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Health Policy 117 (2014) 146150

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Health Policy

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Implementation ofDRG Payment in France: Issues and recentdevelopments

Zeynep Or.

Institut de recherch et documentation en conomie de la sant, IRDES, 10 rue Vauvenargues, 75010 Paris, France

a r t i c l e i n f o

Article history:

Received 12 December 2013Received in revised form 12 May 2014Accepted 22 May 2014

Keywords:

DRG paymentPayment reformsFranceEvaluation

a b s t r a c t

In France, a DRG-based payment system was introduced in 2004/2005 for funding acuteservices in all hospitals with the objectives ofimproving hospital efficiency, transparencyand fairness in payments to public and private hospitals. Despite the initial consensus onthenecessityofthe reform, providers have become increasinglycritical ofthe system because ofthe problems encountered during the implementation.In 2012 the government announcedits intention to modify the payment model to better deal with its adverse effects.

The paper reports on the issues raised by the DRG-based payment in the French hospi-tal sector and provides an overview ofthe main problems with the French DRG paymentmodel. It also summarises the evidence on its impact and presents recent developmentsfor reforming the current model. DRG-based payment addressed some ofthe chronic prob-lems inherent in the French hospital market and improved accountability and productivityof health-care facilities. However, it has also created new problems for controlling hos-pital activity and ensuring that care provided is medically appropriate. In order to alter

its adverse effects the French DRG model needs to better align greater efficiency with theobjectives ofbetter quality and effectiveness ofcare. 2014 Elsevier Ireland Ltd. This is an open access article under the CC BY-NC-ND license

(http://creativecommons.org/licenses/by-nc-nd/3.0/).

1. Policy background

Diagnosis-Related-Groups (DRG) based payment,which links hospital funding to activity, has becomethe most common mode of hospital payment in theindustrialised world over the past decade [1]. This type of

prospective payment, based on the theoretical model ofyardstick competition, encourages hospitals to improvethe use of their resources and to optimise care organisa-tion for improved efficiency [18]. It can also contribute to

Open Access for this article is made possible by a collaborationbetween Health Policy and The European Observatory on Health Systemsand Policies. Tel.: +33 1 53934341.E-mail address:[email protected]

enhancing quality if these changes improve the clinicalprocess and case management. However, despite commonbasic principles, DRG-based payment models can varysignificantly in their architecture and implementationacross countries. The accuracy and consistency of thepatient classification and costing methods together with

the underlying incentive structure are essential for thesuccess of the DRG-based funding, and for the realisationof policy objectives [20].

In France, a DRG-based payment system (called T2A,Tarification lactivit) was introduced in 2004/2005 forfunding acute services in allhospitals. Themajor objectivesof thereformwere improvinghospitalefficiency, creating alevel playing field for payments to public and private hos-pitals and improving the transparency of hospital activityand management. The need for greater transparency andefficiency with better and more autonomous management

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0168-8510/ 2014 Elsevier Ireland Ltd. This is an open accessarticleunder theCC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/3.0/).
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in public hospitalshas long been recognisedby most stake-holders. Until 2005, funding arrangements for public andprivate hospitals were complex with different rules. Pub-lic hospitals had global budgets, mainly based on historicalcosts.Private-for-profithospitals,whichprovidemorethanhalf of all surgery and one fourth of obstetric care in France,had a complex itemised billing system complimented withfee-for service payments [19].

Both public andprivate hospitals initially supportedtheintroduction of DRG-based payments.Global budgets wereconsidered as a rationing instrument by public hospitalsand it was expected that activity based payment (ABP)would reward more dynamic hospitals. Private hospitalssaw the new system as an opportunity for improving theirmarketshare. However, this initial consensuson thereformhas faded during the implementation. Several features ofthe French DRG-model have been criticised and, in 2012,the then newly elected Minister of Health recognised thatthe Frenchmodel needed to be modified to better dealwithits adverse effects.

The paper reports on the issues raised by the activity-based payment in hospital sector in France and providesan overview of the main problems with the French DRGpayment model. It also summarises the evidence on itsimpact and presents recent developments for reformingthe current DRG model.

2. Issues in adaptation and implementation

In the public sector (public and private not for profithospitals), theshare of activities coveredby DRG paymentsincreasedgradually: 10% in 2004, 25% in 2005 andreaching100% in 2008. In contrast, private for profit hospitals havebeen paid entirely by DRGpayments since March 2005. Themajor features of the French DRG payment model and theissues raised in implementation are discussed below.

