A Normative Legal Framework for Diagnosis-Related Group Financing of Acute Hospitals: Reconciling Efficiency, Quality, Equity, Integrity and European Health-Data Law

Abstract

Diagnosis-related group (DRG) financing replaces reimbursement of hospitals’ reported expenditure with prospective payment for clinically defined categories of inpatient cases. Properly designed, it can improve cost awareness, comparability, transparency and technical efficiency. Its incentives are nevertheless incomplete. Because hospitals may retain savings when the cost of treating a patient is below the applicable DRG tariff, they may also have incentives to increase admissions, select financially attractive patients, classify cases into higher-paying groups, discharge patients prematurely, reduce clinically necessary inputs or shift costs to other providers. A humane and legally sustainable DRG system must therefore be designed as a regulated form of strategic purchasing rather than as a stand-alone price mechanism (e.g. public and/or private health insurance).

In this essay I intend to derive the governing principles of such a system from World Health Organization (WHO) and Organisation for Economic Co-operation and Development (OECD) guidance, the values of universality, solidarity, equity and access to good-quality care recognized in European Union (EU) health policy, Article 168 of the Treaty on the Functioning of the European Union, Article 35 of the Charter of Fundamental Rights, the General Data Protection Regulation and Regulation (GDPR) (EU) 2025/327 on the European Health Data Space (EHDS). The essay translates these principles into a legislative architecture addressing classification, tariff setting, risk adjustment, outlier payments, volume control, quality protection, coding integrity, hospital service obligations, public-service compensation, data governance, auditing, sanctions, procedural rights and periodic review.

The central conclusion is that DRG payment should be the principal method of remunerating ordinary acute inpatient episodes, but not the exclusive method of financing hospitals. Case-based payments should be combined with prospective expenditure limits, separately calculated public-service payments, quality and access safeguards, exceptional-case compensation and legally enforceable data-governance requirements. Efficiency is legitimate only when achieved without impairing equal access, clinical quality, continuity of care or the rights of patients.

Keywords: diagnosis-related groups; hospital financing; strategic purchasing; quality of care; health equity; GDPR; European Health Data Space; upcoding; risk adjustment; public-service compensation.

1. Introduction

A Diagnosis-Related Group (DRG) is a patient classification system that categorizes inpatient hospital stays into clinically similar groups based on diagnoses, procedures, age, and clinical severity. Originally developed at Yale University, it standardizes hospital reimbursements by paying a fixed, predetermined amount per case rather than itemizing individual services (Fetter et al., 1980).

Diagnosis-related groups classify hospital cases into categories that are expected to be clinically coherent and to consume comparable levels of resources. Under a prospective DRG system, the payer ordinarily reimburses a predetermined amount for each classified discharge rather than reimbursing every input used by the hospital. This transfers part of the financial risk of inefficient production from the payer (public or private insurance) to the provider and gives hospitals an incentive to manage length of stay (LOS), diagnostic testing, staff time and other inputs more efficiently. DRG information can also support benchmarking, hospital planning and comparison of case mix and expenditure (Busse et al., 2013; Klein et al., 2020).

The World Health Organization (WHO) nevertheless cautions that case-based payment is neither a “magic bullet” nor a complete hospital-financing system. Its suitability depends on national institutional capability, capacity, policy objectives, information systems and complementary payment mechanisms. WHO guidance identifies premature discharge, skimping on inputs, patient selection (cherry picking, lemon dropping), increased admissions, avoidable readmissions, service unbundling and manipulation of coding as foreseeable consequences requiring active countermeasures (Klein et al., 2020).

The OECD reaches a comparable conclusion. Activity-based and DRG payments can improve productivity, but they do not inherently reward quality, outcomes or continuity. Without expenditure controls they may stimulate volumes, while payment for isolated episodes may reinforce fragmentation. The OECD therefore advocates blended arrangements incorporating expenditure limits, coordination payments, bundled payments and carefully designed quality incentives (Lindner & Lorenzoni, 2023; OECD, 2016).

The legal objective is consequently not to eliminate provider incentives. No payment system is incentive-neutral. The objective is to align incentives with the public purposes of the health system and to regulate their foreseeable adverse effects. A DRG statute must determine what is paid, how the amount is calculated, which services remain separately financed, what information hospitals must provide, how quality and access are protected, how claims are audited and how decisions may be challenged. It must also identify the lawful basis for processing health data and establish institutional responsibilities sufficiently clearly to satisfy the principles of legality, accountability and effective judicial protection.

The model proposed below is intended for national legislation within the European Union (EU). Article 168(7) of the Treaty on the Functioning of the European Union preserves Member State responsibility for defining health policy and organizing and financing health services. That discretion is not unlimited: Article 168(1) requires a high level of human-health protection in Union policies, while Article 35 of the Charter protects access to preventive health care and medical treatment under national conditions. National hospital-financing legislation must also comply with data-protection, equality, competition and internal-market law (European Union, 2012a, 2012b).

Note: The framework is formulated at EU-Member-State level; its enactment would still require a staged implementation starting from the country’s constitutional allocation of powers, social-insurance structure, administrative procedure and national health-service legislation.

2. The principal regulatory problems created by DRG financing

2.1 Upcoding, coding error and classification manipulation

DRG tariffs differ according to diagnoses, procedures, clinical severity, complications and other case characteristics. This creates a financial incentive to record a diagnosis or complication that places a case in a higher-paying group, to select a more remunerative principal diagnosis or to document unnecessary procedures. Manipulation may be deliberate, but apparent upcoding can also result from unclear rules and legislation, poor clinical documentation, inadequate coder training or inconsistent coding rule interpretation.

A sound legal regime must distinguish innocent error, negligent non-compliance, systematic recklessness and intentional fraud. Treating every disagreement as fraud would discourage accurate documentation and undermine cooperation. Conversely, treating recurrent “errors” as harmless would make overpayment recovery ineffective.

The statute should therefore require nationally uniform coding standards, certified versions of diagnostic and procedure classifications, coder qualifications, clinician responsibility for clinical documentation and auditable version control for grouping software. Claims should be subject to automated validation, targeted medical-record review and statistically representative random audits. A competent and capable audit authority should be entitled to compare coding patterns, case-mix growth and complication rates across hospitals and over time. WHO specifically recommends automatic checks, sample audits, retrospective analysis of outliers and investment in specialized coding and audit capacity (Klein et al., 2020).

Overpayments should be recoverable regardless of intent, but punitive sanctions should depend on culpability and proportionality. Hospitals must receive the evidence supporting an adjustment, an opportunity to respond and access to independent appeal. Deliberate falsification may justify administrative fines, exclusion of responsible persons, referral for criminal investigation or temporary suspension from the payment system. Clerical errors should ordinarily result in correction and repayment rather than punitive sanctions.

2.2 Premature discharge and reduction of necessary services

Because the hospital ordinarily retains the difference between the tariff and its actual cost, it may reduce clinically necessary nursing, diagnostics, medicines, rehabilitation or length of stay (LOS). The same incentive may lead to discharge before the patient is clinically stable or before adequate community and post-acute care has been arranged.

Length of stay (LOS) alone cannot determine whether care is appropriate. A shorter stay may reflect better clinical organization, but it may also transfer costs and risks to patients, families, primary care, rehabilitation providers or emergency departments. Legal safeguards should therefore focus on outcomes and care processes rather than impose undifferentiated minimum lengths of stay.

The statute should make compliance with professional standards, patient-safety requirements and discharge-planning duties a condition of DRG payment. Hospitals should be required to assess discharge readiness, communicate relevant information to subsequent providers, provide patients with understandable instructions and arrange necessary follow-up. Quality surveillance should include risk-adjusted mortality, complications, unplanned transfers, emergency revisits, readmissions, adverse events, discharge destination, patient-reported outcomes and continuity indicators. WHO identifies readmission, mortality and length-of-stay monitoring, clinical audit and quality-linked payment as important safeguards against reduced service provision (Klein et al., 2020).

An automatic refusal to pay for every readmission would be overbroad. Some readmissions are clinically unavoidable or unrelated to the initial admission, while non-payment may encourage hospitals to obstruct access. Legislation should authorize reduced or bundled payment only for defined, clinically related and potentially avoidable readmissions, with exclusions for planned care, unrelated conditions, unavoidable complications and patients whose social or clinical risk makes readmission unusually likely (e.g. SDoH).

2.3 Volume expansion, unnecessary admissions and case splitting

Although payment is fixed per case, total revenue rises with the number of cases. Hospitals may therefore substitute inpatient treatment for outpatient care, lower admission thresholds, divide one episode into multiple admissions or discharge and readmit a patient to generate additional payments. DRG payment can consequently control expenditure per admission while increasing aggregate activity and expenditure.

This problem should be addressed through a prospective expenditure framework. The public or private purchaser should establish annual activity and expenditure corridors based on population need, capacity planning and available resources. Payments above defined thresholds may be tapered, subjected to prior review or reconciled against an institutional budget. The law should contain rules governing transfers, same-day readmissions, interrupted stays and clinically connected episodes so that one course of treatment cannot be artificially divided into multiple fully paid cases. OECD analysis recognizes tapering and budget controls as mechanisms for moderating the volume incentives of activity-based payment (Lindner & Lorenzoni, 2023).

Volume control must not operate as an undisclosed rationing mechanism. Expenditure ceilings should be accompanied by waiting-time monitoring, referral analysis, emergency-care guarantees and procedures for revising capacity when legitimate need exceeds forecasts. A hospital should not be penalized for mandatory emergency treatment or activity expressly commissioned by the public or private purchaser.

2.4 Patient selection, cream-skimming and dumping

Hospitals may prefer patients whose expected treatment cost is below the tariff and avoid patients likely to require unusually intensive care (cherry picking, lemon dropping). Selection can occur through refusal, delayed appointments, redirection, inappropriate transfer, narrow admission criteria or concentration on profitable procedures. It may disadvantage older persons, persons with disabilities, patients with multimorbidity, people experiencing homelessness, patients requiring language support and those living in remote areas (SDoH).

Value-based care models, bundled payments, and pay-for-performance incentives reward providers for keeping costs down and maintaining high quality. This can create perverse financial incentives to avoid individuals facing socioeconomic barriers. By excluding patients facing severe SDoH, clinics and insurers worsen health disparities. Vulnerable communities are left with fewer resources, and providers who specialize in serving these groups face skewed quality measure denominators.

