Comparing DRG and DIP: Analysis of Bundled-Payment Healthcare Schemes in China

Abstract

The Diagnosis-Related Group (DRG) reimbursement scheme is known to incentivize hospital service providers to reduce medical costs compared to Fee-for-Service (FFS) due to its bundled-payment structure. However, it does not ensure that the total sum of payments remains within the budget set by policymakers. To address this issue, policymakers in China have recently implemented a new bundled-payment scheme called the Diagnosis-Intervention Packet (DIP). This paper presents a theoretical comparison between the DRG and DIP schemes. We develop a threestage game-theoretical model that incorporates an unobservable M/M/1 queueing system to analyze the interactions among the regulator, service providers, and (in)patients. Our findings reveal that while the DRG payment scheme is designed to incentivize hospitals to serve more patients, there are scenarios where the DIP scheme achieves higher throughput compared to DRG. In terms of per capita patient costs, neither DRG nor DIP consistently outperforms the other. However, when the budget is ample, the DIP scheme proves more effective in minimizing per capita patient costs compared to DRG. On the other hand, hospitals always receive higher profits under DIP than under DRG. Our findings support the decision of policymakers in China to roll out both DRG and DIP schemes in different regions, depending on specific goals, budgetary constraints, and demand contexts. We further apply our model to a case study using Acute Appendicitis data from Guangzhou, China, to demonstrate that our model can be a valuable tool for comparing these two payment schemes.

Keywords: Diagnosis-Related Group (DRG), Diagnosis-Intervention Packet (DIP), bundled-payment schemes, budget constraints, medical costs