On April 1, 1983, the first patient classification system (PSC) to be used for paying hospitals for the services they provided was adopted by the US Congress. For the first time, a payer – in this case Medicare – had a way of comparing the outputs of one hospital with those of another and a basis for paying hospitals in a standardized fashion for the “products” they produced.
This system, known as Diagnosis-Related Groups, (DRGs) was developed by a team of researchers at Yale University under the direction of Robert Fetter and John Thompson and sparked a revolution in the health care sector in the United States. At a moment in time when there was increasing concern in Congress and elsewhere about the rapid rise of costs in health care, hospitals could no longer justify higher costs simply by asserting their patients were sicker than anyone else's. By classifying patients according to the resource consumption patterns that were typically associated with particular diagnoses, the DRG case-based system promised to introduce both transparency and operational efficiency into a production process that had previously been largely opaque.
The US, however, was not the only country struggling with increasing costs in health care in the 1980s. A number of other countries, particularly in Western Europe, were experiencing similar increases and were in the hunt for solutions.