STUDIES IN LOGIC, GRAMMAR AND RHETORIC 29 (42) 2012

The use of DRGs in hospital management

Petre Iltchev1, Aleksandra Sierocka2, Michał Marczak1

1
Department of Health Care Policy, Faculty of Health Science, Medical University of
Lodz, Poland
2
Barlicki Hospital in Lodz, Medical University of Lodz, Poland

Abstract. Four years after the implementation of a payment system based on

diagnosis related groups (DRGs) by the National Health Fund (NHF) in Po-
land, little research has been done on the use of DRGs in strategic management,
controlling and managing hospital finances. Today’s reality of managing health
facilities forces their managers to take DRGs into account. This paper presents
the possible use of DRGs in hospital management. The first part of the paper
describes the nature of DRGs, while the second discusses best practices in the
use of DRGs in hospital management and controlling. The NHF’s policy of fre-
quently modifying dictionaries describing DRGs and the way the NHF presents
data on its web site hinder the application of DRGs in the strategic and ope-
rational management of hospitals. This paper is based on a case study of DRG
use in the management of the Barlicki Hospital in Lodz (a clinical hospital of
the Medical University of Lodz).

Introduction

Health care reforms as well as the restructuring and conversion of ho-

spitals into non-public health care facilities (NZOZ) make it necessary to
introduce new management methods, a new approach to effectiveness, la-
bor efficiency, costs and performance, and DRGs should be part of these
new tools. “Apart from their use in reimbursement systems, case-mix sys-
tems such as DRG were designed for planning, budgeting, management and
financing inpatient care” [7]. Currently, the DRG system benefits mainly
(only) the NHF. Hospitals are struggling to implement DRG-based plan-
ning, budgeting, and management.
Four years after the NHF implemented the DRG system, DRG data
have yet to be applied in hospital management. DRGs may have a signifi-
cant impact on hospitals’ contracts and financial position. With proper use
of data from the NHF DRG Statistics web service, hospitals can achieve
a competitive advantage and increase their effectiveness. There is a huge
potential for improving hospital management and profitability using DRG

ISBN 978–83–7431–336–0 ISSN 0860-150X 129

Petre Iltchev, Aleksandra Sierocka, Michał Marczak

data. The key to success is to combine internal (hospital) and external

(NHF) data. Few hospital managers have a vision of how to use DRGs for
effective management and very few hospitals in Poland have incorporated
DRGs into controlling and strategic management processes. The concept of
including DRGs in hospital strategic management faces many challenges.
Managers of public hospitals in Poland are rarely able to plan long term, or
to see beyond the term of the hospital’s contract with the NHF.
Hospital managers lack the knowledge and examples of best practices
on how to implement DRGs at each level of management – from strate-
gic to operational. The profitability of a hospital as a whole depends on
the profits of each individual hospital unit (of each contract and process).
The implementation of an appropriate level of detail in the measurement
of hospital performance requires external data as a basis for benchmarking.
Hospitals should introduce financial monitoring and controlling at the le-
vel of hospital departments and units. An increase in liability for medical
and financial results at the lowest level of organizational structure leads to
higher profitability.
This paper begins a discussion series aimed at extending management
“beyond traditional 20th century hospital management.” Over the years,
controlling has been “the next big idea” in management theory, but few
hospitals have put it into management practice.
The application of DRGs is presented as part of the process of building
a hospital data warehouse. Some examples are also shown of how managers
can compare costs on the basis of DRGs. DRG-based decision-making ideas
and models may be used for the improvement of hospital management.

The history and nature of DRGs

DRGs were introduced in the 1960s, when Robert Fetter started a pro-
ject aimed to compare the quality of medical services. The challenge he
faced was to eliminate the impact of the state of patients’ medical com-
plications on the performance of health care facilities. Subsequently, DRGs
were used to analyze the costs of medical services. The DRG system is used
in most OECD countries. The first attempts to introduce DRGs in Poland
were made in the years 2000–2003 by the Lower Silesian Sickness Fund,
but the liquidation of Sickness Funds and the establishment of the NHF
halted the above-mentioned efforts. Prior to July 1, 2008 the NHF used
the Catalogue of Hospital Services to determine payments for hospitals.
It was not until July 1, 2008 that hospitals around the country started

