what affects drg assignment

Scalable approaches that prioritize acute patient care while achieving strategic goals.

Streamlined management and virtual care solutions to maximize efficiency.

Intensivist staffing and management, leveraging technology for quality care.

Solutions to align and integrate processes and understanding across departments.

Leverage technology to expand coverage & support both in and outside of the hospital.

Engaging with patients for proactive planning and preventative health.

• About SCP Health
• Partner With Us
• Sustainability
• Corporate Careers
• Working with SCP
• Clinical Education and Training

Care Delivery

Understanding MS-DRG and Its Effect on the Case Mix Index

A lot goes into understanding the type of care a hospital provides, the community it serves, and how well it delivers care. A holistic approach to health care determines that we look at each patient as an individual with unique needs. Those needs are quantified through a Diagnosis Related Group (DRG). The collection of DRGs each hospital sees makes up the hospital Case Mix Index. 

What Is the Diagnosis Related Group?  

Centers for Medicare & Medicaid Services (CMS) developed the Diagnosis Related Group system in collaboration with Yale University’s Schools of Management and Public Health to define the treatment that hospitals deliver. It classifies all possible human disease diagnoses into bodily systems and then subdivides those systems into groups.  

DRGs serve as the basis for Medicare’s hospital reimbursement structure. The system calculates fees by considering the damaged body systems and groups and the quantity of hospital resources needed to treat the ailment, resulting in a fixed rate for patient services.

In 1987, CMS separated the DRG system into two parts: the All-Patient DRG (AP-DRG) system, which handles non-Medicare billing, and the Medicare Severity Diagnosis Related Group  (MS-DRG) system, which runs Medicare billing. Because of the expanding number of Medicare beneficiaries, MS-DRG is used most extensively today.  

MS-DRG Details  

With the MS-DRG system, each patient discharged is assigned one of 767 DRGs, an expanded list that facilitates a potential increase in diagnosable services and provides better recognition of the severity of illness and expected hospital resource consumption than the traditional DRG system. 

Each DRG code carries a significant amount of information that gets tied up into multiple levels, including: 

• Anticipated patient care resources used by the hospital; 
• How it relates to the estimated length of stay (LOS), the geometric mean;  
• Reimbursement for the patient’s entire hospitalization; 
• Relative weight for resources and costs and reimbursements versus other DRGs.  

To illustrate the weight value, using a baseline of 1 for an average hospitalization, if the DRG increases to 1.5, it assumes the hospital will use 50 percent more resources. Conversely, a hospital stay with a weight of .5 would require half the resources.  

The DRG system enables CMS to increase reimbursement to hospitals serving more severely ill patients; hospitals treating less severely ill patients receive lower reimbursement.  

Principal and Secondary Diagnoses  

Hospitals may choose from three new DRG designations in the MS-DRG system, including the Principal and Secondary Diagnoses.  

The CMS Uniform Hospital Discharge Data Set defines the Principal Diagnosis as “that condition established after study to be chiefly responsible for occasioning the admission of the patient to the hospital for care.”  

Secondary diagnoses are additional conditions that affect patient care in terms of requiring at least one of the following: 

• Clinical evaluations 
• Therapeutic treatment 
• Diagnostic procedures 
• Extended LOS  
• Increased nursing care and monitoring

Secondary diagnoses may be DRGs with Complication or Comorbidity (CC), with a Major Complication or Comorbidity (MCC), or with no CCs or MCCs. 

Comorbidities represent conditions patients bring with them on admissions that continue to require some type of treatment or monitoring while on inpatient status. Complications are conditions acquired during hospitalization, and MCCs reflect the highest level of severity.  

What Is the Case Mix Index?   

CMS utilizes the Case Mix Index to set hospital reimbursement rates for Medicare and Medicaid patients. This metric indicates the variety, severity, and complexity of patient ailments handled at a specific hospital or health care center.

The Case Mix Index (CMI) is the direct calculation that ties to the DRG. Initially, CMS designed the CMI to calculate hospital payments. Now, it is a standard indicator of hospital disease severity in the United States and internationally.  

CMI is calculated based on the average relative DRG weight of hospital inpatient discharges and by summing the Medicare severity DRG weight for each discharge and dividing the total by the number of discharges. This calculation reflects the severity, clinical complexity, and resource needs of all the patients in the hospital relative to other hospitals and previous years. Using a baseline of 1, like DRGs, a higher case mix index indicates a more complex and resource-intensive patient load. 

