Is compression occurring in DRG prices?

Abstract

Many analysts believe that the prices of truly high cost DRGs are set low relative to their actual costs whereas the prices of truly low cost DRGs are set high relative to their costs. To test whether such "compression" is occurring, I examined the algorithm that the Health Care Financing Administration used to create its DRG pricing structure. I then compared the HCFA algorithm with the more refined weighting systems used by Maryland and New Jersey to create their DRG payment systems. I found that compression is indeed occurring in the Medicare system relative to both the New Jersey and the Maryland systems. This compression will assume special urgency for some hospitals when the standardized national DRG payment system is phased in or if stringent limits are placed on the overall rate of increase in DRGs.