China’s Fixed Hospital Payments Clash With Traditional Medicine, Model Shows a Fix

China’s sweeping overhaul of hospital payment has quietly collided with one of the oldest healing traditions on Earth, and a new study argues that the collision is measurable, quantifiable, and fixable. In research published in BMC Health Services Research, a team from Wuhan University’s Dong Fureng Institute of Economic and Social Development examined how Traditional Chinese Medicine hospitals fare under the Chinese Diagnosis-Related Group system, the fixed-payment scheme known as C-DRG that now governs how much insurers reimburse hospitals for treating individual patients. Their conclusion is stark: the standardized logic of C-DRG systematically disadvantages hospitals whose core treatments are inherently personalized, but a carefully calibrated dynamic compensation model can claw back most of the lost ground without dismantling cost controls.

The C-DRG system belongs to a family of payment reforms that has spread across the globe under the banner of the Diagnosis-Related Group, or DRG, model. The basic idea is deceptively simple. Instead of paying hospitals for every pill, injection, and bed-day they deliver, insurers classify each hospital admission into a disease group and pay a fixed, pre-negotiated amount for that group. Hospitals that treat patients efficiently keep the difference as profit; hospitals that overshoot the expected cost absorb the loss. The approach is designed to curb the notorious incentives of fee-for-service medicine, where more treatment always means more revenue, and to push hospitals toward leaner, more disciplined resource allocation. In principle, it rewards quality and efficiency simultaneously.

But the model was built around the statistical regularities of biomedical, procedure-driven care, and that is precisely where Traditional Chinese Medicine hospitals run into trouble. TCM treatments are famously individualized: two patients with the same Western diagnosis may receive entirely different herbal formulas, external therapies, or acupuncture regimens depending on their perceived pattern of imbalance. Treatment courses can run longer than the standardized lengths of stay embedded in DRG payment groups, and the economic signature of a TCM admission looks nothing like the surgical admissions that dominate the DRG cost database. The result, the researchers note, is a structural mismatch between the personalized nature of TCM practice and the standardized payment requirements of C-DRG, a mismatch that shows up directly in hospital balance sheets.

To measure that mismatch with precision, the team focused on 12 TCM hospitals in a city they designate as W, all of them participating in the C-DRG system. Their methodological centerpiece is a dynamic service weight calibration model built on the entropy weight TOPSIS method, a technique borrowed from multi-criteria decision analysis. TOPSIS, short for Technique for Order Preference by Similarity to an Ideal Solution, ranks entities by their geometric distance to an ideal best case and an ideal worst case across multiple dimensions. The entropy weight component determines how much each dimension should count, weighting criteria by the amount of information they actually carry rather than by subjective judgment. Combined, the two methods allowed the researchers to score the multidimensional adaptability of each hospital to the C-DRG environment, producing a calibrated picture of which institutions were coping and which were sinking.

The cost-structure analysis delivered some of the study’s most revealing findings. When the researchers decomposed hospitalization expenses across the participating hospitals, three categories dominated the financial picture: surgery fees, drug costs, and examination fees were the main drivers of expenditure. By contrast, the fees attached to TCM medicine itself and to TCM technical services, the very services that define these institutions’ identity and clinical mission, exerted far less influence on the cost equation. In other words, the financial anatomy of a TCM hospital admission under C-DRG is shaped overwhelmingly by conventional biomedical inputs, while the traditional therapies that distinguish TCM care contribute little to the revenue calculus and are squeezed hardest when payments are fixed. The study also identifies treatment duration as a persistent friction point, since longer TCM courses of care strain against the expected stays baked into DRG payment standards.

From this empirical foundation, the researchers constructed what they call the TCM participation intensity to payment adjustment to compensation effect mechanism, a causal chain linking how intensively a hospital deploys TCM services to how its payments should be adjusted and what compensation effect follows. They then built a dynamic compensation model grounded in real hospitalization expense data, designed to recalculate payment standards for the disease groups where TCM hospitals hold a genuine clinical advantage. The model’s logic is adaptive rather than static: compensation responds to the measured intensity of TCM participation, so hospitals that lean harder on traditional therapies receive proportionally larger adjustments, while the fixed-payment architecture that disciplines costs remains intact for everything else.

