Jinhua's DRG-Based 'Disease Group Point System' Payment Reform: Evaluation Report and Implementation Outcomes

The Disease Group Point System is a medical insurance payment mechanism based on the total annual budget expenditure of the pooled medical insurance fund within a given region. It establishes a point value for fund allocation by referencing local Diagnosis-Related Groups (DRGs) and their average historical costs (with negotiable adjustments for necessary factors). Under this system, monthly prospective payments (PPS) are made to hospitals according to the total points accumulated for treated disease groups, followed by a final settlement at year-end, where surplus funds are retained by the hospital and deficits are borne either solely by the hospital or shared between parties.

On June 20, 2017, the General Office of the State Council issued the “Guiding Opinions on Further Deepening the Reform of Basic Medical Insurance Payment Methods” (hereinafter referred to as the “Guiding Opinions”), which proposed that “regions with appropriate conditions may actively explore integrating the point-based method with global budget management and diagnosis-related group (DRG) payment, and gradually replace institution-specific global budgets with regional global controls on medical insurance funds. Payments to medical institutions should be made based on their actual accumulated points, thereby promoting division of labor and collaboration, orderly competition, and rational resource allocation among medical institutions.”

In Jinhua City, a vice mayor oversees the administration of health and family planning as well as human resources and social security. The city implemented intelligent claims review and established a knowledge base for medical insurance at an early stage, making it one of the first prefecture-level cities in China to fully implement payment reform based on Diagnosis-Intervention Packet (DIP) point values. The Jinhua Human Resources and Social Security Bureau commissioned the Center for Healthcare Governance Research at the Institute of Hospital Management, Tsinghua University, to conduct a third-party evaluation of the program design and operational effectiveness of Jinhua’s DIP-based payment reform.

In accordance with the State Council’s “Guiding Opinions,” the research team conducted an assessment across three dimensions: the macro-level regulatory mechanism for controlling medical cost growth, the meso-level balancing mechanism for health insurance funds, and the micro-level competitive mechanism for rational cost control and quality improvement in healthcare institutions. Data on inpatient payments from the municipal basic medical insurance fund and operational data from pilot healthcare institutions were collected for the period from July 1, 2016, to June 30, 2017. Using methods such as development indices, DRG-based performance evaluation, and statistical analysis, the study examined 21 indicators to assess the feasibility and implementation effectiveness of Jinhua City’s “Diagnosis-Related Group (DRG) Point-Value” reform initiative.

Evaluation Conclusions: The Jinhua Model represents a comprehensive set of measures to establish a multi-faceted governance mechanism. It has opened channels for dialogue between medical insurance agencies and hospitals, innovatively employed Disease-Related Group (DRG) quality assessment tools (compatible with the national standardized version at any time), and introduced the point-based allocation method alongside Monthly Prospective Payment System (PPS), thereby fostering a favorable environment for the coordinated development of healthcare, medical insurance, and pharmaceutical sectors. By the fifth month of payment reform implementation, the growth rates of average cost per visit, per case, and per DRG group were all lower than the growth rate of healthcare service quality, as measured by the Case Mix Index (CMI).

Over the past year, the medical insurance fund has operated soundly, with favorable results in the Tsinghua Index assessment and healthcare institution operational performance. Both the program design and its implementation outcomes align with the reform direction outlined in the “Guiding Opinions.”

1. At the macro level, a regulatory mechanism for medical insurance fund budgeting and reasonable growth has been initially established, achieving rational growth in regional medical insurance fund expenditures.

The projected target for the growth rate of actual medical insurance fund expenditures in 2016–2017 was 7.5%, while the actual growth rate was 7.11%. The municipal medical insurance fund has entered a sound state of balanced revenues and expenditures with a slight surplus, amounting to RMB 3.11 million for this insurance year. In 2016, the gross revenue growth rate of medical institutions in Jinhua City exceeded 9%. The allocation of medical insurance funds has become increasingly rational.

Data show that the growth rates of service volume and revenue in secondary medical institutions have both outpaced those in tertiary medical institutions, indicating a trend toward more rational patient triage. For example, Wucheng District First People’s Hospital (a secondary-level facility) has seen substantial growth in its inpatient services: the number of hospitalizations increased from 4,548 to 6,545, representing a 43.9% rise (compared with a 9.7% year-on-year increase at the Central Hospital), while the number of diagnosis-related groups expanded from 288 to 350, reflecting a 21.5% increase in service breadth and greatly improving local residents’ access to care. Meanwhile, the hospital’s total medical revenue grew from RMB 24.04 million to RMB 34.07 million, an increase of 41.72%, yielding an additional RMB 1.33 million compared with the previous payment system.