Patient classification. The patient classification sys-tem used (GHM, Groupe Homogne des Malades) initiallyinspired by the US Health Care Financing Administrationclassification (HCFA-DRG). It has been modified threetimessince the introduction of T2A, passing from 600 groups in2004 to about2300 in 2009 with four levels of case severityfor most GHMs [19]. Continuous modifications of the clas-sification created confusion and reduced the comparabilityof the results of the payment system from one year to thenext. Moreover, the economic pertinence of the latest clas-sification has been questioned, as some groups are basedon a very few cases per hospital. It has also been shownthat 40 GHM covers more than half of all hospital cases inFrance [14].

Cost Data. Reference costs are calculated on the basisof an annual national cost study (ENCC) which is car-ried out separately for public and private hospitals. ENCCprovides detailed cost information for each hospital stayfrom selected hospitals which provide data on a voluntarybasis and according to a detailed standardised account-ing model [19,23]. Until 2006, the ENCC covered onlypublic and private-not-for-profit hospitals. The number ofparticipating hospitals has increased regularly, includingprivate-for-profit hospitals, from 44 in 2005 to 110in 2012,representing about 16% of hospital cases. However, until

2010, the reliability of the cost database has been an issue.Moreover, the methods of calculating reference costs andthe lack of information explaining the cost data have beencriticised severely by the Inspection of Finance [14].

Price setting. The DRG prices (tariffs) are set annually atthe national level using reference costs separately for pub-lic and private hospitals. However, the Ministry of Healthsets the final prices taking into account the overall bud-get (expenditure targets) for the acute hospital sector andnational health priorities [23]. Therefore, reference costsare modified in a complex and opaque way to computefinal GHM prices each year. Tariffs are different for pub-lic and private hospitals. Moreover, what is covered by theprice differs between public and private sectors. The tariffsfor public hospitals cover all of the costs linked to a stay,while those for the private sector do not cover medical feespaid to doctors (paid on a fee-for-service basis) and thecost of biological and imaging tests which are billed sepa-rately. The initial objective of achieving price convergencebetween the two sectors, which started in 2010 with about40 selected GHM was stoppedin 2013 as a results of strongcriticism from public hospitals.

Generally, the difficulty of understanding the linkbetween reference costs and prices irritated hospitals as itmade it difficult to predict the evolution of prices and theirbudget situation from one year to the next [15]. Moreover,the ambition of price convergence, which was supportedby the private hospital federation, has created tension. Inpractice, convergence meant price reductions for publichospitals and steady prices for private ones since tariffsare based on average costs in areas where the private sec-tor had a competitive advantage (ambulatory surgery) andalready had a profit margin [11].

Additional payments. Public hospitals receive additionalpayments to compensate for specific missions, including:education,researchandinnovationrelatedactivities;activ-ities of general public interest such as meeting national orregional priorities (e.g. developing preventive care); andthe financing of some investments contracted with theRegional Health Agencies. The costs of maintaining emer-gency care and related activities are paid by fixed yearlygrants, plus a fee-for-service element taking into accounttheyearly activity of providers. Finally, there areretrospec-tive payments, covering full costs for a restricted list ofexpensive drugs and medical devices.

While there has been progress in improving trans-parency of allocations for education and research activitieswith DRG-based payment, the calculation of budgets tofinance public missions appears to be problematic. Theprivate sector claims that this budget is used as a mecha-nism to cover actual efficiency deficits of public hospitals,whilepublicsectorhospitalsaskforbetterevaluation(cost-ing) of the value of their specific missions. The expenditureon these budgets (MIGAC) increased by 30% between 2007and 2010 against a 9% increase in expenditure linked toactivity over the same period [8].

Expenditure control. To contain hospital expenditure,national-level expenditure targets foracute care (with sep-aratetargetsforthepublicandprivatesector)aresetbytheParliament.Iftheactualgrowthintotalvolumeexceedsthetarget, prices subsequently go down. Evolution of activity


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Fig. 1. Evolution of hospital volumes by sector (number of cases).PMSI Hospital statistics, Or et al. [7].

volumes is not followed at individual hospital level but atan aggregate level (publicsector, private sector). Therefore,GHM prices are set as a function of global changesin hospi-tal activity, (increasingly) independently of costs and theirevolution at the hospital level.

