State-run think tank Philippine Institute for Development Studies (PIDS) has urged the government to push for state health insurer Philippine Health Insurance Corp.’s (PhilHealth) shift to a diagnosis-related groups (DRG) payment model—a reform aimed at providing fair hospital compensation while safeguarding patients from high out-of-pocket costs.

“This proposed reform is designed to ensure that hospitals receive fair compensation, and patients are protected from excessive out-of-pocket expenses,” PIDS said in a statement on Monday, Nov. 10.

In its latest study, PIDS reported that PhilHealth’s “all case rates” (ACR) system—implemented in 2013 to standardize hospital reimbursements—has not kept pace with the actual costs of healthcare services.

The think tank recommended that PhilHealth shift to a DRG payment model—an evidence-based system that groups patients by diagnosis, severity, and resource needs to ensure reimbursements reflect the true cost and complexity of care.

“Payments based on DRGs are more realistic, offering better financial coverage for both providers and patients,” the think tank added.

Under the proposed shift, PIDS emphasized that hospitals would receive prospective payments based on expected service volume and performance through a global budget system, as mandated by the Universal Health Care (UHC) Law. This would allow hospitals to access their share of the health budget at the start of the fiscal year, rather than waiting months for reimbursements.

“Rather than being paid after every individual claim is submitted, hospitals can use the prospective payment to budget for the period and smooth the purchase of inputs,” it added.

The think tank underscored that, if properly implemented, the DRG and global budget system could improve incentive alignment, encourage efficiency, and enhance transparency—particularly when paired with regular cost reviews and stronger data reporting.

PIDS also stressed that, “Resolving the underlying design issues of the payment system requires reform to the entire provider payment mechanism as mandated by the UHC Law.”

The think tank warned that one-time rate increases cannot fix the system’s fundamental flaws. Despite a ₱600-billion reserve fund in 2024 and a recent 30-percent across-the-board hike, PhilHealth has yet to carry out systematic updates to its payment structure.

Meanwhile, PIDS pointed out that under the ACR system, PhilHealth provides hospitals with a fixed payment for each illness or procedure, regardless of the patient’s condition or severity. It noted that out of 8,869 case rates, 99.9 percent have remained unchanged since the system’s introduction in 2013.

It added that from 2014 to 2023, hospital inpatient costs grew by an average of 3.4 percent annually, causing the real value of PhilHealth’s stagnant case rates to fall by roughly 40 percent over the past decade.

“While PhilHealth’s nominal reimbursement has remained the same, its real peso value has declined, and hospital charges have continued to rise,” the think tank said.

PIDS added that the case rate for normal childbirth has stayed at ₱6,500 for years, but inflation has reduced its real value to just around ₱3,900 in 2023—far below the actual cost hospitals incur for the service.

The think tank stressed that hospitals are finding it difficult to keep up with rising expenses while maintaining service quality—especially in public and provincial facilities that cater to most low-income Filipinos.

It added that 98.8 percent of hospital claims now surpass PhilHealth’s case rates, forcing hospitals to operate at a loss and patients to cover the remaining costs. Out-of-pocket expenses still account for about 44 percent of total health spending, underscoring the continued financial vulnerability of Filipinos despite having insurance.

PIDS further noted that the ACR’s single-rate system overlooks variations in case severity and comorbidities, adding that PhilHealth’s bundled payment approach fails to capture the diverse conditions and costs patients incur.

“Bundling must be fair and appropriate so that it accounts for the costs of a wide range of complexities in health care: patients with more severe presentations or comorbidities may require more resources, even with the same disease,” the think tank explained.

“When case rates do not consider clinical complexity, healthcare providers may face financial risk and incur losses while delivering the full range of services needed to treat complicated patient cases,” PIDS added.

Under the current system, PhilHealth covers only up to two case rates per patient, with the second diagnosis or procedure reimbursed at just 50 percent of the rate. PIDS warned that this setup penalizes hospitals treating patients with complex or multiple conditions, effectively passing the financial burden onto those already facing health challenges.

The think tank added that hospitals also face slow reimbursements. In 2023, straightforward claims took 87 days, while corrected claims averaged 221 days. With preparation and processing delays, smaller hospitals risk cash flow problems and financial strain.

(Ricardo M. Austria)