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John J. Dalton, FHFMA's avatar

Merrill, your commentary resonated with me. As an engineer with an MBA in Finance (from Illinois Tech), I was the Haskins & Sells (now Deloitte) manager assigned to design and implement New Jersey's first hospital rate-setting system 50 years ago. The SHARE methodology did not adequately reflect the uniqueness of a hospital's service area and patient mix. Commissioner of Health Dr. Joanne Finley was familiar with work being done at Yale University to use clinical data about a patient’s condition to predict how long a patient would stay in the hospital. She recognized that this approach to utilization management might also provide a basis for rate setting. Professors John Devereaux Thompson and Robert Fetter were invited to make a presentation of their work at the Department of Health. I was at the presentation and still vividly recall Thompson stating, “If General Motors can cost out cars, hospitals can cost out patients.” Having recently completed design of a cost accounting system for a major textile manufacturer, Thompson’s statement made sense to me.

The Garden State, with a Sec. 1115 waiver, then embarked on a pioneering effort to set rates per case based on Diagnosis-Related Groups (DRGs) that became the basis for Medicare's Inpatient Prospective Payment System.

In a March 2014 Annals of Internal Medicine article, "After the revolution: DRGs at age 30," author Kevin Quinn argued that Medicare paying hospitals by diagnosis-related group was “the most influential innovation in the history of health care financing.” Quinn stated that “The strong incentives were revolutionary in their impact.” The change from cost reimbursement to prospective payment incentivized hospitals to become more cost-effective. His literature survey concluded that none of the worst fears about adverse effects on patients were realized.

On Friday October 11 at Atlantic City's Hard Rock Hotel and Casino, I'll be moderating a panel of of several surviving participants in that noble exercise for the New Jersey and Metropolitan Philadelphia HFMA Chapters Annual Institute. None of us ever thought at the time that we were part of a revolution!

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Haroon Tariq's avatar

Reading this as a UK citizen is almost surreal. Even the words 'Medical Debt' are oxymoronic in my ears! Thank you for shedding some light on such a sensitive topic!

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