Reform in Provider Payment: DRG Experience in South Korea

1. Reform in Provider Payment: DRG Experience in South Korea at World Bank HCF Conference February 2008 by Bong-min Yang, PhD Seoul National University South Korea

2. Types of Providers in the South Korean Health System Source: Annual Statistics, NHIC (National Health Insurance Corporation), 2006

3. Chronology of Korean DRG • Introduced as a pilot program • In 1997 • For inpatients under 5 disease groupings • Voluntary participation by clinics and hospitals • Diseases category: lens procedures, tonsillectomy and/or adenoidectomy, appendectomy, vaginal delivery, cesarean section • 2nd phase pilot program (1999-2001) • Covered disease groupings varied between 7 and 17 • More providers join , under voluntary scheme • 3rd phase (2002-present): DRG system started • Disease groupings fixed to 8: lens procedures, tonsillectomy and/or adenoidectomy, appendectomy, vaginal delivery, cesarean section, inguinal and/or femoral hernia procedures, appendectomy, anal and/or perianal procedures • Voluntary participation • Number of participating providers remains almost the same

4. Chronology 2 • Change from voluntary DRG participation to compulsory DRG was scheduled in July 2004 • Government (MOH), facing provider resistance, announced delay of compulsory DRG system, shortly before its implementation (in June 2004) • In January 2008, the incoming New government took it as a reform agenda again, and announced adoption of inpatient DRG system • on a compulsory participation basis • starting from 2010 • gradual expansion by disease category planned

5. Facts in the Korean DRG System • Voluntary participation • Currently applied to 8 disease groupings • lens procedures, tonsillectomy and/or adenoidectomy, appendectomy, vaginal delivery, cesarean section, inguinal and/or femoral hernia procedures, appendectomy, anal and/or perianal procedures(NHIC (National Health Insurance Corporation), Annual Health Insurance Statistics 2006) • DRG rates • Principle: DRG fee for a certain DRG disease code was set around mean of the on-going FFS charges by all provider groups

6. Number of providers A B Mean FFS charges Figure: Distribution of FFS charges and DRG fee level

7. Facts 3 • NHIC (national health insurance corporation) reimburses the DRG rates for services provided by DRG scheme participating providers, and FFS charges to non-participating providers. • Naturally, under voluntary participation scheme, those (clinics, some medium and general hospitals) who could gain from DRG system joined, and those (general and tertiary hospitals) who would lose at the announced DRG rates ignored the system • That is, most providers in range ‘A’ in the Figure joined, and providers in range ‘B’ would not • Participation rates vary, depending upon type of providers • Only one out of 40 tertiary hospitals • About 40 % of hospitals and general hospitals • About two thirds of clinics

8. (unit: no. of institutions ) Table. Provider Participation Rates to DRG Scheme * Note: ( ) participation rate Source: HIRA, Jeong HS(2006)

9. Facts 3 • Providers in ‘A’ range receive the DRG rates (equivalent to the ‘mean’ in the Figure), while providers in ‘B’ receives the FFS charges as they claim for reimbursement • In the end, in terms of payment, only the right hand part of the distribution in the Figure remains • Resulting DRG costs • 24% higher than FFS reimbursements (assessment based on the 2nd phase pilot program) (Choi BH, 2004) • In terms of NHI financing, it is a worse option than the FFS system

10. The DRG objective of enhancing appropriateness in service provision behavior by providers could not be pursued • Those providers whose service provision patterns need to be corrected (some of those in ‘B’ range in the Figure) never participate, while those who show reasonable service patterns (some of those in ‘A’ range) join and receive generous (more than they would receive under FFS) DRG fees (Kang KW, 2004) • To correct inherent problems with the current DRG system, MOH announced a compulsory DRG system to be implemented from July 2004 • Faced provider resistance • Decision: MOH delayed compulsory inpatient DRG implementation, just ahead of the scheduled time • To much dismay of the public and civic groups who supported the implementation of compulsory scheme

11. Reasons of Provider Resistance • Announced reason of objection: inpatient case mixes will not be well represented by DRG codes under DRG system • Reasons behind • Although, fee levels are generous under voluntary scheme (to induce more participation) • When become compulsory for expanded service categories, fee levels will be set at a low level • As all providers participate compulsorily, the MOH no more needs to offer generous fee levels as an incentive for participation • Even those who currently participate the DRG program fear that, once all providers are subject to DRG system, the MOH may freeze or even lower the current fee levels • Overall, providers fear that, if it happens, provider revenue on average will be less under DRG system than under the FFS in the long run

12. New Attempt of Compulsory Scheme by the New LBK Government • Even though compulsory (inpatient) DRG implementation is scheduled in 2010, the prospect of successful implementation looks gloomy • Previous successful block of compulsory scheme by provider groups in July 2004 • May have provided provider groups with confidence of another block • Therefore, will place the MOH in a awkward position in the process toward 2010 • Furthermore, it seems difficult for MOH to find a new reason for compulsory DRG policy • The health care system environment remains almost the same • Except that we have a new government • Is the fact that we have a new government a sufficient condition to go for compulsory DRG system?

13. New Attempt 2 • If the K-MOH intended to implement compulsory DRG anyway, she should have done it at the initial attempt (in July 2004). The chance of successful implementation then was reasonably good, because • Merits and potential problems were well recognized through pilot program experiences. They could have been well adjusted into compulsory scheme • The policy implementation announced in advance • And most importantly, it was expected by every stakeholder to happen • But the MOH suddenly abandoned it, and now try to revitalize it • It seems that MOH has lost a good timing, an element for successful public policy implementation, for compulsory DRG

14. New Attempt 3 • Implementation of compulsory DRG in South Korea is now burdened twice as much with, • Loss of timing • Overcoming much stronger and better organized (from experience) provider resistance • How about the public support? • Public support (in particular, by civic groups) is assumed (by government) to remain the same as before • However, the supportive civic groups were much disappointed by the sudden (unexpected) delay of compulsory DRG in July 2004 • It is questionable if they show the same level of support in the future

15. Lessons from Korean Experience • The pilot program should have been set as a compulsory participation program from the beginning. The experimentation could have been set on regional basis instead (for example, Seoul region only), or on varying disease categories, or both • Under voluntary participation scheme, those providers whose service provision patterns need to be corrected never participate, and those who show reasonable service patterns join and receive generous DRG fees • Therefore, the objective of achieving standard service providing patterns among providers (i.e., alleviating demand inducements by some aggressive providers) through adoption of DRG system has never been attainable • Giving the impression of DRG system as a means for cost containment was not a helping strategy for the government (note: a similar situation is being developed with the new pharmaceutical reform policy in Korea as of now)