Cluster approach allows budgeting, planning with DRGs.

Measuring costs and revenues on a diagnosis related group (DRG) basis allows health care managers to define product lines, identify market shares, and examine the effects of case mix and physician behavior on profitability. It also enables public agencies to predict bed needs and evaluate certificate-of-need applications. The large number of DRGs, however, and other managerial considerations may discourage the use of DRG-based budgeting and planning. To save time and enhance data usefulness, financial officers may consolidate the DRGs into fewer groups. Revenue, for example, can be estimated by grouping the DRGs into 23 major diagnostic categories or by clustering them according to cost weight or into one group. Comparisons of payment rates and costs will identify the DRGs that lose money and will determine whether departmental costs are excessive. Strategic planning units formed from the 468 DRGs will help health care managers analyze and project performance. Product lines for this purpose may be clustered according to major diagnostic category, physician specialty, or clinical department. Since a potentially enormous amount of DRG-based clinical and financial information could be generated, hospitals should create data committees to ensure that managers receive only the information they need.