The greatest cost in hospitals is the cost of delivering clinical care. While the costs can easily be seen (in the financial system), the services provided to patients are recorded in various clinical systems and paper records.

The divide between 'financial management' and 'clinical service delivery' can be managed to some extent in emergency departments (one department, short length of stay) and outpatient clinics (short visits for specific services). But inpatient departments are much more complex because of the length of stay and the number of hospital services involved in patient care.

Since there is an almost infinite combination of patient variables (e.g. age, gender), primary diagnoses, secondary diagnoses (co-morbidities) and interventions (e.g. surgical or medical procedures), it is very difficult to arrive an indicative cost for a given episode of care because almost every episode of care would be unique.

To solve this costing problem (and bridge the gap between financial management and clinical service delivery), most OECD countries have adopted Diagnostic Related Groups (DRGs). A DRG is a clinically meaningful group of patients that have the same treatment cost.

The following diagram illustrates how DRGs are calculated:

Calculating a Diagnostic Related Groups Code