Cherry-picking and lemon-dropping are unethical patient-selection practices in healthcare. Providers or insurers select healthier patients ("cherries") who cost less and have better outcomes, while avoiding or dropping sicker, vulnerable populations with multiple comorbidities ("lemons") to maximize financial returns and quality scores.These practices are closely tied to Social Determinants of Health (SDoH) which are non-medical factors like economic stability, housing, and access to education. Patients with adverse SDoH often experience poorer health outcomes and require more extensive resources. Without proper risk adjustment or health equity payment adjustments, providers are financially penalized for caring for these high-risk patients, inadvertently incentivizing cherry-picking and lemon-dropping.

Such conduct is unacceptable and incompatible with the EU health-system values of universality, access to good-quality care, equity and solidarity. The Council of the European Union has identified these as overarching values common to EU health systems, while recognizing that Member States may implement them through different organizational and financing arrangements (Council of the European Union, 2006).

The legislation should prohibit discrimination and financially motivated refusal or transfer of covered patients. Contracted hospitals should be subject to enforceable service obligations, including emergency stabilization, objective admission criteria and continuity duties. The public or private purchaser should monitor referral rates, transfer patterns, waiting times, cancelled procedures and case-mix changes, stratified where legally and statistically appropriate by age, disability, socioeconomic deprivation, residence and other relevant factors.

Risk adjustment and outlier protection should reduce the financial attraction of selection, but they cannot replace legal access duties. Risk models are necessarily imperfect and may themselves perpetuate historical underprovision. Their performance must therefore be audited for calibration and distributional impact. Variables should be clinically and legally justified, not merely predictive, and protected characteristics should not be used to reduce a person’s entitlement to care.

2.5 Inadequate severity adjustment and exceptionally costly cases

A DRG tariff represents an average. Some cases inevitably cost substantially more because of severe complications, rare diseases, prolonged intensive care, high-cost medicines or other exceptional circumstances. If the hospital must absorb the entire excess, it may avoid such patients or provide inadequate care. If every excess cost is reimbursed, however, the prospective-payment incentive disappears.

The appropriate solution is a symmetrical risk-sharing mechanism. The statute should establish an outlier threshold calculated by reference to the expected cost of the DRG and provide a marginal payment for a defined proportion of verified cost above that threshold. It may also establish low-cost or short-stay adjustments where appropriate. Outlier claims should be clinically validated and regularly reviewed because concentration of such claims may indicate either a genuine specialist function or strategic classification.

High-cost medicines, implants, highly specialized procedures and rapidly evolving technologies may temporarily require separate payments or supplementary tariffs when ordinary DRG weights cannot yet reflect their cost. Such exceptions should be time-limited, evidence-based and integrated into the next recalibration of the classification. Permanent carve-outs should be avoided where they undermine incentives for efficient procurement and use.

2.6 Structural costs and hospitals serving vulnerable populations

Case payments are poorly suited to financing fixed costs that do not vary proportionately with admissions. These include continuous 24/7 emergency preparedness, intensive-care (ICU) reserve capacity, teaching, clinical research infrastructure, trauma networks, isolation facilities, maintaining access in sparsely populated areas, regulatory compliance, IT and EHR, and malpractice insurance. Hospitals serving deprived communities may also face costs arising from complex discharge planning, interpretation, social coordination and limited alternatives to hospitalization (SDoH).

These functions should not be hidden in ordinary DRG weights. Doing so makes tariffs less comparable and may overpay hospitals that do not perform the relevant public function. The law should authorize separate, transparent and cost-based payments for specified public-service obligations. Eligibility, the entrusted obligation, cost-allocation rules, performance conditions and measures preventing overcompensation should be defined in advance.

Within the EU, such compensation must also comply with applicable State-aid law. Commission Decision (EU) 2025/2630, in force since January 2026, expressly covers public-service compensation for hospitals providing medical care, including emergency services. It requires a clear entrustment act, advance specification of the compensation mechanism and arrangements to avoid and recover overcompensation. A national DRG statute should therefore separate payment for ordinary episodes from compensation for formally entrusted public-service obligations and require transparent cost accounting for each (European Commission, 2025).

Note: Social Determinants of Health (SDoH) are the non-medical conditions in which people are born, grow, live, work, and age. They are shaped by the distribution of resources and significantly influence health outcomes, often outweighing genetic or clinical factors. Frameworks by the Centers for Disease Control and Prevention (CDC) and the World Health Organization (WHO) categorize these factors into several core domains

2.7 Fragmentation and cost shifting

An inpatient DRG ordinarily ends at discharge. It may therefore reward shifting services into outpatient, rehabilitation, long-term-care or home-care settings even when this increases total system cost or creates gaps in care (profit internalization, cost externalization). Conversely, it may encourage hospitals to retain activities that could safely be delivered in a less intensive setting if those activities generate favourable DRG revenue.

The legislation should authorize episode-based or clinical pathway-based payment where evidence and data infrastructure permit. Selected conditions could be financed through bundles covering pre-admission assessment, inpatient treatment and a defined post-discharge period. Coordination payments may be used where full bundling would impose disproportionate risk. The public or private purchaser should evaluate total pathway cost and outcomes rather than only inpatient expenditure. OECD work on value-based payment emphasizes that broader bundles can align incentives across the continuum of care, although their effects are context-dependent and require careful implementation (Lindner & Lorenzoni, 2023).

2.8 Obsolete weights, non-representative cost data and tariff instability

DRG weights become inaccurate as clinical practice, wages, input prices, technology and treatment settings change. If weights are not updated, hospitals may overproduce overvalued services and withdraw from undervalued ones. Abrupt or opaque changes, however, can destabilize essential providers and make financial planning impossible.

The statute should require regular collection of standardized cost-accounting data from a representative sample of hospitals. Relative weights should reflect efficient and clinically appropriate resource use rather than uncritically reproduce historical expenditure. The methodology, data-cleaning rules and treatment of capital costs should be published. An independent technical body should recommend annual or biennial updates, with external validation and stakeholder consultation. Major revisions should be accompanied by impact assessment, advance notice and, where necessary, temporary transition corridors. WHO guidance similarly treats continuous review of classifications and payment parameters as an integral part of DRG governance (Klein et al., 2020).

Health systems and policymakers must balance the need for accurate Diagnosis-Related Group (DRG) weights against the threat of financial instability. Balancing this requires structured, predictable updates, such as those governed by the CMS Inpatient Prospective Payment System (IPPS), which mitigates volatility for essential providers.

3. Normative principles governing DRG legislation

3.1 Legality and public purpose

The essential elements of hospital payment must have a basis in legislation. Legislation anchors hospital payments by guaranteeing standardized billing, price transparency, and fair reimbursement. Legislative foundations establish essential elements for a robust payment structure. Parliament should determine the objectives, scope, principal institutional responsibilities, payment entitlement, data-processing purposes, enforcement powers and procedural safeguards. Technical details may be delegated to regulations, but delegation should be bounded by statutory criteria and subject to publication, consultation and review.

The legitimate purpose of DRG financing is not merely expenditure reduction. It is the strategic allocation of pooled resources to secure appropriate, efficient, equitable and good-quality hospital care. WHO defines strategic purchasing as the deliberate allocation of funds to providers in accordance with population needs, provider performance and health-system objectives (Mathauer et al., 2019).

3.2 Universality, solidarity, equity and non-discrimination

Payment rules must preserve equal entitlement to covered hospital care according to clinical need. Efficiency gains cannot lawfully be achieved by deterring expensive patients, concentrating services exclusively in profitable locations or shifting costs to patients unable to pay. Tariffs, risk adjustment and public-service payments should therefore be evaluated for their effects on geographic, socioeconomic and clinical equity.

Formal equality is insufficient. Equal tariffs for unequal circumstances can disadvantage hospitals with materially different obligations or patient needs. Equity permits objectively justified adjustments, provided their criteria are transparent, proportionate and directed toward legitimate health-system purposes.

Note: Healthcare legislation establishes the legal frameworks for safety, equity, efficacy, and timeliness. It mandates universal access, ensures financial protection, and sets clear standards for medical facilities and professionals. For a deeper dive into regional policies, you can explore the World Health Organization Health Laws.

3.3 Quality, safety and continuity as conditions of payment

The right to payment should be conditional on lawful and clinically appropriate care. A hospital should not acquire an unconditional claim merely because a discharge has been assigned a DRG code. The claim should depend on valid admission, adequate documentation (structure and content), compliance with applicable quality and safety standards and performance of discharge and continuity of care obligations.

Quality incentives should supplement, not replace, minimum standards. A hospital cannot purchase permission to provide unsafe care by accepting a lower tariff. Serious violations require regulatory enforcement irrespective of financial performance.

Scientifically validated healthcare quality indicators are (internationally) standardized, evidence-based metrics used to assess and improve care. Frameworks like the AHRQ Quality Indicators use national datasets to evaluate clinical performance. The three primary, validated categories of indicators of the Donabedian model are:

Structural Measures: Assess the capacity and resources of a healthcare facility (e.g., staff-to-patient ratios and electronic health record (EHR) adoption).
Process Measures: Evaluate if evidence-based care is correctly delivered (e.g., surgical complication rates and preventive screenings).
Outcome Measures: Track patient results (e.g., mortality rates, 30-day readmissions, hospital-acquired infections, and overall patient experience).

Healthcare quality is evaluated through six key domains often abbreviated as STEEEP:

Safe: Avoiding injuries to patients from the care that is intended to help them.
Timely: Reducing waits and sometimes harmful delays in care.
Efficient: Avoiding waste, including waste of equipment, supplies, ideas, and energy.
Effective: Providing services based on scientific knowledge to all who could benefit, and refraining from providing services to those not likely to benefit.
Equitable: Providing care that does not vary in quality because of personal characteristics such as gender, ethnicity, geographic location, and socioeconomic status.
Patient-Centered: Providing care that is respectful of and responsive to individual patient preferences, needs, and values.

3.4 Efficiency and value

Efficiency in healthcare should be understood as achieving the best possible health outcomes with the resources available, not as minimizing expenditure regardless of consequences. Properly conceived, efficiency is compatible with, and often dependent on, humane patient care and fair working conditions.

Efficiency means obtaining appropriate health outcomes with responsible use of resources, not minimizing cost in isolation. Price-setting should reward efficient care while avoiding tariffs so low that ordinary compliance becomes financially impossible. WHO and OECD price-setting guidance emphasizes institutionalized price review, reliable cost information, transparency and mechanisms that balance expenditure control with access and quality (Barber et al., 2019).

Efficiency in hospital financing means the appropriate and economical use of resources to achieve accessible, safe, effective and patient-centred care. Measures intended to improve efficiency shall not impair patient dignity, clinically necessary treatment, continuity of care, safe working conditions, adequate staffing or the professional integrity of healthcare personnel. The essential distinction is between productive efficiency, which removes waste while preserving or improving care, and cost reduction through underprovision, which is incompatible with a lawful and humane health system.

