Beyond DRG: The effect of socio-economic indicators on inpatient resource allocation in Australia

Financing in Australia's public hospital works through the Australian Refined Diagnosis Related Groups (AR-DRGs) with separations to specific DRG groups based on medical diagnosis or surgical procedure, patient's age, mode of separation, clinical complexity and complications. This paper aims at assessing how the AR-DRGs reflect the efficiency and equity of the hospitals resource allocation. Using administrative data of all acute public hospital admissions and length of stay (LOS) as a proxy for hospital costs, this paper showed that patients’ socio-economic (SES) characteristics are a strong determinant of health care utilization. Our results revealed that the lower the SES, the longer the LOS and hence more utilization of the inpatient resources. Therefore, omitting SES from the risk adjusters list and solely focusing on DRG- based compensation penalizes hospitals catering to lower SES populations. Our findings further support the idea of smaller/remote hospitals based on block funding.