CMS introduced Diagnosis-Related Groups (DRGs) in the early 1980s with the promise of bending the proverbial healthcare cost curve. It was the start of a prospective payment system aimed at ending the ‘usual and customary’ retrospective reimbursement system. Under this new model hospitals were paid a flat rate for treating a patient with a given diagnosis, regardless of the length of stay or actual resource use. The logic was straightforward: fixed payments would discourage overutilization, drive hospitals to become more efficient, and control spending.

DRGs and the communication surrounding their introduction were silent on the role of accountability or linking payment to outcomes that matter. Forty years later, the evidence is clear: DRGs have not delivered on their promise. Instead, they have distorted provider behavior, entrenched inefficiencies, and failed to improve patient outcomes. For business leaders, insurers, and policymakers seeking sustainable healthcare models, it is time to move beyond DRGs and embrace a new framework that aligns payment with value, outcomes, and integrated care.