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Petitioners' system of billing, typical of most hospitals,
has evolved over time in conformity with the reimbursement
practices and procedures of private insurance companies as well
as Medicare and Medicaid, and in conformity with State laws and
regulations. During the beginning of the 20th century, hospitals
typically charged for their services on a per-case or per diem
basis. Subsequently, with the advent of the private health
insurance industry, particularly Blue Cross/Blue Shield
organizations, pressure was placed on hospitals to develop a
charging structure which would enable the insurer to measure the
degree of service furnished to each patient so that the insurer
company could assure itself that it was not subsidizing the cost
of care furnished to other patients. Consequently, insurance
companies required hospitals to detail charges and to bill for
services on a departmental basis.
Until 1983, Medicare and Medicaid paid hospitals based on
the cost of services as computed under a formula using the
detailed charges listed by the hospitals. Effective with
Medicare cost reporting periods beginning on and after October 1,
1983, however, Medicare began to phase in, over a 3-year
transition period, its system of paying hospitals for inpatient
services on the basis of diagnostic related groups (DRG’s).
Under that system, hospitals are paid a flat amount for a
particular procedure, such as a gall bladder operation,
regardless of the precise course of treatment administered to the
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