spending that grows without a proportionate improvement in outcomes.
DRG-based payment was developed as an alternative that aligns payment with the patient’s actual condition rather than the volume of services provided. Under DRG, the hospital receives a fixed payment for each patient episode — a payment determined by the patient’s diagnosis, any procedures performed, the patient’s age, and the presence of complications or comorbidities. If the hospital manages the patient efficiently and the cost falls below the DRG payment, the hospital retains the difference. If the cost exceeds the payment, the hospital absorbs the loss.
How DRG Works in Practice
| Feature | Fee-for-Service | DRG/Casemix Payment |
|---|---|---|
| Payment basis | Each service individually | Fixed amount per patient episode based on diagnosis |
| Financial incentive | Do more → earn more | Be efficient → retain savings |
| Risk of overtreatment | Higher (more services = more revenue) | Lower (no financial reward for unnecessary services) |
| Risk of undertreatment | Lower | Higher (pressure to cut costs may reduce necessary care) |
| Administrative complexity | Simpler billing | Requires accurate clinical coding and documentation |
| Transparency | Difficult to compare costs between hospitals | Enables benchmarking — hospitals treating similar patients can be compared |
What the Research Found About Provider Knowledge
The study assessed healthcare providers’ knowledge, attitudes, and practices regarding DRG in a hospital setting that had implemented or was transitioning to DRG-based payment. The findings revealed significant knowledge gaps at all levels of clinical staff.
Many clinicians understood that a DRG or casemix system existed in their hospital but could not explain how it worked, how payments were calculated, or how their individual clinical decisions (such as ordering an additional test, extending a patient’s stay by one day, or documenting a comorbidity) affected the hospital’s revenue under DRG. This knowledge gap is not surprising — DRG is a complex system that was developed by health economists and administrators, and clinical training programmes typically do not include health financing education.
However, the knowledge gap has practical consequences. Clinicians who do not understand DRG cannot make informed decisions about care efficiency within the system’s framework. They may unknowingly generate costs that exceed DRG payments (harming their hospital financially) or, conversely, may respond to vague pressure to “reduce costs” by cutting care that is clinically necessary but not understood as DRG-relevant.
The Quality Concern
The most common concern expressed by clinicians about DRG was its potential to compromise care quality. If the hospital is paid a fixed amount regardless of what services are provided, doesn’t that create pressure to do less — to discharge patients earlier, order fewer tests, and provide cheaper treatments?
This concern is legitimate and well-documented in the health economics literature. DRG systems do create incentives that, if unchecked, could lead to premature discharge, inappropriate reduction of necessary services, avoidance of complex and costly patients (“cream-skimming”), and “upcoding” — manipulating clinical documentation to assign patients to higher-paying DRG categories than their actual condition warrants.
However, these risks are manageable through quality monitoring systems, readmission penalties (hospitals that discharge patients too early face financial penalties when those patients bounce back), clinical auditing, and coding accuracy checks. The experience of countries that have used DRG for decades — including the United States, Australia, Germany, and many others — demonstrates that DRG can coexist with high-quality care when appropriate safeguards are in place.
Malaysia’s Casemix Journey
Malaysia has been developing its own casemix system — the Malaysian Diagnosis Related Group (MY-DRG) — since the early 2000s. The system has been implemented in stages across government hospitals, and its expansion continues. The Malaysian experience mirrors many of the findings from the international research: clinician engagement and education have been challenging, documentation quality has required significant improvement, and the transition from traditional budgeting to casemix-informed resource allocation is an ongoing process.
For patients using Malaysian government hospitals, the DRG system operates largely invisibly — patients do not see the DRG code or payment amount associated with their hospital episode. However, the system influences hospital management decisions about staffing, equipment, and service provision, which indirectly affects the care experience.
Implications for Healthcare Systems
Healthcare systems implementing or expanding DRG-based payment should invest in clinician education as a core component of implementation, not an afterthought. Providers need to understand not just that DRG exists but how their clinical decisions interact with the payment system, and how they can deliver efficient care without compromising quality. Documentation training is equally essential — accurate clinical coding is the foundation of DRG, and poor documentation leads to inaccurate coding, unfair payment, and unreliable data. Quality monitoring systems must be implemented alongside DRG to detect and address potential negative incentives. And the voices of frontline clinicians should be included in DRG design and refinement, because they understand clinical realities that health economists may not fully appreciate.