Impact of DRG payment reform on revenue and expenditure structure of public hospitals in China: evidence from difference-in-differences analysis

TL;DR

A study in China found that DRG payment reform improved hospital efficiency by shifting revenue and expenditure toward medical services and personnel.

Contribution

This paper provides empirical evidence on how DRG payment reform alters hospital financial structures and resource allocation efficiency in China.

Findings

DRG hospitals increased medical service revenue while decreasing drug and material revenue shares.

Personnel expenditure rose, and drug expenditure fell, indicating a shift in cost structure.

Revenue-to-cost ratios and per capita efficiency improved, showing better resource allocation.

Abstract

Diagnosis-related group (DRG) payment reform has been widely promoted in China to curb the rapid growth of health expenditure, but its effects on the revenue and expenditure structure and resource allocation efficiency of public hospitals remain unclear.

This study used panel data from 48 tertiary public hospitals in China from 2017 to 2023 and applied a quasi-experimental design combining propensity score matching and a difference-in-differences approach to compare hospitals implementing DRG payment reform with non-DRG hospitals.

We examined changes in the composition of hospital revenues and expenditures, concentration indices of income and costs, and efficiency indicators such as the revenue-to-cost ratio and per capita revenue efficiency. Among DRG-paying hospitals, the share of medical service revenue increased from 42.6% to 48.9%, while the shares of drug and material revenue decreased from 29.1 to 24.3% and from 22.8% to 20.4%, respectively; personnel expenditure rose from 35.2% to 39.8%, whereas drug expenditure declined from 28.5% to 23.7%. The income concentration index increased from 0.342 to 0.428 and the expenditure concentration index from 0.356 to 0.441, indicating reduced cross-hospital variability and greater standardization of revenue and expenditure patterns. The revenue-to-cost ratio improved from 1.082 to 1.136, and per capita revenue efficiency increased by 11.0%, suggesting a significant enhancement in hospital resource allocation efficiency.

DRG payment reform has optimized the revenue and expenditure structure of Chinese tertiary public hospitals, reduced dependence on drugs and materials, strengthened incentives for investment in human resources, and supported the shift from scale expansion to quality- and efficiency-oriented development.

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