The first DRG: lessons from the end stage renal disease program for the prospective payment system.

When Medicare implemented the diagnosis related group (DRG) method of reimbursement for hospitals in 1983, it already had a decade of experience using a prospective payment arrangement for its end stage renal disease (ESRD) program. We reviewed this experience to determine the lessons for Medicare's reimbursement of hospital services. The use of a fixed price for renal dialysis encouraged the introduction of cost-saving techniques. Failure to reduce the price for dialysis in keeping with the cost reductions, however, prevented the government from realizing the full benefits of prospective payment. In addition, there were important changes in medical practice that had independent effects on the program. Similar influences are likely to shape the impact of prospective payment on hospital behavior.