Many factors can impact this metric , however, including:

• Coding accuracy 
• Documentation specificity 
• High volumes of highly weighted DRGs (such as organ transplantations, cardiothoracic surgeries, or neurosurgeries) 
• Annual updates to relative MS-DRG weights 
• Penalties for hospital-acquired conditions 

Case Mix Importance to a Hospital  

By documenting the complications and comorbidities accompanying a diagnosis, the hospital ensures that it assigns the correct DRG to a patient, resulting in a more accurate (and improved) CMI, a key ROI value driver . 

There are at least three reasons why this is important: 

• Delivering appropriate documentation guidelines and collaborating with clinical documentation specialists can significantly improve CMI accuracy for medical and surgical patients; 
• CMI reflects the value of bundled DRG payments and advises on expected LOS;  
• The CMI also influences quality scoring of patient outcomes by capturing the case’s complexity and ensuring more accurate reimbursement rates. 

Finally, not only does the CMI play a central role in hospital finances, but it is also an important indicator of hospital performance and clinical documentation.  

For example, two hospitals with similar patient populations and surgical capability might report different case mix index results. A lower CMI could imply that one hospital is documenting its cases less successfully than another, even though the patients they care for and the services they provide are virtually the same. 

With the central role CMI and DRGs play for hospitals, they must be correct and accurate; therefore, the documentation from which they come must be comprehensive and precise.  

As part of our health care solutions, SCP Health offers extensive management and documentation support, ensuring your DRGs and, thus, CMI correctly represents the care you deliver.   

• Documentation and Revenue Cycle
• Hospital Medicine
• Operational Advancement
• Quality Metrics
• Readmissions
• Standardization of Care

Contact SCP Health

to learn more about our health care solutions.

Conditions that Impact MS-DRG Assignment for Newborns

• By Laurie M. Johnson, MS, RHIA, FAHIMA, AHIMA Approved ICD-10-CM/PCS Trainer
• December 10, 2019

Birth weight is used by APR-DRGs and MS-DRGs, and it impacts the assigned group.   

The topic of newborns is rarely addressed when we talk about coding or clinical documentation integrity. Birth weight, prematurity, extreme prematurity, and other significant problems are all conditions that impact the MS-DRG assignment.

Newborns are assigned to MS-DRGs in Major Diagnostic Category (MDC) 15. An interesting fact regarding this MDC is that there is not a surgical division for it. Here are some important definitions that impact the MS-DRG assignment:

• Neonate – an infant less than four weeks old
• Prematurity – the birth weight of 1,000-2,499 grams, or gestational age of 27-36 completed weeks of gestation
• Extreme prematurity – birth weight less than or equal to 999 grams, or gestational age of 23-26 completed weeks of gestation

The diagnosis codes on the newborn’s episode of care should begin with “P,” which would indicate a perinatal condition. It is important to be aware that not all diagnosis codes assigned to the newborn begin with “P,” as there are some “regular” codes that can be assigned as well. The diagnosis codes that begin with “O” can only be assigned to the mother’s episode of care. An edit will display if the codes are used incorrectly.

The above definitions relate to a coding perspective. The diagnoses of prematurity are assigned to MS-DRGs 791 and 792, depending on the presence of major problems. The diagnosis of extreme prematurity is assigned to MS-DRG 790.

Major problem diagnoses may also impact Full Term Neonates (MS-DRG 793) or Neonate (MS-DRG 794) codes. Examples of major problems include maternal conditions affecting the newborn; birth injuries; metabolic disturbances of the newborn; adverse effects of drugs; Rh or ABO incompatibility, and some congenital deformities.

Some code examples of the aforementioned categories are P07.14 (other low birth weight newborn, 1,000-1,249 grams); T50.4X5A (Adverse effect of appetite depressants, initial encounter); P36.4 (Sepsis of newborn due to Escherichia coli); P10.0 (Subdural hemorrhage due to birth injury); and P74.21 (Hypernatremia of newborn).

Conditions such as observation and evaluation of newborns for suspected conditions do not impact the MS-DRG assignment (see category Z05). Normal newborns are grouped by the principal diagnosis, which is most frequently found in category Z38. Some conditions that may be expected to impact the MS-DRG grouping are newborns affected by a prolapsed cord, newborns being light for gestational age, and extreme immaturity of a newborn of unspecified weeks of gestation. The unspecified information identifies a need for clinical documentation integrity.