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DRG-based reporting. Introducing DRGs, the NHF made the following

assumptions:
a) an active influence on the costs of services;
b) a possibility for comparing the performance of hospitals.
The new way of determining payments has given hospital managers the
opportunity to:
a) plan their budgets;
b) develop variants of contracts for negotiation with the NHF and other
payers;
c) monitor, control and actively manage costs in accordance to DRGs;
d) link resource planning (medical personnel, medicinal products, hospital
infrastructure-equipment, beds, etc.) with DRG-based contracts.
The Polish DRG system is based on only one principal diagnosis, and its
distinguishing feature is that it also includes time spent in hospital and se-
parate valuation of scheduled and emergency hospitalization [6]. The Polish
DRG system contains 16 major categories and 519 groups. The basic dictio-
nary includes: age, sex, mode of admission and discharge, and international
classification of medical procedures.

Methodology

The methodology used for DRG-based hospital management in the va-

rious areas comprises of:
a) general data warehouse theory;
b) data warehouse design for hospitals;
c) controlling, benchmarking, strategic management.

The role of controlling

Controlling in hospitals can be considered part of managerial control.

The purpose of controlling is to examine budget implementation and devia-
tions from plans, and to calculate the costs and financial results for different
units in the organization’s structure. The DRG system is an additional di-
mension, specific to controlling processes in hospitals. The factors affecting
the organization and frequency of controlling activities include:
a) the complexity and turbulence of the economic environment;
b) the value of the contract with the NHF (initially one should focus on
controlling contracts with the highest value);

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c) the organizational level at which goals are assigned, plans developed

and responsibility for financial results delegated.
Many hospital mangers find it difficult to combine medical objectives
with economic ones. Economic objectives affect the manner of management,
which is “focused on the market of medical services, the rational use of re-
sources and the rendering of services in compliance with the practice of medi-
cine” [10]. Most public hospitals which have been converted into non-public
hospitals may not expect a rapid increase in revenues. In the initial phase
after conversion the NHF remains the basic source of revenues. This means
that the survival and development of these facilities depends on their con-
tracts with the NHF. After signing a contract, managers should focus on the
effective management of costs and resource utilization [3]. The costs of con-
tracts with NHF can be considered a typical optimization problem. At this
stage, however, optimization does not seem to be used to a sufficient extent
in hospital management. The issues of optimization of contracts signed with
the NHF can be seen in terms of two basic strategies:
– maximizing the value of contracts and financial results given the avail-
able resources;
– minimizing the use of resources at a given value of the contract, with
active management of costs.
While developing a model for optimizing the financial results of a con-
tract, the function describing the costs should be constructed in the follow-
ing way:
– it should be built on a multi-dimensional cost model which includes the
mode of admission and discharge, sex and age of the patients;
– it should be taken into account that costs are not always proportional
to the length of stay; costs are often the highest in the first few days,
and gradually decrease along with improving patient health;
– it should be remembered that “The estimated values of c all being
positive could be the result of the overall costs mainly being driven by
the costs made for non-survivors, which is not surprising given the well
known fact that dying patients are, on average, far more cost consuming
than surviving patients.” [3].
It is generally believed that the costs of medical services are undervalued
in NHF contracts. This in turn means that contractor bears higher costs
than are reimbursed by payments received from the NHF. The hospital
may take steps to carry out the contract on a larger scale in order to avoid
losses. Nevertheless, smaller facilities are left in a situation in which revenues
from the contract will be lower than the costs. The only thing they can do
is reduce costs. In the case of hospitals, it is important for the costs of