For patients, efficient care means avoiding unnecessary admissions, duplicative tests, preventable complications, poorly coordinated treatment and excessively long stays. It does not justify premature discharge, denial of clinically necessary services, unsafe staffing or selection of less costly patients (cherry-picking, lemon-dropping). A measure that reduces expenditure by worsening outcomes, shifting burdens to families or increasing avoidable readmissions is not genuinely efficient; it is merely cost shifting or underprovision.

Respect for the workforce is equally integral to efficiency. Healthcare is labour-intensive, and quality depends on adequately trained, supported and sufficient personnel. Chronic understaffing, excessive workloads, unsafe working hours and inadequate remuneration may produce apparent short-term savings, but they increase burnout, sickness absence, turnover, medical error and recruitment costs. Such practices undermine both productivity and continuity of care.

In a DRG system, this principle means that hospitals should be rewarded for eliminating waste and improving organization, but not for reducing necessary staff time or clinical inputs below safe levels. Payment legislation should therefore combine efficiency incentives with enforceable safeguards concerning staffing, occupational safety, professional autonomy, quality of care, patient rights and continuity of treatment.

Quality-based adjustments should rely on valid measures, adequate sample sizes and appropriate risk adjustment. The financial component should be large enough to attract managerial attention but not so large that statistical noise, coding variation or patient complexity threatens essential services.

3.5 Proportionality and differentiated risk allocation

Financial risk should be allocated to the party best able to manage it. Hospitals can control many aspects of production efficiency, but they cannot fully control epidemics, demographic change, rare catastrophic cases, externally determined wages or the cost of maintaining mandated reserve capacity. Ordinary case risk may be transferred through DRGs; exceptional and structural risk should be shared through outlier payments, recalibration, risk corridors and public-service compensation.

Regulatory intervention must likewise be proportionate. Audits should combine random selection with risk-based targeting. Sanctions should distinguish correction, negligence and fraud. Data collection should be adequate for payment and oversight without becoming excessive (Kafkaesque).

3.6 Transparency, participation and institutional accountability

The classification, grouper version, relative weights, base rate, adjustment factors, quality methodology and audit rules should be transparent and public. Hospitals must be able to reproduce the calculation of their payment. Patients and the public should be able to understand the objectives and principal effects of the system, although publication must not disclose identifiable health data.

Governance should include clinical, economic, patient, data-protection and provider expertise. Conflicts of interest must be declared and managed. The competent and capable body setting weights should be institutionally distinct from individual claim adjudication and fraud investigation, even where these functions are located within one public authority.

3.7 Data protection, data quality and controlled data use

DRG financing necessarily relies on health data, which constitute a special category of personal data under Article 9 GDPR. Operational payment and audit should generally rest on a statutory legal obligation or task carried out in the public interest under Article 6(1)(c) or 6(1)(e), together with the health-system-management or public-health grounds in Article 9(2)(h) or 9(2)(i). Consent is ordinarily inappropriate as the principal basis for mandatory public reimbursement because payment administration cannot realistically depend on freely revocable consent.

National law must specify the purposes of processing, relevant actors, categories of information, access rights, retention periods, security measures, permitted disclosures and remedies. The GDPR principles of purpose limitation, data minimization, accuracy, storage limitation, integrity, confidentiality and accountability apply throughout the payment process. Controllers must implement data protection by design and by default, while high-risk, large-scale processing of health data generally requires a data-protection impact assessment (European Parliament & Council of the European Union, 2016, arts. 5, 6, 9, 24, 25 and 35).

Data accuracy has both fiscal and patient-rights dimensions. An incorrect diagnosis can alter payment, affect future treatment and stigmatize the patient. The framework should permit correction of clinical and administrative records while preserving an auditable history of amendments.

3.8 Adaptability and evidence-based revision

DRG legislation should establish a stable legal framework but permit regular technical adaptation. Classification revisions, quality measures and risk models must be evidence-based, prospectively announced and evaluated. A statutory review cycle should assess expenditure, access, waiting times, mortality, readmissions, patient selection, administrative burden, provider solvency and distributional effects. Provider solvency means whether a hospital remains financially capable of meeting its obligations and continuing to deliver services over time. Distributional effects are the ways in which the benefits, burdens, revenues, and risks created by the DRG system are distributed among different hospitals, patients, regions, and population groups.

3.8.1 Evidence-based revisions - EBM, EBP, EIM - What's in a name?

Classification revisions, quality measures and risk models shall be informed and revised by the best available and relevant scientific evidence, critically appraised for quality and applicability, and integrated with professional expertise, patient values, ethical obligations, equity considerations, and the circumstances of the healthcare setting.

Evidence-based medicine (EBM), evidence-based practice (EBP), and evidence-informed medicine (EIM) all seek to improve decisions by using research evidence. They differ mainly in scope and in how strongly the term “evidence” is understood to determine the decision. In essence, EBM is the medical application, EBP is the broader professional application, and EIM emphasizes that evidence guides - but does not mechanically dictate - the final decision.

Evidence-based medicine (EBM) originated principally within medicine and clinical epidemiology. It emphasizes formulating answerable clinical questions, searching for relevant studies, critically appraising their validity, and applying the findings to a particular patient. EBM does not mean mechanically following randomized trials or guidelines. Research evidence is one element of professional judgment, not a substitute for it.

Evidence-based practice (EBP) is the broader, multidisciplinary application of the same general approach across healthcare and other professional fields. Compared with EBM, EBP often gives greater attention to implementation, professional workflows, team-based care, and the feasibility of applying evidence in a real service environment.

Evidence-informed medicine (EIM) is usually used to emphasize that research evidence informs rather than dictates medical decisions.The term responds to concerns that “evidence-based” may be misunderstood as meaning that decisions should be determined exclusively by published research. EIM is not necessarily a different scientific method from EBM. Often, it is a different formulation intended to make the role and limits of evidence more explicit. The phrase “evidence-informed” can be conceptually valuable, but it should not be used to weaken standards of scientific appraisal. Evidence should inform decisions, but stronger and more relevant evidence should normally receive greater weight than anecdote, habit, or unsupported professional preference.

Note: Evidence-informed medicine (EIM) and casuistry are closely related because both reject the idea that a general rule, guideline, or body of evidence can mechanically determine the correct decision in every individual case. EIM provides the evidential foundation, while casuistry provides a method for translating that evidence into a justified decision for the individual patient. Clinical decisions shall be informed by the best available scientific evidence but determined through reasoned consideration of the particular patient’s circumstances, values, prognosis, treatment burdens, and relevant analogous cases. Departure from general recommendations have to be be justified by clinically and ethically material differences and have to be documented transparently.

Feature	EBM	EBP	EIM
Primary field	Medicine and individual clinical care	All health professions and broader professional practice	Medicine and clinical decision-making
Main focus	Applying research evidence to patient care	Applying evidence across professional and organizational practice	Using evidence as one important input among several
Scope	Mainly clinical diagnosis, prognosis, treatment, and prevention	Clinical care, implementation, service delivery, professional interventions	Clinical care under uncertainty and contextual constraints
Role of research	Central but integrated with expertise and patient values	Central but integrated with professional and organizational context	Explicitly advisory rather than determinative
Typical concern	Is the evidence valid and applicable to this patient?	Can this evidence improve practice in this setting?	How much weight should this evidence receive in this particular decision?
Relationship to guidelines	Guidelines support but do not replace judgment	Guidelines may support standardized multidisciplinary practice	Guidelines are considered alongside context, values, and uncertainty
Main risk if misunderstood	“Cookbook medicine” or overreliance on hierarchies of evidence	Rigid implementation without regard to setting or professional realities	Excessive flexibility that may permit weak evidence or personal opinion to dominate

4. Essential legislative architecture

4.1 Part I: Purpose, scope and definitions

The statute should declare that its purpose is to finance necessary acute hospital care in a manner that promotes efficiency, quality, safety, equitable access, financial sustainability, transparency and data protection.

It should apply to all public (private) purchasers and hospitals receiving payment for covered acute inpatient services, irrespective of ownership, unless objectively justified exceptions are stated. Core definitions should include “acute hospital,” “covered case,” “diagnosis-related group,” “base rate,” “relative weight,” “outlier,” “public-service obligation,” “quality adjustment,” “upcoding,” “readmission,” “transfer,” “personal health data” and “secondary use.”

The Act should expressly provide that no payment rule may be interpreted as authorizing clinically inappropriate refusal, premature discharge, discrimination or reduction of statutory patient entitlements.

4.2 Part II: Institutional responsibilities and independence

The legislation should establish or designate:

A competent minister, responsible for national policy, the overall budget and regulations.
A public purchaser or insurance authority, responsible for contracts, routine payment and expenditure management.
An independent DRG technical authority, responsible for classification, costing, weights, grouper certification and methodological publication.
A clinical quality authority, responsible for indicators, risk adjustment, safety surveillance and investigation of quality signals.
An audit and integrity unit, empowered to validate claims and investigate irregularities.
An independent appeal body, competent and capable of reviewing coding, payment and enforcement decisions.
A stakeholder advisory council, including patient representatives, clinicians, hospitals, payers, health economists, data-protection expertise and representatives of vulnerable populations.

Institutional rules should prevent the same official from setting a contested rule, investigating an alleged violation and deciding the final appeal. The technical authority should publish methodologies and conflicts of interest. Sensitive audit operations may remain confidential where disclosure would facilitate evasion, but the governing audit criteria should be public.

4.3 Part III: Provider eligibility and service obligations

Payment eligibility should depend on licensing, accreditation, participation in required data systems and acceptance of statutory provider obligations. Contracts (SLA's) should specify the hospital’s service profile, geographic responsibilities, emergency obligations, quality standards, reporting duties and commissioned activity.

A participating hospital should be legally required to:

admit and treat patients according to objective clinical criteria;
stabilize emergency patients irrespective of expected profitability;
refrain from financial selection or inappropriate transfer;
maintain required staffing and safety systems;
provide clinically appropriate discharge planning;
submit complete and accurate information;
cooperate with audits and quality investigations; and
inform patients of complaint and redress mechanisms.

Persistent failure should permit corrective action plans, enhanced supervision, payment suspension or termination, subject to proportionality and continuity-of-care safeguards.

4.4 Part IV: Classification, documentation and coding

The Act should authorize one official DRG classification for each payment period. Regulations should identify the applicable diagnostic and procedure classifications, severity variables, exclusion rules, transfer rules and grouper version.

Hospitals should maintain documentation sufficient to substantiate every code affecting classification. Diagnoses should be coded only where they satisfy published clinical and coding criteria. Clinical staff should remain responsible for the truthfulness of clinical documentation, while well-trained and certified coders should be responsible for applying classification rules. Financial staff should not be permitted to alter clinical content.

