HCA 675 What are the pros and cons of a DRG payor system, and a capitated payor system?

HCA 675 What are the pros and cons of a DRG payor system, and a capitated payor system?

HCA 675 What are the pros and cons of a DRG payor system, and a capitated payor system?

DRG stands for diagnosis-related group. The idea behind DRGs is to ensure that Medicare reimbursements adequately reflect “the fundamental role which a hospital’s case mix [ie, the type of patients the hospitals treats, and the severity of their medical issues] plays in determining its costs” and the number of resources that the hospital needs to treat its patients. The advantages of the DRG payment system are reflected in the increased efficiency and transparency and reduced average length of stay. The disadvantage of DRG is creating financial incentives toward earlier hospital discharges (Mihailovic,Kocic,& Jakovljevic,2016).

Capitated payment system is in which a doctor or hospital is paid a fixed amount per patient for a prescribed period of time by an insurer or physician association. It simplifies bookkeeping, discourages excessive billing or more costly procedures, and avoid unnecessary tests and procedures for patients. The disadvantages are providers may spend less time per patient and also incentivizes providing fewer services(Torry,T.2019).

If I were a health care czar, I would probably choose a capitated payor system. It’s the only payment system that fully aligns providers’ financial incentives with the goal of eliminating all major categories of waste. It fundamentally shifts the role of managing the amount, form, and cost of care from insurers to medical practitioners. It also ensures that providers receive enough of the savings that they can afford to fund the changes needed to bring down costs(James & Poulsen,2016).

James,B,C,.& Poulsen,G,P,.(2016).The Case for Capitation. Retrieved from .https://hbr.org/2016/




This is a great work Maggie Paul. You have succinctly defined and differentiated DRG pay and capitated pay, including their pros and cons. Indeed, it is an indication that you had a better grasp of the topic. Adding to benefits of the preferred system chosen, which is capitated pay, the system can be more efficient and simple. The reason for this is that the only requirement to focus on is the number of enrolled members (Basu, Phillips, Song, Bitton & Landon, 2017). Further, the use intricate billing codes or the involving paper works is limited. Besides, it is easier for providers to predict cash flow and patients can also easily predict health care costs.


Basu, S., Phillips, R. S., Song, Z., Bitton, A., & Landon, B. E. (2017). High levels of capitation payments needed to shift primary care toward proactive team and nonvisit care. Health Affairs, 36(9), 1599-1605.

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Diagnosis-related group (DRG) is a payment system that classifies diagnoses with payment formulas that account for

HCA 675 What are the pros and cons of a DRG payor system, and a capitated payor system
HCA 675 What are the pros and cons of a DRG payor system, and a capitated payor system

different weights of the groupings (Mihailovic, Kocic, & Jakovljevic, 2016). The pros include that the system should align with expected screenings, tests, and treatments for major diagnoses that are supported by clinical evidence (Mihailovic et al., 2016). This means that the DRG groups can evolve with time and expected treatment protocols of these conditions, which can set expectations for providers and health entities on reimbursement. Other pros include increased efficiency and transparency of care, as well as a reduced length-of-stay (Mihailovic, 2016). The primary con of the DRG system appears to be a financial incentivization of decreasing length-of-stay that may not be supported by research for some conditions.

The capitated payor system involves using a “fixed per person (or ‘capitated’) payment that covers all health care services over a defined time period, adjusted for each patient’s expected needs and are also held accountable for high-quality outcomes” (James & Poulsen, 2016, para. 3). The pros of this system include that it focuses on decreasing wastes and financially incentivizing providers through quality outcomes. Types of waste that it helps decrease are production-level waste, case-level waste, and population-level waste (James & Poulsen, 2016). Cons may include that it removes oversight from insurances in giving more care management responsibilities to the provider.

If I were a health care czar, I would implement a population-based, or capitated system over a DRG system. The capitated system appears to account for factors other than predetermined tests and treatments for certain diagnosis. Decreasing health care wastes and increasing quality are two primary outcomes of a population-based health care system (James & Poulsen, 2016). Shifting the responsibility of managing care to the provider will enable them to control more factors affecting care and costs. This type of system will also increase free market in the competition for patients using cost and quality as advertisement for services (James & Poulsen, 2016). I feel that this system is close to accomplishing overall goals for health care, which include controlling costs, increasing access to care, and improving quality.


James, B. C., & Poulsen, G. P. (2016). The case for capitation. Retrieved from https://hbr.org/2016/07/the-case-for-capitation

Mihailovic, N., Kocic, S., & Jakovljevic, M. (2016). Review of Diagnosis-Related Group-Based Financing of Hospital Care. Health services research and managerial epidemiology3, 2333392816647892. https://doi.org/10.1177/2333392816647892




This is an excellent work Amber. You have not only clearly defined the two payor systems, but also given in-depth overview including detailing their pros and cons and finally settling on the best system a czar may choose in a healthcare setting. Indeed, this an indication that you have good grasp of the content. Consequently, I would concur with you that capitated payor system is more cost efficient and dependable health care model (Foster, Stephens, Wilson & Dunphy, 2018). The system discourages providers from conducting unnecessary or using expensive procedures that may are essentially not more effective than the normal ones. Hence, it avoids the risk of high billing for unnecessary procedures that may prompt excessive out-of-pocket expenditures.  Therefore, as a health care czar, this is what I would favor.



Foster, R., Stephens, S., Wilson, S., & Dunphy, S. (2018). Why Provider Organizations Should be a Proponent of Capitation. Journal of Health Care Finance.