How DRG Facilitates the Establishment of a Lean Operational Management System in Hospitals: Insights from Li Jianjun, Chief Accountant of Henan Provincial People's Hospital

Currently, significant changes have occurred in both the broader policy environment and the internal operational environment of hospitals.

First, macro-level changes in the landscape of hospital healthcare reform.For public hospitals, the goal of healthcare reform has shifted from providing basic medical services to delivering comprehensive, full-cycle health services; physicians’ responsibilities have expanded from clinical care to include talent development, tiered diagnosis and treatment, targeted poverty alleviation, and scientific research.

Second, changes in hospital management.Currently, hospitals’ clinical technologies and service capabilities are outpacing their management proficiency. Hospital management has indeed become a bottleneck to the development of public hospitals. Although hospital administrators are striving to improve management standards, the tools and methods for hospital, health insurance, and industry management remain lagging. Amid slowing revenue growth and persistently rigid cost increases, hospital managers need to consider how to establish a modern hospital operational management system to support and promote the healthy and sustainable development of hospitals.

Third, policy changes.The focus is on DRG-based payment. Over a three-year period, DRG has progressed from policy formulation to pilot implementation. It is foreseeable that DRG-based payment will soon be rolled out nationwide. Against this backdrop, hospitals are transitioning from fee-for-service to diagnosis-related group (DRG)-based payment, and regulatory oversight is shifting from post-consultation to intra-consultation monitoring. This undoubtedly poses a significant challenge to hospital operational capabilities.

Amidst changes across all fronts, public hospitals are also grappling with issues such as financial and economic pressures, efficiency in resource allocation, and coordinated development. To align with the times, every hospital is seeking transformation.

Recently, the Global Hospital Lean Operations Forum and the 2nd HIA Big Data International Summit, co-hosted by Neusoft Wanghai and Sinopharm Reeds Exhibitions, were held in Qingdao, Shandong Province. At the parallel forum themed “DRG-Led Lean Transformation,” Mr. Li Jianjun, Chief Accountant of Henan Provincial People’s Hospital, shared his insights on “DRG Facilitating Lean Operational Management in Hospitals,” drawing on practical experiences at Henan Provincial People’s Hospital. VCBeat has compiled and edited the highlights of his presentation.

Li Jianjun, Chief Accountant of Henan Provincial People's Hospital

In 2016, Henan Provincial People’s Hospital introduced the Diagnosis-Related Group (DRG) management tool and pioneered its application in areas such as discipline development, performance evaluation, and cost control. Li Jianjun shared that the hospital established a DRG implementation task force and created a multi-departmental coordination mechanism involving medical informatics, medical records, finance, and operations. Currently, the hospital’s DRG-based cost control for disease groups has been effectively implemented, meeting the needs of current hospital management. Li Jianjun believes that value-based healthcare requires discipline development, which in turn necessitates enhancing disciplinary capabilities to establish competitive advantages within the region, thereby attracting patients. Regarding hospital resource operations, the key components are budget management, cost control, and performance management.

Many people believe that Diagnosis-Related Groups (DRGs) are solely related to clinical management and clinical pathways, with no connection to hospital finance. However, this is not the case. Li Jianjun argues that the ultimate goal of hospital control is to enable DRGs to facilitate seamless integration between hospital operations and clinical practice. To achieve this objective, benchmarking must be established first, followed by evaluation. Hospitals need to manage clinical pathways and perform DRG pre-grouping to align the costs of DRG-specific cases with standard costs, and then conduct evaluations, thereby establishing a closed-loop management system.

Since the second half of 2018, Henan Provincial People’s Hospital has spent nearly six months exploring the role of Diagnosis-Related Groups (DRGs) in cost accounting, financial accounting, departmental accounting, and DRG-based case-mix accounting within its hospital financial management system.

Performance management is a crucial component of financial management. It involves the monitoring of budget execution during and after the fact, and cost management must be linked to the performance evaluations of both clinical departments and staff. Currently, Henan Provincial People’s Hospital has established a knowledge-value-based performance evaluation and incentive system grounded in RBRVS (Resource-Based Relative Value Scale) and DRG (Diagnosis-Related Groups).

From Li Jianjun’s perspective, the key challenge in performance appraisal at public hospitals lies in accounting.

The Resource-Based Relative Value Scale (RBRVS) tool focuses more on assessing individual physician incentives, which may, to some extent, induce overtreatment. In contrast, the Diagnosis-Related Group (DRG) tool emphasizes overall performance and disciplinary perspectives. Its drawback lies in the inability to accurately account for cases involving prolonged hospital stays, as well as departments such as rehabilitation, psychiatry, and emergency medicine. Therefore, the hospital has adopted a combined approach using both RBRVS and DRG tools to establish a scientific performance appraisal system that rewards greater effort with higher compensation and superior performance with better pay. This system precisely measures the workload of medical staff and reflects the value of their professional expertise.

Regarding cost control, the main issues currently facing cost management in public hospitals include the absence of a systematic cost accounting framework, the lack of a scientific cost control architecture, insufficient strategic thinking in cost management, inadequate information technology support for cost management, and a shortage of highly qualified management accounting professionals.

To address the aforementioned issues, it is essential to establish a cost accounting system centered on Diagnosis-Related Groups (DRGs). This system comprises three components: department-level, service item-level, and DRG-level cost accounting.

Departmental Cost Accounting.Departmental cost accounting is the foundation of the entire cost accounting system. It can support cost control at the departmental level.

Project Cost Accounting.Project cost accounting is primarily used to support DRG-based costing and single-disease cost accounting, and also serves as the basis for pricing medical service items.

DRG Cost Accounting.Calculate case costs based on the accounting results of project and departmental costs, and then aggregate them into DRG group costs.

In the face of rapid changes in hospitals, Li Jianjun shared three key insights from the perspective of financial management in the new era. First, adopt systems thinking to strategically plan and design financial operations, including the financial management system, operational management system, smart finance system, and internal control system. Second, cultivate interdisciplinary thinking. Finally, embrace emerging technologies and master new tools to leverage technology in driving the transformation and upgrading of hospital financial and operational management.