The technical authority should operate a formal clarification process. Binding coding decisions of general relevance should be anonymized and published so that comparable cases are treated consistently. New interpretations should normally apply prospectively unless they correct manifest error or fraud.

4.5 Part V: The payment formula and tariff setting

The payment for an eligible hospital case shall equal the applicable base rate multiplied by the relative weight of the assigned diagnosis-related group and by any authorized hospital-level and patient-level adjustment factors, plus any approved outlier, supplementary, and quality-related payment adjustments (e.g. MedPAC).

Every component must have a statutory purpose and a published methodology. Hospital adjustments may cover objectively demonstrated differences such as teaching obligations, unavoidable geographic costs or legally mandated service capacity. They should not preserve historical inefficiency.

The base rate should be established prospectively using the available health budget, expected activity, efficient cost data and policy objectives. Relative weights should be calculated from standardized patient-level cost information and adjusted to exclude expenditure arising from inefficiency, unlawful practice or services financed separately.

No hospital should receive duplicate payment for the same resource. The law should contain coordination rules for DRG payments, supplementary tariffs, public-service compensation and grants.

In legal terms, each variable should be defined by legislation or implementing regulations. The law should specify:

who calculates it;
which (standardized) data may be used;
how often it is updated;
whether it can increase or reduce payment;
how double payment is prevented;
how hospitals may challenge the calculation; and
how the methodology is audited and published.

The average of all relative weights for a hospital's inpatient discharges produces the facility's Case Mix Index (CMI). A higher CMI reflects a more complex, resource-intensive patient population, which generally leads to higher insurance and reimbursement rates

4.5.1 The payment formula - overview

The ordinary payment for an eligible discharge may be represented by a composite formula combining the base rate and DRG relative weight with authorized hospital, case, outlier, supplementary, and quality adjustments (Busse et al., 2011; Klein et al., 2020; Kumar & Schoenstein, 2013; CMS, 2026a–f).

For an eligible discharge, the ordinary payment may be expressed as:

Pi,h,t = BRt × RWg,t × HAh,t × PAi,t + OPi,t + SPi,h,t + QAh,t

The formula calculates the total payment to hospital h for patient case i during payment period t, where:

Pi,h,t is the final amount paid for patient or case i, treated by hospital h, during year or payment period t;

The core DRG payment:

BRt is the base rate for the payment year or the standard monetary amount assigned to a DRG weight of 1.00 during period t;
RWg,t is the relative weight of the assigned DRG, which expresses how resource-intensive DRG category g is compared with an average hospital case;

Baseline Metric: An average hospital case has a relative weight of exactly 1.0;
Low-Intensity Cases (< 1.0): DRGs with weights below 1.0 are routine, less costly stays (e.g., uncomplicated childbirth);
High-Intensity Cases (>1.0): DRGs with weights above 1.0 require more resources, longer stays, or complex procedures (e.g., organ transplants);

HAh,t is an authorized hospital adjustment, which adjusts payment for legitimate characteristics of hospital h (teaching status, geographic cost differences, remote location, specialist functions, unavoidable wage differences, designated emergency or trauma capacity);
PAi,t is an authorized patient or case i adjustment, which adjusts payment for characteristics of the individual case that are not adequately reflected in the ordinary DRG weight (unusual clinical severity, multimorbidity, age-related complexity, clinically relevant social complexity, specific treatment circumstances,approved risk-adjustment variables);

Additive payment components:

OPi,t is an outlier payment, which compensates the hospital when the case i is exceptionally expensive compared with other cases in the same DRG (an unusually long intensive-care (ICU) stay, very expensive medicines, prolonged ventilation, treatment of severe complications);
SPi,h,t is an approved supplementary payment for hospital h, which covers defined services or products not adequately included in the normal DRG tariff for case i. (an approved high-cost medicine, an expensive implant, a new medical technology, a specialized procedure, an additional payment connected with a designated hospital function); and
QAh,t is a quality-related adjustment links part of the payment to the hospital h’s quality, safety, access, or outcome performance.

The central idea is that SPi,h,t pays for a specific approved additional resource or service, whereas OPi,t protects the hospital against the exceptional overall cost of the case.

Example

Assume:

The core DRG payment:

$B R_{t} = €5 . 000$
RWg,t = 1,40
HAh,t = 1,05
PAi,t = 1,10

Additive payment components:

OPi,t = €2.000
SPi,h,t = €1.000
QAh,t = €300

The core DRG payment is: €5.000 × 1,40 × 1,05 × 1,10 = €8.085

The final payment is: €8.085 + €2.000 + €1.000 + €300 = €11.385

The formula expresses a blended hospital-payment model rather than a pure DRG model.

Payment component	What it addresses
RWg,t	Ordinary expected cost of the DRG - factor
PAi,t	Patient-specific complexity not fully captured by the DRG - factor
HAh,	Structural and unavoidable hospital-level cost differences - factor
OPi,t	Exceptional total cost above an outlier threshold - amount
SPi,h,t	A defined approved product, procedure, technology, or function - amount
QAh,t	Quality-related bonus or deduction - amount

4.5.2 The payment formula - aspects of the core DRG payment

4.5.2.1 HAh,t

HAh,t is a hospital-level adjustment factor applied when hospital h faces legitimate, measurable costs that are not adequately reflected in the ordinary DRG weight. It should compensate for structural obligations or unavoidable cost differences, not for inefficiency, weak management, or historically high spending.

$Adjusted core payment = B R_{t} \times R W_{g, t} \times H A_{h, t}$

For example,

$H A_{h, t} = 1,06$ increases the relevant DRG payment by 6%.

The legislation should require that every hospital adjustment be:

based on objective and published criteria;
supported by verified cost data;
proportionate to the additional unavoidable cost;
reviewed periodically;
applied consistently to comparable hospitals;
separated from compensation for inefficiency;
coordinated with outlier, supplementary, and public-service payments; and
subject to audit and appeal.

A hospital-level adjustment may be granted only where the provider incurs objectively demonstrated and unavoidable additional costs arising from legally recognized teaching functions, geographic conditions, remoteness, designated specialist responsibilities, external labour-market conditions, or emergency and trauma preparedness. The adjustment shall be transparent, proportionate, periodically reviewed, and shall not duplicate compensation available through another payment mechanism.

a. Teaching status

A teaching hospital may incur additional costs because it:

trains medical students, residents, nurses, and other professionals;
requires supervision by senior clinicians;
experiences lower productivity during training;
maintains simulation, education, and academic infrastructure;
treats more complex cases associated with tertiary referral activity.

A teaching adjustment should compensate only for the verified additional cost of education or training not already included in DRG weights or funded through a separate teaching grant.

Teaching status alone should not automatically justify a higher tariff. The hospital should demonstrate accredited training functions, numbers of trainees, supervision obligations honored, and attributable costs.

b. Geographic cost differences

The cost of providing the same treatment may differ between regions because of factors such as:

property and construction costs;
energy and transport costs;
regional labour-market conditions;
costs of obtaining supplies;
regional price differences that hospitals cannot reasonably control.

A geographic adjustment should be based on objective external indices rather than on each hospital’s actual expenditure. Otherwise, inefficient spending could be rewarded.

c. Remote location

A remote or rural hospital may face structural costs that differ from ordinary geographic price differences. It may need to:

maintain services despite low patient volumes;
operate emergency care continuously;
retain staff on call even when activity is limited;
maintain diagnostic or surgical capacity for accessibility reasons;
provide transport coordination or telemedicine;
recruit and retain staff in an underserved area.

The central issue is that the hospital may have high fixed costs per patient because it must maintain essential capacity for a small or dispersed population.

A remote-location adjustment should therefore depend on criteria such as:

travel time to the nearest alternative hospital;
population density;
service volume;
necessity of maintaining local access;
emergency-service obligations;
seasonal or geographic isolation.

Where the cost primarily concerns keeping a service available rather than treating individual cases, a

d. Specialist functions

Some hospitals perform specialized functions that generate additional costs not fully reflected in ordinary DRGs, such as:

transplant services;
major burns treatment;
highly specialized paediatric care;
complex oncology;
rare-disease treatment;
extracorporeal life support (e.g. ECMO);
national referral services;
highly specialized laboratories or multidisciplinary teams.

These hospitals may require specialized staff, equipment, accreditation, reserve capacity, and low-volume expertise.

An adjustment is justified only where the additional cost is not already captured by:

a higher DRG relative weight;
a severity adjustment;
an outlier payment;
a supplementary payment for high-cost technology; or
a separate specialist-service budget.

The law should prevent double payment for the same specialist function.

e. Unavoidable wage differences

Hospitals may face labour costs above the national average because of external labour-market conditions, such as:

legally mandated regional wage scales;
collective agreements;
scarcity of particular professionals;
recruitment premiums in remote areas;
nationally recognized cost-of-living differences;
competition for staff in high-cost urban areas.

The adjustment should cover only wage differences that are:

externally determined;
objectively measurable;
necessary to recruit and retain appropriate staff; and
not caused by excessive salaries, overstaffing, or inefficient rostering.

A national wage index could be used. For example, if eligible wage costs are 8% above the national average and labour represents 60% of relevant hospital costs, the total hospital adjustment would not necessarily be 8%; it might be approximately:

$1 + (0.08 \times 0.60) = 1.048$

Thus, the hospital-level effect would be about 4.8%.

f. Designated emergency or trauma capacity

A designated emergency or trauma hospital may be legally required to maintain:

24-hour emergency departments;
operating theatres available at short notice;
intensive-care beds (ICU);
blood-bank capacity;
24/7 trauma teams;
imaging and laboratory services;
disaster preparedness;
standby personnel and equipment.

These costs arise even when the capacity is not fully used. Ordinary DRG payments generally remunerate completed cases, but they may not adequately compensate for the cost of maintaining readiness.

The adjustment should be linked to formal designation and enforceable service standards, such as:

continuous availability;
specified response times;
minimum staffing;
participation in regional trauma networks;
acceptance of emergency transfers;
disaster-response obligations.

Because readiness costs are predominantly fixed, a separate annual capacity payment is often more accurate than an increase to every DRG payment. A DRG adjustment may still be used where part of the additional cost varies with treated cases.

