China’s Hospital Payment Rules May Shortchange Sick Children, Study of 289,000 Cases Finds

When governments pay hospitals a fixed price for each category of illness, the entire system rests on a quiet statistical assumption: that patients sorted into the same category genuinely cost the same to treat. A new study of nearly 289,000 pediatric hospital stays in China suggests that, for children, that assumption is breaking down in ways that could distort both hospital finances and the care that young patients receive. The research, published in BMC Pediatrics by a team from Beijing Children’s Hospital, Capital Medical University, examined inpatient encounters enrolled in China’s Diagnosis-Related Group, or DRG, payment system in Chengdu and Hangzhou during the first half of 2025, and found that costs within pediatric groups are far from uniform.

The DRG model is now the dominant logic of hospital payment worldwide. Rather than reimbursing hospitals item by item for every drug, test, and bed-day, the payer assigns each admission to a group of clinically similar cases expected to consume similar resources, and pays a fixed sum per group. The design rewards efficiency: a hospital that treats a case for less than the group payment keeps the difference, while one that runs over absorbs the loss. But the mechanism only works fairly when the grouping is well calibrated. If a group lumps together cases with wildly different true costs, hospitals treating the expensive end of the distribution are systematically underpaid, and the payment standard itself becomes a hidden subsidy or penalty depending on which patients walk through the door.

The Chinese researchers set out to test precisely this property, which they call cost homogeneity, in the pediatric context. Their data came from the National Healthcare Security Administration and covered 289,026 pediatric inpatient encounters from January to June 2025. The team compared medical costs across adjacent diagnosis-related groups, the intermediate categories that sit beneath the final payment groups, and looked specifically at whether children with common diseases and children with idiopathic diseases, conditions whose origins are poorly understood and whose treatment pathways are often less predictable, generated comparable expenses within the same group.

The headline finding is a consistent gradient tied to hospital tier. Three adjacent diagnosis-related groups, labeled ES3, DT1, and EX2, all showed the same pattern: the higher the level of the hospital, the higher the average hospitalization expense for each subgroup. In other words, a child treated at a top-tier tertiary children’s hospital typically cost more to treat than a child with the same grouped diagnosis at a lower-level facility. That might sound unsurprising, since referral systems channel the sickest children upward, but it collides directly with the way China’s DRG payment standards are currently set. Under the prevailing arrangement, the payment for the same DRG group is uniform across hospitals of different tiers, with no adjustment for the variations in treatment costs that different levels of hospital actually incur.

The mismatch matters because the DRG framework in use was largely built around adult medicine. The authors argue that the existing grouping for pediatric cases needs to fully account for the unique characteristics of pediatric diseases rather than merely relying on a unified framework shared with adult patients. Children are not small adults, statistically or clinically. Their conditions evolve rapidly, diagnostic workups differ, length of stay patterns diverge, and rare or poorly understood disorders cluster in specialist children’s hospitals, which sit at the top of the hospital hierarchy and therefore at the expensive end of every tier-based gradient the study detected.

Two conditions crystallized the problem. The average hospitalization costs for Kawasaki disease, an inflammatory illness of young children that affects the blood vessels and is a leading cause of acquired heart disease in children worldwide, were significantly higher than those of the adjacent diagnosis-related group to which such cases were assigned, a difference the researchers report as statistically significant. The same held true for anorectal malformation complicated with rectal malformation, a congenital surgical condition requiring complex operative repair and often prolonged postoperative care. Both are exactly the kinds of cases that concentrate at national children’s centers, and both are exactly the kinds of cases a flat payment rate punishes.

The technical vocabulary of the paper deserves unpacking, because it explains why the findings are more than a bureaucratic complaint. The authors evaluated dispersion using measures such as the coefficient of variation, the ratio of the standard deviation to the mean, which expresses how spread out costs are relative to their average. A well-designed DRG group should show low within-group variation and clear between-group variation: patients in the same group should cost about the same, and patients in different groups should differ. When a group’s coefficient of variation is high, the fixed payment attached to it is essentially a lottery ticket, and the hospitals drawing the costly tickets lose money on cases they cannot refuse. The study’s evidence that idiopathic pediatric conditions and complex surgical anomalies inflate costs within their assigned groups is direct evidence that some pediatric groups fail this homogeneity test.

Why does this matter beyond the accounting department? Payment systems shape clinical behavior. If a hospital consistently loses money on Kawasaki disease admissions because the DRG rate was calibrated on a cost distribution that does not reflect tertiary pediatric practice, the institution faces pressure to limit such admissions, transfer complex children elsewhere, or skimp on the intensive workup these conditions demand. Conversely, if the rate is set too generously for the low-cost end of the distribution, lower-tier hospitals are rewarded in ways that may not correspond to quality. The study’s tier gradient suggests that a single national or regional price for a pediatric group cannot simultaneously be fair to a county hospital and to a national children’s center, because the case mix and cost structures at the two levels differ systematically.

The authors’ prescription follows directly from the diagnosis. They conclude that the implementation of DRG payment should take pediatric clinical characteristics into account, and they call for refined grouping adjustments to be performed for disease groups with high cost heterogeneity to improve the adaptability of the DRG system to pediatric cases. In practical terms, that could mean splitting groups whose internal variation is excessive, creating pediatric-specific categories rather than folding children into adult frameworks, and introducing tier-adjusted payment weights that acknowledge the real cost differences the study documented across hospital levels. The research was supported by the National Healthcare Security Administration, the very agency that administers the payment system, which signals institutional interest in getting the calibration right.

The stakes are considerable. China’s DRG-based payment reform is one of the largest health financing experiments in the world, covering hundreds of millions of insured patients, and pediatric care is a domain where the consequences of mispricing fall on some of the most vulnerable people in the system. A study of this scale, nearly three hundred thousand encounters across two major cities with different economic profiles, offers the kind of empirical grounding that payment reform rarely gets before the rules are locked in. Its message is deceptively simple: a payment system is only as good as its statistics, and for children, the statistics currently say the groups do not hold together. Until the grouping is refined, every Kawasaki disease admission and every complex congenital malformation repair quietly tests how much financial strain the system is willing to place on the hospitals that care for the sickest children.

Subject of Research: Cost homogeneity of pediatric inpatient care under China's DRG hospital payment system

Article Title: Evaluation of cost homogeneity among pediatric inpatients under DRG system: a study of inpatient encounters in Chengdu and Hangzhou, China

Article References: Song, F., Na, C., Lv, Y., Zang, Z., & Zhao, C. (2026). Evaluation of cost homogeneity among pediatric inpatients under DRG system: a study of inpatient encounters in Chengdu and Hangzhou, China. BMC Pediatrics. https://doi.org/10.1186/s12887-026-07693-7

Image Credits: AI Generated

DOI: 10.1186/s12887-026-07693-7

Keywords: DRG payment, pediatrics, hospital costs, cost homogeneity, Kawasaki disease, anorectal malformation, China, health policy, hospital tiers, case-mix grouping, healthcare financing, inpatient care