The results, when the model was run against the payment data, were striking. After payment standards were adjusted for the C-DRG groups where TCM hospitals enjoy an advantage, 24 groups that had been continuously profitable remained aligned with their pre-compensation position, meaning the adjustment did not overpay already successful groups. Among the 164 groups that had been operating at a loss, the average loss decreased by 25.83 percent, a substantial correction that would materially change the financial trajectory of the hospitals involved. Most dramatically, 26 groups flipped from loss to profit entirely. The overall compensation compliance rate, a measure of how well the adjusted payments matched the underlying cost reality, reached 89.4 percent, a figure the researchers present as evidence that the model achieves scientific quantification of TCM-specific payment standards rather than crude across-the-board subsidies.

Why does this matter beyond the 12 hospitals in one Chinese city? Because the tension the study documents is not unique to China. Health systems from Germany to Taiwan to the United States have grappled with how fixed-case payments treat specialties whose care is individualized, prolonged, or poorly represented in the cost databases used to set payment weights. When payment systems are calibrated on the average patient and the average procedure, providers serving atypical populations or practicing distinctive clinical traditions absorb hidden losses, and the rational response is to abandon the very services the payment system fails to price. For TCM, which China’s national health policy explicitly promotes, that erosion would be self-defeating. The study’s framework offers a template for pricing traditional and personalized services within a standardized payment architecture, using data-driven weight calibration instead of political negotiation.

The research also carries a methodological lesson for health services science. Rather than treating hospital payment as a binary of fixed rates versus fee-for-service, the Wuhan team treats it as a dynamic system whose parameters can be continuously recalibrated against observed cost structures and profit-loss balances. The entropy weight TOPSIS approach gives administrators a reproducible way to score adaptability across multiple dimensions, and the compensation model converts those scores into concrete payment adjustments with measurable effects. The study was approved by the Ethics Committee of Hubei Provincial Hospital of Traditional Chinese Medicine and relied on retrospective, de-identified administrative inpatient data, with the informed consent requirement waived accordingly. It was supported by a research project from the Hubei Administration of Traditional Chinese Medicine on combining DRG payment with diversified medical payment methods for the dominant diseases of Traditional Chinese Medicine.

The broader takeaway is that cost control and clinical diversity need not be enemies. The C-DRG system’s core promise, optimizing resource allocation while containing expenses, survives contact with Traditional Chinese Medicine, but only if the payment standards themselves learn to recognize where TCM hospitals genuinely differ. A dynamic compensation model that adjusts payments for TCM-advantaged disease groups, the study shows, can cut average losses by more than a quarter, restore profitability to dozens of service lines, and achieve nearly 90 percent compliance, all while leaving the efficiency discipline of fixed payments untouched. For the thousands of TCM hospitals navigating China’s payment reform, and for health economists everywhere watching how standardized payment systems adapt to personalized medicine, the message is that the fix lies not in weakening the system but in making its weights smarter.

Subject of Research: Adaptation of Traditional Chinese Medicine hospitals to the Chinese Diagnosis-Related Group payment system using a dynamic compensation model

Article Title: Optimizing adaptation of TCM hospitals under the C-DRG: a dynamic compensation model analysis

Article References: Zhang, J., Ren, M., & Duan, Z. (2026). Optimizing adaptation of TCM hospitals under the C-DRG: a dynamic compensation model analysis. BMC Health Services Research. https://doi.org/10.1186/s12913-026-15843-x

Image Credits: AI Generated

DOI: 10.1186/s12913-026-15843-x

Keywords: C-DRG payment system, Traditional Chinese Medicine, TCM hospitals, diagnosis-related groups, health economics, entropy weight TOPSIS, dynamic compensation model, hospital management, healthcare cost control, payment reform, health services research, resource allocation