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particular DRGs to be lower than those posted on the NHF DRG Statistics
web site. Hospitals may reduce costs by:
– reducing the costs of daily patient hospitalization and treatment;
– shortening the length of stay in hospital; if the hospital does not perform
scheduled operations on Saturday and Sunday, then admitting a patient
on Friday means increased costs and therefore it should be avoided as
long as the patient’s life is not at risk.
Cost analysis is based on expenses per patient admission. Costs include
expenses incurred from admission to discharge [8]. The prerequisite for cost
reduction is that income / financial result maximization must not deterio-
rate the quality of care provided. The purpose of analysis is to determine
whether it is more cost effective to use expensive technology which would
shorten the length of stay or use traditional therapy with longer stays. Daily
expenses include all patient expenses (expenses which a patient has gene-
rated) per day. These expenses are usually the greatest during the first day
after admission, but there are some exceptions and therefore separate mo-
dels should be developed for each element of the multidimensional analytical
space.
The use of a cost reduction strategy may collide with the other stra-
tegy, that is, shortening the time of stay. For example, if a less potent
medical product is administered, the patient may stay longer in hospital
and vice versa. Thus, we are faced with a dilemma: Which costs should
be minimized? What should the cost function contain? How often should
the cost function be updated? High costs may result from the low labor
productivity of medical personnel or from insufficient use of expensive spe-
cialized equipment. The right path leading to lower costs is to increase the
use of resources by gaining more clients who will complement contracts
with the NHF.
A problem with the implementation of this strategy is the Polish em-
ployment law which prevents dynamic changes in the number of employees
according to needs. Civil contracts are much more flexible in this respect,
but hospital managers who exclusively use this form of employment risk
that highly specialized doctors might easily change jobs. The employment
of highly skilled staff should be governed by contracts of employment. Spe-
cialist equipment that may not be effectively used because of reduced NHF
contracts is yet another problem. Under the circumstances, active manage-
ment of operating costs to maximize financial results is a partial solution
for hospital mangers. Active cost management requires the implementation
of a controlling system and an appropriate change in the organizational
structure of the health care facility.

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How to create value with DRGs?

The key to ensuring the financial success of a hospital by using

DRG-based payments is managing the profitability of contracts at the DRG
level. This means that a hospital obtains higher revenues than costs for
a particular DRG. Given the fact that in Poland there exist both public
and non-public hospitals, it is easy to predict the winners and losers. The
non-public ones will be in a better position because in public health care in-
stitutions medical goals take precedence. DRGs, if used appropriately, may
be an asset for the organization. Therefore, DRG data should be used ade-
quately in hospital management. DRG analysis is similar to balance sheet
analysis:
– change of data over time characterizing a given DRG and the major
category;
– change of proportion of particular major categories over time;
– change of proportion of a given DRG in a given major category and in
overall DRGs.
Having data concerning the performance of a contract in a given ho-
spital at the DRG level, one can compare these results with data from the
NHF DRG Statistics web service. This shows where a given hospital stands
relative to other hospitals in terms of costs, length of hospitalization, ICD-9
and ICD 10 medical procedures used, and mode of patient admission and
discharge.
In order to efficiently utilize DRG information, one needs to have detail-
ed historical data concerning contracts: a) from the hospital’s IT system;
b) from the NHF DRG Statistics web service for all hospitals. The managers
theoretically have detailed information on DRGs obtained from the hospi-
tal’s IT system. What is important in analysis of the potential of DRG use
in the process of hospital management is to have data on hospital costs bro-
ken down by DRG, wards, cost centers, patients, and medical procedures.
A hospital’s IT system may combine both of the abovementioned sources
of data to use them in management. The following stages of DRG analysis
may be distinguished:
a) extracting data from the hospital’s IT system;
b) importing NHF data;
c) combining data from these two sources;
d) data analysis – comparing, developing models, describing data, and
making forecasts on their basis. New analyses using DRGs and new
data from the NHF DRG Statistics data web service make it possible
to compare hospitals in particular regions and by hospital type. Thus,

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one can identify the best, average, and the worst hospitals. An example
here is a comparison of clinical hospitals across Poland.

The role of data warehouses

Data warehouses are often used as a platform supporting strategic ma-

nagement processes. In Poland it has not been until now that hospital ma-
nagers find it necessary to use such solutions. A data warehouse, being an
analytical platform, facilitates such analyses as:
a) monitoring the achievement of medical and financial goals by a hospital;
b) analysis of a hospital’s efficiency and benchmarking vs. all hospi-
tals/hospitals of the same kind;
c) analysis of profitability by DRG;
d) analysis of tendencies in use of medical services;
e) analysis of cost levels;
f) analysis of cost influencing factors and their change over time (e.g.
length of hospital stay);
g) analysis of the structure of a medical service by age, sex, and mode of
admission and discharge.
Typical questions that may be addressed by analysis of processed and
aggregated data from the NHF DRG Statistics web service include:
– What is the share of 10 DRGs with the highest value in the hospital’s
contract with the NHF?;
– Where do those DRGs come in the NHF ranking?;
– What are the factors that determine differences between the hospitali-
zation time in a given hospital and the average hospitalization time as
given by the NHF for a particular DRG?;
– The share and cost of a given DRG in a given major category;
– The share and cost of a given DRG against all DRGs;
– Average daily costs for a given DRG;
– Which DRGs are characterized by the highest/lowest costs?;
– Patients with which DRGs are hospitalized for the longest/shortest
time?
The development of a data warehouse in a hospital must bring economic
benefits. The managers must learn how to create business value using the
implemented data warehouse. In this context, it would be useful to address
questions such as: What new business value and benefits can be gained using
a data warehouse? Where does the hospital stand relative to its competi-
tors? This question can be answered only if the hospital uses benchmarking