Of course, this trend requires continuous monitoring. Insured individuals have benefited from the reform. First, the average cost per hospitalization decreased by 170 yuan, reducing the financial burden on the public by 23.7 million yuan. In the 2016 medical insurance year, the average cost per hospitalization for patients in Jinhua’s urban area was 9,546 yuan, marking the lowest level in the past four years. Second, the average out-of-pocket expense per person dropped from 742 yuan to 680 yuan, a decrease of 8.37%, while the average total medical expenditure per person declined by 3.51%. Third, practices such as fragmented hospitalizations and frequent transfers between hospitals have decreased. For instance, among 16 disease groups prone to fragmented hospitalizations and frequent transfers, such as stroke and kidney failure, the ratio of hospital admissions to unique patients fell from 1.29 in the 2015 medical insurance year to 1.12, a 15% reduction. Meanwhile, the rate of readmission within 10 days for the same disease groups dropped from 0.87% to 0.72%, a 20% decline. Resident satisfaction, as assessed via WeChat, reached 100%.

2. At the meso level, a long-term mechanism for maintaining the balance between revenue and expenditure of the medical insurance fund has been preliminarily established.

Achieve full coverage of inpatient disease types, with quality indicators for all diagnosis-related groups (DRGs) meeting or exceeding internationally applicable standards, and a DRG assignment rate of 100%. The average historical cost of DRGs over the 18 months prior to the reform was used to determine the average payment standard for each DRG (the DRG payment standard includes all medical expenses covered by both the medical insurance fund and out-of-pocket payments). This established a cost "benchmark" recognized by four stakeholders: medical insurance agencies, hospitals, physicians, and patients. Hospital tier classifications were temporarily set aside in favor of considering hospital-specific DRG cost coefficients, thereby supporting healthcare institutions in planning and budgeting, and encouraging proactive cost control to gradually align with the average. Using the Tsinghua University Medical Security Development Index, an assessment based on seven indicators [1-7] was conducted and compared with the national average. Jinhua City’s Medical Security Development Index was 0.8807, higher than the national average index of 0.6366 (2015), placing it among the cities with the highest indices.

3. At the micro level, a preliminary guidance mechanism for fostering healthy competition among medical institutions, centered on “cost control and quality improvement,” has been established.

(1) Established a collaborative mechanism between hospitals and health insurance for prospective payment. Following the implementation of the diagnosis-related group (DRG) point-based payment system, monthly prospective payments are made to hospitals based on their service points. This shift from retrospective to prospective payment by health insurance has created a favorable environment for hospitals to engage in strategic planning, budget management, and cash flow management, thereby incentivizing hospitals to actively collaborate with health insurance authorities to strengthen management.

Taking the Central Hospital as an example, a leadership group for the management and application of health insurance payment reform using the Diagnosis-Intervention Packet (DIP) points-based method was established, with the hospital president serving as the team leader and involving multiple departments. The hospital organized institution-wide participation in the reform and imposed requirements on the completion of medical record front pages, including “standardizing the selection of definitive diagnosis (procedure) names, clarifying personnel responsibilities, and defining quality control indicators and scoring criteria.” Multiple training sessions were conducted, staffing for coders and health insurance office personnel was increased, and over 6,800 feedback communications were carried out with clinicians. A highly integrated electronic medical record system was implemented, and efficiency was enhanced through dual-frequency coding on standalone terminals. These measures promoted the development of hospital management toward homogeneous, standardized, and normalized service quality and operational efficiency compatible with the DIP points-based method. Under conditions of reasonable cost and time consumption, as well as improved quality and safety, patients gained access to affordable and appropriate services.

Pilot hospitals have achieved an overall surgical coding completeness rate of 96%, a medical record completeness rate of 98% (including private hospitals, traditional Chinese medicine hospitals, and community health centers), and a clinical pathway enrollment rate of over 92% (for Grade A tertiary hospitals). Additionally, service breadth has expanded, case-mix index has increased, and the structure of medical expenses has become more rational.

(2) Established an incentive and constraint mechanism whereby surpluses are retained by the institution while deficits are borne by it. Data from 2017 show that hospitals’ proactive awareness of cost containment has yielded significant results. Hospitals have utilized diagnosis-related groups (DRGs) as a tool for cost comparison, thereby achieving precise cost control at the DRG level.

Statistical analysis indicates that costs for 445 DRG groups decreased or remained stable, accounting for 82.68% of total costs and 80% of all DRG groups. Costs for 159 DRG groups increased reasonably, representing 17.32% of total costs and 20% of all DRG groups. The City Central Hospital, which demonstrated outstanding management performance, achieved cost savings of RMB 10 million (with over 90% attributable to cost control within DRG groups), resulting in a net revenue increase of nearly RMB 20 million compared to the previous payment system. Hospitals participating in the evaluation symposium unanimously agreed that the reform of medical insurance payment methods has played a significant role in promoting quality management improvements in hospitals, with evident positive impacts on sustainable hospital development and optimized resource allocation.