From a clinical documentation integrity perspective, the newborn record should specify if the infant was born in the hospital or outside the hospital; congenital versus acquired conditions; gestational age; and birth injuries. Birth injuries can affect all body systems, so the specific body system and the extent of the injury are important in assigning the correct diagnosis code.

Remember that birth weight is used by APR-DRGs and MS-DRGs, and it impacts the assigned group. The specific codes can be found in the MS-DRG Definitions Manual, version 37, available online at https://www.cms.gov/icd10m/version37-fullcode-cms/fullcode_cms/P0017.html .

Programming Note:

Listen to Laurie Johnson’s live reports every Tuesday on Talk Ten Tuesday , 10-10:30 a.m. EST,

• TAGS: MS-DRG

Laurie M. Johnson, MS, RHIA, FAHIMA, AHIMA Approved ICD-10-CM/PCS Trainer

Related stories.

Cardiology Question for the Week of September 9, 2024

A patient comes in through ED as STEMI. Straight to CCL, LAD is the culprit vessel. DES placed, C9606. After LAD is stented and flow restored, an ostial diagonal lesion is found resulting in DES to the diagonal. The question is: Is the diagonal DES coded as C9601- DES Additional Vessel, since it was treated in the same manner as the STEMI LAD? Or is it coded C9600 because even though DES, it was not a STEMI vessel like the primary vessel C9606?

Radiology Question for the Week of September 9, 2024

Is a physician’s prescription required for Medicare to cover a screening mammography?

Leave a Reply

Please log in to your account to comment on this article.

Featured Webcasts

Comprehensive Outpatient Clinical Documentation Integrity: From Foundations to Advanced Strategies

Optimize your outpatient clinical documentation and gain comprehensive knowledge from foundational practices to advanced technologies, ensuring improved patient care and organizational and financial success. This webcast bundle provides a holistic approach to outpatient CDI, empowering you to implement best practices from the ground up and leverage advanced strategies for superior results. You will gain actionable insights to improve documentation quality, patient care, compliance, and financial outcomes.

Advanced Outpatient Clinical Documentation Integrity: Mastering Complex Narratives and Compliance

Enhancing outpatient clinical documentation is crucial for maintaining accuracy, compliance, and proper reimbursement in today’s complex healthcare environment. This webcast, presented by industry expert Angela Comfort, DBA, RHIA, CDIP, CCS, CCS-P, will provide you with actionable strategies to tackle complex challenges in outpatient documentation. You’ll learn how to craft detailed clinical narratives, utilize advanced EHR features, and implement accurate risk adjustment and HCC coding. The session also covers essential regulatory updates to keep your documentation practices compliant. Join us to gain the tools you need to improve documentation quality, support better patient care, and ensure financial integrity.

Foundations of Outpatient Clinical Documentation Integrity: Best Practices for Accurate Coding and Compliance

This webcast, presented by Angela Comfort, DBA, RHIA, CDIP, CCS, CCS-P, a recognized expert with over 30 years of experience, offers essential strategies to improve outpatient clinical documentation integrity. You will learn how to enhance the accuracy and completeness of patient records by adopting best practices in coding and incorporating Social Determinants of Health (SDOH). The session also highlights the role of technology, such as EHRs and CDI software, in improving documentation quality. By attending, you will gain practical insights into ensuring precise and compliant documentation, supporting patient care, and optimizing reimbursement. This webcast is crucial for those looking to address documentation gaps and elevate their coding practices.

Preventing Sepsis Denials: From Recognition to Clinical Validation

ICD10monitor has teamed up with renowned CDI expert Dr. Erica Remer to bring you an exclusive webcast on how to recognize sepsis, how to get providers to give documentation that will support sepsis, and how to educate to avert sepsis denials. Register now and become a crucial piece of the solution to standardizing sepsis clinical practice, documentation, and coding at your facility.

Trending News

Sorting Through Recent Overturns of Government Bans on Noncompete Agreements

Understanding Why Accusations Are not Always Accurate

AHA Coding Clinic Third Quarter

A Two-Year Anniversary

The OIG Update: Targets and Tools to Stay in Compliance

During this RACmonitor webcast Dr. Ronald Hirsch spotlights the areas of the OIG’s Work Plan and the findings of their most recent audits that impact utilization review, case management, and audit staff. He also provides his common-sense interpretation of the prevailing regulations related to those target issues. You’ll walk away better equipped with strategies to put in place immediately to reduce your risk of paybacks, increased scrutiny, and criminal penalties.