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to compare its results with those of other hospitals. The role of DRG ana-
lysis increases in a fast-changing environment with substantial changes in
the costs of medical technologies, labor, and entry of new market players
(competitors).
Of utmost importance is the manner of extracting, transforming, clean-
ing and combining external and internal data. From the business point of
view it is important to have a documented approach to combining DRG
data from the NHF and from the hospital. It is better to combine dic-
tionary categories in the process of analysis rather than while building
a data warehouse. In this way, one can ensure consistency with NHF
data.
Before one can commence data analysis, it is necessary to develop
a data model. The key issue here is to determine which data will be ob-
tained from which source. Modeling data for DRG use in hospital mana-
gement is an element of a larger project – developing a data warehouse
for the hospital. The data model was designed using the free application
BizAgi Process Modeler. The model employs the main functional compo-
nents which are crucial for the hospital’s controlling. The first data ware-
house model was expanded by reengineering data obtained from the NHF
DRG Statistics web site. The objective was for the application to create
value for the hospital’s managers as early as in the initial phase of develop-
ment.
Hospital managers do not wait until the full comprehensive solution is in
place. During the implementation of the project, management consultants
train the hospital managers on how to use DRGs in controlling and strategic
decision making. Seeing and assessing the real benefits and business value
connected to DRG data, the hospital’s managers will support the subsequent
part of the project, which is aimed to increase the number of dimensions
and the level of detail of available data.
The following analytical tools for storing and processing multidimen-
sional data may be identified:
a) spreadsheets with pivot tables;
b) databases;
c) Google Fusion Tables.
Each of these tools has its strengths and weaknesses. Spreadsheets can
be comfortably used for importing NHF data concerning several DRGs and
their comparison with a hospital’s performance. However, with greater vo-
lumes of data the advantage of database management systems is evident.
In turn, Google Fusion Tables are a useful tool for data presentation and
visualization and ensuring good data accessibility.

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Comparative analysis of DRGs in the Barlicki Hospital

(a clinical hospital in Lodz) with the NHF DRG statistics

Hospital managers may find it difficult to extract value from DRGs. To

achieve this, they need to compare internal DRG data with external data.
The first step is to import data from the NHF DRG Statistics web service.
Subsequently, data from the NHF service need to be combined with the
hospital’s data. After this process has been completed, it will be possible
to analyze and compare the performance of the hospital with that of other
hospitals. Such an analysis may equip the hospital’s managers with informa-
tion that may be used for making strategic choices concerning the direction
of developing the hospital’s medical activity. To draw business benefits from
DRGs, the hospital’s managers need to have some knowledge in such areas
as controlling, performance management and strategic management. The
necessary data must be prepared by analysts and the IT personnel. This
team needs to have expertise on databases, data warehouses, multidimen-
sional modeling and OLAP technology.
Some of the challenges related to importing data from the NHF web
site with Excel include:
a) data are not available in a spreadsheet, but are presented on web
pages;
b) there are no clear rules for generating top-level page addresses for DRGs
or second-level page addresses for NHF regions and hospital types;
c) data may not be readily imported form the NHF web site to a spread-
sheet; if a NHF branch does not have any patients with a given DRG,
that branch does not show the value “0”; rather, it is not displayed on
the web page at all.
Data imported from the NHF DRG Statistics web service are stored in
13 sheets:
– the first one contains all data from tables 1 to 5;
– data in the second tab are data from table 6 of the web service – infor-
mation on ICD-9;
– the third tab presents data from table 7 – ICD-10 codes;
– the other tabs contain detailed data concerning NHF branches and ho-
spital types.
In order to decrease the volume of data imported from the DRG Sta-
tistics web service, one should decide which DRGs are most vital to the
hospital. This can be done according to contract values, number of patients
or man-days.
Some of the practical problems related to data analysis that must be