This macro-level regulatory mechanism created anopaqueenvironment where itbecame verydifficult forhos-pitals to predict their budget situation for the next yearas prices change every year as function of overall activity.The lack of information on the specific objectives pursuedwith payment policy also created frustration and resent-mentaboutT2Aattheproviderlevel [21,29]. Intheabsence

ofclearpricesignalsandlackofcostdataforbenchmarkinghospitals, providers appear to be concerned mainly by bal-ancing their accounts [22].

3. Monitoring and outcomes

Like any form of payment, DRG payments may induceundesirable behaviour by providers, adverse effects thathave been widely described in the literature [24]. Theselection of patients, up-coding of severity levels, prema-ture discharge of patients are opportunistic behavioursoften mentionedin theliterature. In addition,the efficiencysought at each hospital level maynot alwaysbe compatiblewith the overall objectives in terms of allocative efficiencyand value for money. To maximise revenues, hospitals canincrease activity that is little justified and alter the com-position of care by abandoning certain activities deemedunprofitable.

Available data suggest that overall hospital activity(number of cases treated) hasgrown regularly (Fig.1) sincethe introduction of T2A [5,6], although public and pri-vate hospitals followed different strategies [7]. In publichospitals both the number of cases treated and case-mixadjusted production have increased significantly between2004 and 2009, and for all types of activities (medicine,surgery, obstetrics), with a more striking increase insurgery. In private-for-profit hospitals, a strong increase of

ambulatory procedures and surgery was observed simul-taneously with a reduction in full-time hospitalisations insurgery and in obstetrical and medical cases. While pub-lic sector has improved its market share in surgery, theprivate sector(specialised traditionally in elective surgery)remains the main producer of outpatient surgery. In 2009,62% of ambulatory surgery was performed by private-for-profit hospitals.

Globally, there seems to be some positive change inpublic sector productivity. The number of public hospi-tals in deficit has been going down [8]. Average length ofstays went down, in particular for surgery with the devel-

opment of ambulatory surgery while the reduction is lesspronounced for medical and obstetric cases (Fig.2). In pub-lic hospitals, technical efficiency may have also increased:there has been a significant increase in case-mix weightedproduction between 2005 and 2009 while the number oftotal hospital staff rose only modestly [7,16]. In contrast, inprivate-for-profit sector the level of weighted productionhas slightly decreased due to the contraction in inpa-tient hospitalisations (weighted more in the productionindex). In all sectors, better activity coding and changes incoding habits (optimisation of co-morbidities) could have

Fig. 2. Average length of stay (days) for surgery, obstetrical and medical

cases.Oret al. [7].


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an impact on the higher production index. However, thegrowing gap between the public and private sectors inproduction index (since 2007) indicates different case-mixtrends between the two sectors [7].

DRG creep. Since the classification of patients into DRGsdetermines hospital revenues, strong perverse incentivesexist for hospitals to optimise their coding practices.In 2006, a year after the introduction of DRG payments,controls from the Health Insurance Funds demonstratedthat up-coding of some outpatient procedures as day caseswas a real problem [9]. This problem was solved in 2007by a decree describing those procedures carried out onan outpatient basis which should not be coded as daycases. Moreover, external data quality checks carried outat the regional level showed that a large number of hospi-tals either intentionally up-coded patients or inadvertentlyclassified patients incorrectly. Between 2006 and 2009,three quarters of hospitals were audited at least once and,among these, half more than once. In 2006, more than 60%of inpatient stays (more than 80% for ambulatory episodes)had some kind of coding error or inconsistency in pro-cedures billed [10]. If intentional up-coding is detected,hospitals may be liable for financial penalties of up to 5% oftheir annual budgets. The revenues recovered from thesepenalties amounted to D51 million in 2008 and D23 millionin 2010 [8].

Quality. There is no specific adjustment for quality inDRG payments in France. In several countries adjustmentsaremade,inparticulartocontrolforreadmissionratescon-sidered as a relevant indicator of hospital quality, sincepayments per case/stay do not give any incentive to pre-vent readmissions. A recent study suggests that 30-dayreadmissions rates for common medical conditions suchas strokes and myocardial infarction but also colon cancerand hip surgery have increased over the period 20072009[7]. Nevertheless, in-hospital mortality rates at 30 days, forthe same conditions show a steady decline between 2002and 2009, as in other European countries.

