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A Model for Allocating Budgets in a Closed System Which Simultaneously Computes DRG Allocation Weights

Author

Listed:
  • Max A. Woodbury

    (Duke University, Durham, North Carolina)

  • Kenneth G. Manton

    (Duke University, Durham, North Carolina)

  • James C. Vertrees

    (SOLON Consulting Group, Ltd., Silver Spring, Maryland)

Abstract

This paper presents a quadratic programming model for allocating a global budget to individual hospitals. In the model, allocation weights are estimated for Diagnosis Related Groups (DRGs) which reflect the average historical costs of treating an additional case in each of nine DRG systems. The model is illustrated using data from the Department of Defense (DoD). Allocated budgets and DoD specific DRG marginal cost weights are estimated using information on three factors; the facility designated functions in the military health care system; hospital output; and sets of price structures used in other systems. The model's weights are used to allocate the DoD's global budget to its treatment facilities under constraints. The model minimizes the difference (in a least squares sense) between the facilities' current budgets and their computed budgets, while constraints are designed to produce budgets representing differences in the type and volume of patients and to preserve certain specialized institutional capabilities.

Suggested Citation

  • Max A. Woodbury & Kenneth G. Manton & James C. Vertrees, 1993. "A Model for Allocating Budgets in a Closed System Which Simultaneously Computes DRG Allocation Weights," Operations Research, INFORMS, vol. 41(2), pages 298-309, April.
    • Handle: RePEc:inm:oropre:v:41:y:1993:i:2:p:298-309
    DOI: 10.1287/opre.41.2.298
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    Cited by:

    1. Peter Williams & Guangfu Tai & Yiming Lei, 2010. "Simulation based analysis of patient arrival to health care systems and evaluation of an operations improvement scheme," Annals of Operations Research, Springer, vol. 178(1), pages 263-279, July.
    2. Fainman, Emily Zhu & Kucukyazici, Beste, 2020. "Design of financial incentives and payment schemes in healthcare systems: A review," Socio-Economic Planning Sciences, Elsevier, vol. 72(C).

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