Summary

Factor	Cost problem addressed	Typical financing response
Teaching status	Training and supervision costs	Teaching adjustment or separate education grant
Geographic cost difference	Higher regional input prices	Geographic index
Remote location	Low volume and need to preserve local access	Rural adjustment or availability payment
Specialist function	Specialized expertise, equipment, or infrastructure	Specialist adjustment, carve-out, or supplementary payment
Unavoidable wage difference	External labour-market costs	Wage-index adjustment
Emergency or trauma capacity	Cost of permanent readiness	Capacity payment or designated-hospital adjustment

4.5.2.2 PAi,t

$P A_{i, t}$ is a patient- or case-level adjustment factor applied when the individual case $i$ has legitimate, measurable cost characteristics that are not adequately captured by the ordinary DRG classification and relative weight. In essence, $P A_{i, t}$ corrects the payment for patient-specific complexity that remains after the ordinary DRG classification has been applied.

$Adjusted core payment = B R_{t} \times R W_{g, t} \times H A_{h, t} \times P A_{i, t}$

For example,

$P A_{i, t} = 1.12$ increases the core DRG payment for that case by 12%.

The adjustment should not duplicate severity, complications, or procedures already reflected in the DRG. It should be used only where the classification systematically underestimates the expected cost of a defined type of case.

A patient- or case-level adjustment may be applied where objectively verified clinical, functional, demographic, social, or treatment-related characteristics materially increase the expected cost of an individual episode and are not adequately reflected in the applicable diagnosis-related group. Eligible variables and adjustment values shall be clinically validated, published in advance, applied consistently, periodically recalibrated, and designed to prevent discrimination, manipulation, and duplicate compensation.

The central legal safeguard is that the same characteristic must not be paid twice.

For example:

a severe complication already reflected in the DRG weight should not also generate a patient adjustment;
a high-cost medicine financed through a supplementary payment should not also increase $P A_{i, t}$ ;
prolonged cost above the outlier threshold should ordinarily be addressed through $O P_{i, t}$ ;
general costs of serving a deprived population may be better addressed through $H A_{h, t}$ or a separate

The law should require that supplementary payments be:

listed or authorized in advance;
based on defined clinical indications;
supported by itemized documentation;
subject to price and utilization controls;
limited to approved hospitals where specialization is required;
reviewed periodically;
time-limited for new technologies;
excluded where the cost is already covered elsewhere;
subject to audit and recovery; and
open to administrative appeal.

a. Unusual clinical severity

Unusual clinical severity means that the patient’s illness is substantially more serious or resource-intensive than the ordinary cases assigned to the same DRG.

Examples include:

severe physiological instability;
advanced organ failure;
unusually extensive injury;
severe infection or sepsis;
prolonged mechanical ventilation;
an exceptionally high risk of deterioration;
complications present on admission that materially increase treatment needs.

The distinction is between ordinary severity already reflected in the DRG and residual severity that the DRG does not adequately recognize.

The adjustment should rely on objective clinical information, such as:

validated severity scores;
laboratory and physiological data;
intensive-care indicators;
documented organ dysfunction;
(inter)nationally defined severity criteria.

It should not be based merely on the hospital’s assertion that the case was difficult.

b. Multimorbidity

Multimorbidity means that the patient has two or more significant chronic or acute conditions that interact and increase the complexity or cost of treatment.

For example, a patient admitted for pneumonia may also have:

heart failure;
chronic kidney disease;
diabetes;
dementia; and
chronic obstructive pulmonary disease.

These conditions may require additional diagnostics, medication management, specialist consultations, monitoring, longer treatment, and more complex discharge planning.

A multimorbidity adjustment should not count every recorded diagnosis. Only conditions that materially affect treatment, resource use, risk, or discharge should qualify. Otherwise, the adjustment could encourage indiscriminate coding of minor comorbidities.

Possible measurement tools include:

the Charlson Comorbidity Index (CCI);
the Elixhauser comorbidity measures;
(inter)nationally validated comorbidity groupings;
(inter)national condition-specific risk models.

c. Age-related complexity

Age alone should not automatically justify a higher or lower payment. The adjustment should address additional complexity that is statistically and clinically associated with certain age groups but not adequately reflected in the DRG.

For older patients, relevant factors may include:

frailty;
cognitive impairment;
polypharmacy;
falls risk;
reduced mobility;
delirium;
nutritional vulnerability;
greater need for rehabilitation or discharge coordination.

For children, particularly neonates, relevant factors may include:

low birth weight;
prematurity;
age-specific equipment and staffing;
specialized paediatric monitoring;
family-centred care requirements;
dependence on paediatric subspecialists.

A legally sound model should therefore use clinically meaningful variables such as frailty, functional status, gestational age, or birth weight rather than age alone wherever possible.

The adjustment must not create age discrimination or imply that older or disabled patients are entitled to a lower standard of care.

d. Clinically relevant social complexity

Social circumstances (SDoH) may materially affect the resources required to provide safe and effective hospital care. Examples include:

homelessness or unstable housing;
absence of family or informal support;
language or communication barriers;
severe poverty affecting discharge arrangements;
safeguarding concerns;
domestic violence;
substance-use problems;
inability to obtain essential post-discharge care;
residence in an institution requiring complex coordination.

These factors may require:

interpreters;
social-work intervention;
safeguarding assessments;
multidisciplinary discharge planning;
coordination with housing, community, or social-care services;
additional time to arrange safe follow-up.

The adjustment should compensate for clinically relevant additional care needs, not stigmatize or penalize socially disadvantaged patients.

It should also not permit hospitals to record broad social categories merely to increase revenue. The law should require defined criteria, documented service use, and data minimization. Sensitive personal data should be processed only where necessary and lawful under the GDPR.

In many systems, some social-complexity costs may be better financed through a hospital-level equity payment rather than a case-by-case adjustment, especially where deprivation affects a large share of the hospital’s population.

e. Specific treatment circumstances

Specific treatment circumstances are identifiable features of the episode that create additional legitimate cost but are not sufficiently reflected in the assigned DRG.

Examples include:

treatment under mandatory isolation conditions;
additional infection-control requirements;
emergency surgery outside ordinary operating hours;
transfer from another hospital after substantial prior treatment;
treatment requiring continuous one-to-one observation;
complex safeguarding arrangements;
use of specialized communication support;
treatment during a formally declared epidemic or disaster;
treatment involving unusually complex clinical coordination.

These circumstances should be distinguished from:

outlier costs, which concern an exceptionally expensive case overall;
supplementary payments, which may finance a particular medicine, implant, or technology;
hospital adjustments, which address structural characteristics of the hospital.

A case-level adjustment is appropriate where the additional cost arises from the circumstances of that particular patient episode.

f. Approved risk-adjustment variables

Approved risk-adjustment variables are patient characteristics that have been formally validated and legally authorized for use in predicting expected resource use, cost, or outcomes.

They may include:

principal diagnosis;
clinically relevant secondary diagnoses;
severity indicators;
comorbidity burden;
frailty;
functional status;
intensive-care use;
birth weight or gestational age;
admission type;
transfer status;
prior utilization;
clinically justified socioeconomic factors.

The variables should be approved through a transparent technical and legal process. They should satisfy several conditions:

Clinical relevance: The variable must have a plausible relationship with treatment complexity or expected cost.
Predictive validity: It must materially improve the accuracy of the payment model.
Data reliability: Hospitals must be able to record it consistently.
Resistance to manipulation: It should not be easily altered merely to increase payment.
Proportionality: The data collected must not be excessive.
Equality review: The variable must not create unjustified discrimination.
Periodic recalibration: Its effect should be reviewed as treatment patterns change.

Protected characteristics should be used with particular caution. A variable may be statistically predictive but still be legally inappropriate if it entrenches historic under-treatment or produces discriminatory outcomes.

4.5.3 The payment formula - aspects of additive payment components

$4.5.3.1$ $O P_{i, t}$

$O P_{i, t}$ is an outlier payment for an individual case whose verified treatment cost is far above the normal cost range for its assigned DRG.

The ordinary DRG tariff pays the average expected cost of cases in that category. The outlier mechanism prevents hospitals from suffering disproportionate financial losses when a particular patient requires exceptional resources.

An outlier payment may be granted where the verified and clinically justified cost of an individual case materially exceeds the prescribed threshold for the applicable diagnosis-related group. The payment shall cover only a prescribed proportion of eligible excess cost and shall exclude costs already reflected in the DRG weight, supplementary payments, or other reimbursement mechanisms.

An outlier payment should require:

a published financial or length-of-stay (LOS) threshold;
verified patient-level cost data;
proof of clinical necessity;
exclusion of costs already reimbursed elsewhere;
review of unusually frequent outlier claims;
reduced or denied payment for avoidable or fraudulently generated costs;
consistent application across hospitals; and
a right to administrative appeal.

A typical design is:

$O P_{i, t} = α \times \max (0, C_{i, t} - T_{g, t})$

where:

$C_{i, t}$ is the verified cost of case $i$ ;
$T_{g, t}$ is the outlier threshold for DRG $g$ ;
$α$ is the percentage of excess cost reimbursed, such as 70% or 80%.

The hospital normally continues to bear part of the excess cost so that an incentive for efficient treatment remains.

Numerical example

Assume:

ordinary DRG payment: €18,000;
outlier threshold: €40,000 in verified case cost;
actual verified case cost: €70,000;
marginal reimbursement rate: 75%.

The excess cost is:

$€ 70,000 - € 40,000 = € 30,000$

The outlier payment is:

$O P_{i, t} = 0.75 \times € 30,000 = € 22,500$

The hospital receives:

$€$

The hospital still bears part of the exceptional cost, preserving some incentive for efficiency.

a. Unusually long intensive-care stay

Some patients require substantially more ICU care than is typical for their DRG. Examples include:

persistent circulatory or respiratory instability;
multiple-organ failure (MOF);
severe sepsis or septic shock;
prolonged postoperative instability;
repeated emergency interventions;
extensive monitoring and organ support.

ICU care is expensive because it requires:

high nurse-to-patient ratios;
continuous medical supervision;
advanced monitoring;
ventilators and other life-support equipment;
frequent laboratory and imaging investigations;
costly medicines and disposables.

A long ICU stay should not automatically qualify for additional payment. The stay must be clinically necessary and substantially exceed the resource use already included in the DRG tariff.

For example, if a DRG ordinarily assumes two ICU days but the patient requires 18 clinically justified ICU days, the additional cost may exceed the outlier threshold.

b. Very expensive medicines

A case may become an outlier because the patient requires unusually costly pharmaceutical treatment, such as:

specialized antimicrobial therapy for resistant infection;
high-cost biological medicines;
clotting factors;
antidotes;
immunoglobulins;
specialized oncology treatments;
medicines required for rare complications.

The medicine must be clinically indicated, authorized under the applicable reimbursement rules, and documented in the medical record.

