Korea faces an urgent need to reform the state-run health insurance system as its sustainability is threatened by a rapid increase in health care spending. During the past 10 years, per-capita heath spending has grown at nearly 8 percent a year, about double the nation’s economic growth rate.

One factor driving up health care costs is the fee-for-service payment formula, under which the National Health Insurance Corp. reimburses hospitals for each and every service they provide to their patients.

Ostensibly, this reimbursement method sounds rational. But it has a serious drawback ― it encourages physicians to increase the amount of care per case to maximize revenue.

Physicians usually arrange frequent consultations with their patients, regardless of the severity of their illnesses, as the more frequently they see them, the more revenue they can generate.

Hospitals also seek to offer services outside the insurance benefit basket as they can set the prices of these services as high as they wish. To introduce new services, they spend lavishly on state-of-the-art medical equipment. All these practices contribute to higher health care costs.

To address this problem, the Ministry of Health and Welfare has recently decided to introduce a new reimbursement formula, which classifies patients into “diagnosis-related groups” and sets a benchmark price for each group.

The underlying logic of this approach is that patients within each DRG are clinically similar and are expected to require the same level of care. Hence, a uniform price for all patients in a group, although the exact volume of care offered to each patient may differ to some degree.

This system rewards hospitals that treat a given category of illness at a cost below the benchmark price. To earn a profit, hospitals have to be efficient and stop providing unnecessary treatments to patients.

In fact, Korea introduced a fixed-price system in 2002 for seven disease groups, such as appendectomies, hernia operations, cataract surgery, Caesarean sections and hysterectomies.

Yet the system has thus far been operated on a voluntary basis, which prevents its benefits from spreading to the entire hospital sector. Hence the ministry’s plan is to make this program compulsory for all hospitals.

As a first step, it has announced that the DRG scheme will become mandatory for all small and medium-sized hospitals starting July. From next July, all general hospitals will also be required to participate in it. If things go as planned, the plan will be expanded to cover other clinical categories.

The ministry’s scheme, however, faces strong resistance from physicians, who fear that a fixed-price reimbursement formula would reduce their income by putting a premium on controlling the volume of care.

More importantly, they are concerned that a full-fledged DRG system would ultimately enable the government to set an overall annual budget for acute services and to force hospitals to provide care within their given budgets, with budget overruns being met with penalties, such as discounted payment for services.

Physicians argue that a DRG formula ― and a fixed-budget approach ― would lower the quality of health care as it would discourage them from offering sufficient care to patients.

This argument is not persuasive in light of a government study on the current DRG program, which found little negative effect on the quality of care. The study found instead that the fixed-price formula lowered medical costs by 14 percent by cutting the number of tests conducted on patients and reducing the use of antibiotics by 30 percent.

Furthermore, the OECD has consistently advised the Korean government to expand the DRG program across all hospitals and all disease groups. It says Korea should undertake the reform to meet the challenges posed by rapid population aging.

Yet physicians are determined to resist the ministry’s push to reform the insurance reimbursement framework. The Korean Medical Association recently resolved to reject the planned introduction of the DRG formula in July.

The association’s move is ill-advised. It needs to be reminded that the government’s reform plan enjoys wide public support. Physicians should embrace the new payment system and try to put the quality of care before the volume of care. Under the new scheme, they are unlikely to suffer a loss in income because, if they reduce the volume of care, input costs would fall correspondingly.