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Uncontrolled increases in Medicare expenditures spurred U.S. policymakers to turn from a cost-reimbursement system to episode-based hospital financing in the 1980’s. The Diagnosis Related Groups (DRGs ) were used to define patient types, and fixed national prices for patients covered by Medicare were defined to create economic incentives for hospitals to become more efficient. Today, U.S. hospitals are treating only the most seriously ill patients. Simpler procedures are being performed outside the hospital. Nursing care is increasingly moved to intermediate-care facilities or is given during home visits and recuperation is occurring outside the hospital, where patients and families have more responsibility in the recovery process. This paper describes the DR G experience, how hospitals and physicians changed the use o f hospitals, the successes and failures of that experience, and lessons that may be learned as other countries adopt similar hospital financing schemes.
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