What is the role of Diagnosis-Related Groups (DRGs) in hospital reimbursement under prospective payment systems?

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In a prospective payment system, DRGs group inpatient cases into categories with similar expected resource use, and hospitals are paid a fixed DRG rate for each admission regardless of actual costs. This shifts financial risk to the hospital and creates incentives to operate efficiently and shorten the length of stay. It also introduces risks like upcoding to secure higher payments and potential under-treatment to stay within the fixed rate.