Induced demand. It isdifficultto prove what isjustifiedand what may be induced demand. Some of the increase inactivity can be explained by the increasing demand due topopulation ageing and dissemination of new interventionsbut also by the improvement in coding hospital activity[24]. However, the strong increase in the aged standard-ised rates of elective interventions/procedures which areprofitable(such as cataract,endoscopy) compared with therates of hip replacement, a heavy intervention difficult toinduce (as a benchmark), is suggestive of induced demandthat may be little justified [7].

4. Recentdevelopments

In 2009, the Auditors Office [12] pointed out that: (1)DRG-based hospital payment has become a very opaquemechanism of cost control for managers and local regu-lators; and (2) the follow up of hospital resources, costsand quality was insufficient. In 2012, several nationalauditing institutions have criticised the French DRG-basedpayment model [1315]. In addition to the necessity ofimproving transparency of price setting and modifyingmacro-level control mechanisms, they pointed out the

need for simplification of the system (including the classi-fication), better communication with public hospitals andbetter monitoring of results.

Attheendof2012,theMinisterofHealthsetupaformalcommission to reform the French DRG system [25,26]. Thecommission works in four areas for improving the currentmodel. First, it is increasingly recognised that tariffs shouldreflect thecosts of efficient providers. Where relevant,DRGprices are aligned with the tariffs for ambulatory surgery.There are also suggestions for adjusting tariffs, wherepossible, on the basis of efficient providers [27]. Unfortu-nately, hospital cost data is currently not used/publishedfor benchmarking or for identifying efficient providers, inorder to facilitate an understanding of the differences inmedical practices and to monitor changes in behaviour ofvarious actors. Therefore thesize of the potential efficiencygains cannot be established.

Second, the commission proposed to supplement activ-itybasedpaymentwithquality-basedfunding,inparticularin areas which may be under-invested (patient follow-up and coordination, patient safety, etc.). The pilot model,testedover 2014/15 in about 220voluntaryhospitals, plansto finance up to 0.5% of hospital budget based on a seriesof quality indicators [28]. The idea is to reward both theresults and the effort taking into account the progressmade over time. However, the vast majority of the indica-tors concern care organisation. Major outcome indicatorssuch as readmission rates and mortality after surgery arenot monitored; information on patient experience is notcollected either.

Third, the appropriateness of services provided undertheDRG systemis being increasinglyquestioned [15]. DRG-based payment can foster the development of hospitalactivity, sometimes beyond what is medically necessary.Assuring the appropriateness of care has become a policypriority, with several institutions tackling the issue. TheHigh HealthAuthority (HAS) started to work on developingclinical guidelines for selected surgery and/or treatmentsin hospital. The variations in hospitalisation and surgeryrates across hospitals and regions are also being followedup more closely now. There are plans to move towardsa more contractual approach with providers, giving clearvolume/price signals for specific DRGs. The objective isto refine the current macro-level regulation system withexplicit volume targets for some interventions for whichDRG prices would go down once the target is reached.

Finally, it is recognised that DRG payments, in theirbasic form, do not encourage an improvement in carepathways and may not be optimal for paying for patientswith chronic illnesses. There are plans to extend paymentsbeyondacute hospital care andbundlingpayment forreha-bilitative services. In 2014, two chronic conditions(chronicrenal insufficiency, radiotherapy in breast and prostatecancer treatment) will be tested in regional pilots. The ideais to pay for the overall treatment rather than for eachsession of treatment as is the case today.

5. Conclusion

Overall, theFrench experience suggests that DRG-basedpayment provides opportunities for enhancing efficiency


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andtransparency in hospital markets butalso present risks.DRG-based payment addressed some of the chronic prob-lems inherent in the French hospital market and improvedaccountability and productivity of health-care facilities.However, it has also created new problems for controllinghospital activity volumes and ensuring appropriateness ofcare. In order to alter its adverse effects the French DRGmodel needs adjustments to better align greater efficiencywith the objectives of better quality and effectiveness ofcare. For this, availability of a strong information systemfor monitoring both costs and quality of hospital servicesis essential. Furthermore, it is necessary to make better useof the available data and information for benchmarkingcost and quality in order to identify efficient providersand disseminate good medical/organisational practices.This needs to be backed up by flexible and transparentgovernance which supports continuous fine-tuning of theincentive structure.

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