In the 1980s, Medicare initiated a program of diagnosis-related groups (DRGs) to reduce hospital costs. How did the DRGs reduce hospital costs?

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The DRGs reduced hospital costs by allotting a set amount of hospital days and prospective payment on the basis of the admitting diagnosis. This encouraged hospitals to discharge patients as soon as possible to avoid losing money and also incentivized them to provide efficient and effective care to reduce the number of hospital days needed. This led to a decrease in unnecessary hospitalizations and reduced overall healthcare costs.

In the 1980s, Medicare Initiated a Program of Diagnosis-Related Groups