(3) A quality evaluation mechanism for contracted medical institutions has been established based on intelligent monitoring and big data. To effectively prevent the “roller coaster” effect (short-term constraints followed by rebound) and the “mole” effect (decrease in drug costs accompanied by an increase in material costs) during the reform, a supplementary evaluation and analysis system for the service quality of contracted medical institutions was developed leveraging the intelligent monitoring platform and healthcare security big data (with 50 indicators designed, 37 of which were implemented in Phase I). This system facilitates convenient evaluation of inpatient service satisfaction via mobile WeChat. Furthermore, supporting measures for retaining surplus funds and bearing deficits have been explored and improved, and a point adjustment mechanism has been established. Based on comprehensive evaluations, for institutions scoring below 85 points in the annual healthcare security assessment, 0.5% of their total points will be deducted for each point below the threshold as a penalty for poor performance. The top three medical institutions with scores above 90 points will receive incentive points allocated in proportion to the weight of their service points.

Evidence has shown that reforms in healthcare insurance payment methods can indeed incentivize medical institutions to control costs and improve quality, thereby fostering an environment of rational competition. Moreover, as the landscape of payment reform unfolds, new issues have emerged across healthcare insurance, hospitals, pricing, finance, and health administration sectors during the deepening of these reforms. These challenges require collaborative efforts to address systemic and institutional barriers.

During one year of reform practice, the following issues are worth discussing:

1. On the growth rate of total local healthcare expenditure.

In 2016, the total health expenditure in Jinhua City amounted to RMB 4.28326 billion, of which the total expenditure from the municipal medical insurance fund was RMB 1.44913 billion, accounting for 33.83% of the total health expenditure. Calculated at current prices, the average annual growth rate of the city’s total health expenditure between 2012 and 2016 was 15.69%, significantly exceeding the local level of economic development. It is therefore necessary to further integrate relevant data, establish a mechanism for the rational growth of total health expenditure, and include it as one of the key performance indicators for the municipal government’s livelihood-related achievements.

2. Regarding the baseline for the medical insurance fund expenditure budget.

Currently, using the actual reimbursement amount of the inpatient fund for insured individuals from the previous year as the base, multiplied by a growth rate, to determine the total budget for medical insurance expenditure in the following year may create moral hazard by encouraging healthcare institutions to “spend money to inflate the base.” Continuous data analysis is needed to observe its development trends.

3. On the Fair Value of Diagnosis-Related Group (DRG) Payment.

To ensure the smooth advancement of payment reform and facilitate a seamless transition between the legacy and new payment systems, cost coefficients were incorporated into the design of the inpatient payment system based on the Diagnosis-Intervention Packet (DIP) point-value method. This approach acknowledges historical disparities in medical service costs; however, it may be inequitable to hospitals that have effectively controlled costs in previous periods. Therefore, it is essential to gradually achieve basic uniformity in citywide cost standards for disease groups during the reform process. The classification of certain complex and critical cases requires further refinement. Furthermore, aligned with public welfare objectives, preferential payment policies should be implemented for key specialties requiring prioritized development, such as pediatrics, psychiatry, and geriatrics, thereby supporting the healthy development of the healthcare service system.

4. Information Disclosure Report on the Prepayment System of Medical Insurance.

It is necessary to allocate human and financial resources to establish a specialized team that regularly publishes reports on the point-based payment system for medical insurance disease groups, including performance evaluation reports of contracted medical institutions. This initiative aims to foster dialogue and collaboration among stakeholders in basic medical services, provide a basis for contracted medical institutions to strengthen management, and create an environment of orderly competition.

5. Issues Regarding Supporting Measures for Deepening Reform.

First, it is urgent to improve the incentive and constraint mechanisms for physicians’ medical service delivery. Under the global budget system, where deficits are borne by providers and surpluses are retained, it remains unclear how these financial mechanisms translate into effective incentives and constraints for individual physicians. Currently, physicians still lack sufficient motivation to proactively adjust their clinical practice behaviors.

Second, accelerate the implementation of clinical pathway management. Clinical pathway management is a refined, standardized, and procedural approach to disease treatment. Efforts should be accelerated to establish top-level designs for clinical pathway management systems, operational models, mechanisms, and quality assessment and continuous improvement frameworks tailored to China’s national conditions, thereby laying a solid operational foundation for the broader adoption of Diagnosis-Related Groups (DRGs) payment.

Third, there is an urgent need to establish mechanisms for the introduction, evaluation, and procurement of third-party services. Currently, Jinhua City obtains third-party services free of charge through cooperative co-construction models, which are unsustainable and non-replicable in the long term. Therefore, it is imperative to establish and improve a compensation mechanism for government procurement of third-party services.