In the Philippines, out-of-pocket or direct payments made by patients have persistently accounted for nearly half of the country’s health spending, indicating the financial burden experienced in accessing care. Since 2013, PhilHealth has paid accredited public and private providers for inpatient services using a case-based payment scheme called “All Case Rates” (ACR), which establishes a fixed case rate for the costs of treating a disease or procedure. Recognizing the limitations of ACR, PhilHealth was mandated to shift to a prospective payment system based on Diagnosis-Related Groups (DRG) for inpatient cases.
Under DRG, patients are classified into groups based on demographic information, clinical presentations, and all procedures performed during their stay. Each DRG has an associated average payment amount that corresponds to the resources used to treat patients, depending on case complexity. Through a literature review and thematic analysis, the Philippine ACR was analyzed across six characteristics of provider payment systems: (1) sufficiency of payment rates, (2) bundling of services, (3) payment schedules, (4) performance measurement, (5) transparent adjustments, and (6) accountability mechanisms. The design and features of DRGs are also discussed by presenting how other countries navigated their transitions and highlighting lessons learned for Philippine implementation. This was supplemented by conducting quantitative analyses of available PhilHealth claims and financial data from 2024. As a result, the data used in the study is only up to 2023. The use of data from this period aligns with the study's goal to provide PhilHealth with a baseline on the features of ACR that could be improved by a DRG system.
Three structural and design features of ACR were found to lead to inadequate and unresponsive payment rates: (1) The flat case rate per disease or procedure does not realistically reflect the services required to treat patients with varying clinical complexities, (2) Payment rates are not linked to hospitals’ organizational service utilization or performance in delivering quality healthcare, and (3) ACR lacks mechanisms for systematically updating payment rates, and opaque adjustment processes erode public trust in PhilHealth policies and reforms. Consequently, costs exceeding ACR payments are passed onto patients with comorbidities and severe illnesses—disproportionately affecting the poor, elderly, and those in conflict-affected areas.
DRGs have the potential to transform the health financing system toward achieving universal healthcare goals. DRG-based payments account for the complexity of treatment and resource use associated with patients’ clinical and sociodemographic characteristics. Coupled with a prospective global budget (spending target) based on facility case mix and patient volume, PhilHealth payments can incentivize the efficient and quality delivery of healthcare services. Updates or adjustments to the DRG classification scheme and payment rates are based on clear clinical criteria. Therefore, DRGs can provide PhilHealth with an opportunity to engage with different stakeholders and transparently report progress toward providing Filipinos with financial risk protection. The experiences of countries with advanced DRG systems demonstrate that successful adoption is not limited to developing technical capacity, such as the information technology needed to routinely collect hospital data, update the grouping software, and adjust payment rates. PhilHealth must implement adaptive solutions, such as emphasizing the importance of value-based care to providers and establishing a governance model to institutionalize DRGs. This will involve close collaboration with the Department of Health, an arms-length agency functioning as a case mix center, as well as engagement with providers, patient-interest groups, and the general public.
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