Implementation of a severity-adjusted diagnosis-related groups payment system in a large health plan: implications for pay for performance.

This article describes the implementation of the All Patient Refined Diagnosis Related Group (APR-DRG) inpatient payment system in a large regional commercial payer. The APR-DRG system replaced the Plan's current All-Payer DRG (AP-DRG) payment methodology on December 1, 2006, and is part of a strategic hospital payment redesign that will enable the Plan to control costs, increase pricing transparency for customers and providers, and reward hospital quality and efficiency. On the basis of modeled results using 2005 data, we found that the APR-DRG payment system using cost-based weights will do a better job of linking inpatient severity and use of resources to payments. The transition to the cost-based APR-DRG methodology with enhanced clinical specificity will also support measurement of hospital quality and efficiency in the Plan's performance improvement programs.