Not every expensive medicine should be handled through an outlier payment. Where a medicine is predictably expensive and used in a defined class of cases, a supplementary payment or separate pharmaceutical reimbursement may be more appropriate. Outlier payment is generally better suited to exceptional total case cost rather than a routinely identifiable product.

c. Prolonged mechanical ventilation

Mechanical ventilation may materially increase the cost of treatment because it requires:

ICU admission;
specialized respiratory and nursing care;
sedation and continuous monitoring;
airway management;
repeated blood-gas testing;
prevention and treatment of ventilator-related complications;
rehabilitation and gradual weaning.

Many DRG systems already use ventilation duration to distinguish between DRG categories. Therefore, an outlier payment should apply only where the duration or associated resource use exceeds what is already recognized in the assigned DRG.

For example, a DRG may already cover ventilation exceeding 96 hours. A patient ventilated for 40 days might nevertheless generate exceptional verified costs beyond the applicable threshold.

d. Treatment of severe complications

A patient may develop serious complications that require extensive additional treatment, such as:

postoperative haemorrhage;
severe hospital-acquired infection;
acute kidney failure requiring dialysis;
stroke;
pulmonary embolism;
wound breakdown;
unexpected organ failure;
emergency reoperation;
prolonged nutritional support.

The complication may lead to additional surgery, ICU care, diagnostics, medicines, rehabilitation, or a much longer hospital stay.

However, legal and payment rules should distinguish among three situations:

The complication is already reflected in a higher-severity DRG.
In that case, the higher DRG weight may already provide additional payment.
The complication is not fully reflected and pushes total cost above the outlier threshold.
An outlier payment may then be justified.
The complication resulted from preventable unsafe care or serious non-compliance.
The hospital should not automatically receive additional payment merely because its own failure increased the cost. The case may require clinical review, payment reduction, or regulatory action.

Thus, outlier compensation should protect hospitals from unavoidable exceptional risk without rewarding avoidable harm.

Note: Potentially preventable complications (PPCs) are harmful events or negative outcomes - such as hospital-acquired infections (HAI), surgical errors, or adverse drug reactions - that develop after admission and result from the care process rather than the natural progression of an illness.

Note: Never events in healthcare are egregious, devastating, and entirely preventable medical errors that should never happen if proper safety protocols and procedures are followed. Coined in 2001, these incidents cause severe patient harm or death and often lead to strict accountability measures, such as hospitals waiving the costs of care.

4.5.3.2 Pi,h,t

$P_{i, h, t}$ is an approved supplementary payment added to the ordinary DRG tariff for a specifically identified service, product, technology, or designated function used in treating case $i$ at hospital $h$ . The central idea is that $S P_{i, h, t}$ pays for a specific approved additional resource or service, whereas $O P_{i, t}$ protects the hospital against the exceptional overall cost of the case.

A supplementary payment may be made for an approved medicine, device, technology, procedure, or designated specialist function where its clinically justified cost is material and is not adequately reflected in the applicable diagnosis-related group or another payment mechanism. Eligibility criteria, payment amounts, documentation requirements, authorized providers, review periods, and rules preventing duplicate compensation shall be prescribed and published in advance.

It is appropriate where the additional cost is:

material;
clinically justified;
identifiable in advance;
not adequately included in the DRG weight; and
authorized under published reimbursement rules.

Unlike an outlier payment, which responds to the exceptional total cost of a case, a supplementary payment reimburses a defined item or activity.

$Total case payment = core DRG payment + S P_{i, h, t}$

Numerical example

Assume:

core adjusted DRG payment: €12,000;
approved high-cost implant supplement: €7,500;
specialized procedure supplement: €2,000.

Then:

$S P_{i, h, t} = € 7,500 + € 2,000 = € 9,500$

The total payment before any outlier or quality adjustment is:

$€ 12,000 + € 9,500 = € 21,500$

If the implant and procedure were already included in the DRG weight, the supplements would not be payable.

a. Approved high-cost medicine

A supplementary payment may cover a medicine whose cost is too high or too variable to be absorbed safely into the ordinary DRG tariff.

Examples may include:

a high-cost oncology medicine;
an orphan medicine for a rare disease;
a specialized biological therapy;
an expensive antidote;
immunoglobulin or clotting-factor treatment;
a new antimicrobial reserved for resistant infection.

The medicine should qualify only where:

it has the required marketing and reimbursement authorization (e.g. ECDC, national);
its use complies with approved clinical indications;
it is prescribed according to relevant guidelines;
the administered quantity is documented;
the price is verified; and
the cost is not already included elsewhere.

Payment may be based on the verified acquisition cost, a nationally negotiated price, or a fixed supplement. It need not reimburse the hospital’s full purchase price where procurement efficiency is expected.

A medicine used routinely in a DRG should eventually be incorporated into the relative weight rather than remain indefinitely outside the tariff.

b. Expensive implant

A supplementary payment may cover a costly implant or medical device whose price is not adequately represented in the ordinary DRG.

Examples include:

a specialized cardiac valve;
a complex vascular stent;
a cochlear implant;
a customized orthopaedic prosthesis;
a neurostimulator;
a ventricular assist device;
a highly specialized spinal implant.

Eligibility should depend on:

clinical necessity;
conformity with applicable medical-device law;
inclusion on an approved reimbursement list;
documentation of the exact device used;
traceability through a device identifier where required;
compliance with procurement rules; and
absence of duplicate reimbursement.

A standard implant already included in the DRG should not also generate a supplementary payment. A supplement is more defensible where the implant is unusually costly, restricted to selected indications, or newly introduced.

c. New medical technology

A new technology may be clinically valuable before sufficient national cost data exist to incorporate it accurately into the DRG classification.

Examples include:

a newly introduced robotic procedure;
an advanced gene- or cell-based treatment process;
a novel image-guided intervention;
new extracorporeal support technology;
an innovative diagnostic platform used during treatment;
a new minimally invasive technology that requires expensive equipment or disposables.

A temporary supplementary payment can facilitate controlled adoption while evidence is collected.

Approval should normally require:

an assessment of safety and clinical effectiveness;
evidence that the technology adds material cost;
consideration of comparative effectiveness;
defined patient eligibility criteria;
use in authorized hospitals;
data reporting on outcomes and costs; and
a time limit.

The supplement should be reviewed after sufficient evidence becomes available. It may then be:

incorporated into the DRG weight;
continued for a further defined period;
reduced; or
withdrawn if value is not demonstrated.

Supplementary payment should not become an automatic subsidy for every innovation. It should support technologies that are clinically justified and reasonably cost-effective (e.g. QALY).

Note: A QALY (Quality-Adjusted Life Year) is a standard metric used in health economics to measure the overall value of medical interventions. It combines both the duration and the quality of life into a single number, where 1 QALY equals one year of life spent in perfect health.

d. Specialized procedure

A supplementary payment may finance a specific procedure that imposes substantial additional cost but is not adequately differentiated in the applicable DRG.

Examples include:

extracorporeal membrane oxygenation (ECMO);
complex interventional radiology;
highly specialized endovascular treatment;
intraoperative neurological monitoring;
specialized perfusion procedures;
complex reconstructive surgery;
an additional procedure performed during an already classified admission.

The procedure should be separately identifiable through an approved procedure code and supported by clinical documentation.

The legislation should determine whether the procedure:

belongs in a higher-weighted DRG;
should receive a fixed supplement;
should be reimbursed according to verified cost; or
should be financed through a specialized-service contract.

A supplementary payment is justified only where the procedure is not already reflected in the DRG assignment.

e. Additional payment connected with a designated hospital function

A hospital may receive a supplementary payment because it performs a formally designated function relevant to the treatment of a particular case.

Examples include:

treatment within an accredited transplant centre;
operation of a designated major-trauma service;
treatment in a national burn centre;
provision of highly specialized paediatric care;
management of a patient through a rare-disease reference centre;
participation in a designated stroke or cardiac network;
provision of specialized isolation or containment facilities.

This type of payment should be distinguished from a general hospital-level adjustment.

A hospital-level adjustment, $H A_{h, t}$ , applies broadly because of a structural characteristic of the hospital. A supplementary payment, $S P_{i, h, t}$ , applies only when the designated function is actually used for a particular eligible case.

For example:

an annual payment for maintaining trauma readiness is a capacity or public-service payment;
an additional amount for each qualifying major-trauma patient treated under the designated service may be a supplementary payment.

The hospital should qualify only where it has been formally designated and complies with defined staffing, equipment, accreditation, availability, reporting, and referral obligations.

$4.5.3.3$ QAh,t

$Q A_{h, t}$ is a hospital-level quality adjustment that increases, leaves unchanged, or reduces the payment made to hospital $h$ during period $t$ , according to predefined measures of quality, safety, access, patient experience, continuity, and reporting performance.

A quality-related adjustment may increase, leave unchanged, or reduce payment according to the provider’s performance on prescribed indicators of clinical outcomes, patient safety, access, potentially preventable complications and readmissions, patient-reported experience, continuity of care, and data-reporting compliance. Indicators shall be valid, transparent, proportionate, appropriately risk-adjusted, based on statistically reliable data, and subject to verification and appeal. Financial adjustment shall supplement and shall not replace enforcement of mandatory quality and safety standards.

The central point is that $Q A_{h, t}$ should reward or correct measurable dimensions of hospital performance, while avoiding the assumption that every adverse outcome is preventable or attributable to the hospital.

Essential legal safeguards

A lawful quality-adjustment system should require that indicators be:

published in advance;
clinically valid;
capable of reliable measurement;
risk-adjusted where necessary;
based on sufficient case numbers;
resistant to manipulation;
periodically reviewed;
assessed for equity effects;
proportionate in financial impact;
open to correction and appeal.

The hospital should receive its underlying data before the adjustment becomes final. It should be able to challenge coding errors, statistical mistakes, inappropriate attribution, or incorrect exclusions.

Quality adjustment should also avoid double counting. The same adverse event should not produce multiple overlapping deductions unless the law clearly justifies separate consequences.

A possible calculation model

In the payment formula, Pi,h,t=BRt×RWg,t×HAh,t×PAi,t+OPi,t+SPi,h,t+QAh,t,

is written as an additive monetary adjustment. It may be calculated annually at hospital level and then allocated across cases, or applied to defined categories of cases.

For example:

$Q A_{h, t} = + € 300: a quality bonus is added;$
$Q A_{h, t} = € 0: no quality adjustment applies;$
$Q A_{h, t} = - € 300$ : a quality deduction is made.

A system may alternatively express quality adjustment as a percentage of the core DRG payment. The legislation must clearly specify which method is used.

Assume that 3% of a hospital’s eligible annual DRG revenue is subject to quality adjustment.

The hospital might receive scores in five domains:

clinical outcomes: 30%;
patient safety: 25%;
readmissions and continuity: 20%;
patient experience: 15%;
reporting compliance: 10%.