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solved in the process of modeling include the lack of DRG dictionaries and
frequent modifications of DRG dictionaries.
To provide an example of data analysis, this paper presents data con-
cerning those DRGs that are most important to the Barlicki Hospital. It was
assumed that dictionaries describing the data are to incorporate those ele-
ments that were present throughout all the studied years. [Tab. 1] presents
a dictionary of admissions and [Tab. 2] a dictionary of discharges. These
dictionaries will be expanded in the future as the NHF adds new elements.
Tab. 1. Dictionary of admission modes used in 2009–2012

Applied in DRG in the year

Description of admission mode
2009 2010 2011 2012
Scheduled admission Yes Yes — —
Scheduled admission based on referral — Yes Yes Yes
Emergency admission with referral from the emergency Yes — — —
Emergency admission resulting from transfer by a medi- — Yes Yes Yes
cal emergency team
Emergency admission with referral other than from the Yes — — —
emergency
Emergency admission without referral Yes Yes — —
Emergency admission – other cases — Yes Yes Yes
Admission of a newborn as a result of childbirth in this — Yes Yes Yes
hospital
Scheduled admission of a person who benefited from — Yes Yes Yes
health care services out of turn under a privilege afforded
her by the law
Transfer from another hospital — — — Yes
Admission of a person subjected to mandatory treatment — — — Yes
– admissions related to the implementation of statutory
compulsory treatment set out in art. 26 of the Act of
26 October 1982 on upbringing in sobriety and counte-
racting alcoholism and art. 33. 1 and art. 34.1 of the Act
of 5 December 2008 on preventing and fighting infections
and infectious diseases in humans
Forced admission – forced admission in connection with — — — Yes
the statutory obligation to submit to hospitalization re-
ferred to in art. 35.1 of the Act of 5 December 2008
on preventing and fighting infections and infectious di-
seases in humans, art. 21.3, art. 23, 24 and 29 of the Act
of 19 August 1994 on the protection of mental health,
art. 30 and 71.1 and 3 of the Act of 29 July 2005 on
counteracting drug addiction, art. 94, 95a and 96 of the
Act of 6 June 1997 on Penal Code, art. 203 and 260 of
the Act of June 6, 1997 on Code of Criminal Procedure
and art. 12 and 25a.2 of the Act of 26 October 1982 on
proceedings in juvenile cases
Source: Based on DRG data from the NHF site: “DRG Statistics”. Available at
https://prog.nfz.gov.pl/APP-JGP/KatalogJGP.aspx, accessed on 12.06.2012.

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Tab. 2. Dictionary of discharge modes used in 2009–2012

Applied in DRG in the year

Discharge mode
2009 2010 2011 2012
Completion of a therapeutic or diagnostic process Yes Yes Yes Yes
Referral for further treatment in an outpatient clinic Yes Yes Yes Yes
Referral for further treatment – other cases Yes Yes — —
Discharge at the patient’s own request Yes Yes Yes Yes
Death of patient Yes Yes Yes Yes
Referral for further treatment in another hospital — Yes Yes Yes
Referral for further treatment in a stationary care facility Yes — — —
Referral for further treatment in a stationary care facility — Yes Yes —
other than a hospital
Referral for further treatment in a long-term care facility Yes — — —
The person treated left a stationary care facility without — Yes Yes —
formal discharge before the completion of a therapeutic
or diagnostic process
Discharge under art. 22.1.3 of the Act of August 30, 1991 — Yes Yes —
on health care facilities
Referral for further treatment at a unit (other than a ho- — — — Yes
spital) of a health care facility offering therapeutic medi-
cal services such as stationary and 24 h medical care;
The person treated left a unit of a health care facility — — — Yes
offering therapeutic medical services such as stationary
and 24 h medical care without formal discharge before
the completion of a therapeutic or diagnostic process
The person treated, admitted with code “9” or “10”, left — — — Yes
the hospital without formal discharge
Discharge under art. 29.1.3 of the Act of 15 April 2011 — — — Yes
on medical activity
Source: Based on DRG data from the NHF site: “DRG Statistics”. Available at
https://prog.nfz.gov.pl/APP-JGP/KatalogJGP.aspx.

