Translating technological advantages into cost advantages: the reform of DRG payment method and strategic responses of medical device enterprises

  • 2019-02-21
In recent years, medical insurance departments of various countries are embroiled in enormous financial and operational pressures as a result of a surge in medical expenditures. In order to solve this problem, most countries have chosen to charge medical expenses based on DRG (Diagnosis Related Groups) payment system.

DRG is able to standardize medical services and clearly defines and measures “outputs” in the medical field as a payment standard. Specifically, the DRG system divides patients into more than 700 groups based on their major diagnostics, secondary diagnosis, treatment methods, demographic characteristics and status at discharge, as well as clinical similarity and similarity in resource consumption. And it seeks to charge medical expenses group by group. In this system, the “input” of the medical system is transformed into cost and does not need to be controlled by the payer. In other words, DRG is an agreement between medical insurance institutions and hospitals on payment standard for treating different diseases. When patients who have bought a medical insurance policy are admitted to a hospital, a medical insurance institution will pay the hospital their medical expenses based on a prepaid standard for the disease, and the excess charges shall be borne by the hospital according to a payment system.

Although the original intention of DRG is to control costs, in applying this system, policy makers found it can also play a huge role in the overall management of the hospital. For example, CMI (Case Mix Index), an important parameter in the DRG system, can be leveraged to horizontally compare the clinical quality performance of each department. CMI which can reflect the overall average quality of medical care represents the average technical difficulty or treatment level of every case. DRG-related indicators can transform the quality of medical services, previously difficult to quantify, into quantifiable indicators, making dual horizontal comparisons between hospitals and departments possible. A scientific quantification comparison between hospitals and departments will make superior hospitals and departments more transparent, facilitating the strive for high-end technologies between departments.

Such significantly differentiated products as peripherally inserted central catheter (PICC), radiofrequency ablation catheter, etc. are still desperately needed and hardly to be replaced by domestic products, so the high premium will last for a long time. Reasonably, a value proposition based on value and economics and the strategy to accelerate product penetration shall be adopted for such products. As for those differentiated products with a mature market, including high-flux dialyzer, coronary stent, etc., the premium is increasingly difficult to sustain and equivalent domestic products keep cropping up, so we’d better make plans in advance, foster competition and put investment to obtain economic evidence and value proposition. Furthermore, the sales teams shall grasp the sales skills based on economic concepts and the quantifiable value proposition to determine the price. Those slightly differentiated products, such as low-flux dialyzer, disinfection products, etc., in the mature or waning stage are probably to be replaced by domestic products and their premium is hardly to sustain, so the corresponding enterprises shall allocate small investment to obtain economic value proposition, set price based on quantifiable value proposition and adopt lean model.