The resulting adjustment could range from:

$- 3 % \leq Q A_{h, t} \leq + 3 %$

A hospital performing above the bonus threshold might receive $+ 2 %$ . A hospital within the acceptable range would receive 0%. A hospital with persistent deficiencies might receive $- 1.5 %$ .

The system should normally include a maximum deduction so that financial penalties do not destabilize essential services.

a. Positive quality adjustment

A positive adjustment rewards a hospital for meeting or exceeding defined standards.

It may reward:

high performance relative to a benchmark;
meaningful improvement over the hospital’s previous performance;
sustained compliance with demanding safety standards;
reduction of avoidable complications or readmissions;
strong patient-reported experience;
reliable discharge communication;
complete and timely reporting.

A bonus should not be based solely on being the best-performing hospital. Otherwise, hospitals serving less healthy or socially disadvantaged populations may be unfairly penalized. A balanced system may reward both attainment and improvement.

b. Zero adjustment

A zero adjustment means that the hospital receives the ordinary payment without either a bonus or deduction.

This may occur where:

performance falls within the acceptable range;
the hospital meets mandatory requirements but does not qualify for a bonus;
the available data are statistically insufficient;
the indicator does not apply to the hospital;
the hospital is in an approved introductory or validation period.

A zero adjustment should not imply that quality is irrelevant. Minimum legal and professional standards continue to apply regardless of the financial adjustment.

c. Negative quality adjustment

A negative adjustment reduces payment where the hospital fails to satisfy defined quality, safety, access, or reporting requirements.

It may apply in cases of:

persistently poor risk-adjusted outcomes;
excessive rates of potentially preventable complications (PPC);
repeated potentially preventable readmissions (PPR);
serious patient-safety failures;
inadequate discharge documentation;
incomplete or unreliable reporting;
failure to implement a required corrective plan.

A deduction must be proportionate. A hospital should not lose the entire DRG payment because of a minor administrative error. Serious unsafe care may require separate regulatory sanctions in addition to a payment deduction.

d. Potential sources of hospital-level quality adjustment

d.1 Risk-adjusted mortality

Risk-adjusted mortality compares observed deaths with the number of deaths expected after accounting for relevant differences in patient risk.

Relevant variables may include:

age;
principal diagnosis;
comorbidities;
severity on admission;
emergency status;
transfer status;
palliative-care status;
frailty or functional condition, where reliably measured.

A simplified indicator is:

$\text{Standardized mortality ratio} = \frac{\text{Observed deaths}}{\text{Expected deaths}}$

A ratio above 1 indicates more deaths than expected, while a ratio below 1 indicates fewer.

Mortality should rarely trigger an automatic payment deduction by itself. A high rate may reflect data problems, referral patterns, unusually complex patients, or random variation. It should normally function as a signal for clinical review. Financial consequences should follow only where the measure is adequately risk-adjusted, statistically reliable, and supported by investigation.

d.2 Avoidable complications

Avoidable complications are adverse clinical events that could potentially have been prevented through appropriate care.

Examples may include:

certain hospital-acquired infections (HAI);
pressure injuries;
postoperative haemorrhage;
avoidable venous thromboembolism;
medication-related harm;
falls resulting in injury;
preventable surgical-site infection (SSI).

The preferable expression is often potentially preventable complication, because preventability is rarely absolute. A complication may occur despite appropriate care.

The indicator should distinguish:

conditions present on admission (POA=Y);
complications arising during hospitalization (POA=N);
unavoidable complications;
events plausibly associated with failures in care.

d.3 Never events

“Never events” are serious incidents that should be largely preventable where established safety procedures are followed.

Examples may include:

surgery on the wrong patient or body site;
retention of a surgical object;
administration of incompatible blood;
serious medication errors involving prohibited administration routes.

The term does not mean that such an event is literally impossible. It means that occurrence ordinarily indicates a grave failure of systems or procedures.

A never event may justify:

non-payment for the additional cost caused by the event;
a quality deduction;
mandatory reporting and investigation;
a corrective action plan;
regulatory or disciplinary measures.

Automatic sanctions should still allow verification, causation analysis, and procedural fairness.

d.4 Potentially preventable readmissions

A readmission is a new hospitalization after discharge, commonly measured within 7, 14, or 30 days.

A readmission may be potentially preventable where it is clinically related to the earlier admission and associated with deficiencies such as:

premature discharge;
inadequate treatment;
poor medication reconciliation;
insufficient patient instructions;
failure to arrange follow-up;
inadequate communication with primary or community care.

Not all readmissions are preventable. Exclusions may be needed for:

planned readmissions;
unrelated conditions;
disease progression despite appropriate care;
unavoidable complications;
highly complex or palliative patients.

Readmission measures should therefore be clinically defined, risk-adjusted, and evaluated over sufficient case numbers. The law should avoid incentives for hospitals to discourage patients from returning when readmission is medically necessary.

d.5 Patient safety

Patient-safety measures concern the hospital’s prevention, detection, and management of avoidable harm.

Possible indicators include:

medication-safety performance;
compliance with surgical checklists;
infection-prevention practices;
timely recognition of deterioration;
adverse-event reporting;
incident investigation;
implementation of corrective measures;
staffing or competency requirements in safety-critical services.

Safety measurement should include both outcomes and processes. A low number of reported incidents does not necessarily indicate a safe hospital; it may indicate underreporting. Hospitals should therefore not be financially punished merely for maintaining an open reporting culture.

d.6 Patient experience and PREMs

Patient-Reported Experience Measures, or PREMs, measure patients’ experiences of receiving care rather than their clinical health outcomes.

PREMs may ask whether:

clinicians explained treatment clearly;
staff treated the patient with dignity and respect;
the patient was involved in decisions;
pain and concerns were addressed;
information about medicines was understandable;
discharge arrangements were clear;
care was coordinated;
communication needs were accommodated.

PREMs should be distinguished from Patient-Reported Outcome Measures, or PROMs. PREMs concern the experience of care; PROMs concern the patient’s reported health status or functional outcome.

Quality adjustment based on PREMs should account for:

survey response rates;
accessibility for different languages and disabilities;
non-response bias;
patient mix;
minimum sample sizes;
protection against manipulation or selective surveying.

Patient satisfaction alone should not determine payment. A clinically inappropriate treatment does not become high-quality merely because it was popular with the patient.

d.7 Continuity of care

Continuity of care concerns whether relevant information and responsibility are transferred effectively when the patient moves between providers or care settings.

For hospital discharge, the quality measure may assess the content, completeness, accuracy, timeliness, and technical structure of the discharge communication.

A discharge letter or structured electronic message should ordinarily contain:

patient identification;
admission and discharge dates;
principal and relevant secondary diagnoses;
procedures performed;
significant test results;
complications;
medication at discharge;
changes from pre-admission medication;
allergies and adverse reactions;
pending tests;
follow-up arrangements;
warning signs;
responsible clinicians or services;
information communicated to the patient.

d.7.1 XML or structured electronic format

Where discharge information is transmitted electronically, XML or another structured interoperable format may be required. The purpose is not merely technical conformity. Structured data support:

automatic import into electronic health records;
medication reconciliation;
reduced transcription errors;
interoperability between hospitals and community providers;
machine-readable audit and quality review.

A continuity indicator may therefore assess both:

content quality: whether the necessary clinical information is present and accurate; and
structural quality: whether the document complies with the required technical schema, terminology, coding, and transmission standard.

A technically valid XML file with clinically incomplete content should not count as satisfactory. Conversely, a clinically sound letter that cannot be securely received or interpreted by the next provider may also fail the continuity objective.

d.8 Compliance with reporting obligations

Hospitals may be required to report data concerning:

DRG claims;
diagnoses and procedures (e.g. SNOMED CT, WHO ICD-11, WHO ICHI, ...);
complications;
mortality;
readmissions;
infections;
adverse events;
waiting times;
staffing;
PREMs and PROMs;
discharge information;
financial and cost-accounting data.

Quality adjustment may depend on whether reporting is:

complete;
timely;
accurate;
internally consistent;
submitted in the prescribed format;
capable of validation;
corrected when errors are identified.

d.8.1 Structure and content

Structural compliance concerns whether the data satisfy technical specifications, such as:

required data fields;
coding standards;
file format;
XML schema;
date and identifier formats;
interoperability requirements;
secure transmission protocols.

Content compliance concerns whether the submitted information is clinically and factually complete and accurate.

A file may be structurally valid but substantively wrong. For example, it may follow the XML schema while omitting a clinically important diagnosis. Both dimensions must therefore be assessed.

4.6 Part VI: Outlier payments and exceptional technologies

The Act should require both clinical and financial criteria for outlier status. A marginal payment should apply only above a published threshold and should reimburse less than the full excess cost unless full reimbursement is specifically justified. This preserves an efficiency incentive while protecting hospitals from catastrophic losses.

Supplementary payment for high-cost technologies should require evidence of clinical effectiveness, material budget impact and inadequate recognition in existing weights. Approval should be time-limited and reviewed when sufficient cost data become available. Procurement savings should be shared appropriately with the payer rather than automatically increasing provider margins.

4.7 Part VII: Activity controls and blended payment

DRG payment should operate within a prospective national and institutional expenditure framework.

The Act should authorize:

agreed activity corridors;
tapering of payment above defined thresholds;
additional authorization for unplanned elective growth;
reconciliation against a global budget;
episode rules preventing case splitting; and
special treatment of epidemics and other extraordinary events.

Emergency and legally mandated activity should be protected. Where a volume limit is reached, the public or private purchaser must determine whether demand reflects avoidable practice, inadequate capacity elsewhere or genuine unmet need. Limits should not silently convert into denial of clinically necessary care.

4.8 Part VIII: Quality, safety, access and value-based adjustment

The law should distinguish three levels of quality regulation.

First, mandatory standards should establish the minimum lawful level of care. Breach triggers regulatory action and cannot be offset by financial bonuses elsewhere.
Second, quality gates should make a defined portion of payment conditional on complete data submission and absence of serious unresolved safety violations.
Third, performance adjustments may reward improvement or attainment on validated indicators. Indicators should cover outcomes, complications, readmissions, patient experience, continuity, access and equity. They should be risk-adjusted where appropriate and reported with confidence intervals or other measures of statistical reliability.

No financial penalty should be based exclusively on raw mortality or readmission rates. The methodology should account for case mix, transfers, palliative care and data completeness. Hospitals must be able to inspect and challenge the data before a financial consequence becomes final.

Quality results should be published in an accessible form, but public reporting should avoid misleading league tables and protect confidentiality. Indicators should be understandable and clinically stratified to identify unequal outcomes, provided that group sizes and disclosure controls prevent re-identification.