What are the transformation rules for dictionaries describing admis-

sions and discharges? These rules may only be determined on the basis of
analyzing and mapping medical conditions. Without appropriate mapping
of dictionaries used by the NHF in particular years, it would be impossi-
ble to compare hospitals’ activity in respect of a given DRG in a detailed
and accurate way. A comparison that takes into account patients’ age and
sex, medical procedures used, and mode of admission and discharge may
form the basis for comparing one hospital with others in terms of both their
medical and economic performance.
Another problem with DRG data analysis is the lack of grouping rules,
or a so-called grouper, which is no longer made available by the NHF.

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 Tab. 3. Analysis of DRG groups with the highest values at the Barlicki Hospital in 2010 using data
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Petre Iltchev, Aleksandra Sierocka, Michał Marczak

from the “DRG Statistics” service

Main data for Municipal,

Barlicki NHF Lodz Clinical District
selected DRG county,
Hospital region hospitals hospitals
groups city hospitals
DRG Description of DRG N L W N L W N L W N L W N L W N L W
A11 Comprehensive intracranial treat- 0.27 9 1.7 6.6 11 1.4 0.43 11 1.4 4.3 11 1.4 0.3 15 1.0 2.0 13 1.2
ment
A23 Major operations on the spinal 0.23 8 1.4 11.0 8 1.4 1.2 8 1.4 4.5 8 1.4 1.4 6 1.9 4.5 8 1.4
cord and spinal canal
B13 Uncomplicated cataract surgery by 0.93 2 1.6 106.0 2 1.5 8.2 2 1.5 16.1 2 1.5 18.3 2 1.5 31.8 2 1.5
emulsification with simultaneous
lens implantation
B12 Complicated cataract surgery by 0.62 2 1.8 54.6 2 1.7 3.1 2 1.8 14.4 2 1.8 9.8 2 1.8 16.0 2 1.8
emulsification with simultaneous
lens implantation
Q01 Endovascular aortic aneurysm 0.03 6 10.3 1.7 7 8.9 0.16 6 10.3 1.1 7 8.9 0.2 6 10.3 0.3 7 8.7
repair
L94 Kidney Transplant – category II 0.04 4.5 9.5 0.7 19 2.3 0.08 22 2.1 0.5 19 2.3 0 0.2 19 2.4
F11 Comprehensive gastric and duode- 0.17 4 3.1 3.7 13 0.9 0.3 8 1.6 1.3 8 1.5 1.0 15 0.8 1.2 14 0.9
nal surgery
G34 Endoscopic and percutaneous pro- 0.48 3 1.4 19.5 4 1.0 1.3 4 1.0 5.0 4 1.0 6.2 4 1.0 5.7 5 0.8
cedures on biliary tract and
pancreas
Notes: N – Number of hospitalizations (000); L – Length of stay, median (days); W – Average price for 1 day of hospitalization (PLN 000)
 The use of DRGs in hospital management

NordDRG is an example of a DRG system that gives access to information

about the grouper [9].
The present study compared the number of patients, costs and length of
stay in the Barlicki Hospital with other Polish clinical hospital. We focused
on those DRGs with the greatest share in the hospital’s budget or the largest
number of patients or man-days.
[Tab. 3] presents 8 top DRGs in terms of contract value or number of
patients or man-days. Furthermore, it is shown why one should use detail-
ed data in medical-economic analyses. As it can be easily seen from the
table, comparisons of the Barlicki Hospital’s performance with overall NHF
data and with data for clinical hospitals lead to very different results. The
difference in costs and average length of hospital stay (median) between
particular hospitals in terms of the selected DRGs may influence the com-
parison results.

Conclusions

The DRG system in Poland should not be limited to contracting, re-

porting to the NHF and determining NHF payments to hospitals.
In the process of DRG implementation in hospital management we gain
experience and test various approaches to data collection, cleaning and ag-
gregation. The managers voice their opinions about reports and identify
potential future improvements. Further development of data warehouses
should focus on tapping external data sources. Real benefits from data ware-
houses may be gained when they are used in combination with dashboards in
the process of management. Polish experiences in terms of employing DRGs
in hospital management are particularly relevant for countries which have
yet to implement a DRG system or which have introduced it only recently.

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