On 11 August 2025, the National Healthcare Security Administration (“NHSA”) of the People’s Republic of China (“PRC”) released the Interim Measures for Disease-based Payment Management under Healthcare Security (“Measures”) with immediate effect. The Measures consolidated the pilot experience on health security reform of the past three years and aim to advance a diversified composite healthcare security payment system featuring Diagnosis Related Group (“DRG”) and Diagnosis Intervention Packet (“DIP”) payment mechanisms.
1. DRG/DIP Reform
China is transitioning from the traditional fee-for-service (“FFS”) model to a more sustainable, case-based payment system, primarily through the implementation of DRG and DIP mechanisms. The FFS model, which reimburses hospitals for each service provided, has led to misaligned incentives, such as over-prescribing expensive drugs and services, resulting in a dramatic increase in healthcare security costs. To deal with this issue, the NHSA launched pilot programs for DRG in 2019 and DIP in 2021, aiming to create a diversified, composite healthcare payment system to ensure the sustainability of healthcare security.
The DRG pilot is a case-based prospective payment system. Under DRG, patients are classified into diagnosis-related groups based on diagnosis, treatment, and patient characteristics. A fixed, pre-determined payment rate is set for each group, meaning healthcare security funds will reimburse the same amount for every patient discharged within the same group. In contrast, DIP is an alternative case-based payment model which also takes into account the treatment measures. While the relative weight (points) of each DIP group is fixed, the monetary value per point floats. It is calculated by dividing the region’s pre-determined annual budget by the total points accrued from all inpatient cases within that region. Therefore, the final reimbursement is not fixed in advance but depends on the overall service volume and the range and severity of diseases treated by all hospitals in the region.
Following the pilot programs in some cities, in November 2021, the NHSA promulgated the “Three-Year Action Plan for DRG/DIP Payment Reform,” to scale up the twin payment mechanisms to the entire country by the end of 2025. So far, according to NHSA (国家医保局：按病种付费基本实现全覆盖-新华网), among the 393 pooled areas, 191 have implemented DRG mechanism and 200 have adopted DIP mechanism. This has led to full coverage of pooled areas and qualified medical institutions, with a 95% coverage rate for diseases and an 80% coverage rate for healthcare security funds.
2. Key Takeaways of Measures
The recent Measures issued by the NHSA consolidate these pilot experiences and introduce a more systematic approach to managing and promoting the new payment models.
(a) Budget Control
The Measures outline the principle to manage the budget of healthcare security funds, emphasizing financial discipline and sustainability. Healthcare security authorities must adhere to strict budgetary principles, and local authorities must strictly follow their budgets. Any adjustments to the total payment amount will only be permitted under specific circumstances, such as changes in fund revenue, a rise in patient numbers, or during major public health emergencies. The overarching goal is to ensure the efficient use of healthcare security funds while protecting the interests of both healthcare providers and patients.
(b) Case-based Grouping
The Measures provide for a national grouping framework. The NHSA is responsible for creating and updating the national standards for both DRG and DIP payments by using real-world medical data and clinical evidence to develop a comprehensive system that can be implemented nationwide. While provinces and local areas will adapt these grouping guidelines, they must remain consistent with the national core framework.
Specifically, according to the Measures, the DRG classifies cases into “diagnosis groups” based on a patient’s anatomical site and the nature of the disease. It further divides these groups into “core groups” and “sub-groups”, allowing for more precise payment calculations. With respect to DIP, this model operates on a “core disease” and “general disease” differentiation approach. It uses a threshold for the number of cases to determine which disease combinations are considered “core”, serving as the primary basis for payment settlements.
The NHSA will regularly update the national grouping guidelines, with a planned review every two years.
Although national standards provide for the underlying principles, local authorities have the flexibility to adapt them to their specific needs.
(c) Technical Standards of DRG/DIP
The Measures establish a mechanism for managing and adjusting weights (values assigned to each disease group), rates (the price per value point), and adjustment coefficients. In principle, the payment for each case is the multiply of weight and rate.
Local authorities can choose from three methods to set rates, including (1) a fixed-rate that remains constant over a period, (2) a floating-rate by which an initial rate will be set and be adjusted based on actual annual costs and total weights, or (3) a hybrid “elastic” rate that combines both. This flexibility allows for a better fit with a region’s specific budget, disease severity, medical consumption and value of medical labor.
(d) Special Case Negotiation
While DRG/DIP aims to control costs by providing fixed payments for specific conditions, there are still room for the “special cases”. Hospitals can submit cases for special review if they involve extended stays, high resource consumption, new technologies, or are complex and require multi-disciplinary care. The number of these cases is capped at 5% of DRG discharges and 5‰ of DIP discharges in a region. Healthcare security authorities are responsible for managing the review process.
As we can see from the rate figures of 5% and 5‰ respectively, such “special cases” are highly exceptional and not the main trend.
(e) Settlement
The Measures strengthen the management of prepayments to healthcare providers, with the goal of providing funds about a month in advance. The Measures also mandate monthly settlements and push for instant payments to significantly reduce the time it takes for hospitals to receive funds, easing their cash flow pressures. Local authorities shall expedite the annual financial reconciliation process with hospitals and strengthen the performance reviews of healthcare providers. Finally, the Measures incentivize hospitals that provide good quality of healthcare services while controlling costs by allowing them to keep any surplus funds from their payments received.
3. Conclusion
The new Measures mark a significant step toward a systematic and transparent nationwide DRG and DIP payment system. Hospitals are pushed by such new policies to standardize and streamline their diagnosis and treatment processes, and to reduce medical costs to control the budget. For the pharmaceutical industry, this newly adopted healthcare payment mechanism, alongside policies like Volume-based Procurement, presents both challenges and opportunities. While these policies do not directly affect pharmaceutical and medical device companies, the pressure on hospitals to reduce costs will impact their purchasing decisions. Consequently, hospitals will likely favor drugs and medical devices that offer greater cost-effectiveness and demonstrate a high value proposition. Relevant pharmaceutical and medical device companies may therefore need to consider expanding the out-of-hospital market for their affected products. However, DRG and DIP payment system also bring opportunities. Companies with products that can reduce overall medical costs, for example, by shortening hospital stays, reducing caregiving needs, or lowering recurrence rates, or improve healthcare efficiency, may gain a significant market advantage under the DRG and DIP payment system. Furthermore, the special case negotiation mechanism provides a pathway for innovative therapies. For new drugs and medical devices with truly irreplaceable clinical value or a significant ability to alter the course of a disease, hospitals are less likely to be deterred by cost concerns, leaving room for pharmaceutical and medical device companies to keep developing innovative products.