Ranking organizations or public services into rigid "league tables" often leads to unintended consequences and a misunderstanding of the underlying data.

Relative vs. Absolute Metrics: League tables measure performance relative to peers rather than against absolute, objective standards. An organization might rank in the "bottom tier" of a table while still performing well overall, or sit near the top while universally missing core performance targets.
Data Validity: Different metrics are frequently gathered on varied cycles, resulting in composite scores that combine outdated and current data. Small changes in calculation methodology or minor errors in classification can cause drastic, inaccurate shifts in an entity's rank.
Perverse Incentives: When league tables are used primarily to "name and shame," it can decrease professional morale and prompt organizations to manipulate data to preserve their ranking.

University hospitals (academic medical centers) and third-level (tertiary) hospitals represent the highest tiers of medical care. They are centers of last resort where doctors handle rare conditions, complex surgeries, and specialized treatments. These hospitals should not be punished for having to treat more severe cases (compare apples with apples and oranges with oranges).

Note: A quality gate is a minimum condition that a hospital must satisfy before it can receive all, or a specified part, of its DRG payment. It operates as a threshold rather than as a general performance score. The question is not whether the hospital performed better than another hospital, but whether it met a basic clinically relevant predefined requirement.

4.9 Part IX: Public-service obligations and targeted support

Separate payments should finance obligations not adequately captured by ordinary case tariffs, including:

emergency and disaster readiness;
essential low-volume services;
access in remote or underserved areas;
teaching and accredited training;
approved research infrastructure;
trauma, burn or other specialized networks;
infectious-disease reserve capacity; and
additional functions required when serving vulnerable populations.

Each payment should be supported by an entrustment act or equivalent legal instrument stating the obligation, provider, territory, duration, performance requirements, compensation parameters and method for recovering overcompensation. Separate accounts or analytical cost allocation should be required where the hospital undertakes both compensated public-service and ordinary commercial activities. This structure is consistent with the current EU SGEI (Services of General Economic Interest) framework for hospitals (European Commission, 2025).

Note: Specialized (hybrid) civilian and military clinical networks (trauma, burn) are fundamentally necessary to handle Seveso and CBRNe (chemical, biological, radiological, nuclear, explosives) incidents. Because these disasters cause multifaceted chemical, thermal, and mechanical injuries, standard emergency departments can rapidly be overwhelmed without the backup, regional triage, and specialized infrastructure of dedicated disaster networks.

4.10 Part X: Data governance under the GDPR and EHDS

The statute should distinguish three legally different uses of DRG data.

Operational use includes classification, payment, audit, quality assurance and correction of claims. It should be governed by the national health-financing statute and the GDPR.

System-management use includes planning, tariff calibration and evaluation by authorized public bodies. The statute should identify the purposes and establish role-based access, pseudonymization and disclosure controls.

Secondary use includes broader research, official statistics, policy development and innovation beyond the immediate administration of a claim. This use must comply with the applicable GDPR provisions and, as its relevant provisions become applicable, the European Health Data Space.

Regulation (EU) 2025/327 establishing the EHDS entered into force in March 2025, but its substantive application is phased. Most of the general framework applies from 26 March 2027, while much of the secondary-use regime applies from 26 March 2029. National legislation adopted before those dates should therefore be designed for future interoperability without incorrectly treating every operational payment transaction as an EHDS secondary-use application (European Parliament & Council of the European Union, 2025).

The EHDS permits defined secondary uses including public-health activities, policy and regulatory work, official statistics, scientific research and improvement of health-care delivery. It prohibits uses including detrimental decisions against individuals, certain employment and insurance decisions, advertising and activities harmful to persons or society. Once applicable, access to relevant patient-level DRG datasets for secondary purposes should proceed through the competent Health Data Access Body and, where required, a secure processing environment. Only authorized users should obtain access, activity should be logged and outputs should be subject to anonymization controls (European Parliament & Council of the European Union, 2025, arts. 53–55 and 73).

The national statute should consequently provide for:

explicit designation of controllers and, where applicable, joint controllers;
purpose-specific access rights;
data minimization and role-based access;
encryption and pseudonymization;
immutable access and amendment logs;
retention periods proportionate to payment, audit and limitation requirements;
procedures for exercising data-subject rights;
mandatory breach-management procedures;
periodic security testing;
data-protection impact assessments;
consultation with the national supervisory authority where required;
anonymization of public reports; and
a prohibition on using DRG information for unrelated commercial profiling or detrimental decisions.

Research and statistical processing should apply the safeguards required by Article 89 GDPR, including pseudonymization or anonymization where the purpose can be fulfilled in that manner (European Parliament & Council of the European Union, 2016).

4.11 Part XI: Auditing, recovery and sanctions

The audit regime should combine:

automated pre-payment validation;
random post-payment audit;
risk-based audit using documented indicators;
clinical review by appropriately qualified professionals;
horizontal review of anomalous provider patterns; and
periodic external evaluation of audit effectiveness.

The authority should be empowered to request relevant records, interview responsible staff, recalculate classifications and recover overpayments with interest. Audit access should be limited to information necessary for the stated purpose, and auditors should be bound by confidentiality and security duties.

The Act should establish a graduated enforcement ladder:

correction and education for isolated minor errors;
repayment for unsupported payment;
enhanced monitoring for recurrent non-compliance;
administrative penalties for negligent or reckless conduct;
aggravated penalties for concealment, falsification or obstruction;
temporary payment suspension or contractual exclusion for serious systemic violations; and
criminal referral where legally defined fraud is suspected.

The authority should publish aggregate audit findings and recurring error patterns. Whistle-blowers and staff reporting patient-safety or coding concerns should receive protection against retaliation.

4.12 Part XII: Administrative procedure, appeals and remedies

Hospitals should receive reasoned decisions specifying the facts, legal basis, calculation and available remedies. They should have access to the evidence necessary to contest a reassignment or sanction, subject to protection of confidential information and audit methods.

The framework should provide:

an informal correction procedure for clerical matters;
formal administrative reconsideration;
independent specialist appeal;
judicial review;
provisional payment where withholding the entire amount would threaten continuity of essential services; and
authority to award interest where payment was unlawfully delayed.

Patients should have a separate complaint route for inaccurate records, discriminatory selection, unsafe discharge or denial of care. A financial appeal by a hospital must not extinguish patient rights or prevent clinical regulators from acting.

4.13 Part XIII: Transparency, consultation and review

The competent authorities should publish:

the DRG catalogue and grouper version;
relative weights and base rates;
adjustment and outlier formulas;
quality measures and risk models;
coding guidance;
audit standards;
aggregate payment and activity data;
distributional and equality impact assessments;
decisions of general interpretative importance; and
annual evaluations of expenditure, quality, access and integrity.

Draft material changes should undergo public consultation. A technical amendment should normally be announced before the payment year in which it takes effect. Retrospective reductions should be exceptional and limited to correction of unlawfulness, manifest error or fraud.

The Act should require an independent comprehensive review at least every three to five years. Review criteria should include technical efficiency, aggregate expenditure, financial sustainability, waiting times, service availability, mortality, readmission, patient experience, health inequalities, coding burden, audit yield and effects on different hospital types.

4.14 Part XIV: Transitional implementation

A DRG system should not move directly from legislative enactment to full financial risk. Implementation should include:

standardized clinical documentation and coding training/certification (e.g. AHIMA standards);
certification of information systems and grouping software;
shadow billing without financial consequences;
validation of cost weights and data quality;
phased transfer of financial risk;
temporary budget corridors;
independent evaluation; and
correction before nationwide consolidation.

Transition rules should protect essential services but should not permanently preserve historical allocations. Temporary adjustments should contain expiry dates and explicit criteria for renewal.

Note: Temporary budget corridors are transitional limits around a hospital’s expected annual revenue or expenditure when a new DRG system is introduced or substantially revised. They prevent a hospital’s funding from changing too sharply in a single year while tariffs, coding practices, case-mix data, and cost weights are still being stabilized.

5. Integration of the framework

The components above should operate as a single regulatory system. Coding standards without outlier protection may merely shift gaming toward patient selection. Risk adjustment without quality monitoring may reward documentation intensity rather than better care. Quality penalties without adequate case-mix adjustment may punish hospitals serving vulnerable populations. Public-service grants without transparent entrustment and cost accounting may produce overcompensation. Extensive data collection without clear statutory purposes may violate the GDPR even when motivated by legitimate fiscal concerns.

The coherent solution is therefore a conditional payment entitlement. A hospital is paid for an eligible case when four conditions are satisfied:

the patient was lawfully admitted and received clinically appropriate covered care;
the case was classified using accurate, sufficiently documented information;
the hospital complied with applicable access, quality, safety and continuity obligations; and
the claim was processed under lawful, secure and accountable data-governance arrangements.

The amount should reflect ordinary efficient cost, patient complexity and exceptional resource use. Costs arising from separately entrusted public functions should be financed through distinct mechanisms. Total expenditure should be managed through prospective budgets and activity corridors. Quality and equity should be treated as binding constraints on efficiency, not as optional objectives.

6. Conclusion

DRG financing can make hospital activity and resource use more transparent and can encourage acute hospitals to reduce unnecessary inputs and length of stay. Its principal weakness is that the same prospective-payment incentive that rewards efficiency can also reward coding manipulation, selection of favourable patients, unnecessary admissions, premature discharge and underprovision. These are not accidental implementation problems; they are foreseeable responses to the economic structure of case-based payment.

An effective legal framework must therefore regulate the entire purchasing relationship. It should establish uniform classification and coding rules, independent cost-based tariff setting, regular recalibration, risk adjustment, outlier protection, volume controls, public-service compensation, quality conditions, equitable-access duties, robust audit powers, proportionate sanctions, transparent governance and effective appeal. DRG payment should remain part of a blended financing system rather than becoming the exclusive source of hospital revenue.

Within the European Union (EU), such legislation should give concrete effect to universality, solidarity, equity and access to good-quality care while respecting Member State competence over health-system organization. Its data provisions should be founded on the GDPR’s principles of legality, minimization, security and accountability and should distinguish operational payment administration from secondary data use under the phased EHDS framework.

The governing legal proposition may be stated succinctly: public purchasers may use DRG financing to reward efficient treatment, but only within a system that protects clinical need, patient rights, quality, equitable access and responsible stewardship of health data. Cost efficiency is legally and ethically defensible only when it serves, rather than displaces, the fundamental objectives of the health system.

Cost efficiency in health care must support but not compromise fundamental system objectives like equity, quality of care, and universal coverage. The World Health Organization emphasizes that while maximizing value for money is essential for sustainable health systems, efficiency measures should improve population health outcomes rather than act simply as cost-cutting exercises (Wilson, 2023).

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