Pediatric SDoH: An Essential Guide to Accurate Coding and Reporting

This webcast, presented by Tiffany Ferguson, LMSW, CMAC, ACM, addresses the critical gap in Social Determinants of Health (SDoH) reporting for pediatric populations. While SDoH efforts often focus on adults, this session emphasizes the unique needs of children. Attendees will gain insights into the current state of SDoH, new pediatric Z-codes, and the importance of interdisciplinary collaboration. By understanding and applying pediatric-specific SDoH factors, healthcare professionals can improve data capture, compliance, and care outcomes. This webcast is essential for those looking to enhance their approach to pediatric SDoH reporting and coding.

Oncology and E/M Services: Compliance, Medical Necessity, and Reimbursement

Join Becky Jacobsen, BSN, RN, MBS, CCS-P, CPC, CPEDC, CBCS, CEMC, VP of CDM, for a webcast addressing oncology service coding challenges. Learn to navigate coding for infusions and injections alongside Evaluation and Management (E/M) services, ensuring compliance and accurate reimbursement. Gain insights into documenting E/M services for oncology patients and determining medical necessity. This webcast is essential to optimize coding practices, maintain compliance, and maximize revenue in oncology care.

The Inpatient Admission Order: Master the Who, When, and How

During this webcast Dr. Ronald Hirsch delves into the inpatient admission order process including when to get it, when it becomes effective, its impact on billing and payment, who can write it, how to cancel it, the effects on the beneficiary, and more. You’ll leave with a clear understanding of inpatient orders and guidelines for handling improper orders that you can implement immediately.

National Study: Artificial Intelligence Helps Patients When Refilling Prescriptions

National Progress Reported in Reducing Medical Errors: Leapfrog Group CEO to Report Findings on Talk Ten Tuesdays

DOJ Launches New Whistleblower Award Program Aimed at Attracting Tips about Healthcare Fraud

Leveraging Generative and Advanced AI to Transform Coding and CDI – Part 1

Stay connected.

Subscribe to receive free RAC news and updates.

5874 Blackshire Path, #13 Inver Grove Heights, MN 55076

Hours: 9am – 5pm CT Phone: (800) 252-1578 Email: [email protected]

Copyright © 2024 RACmonitor. Powered by MedLearn Media.

Prepare for the 2025 CMS IPPS Final Rule with ICD10monitor’s IPPSPalooza! Click HERE to learn more

Get 15% OFF on all educational webcasts at ICD10monitor with code JULYFOURTH24 until July 4, 2024—start learning today!

Search form

Q&a: identifying the ms-drg for unreleated surgical procedures.

Q:   Could you please explain unrelated surgical procedure DRGs? For example, a patient with a principal diagnosis of pneumonia whose surgical procedure transurethral resection of the prostate (TURP), MS-DRG 168. Also can you explain how we can differentiate between extensive operating room (OR) procedure and non-extensive OR procedure.

A:  Many CDI specialists with a clinical background are what I like to call, encoder dependent. What I mean by that is we’ve been trained to “code” using an encoder and create our working MS-DRGs based on “grouper” software. It is often helpful to understand how to manually assign a MS-DRG. The basics steps for assigning a MS-DRG are as follows:

• Identify all the applicable diagnoses in the health record
• Identify the principal diagnosis (the condition after study to be chiefly responsible for occasioning the admission)
• Determine its associated ICD code (we currently use ICD-9-CM, but we’ll eventually use ICD-10-CM)
• Identify the base/medical DRG noting its Major Diagnostic Category/body system
• Identify any/all procedures

This is where it can get a little tricky. The UHDDS (Uniform Hospital Discharge Data set) defines the principal procedure as

• One that was performed for definitive treatment, rather than one performed for diagnostic or exploratory purposes, or was necessary to take care of a complication
• If there appear to be two procedures that are principal, then the one most related to the principal diagnosis should be selected as the principal procedure

If there was a procedure performed take the following steps:

• Determine the associated procedure codes (currently based on ICD-9-CM Vol. 3 codes and soon to be ICD-10-PCS) and determine if the procedure code associated with the principal procedure as listed in the DRG Expert?
• If the code isn’t in the DRG Expert index of procedures, it is for one of two reasons: Either it is not a “reimbursable” procedure (i.e., one that will affect the MS-DRG assignment) or is it a major OR procedure
• If there isn’t a procedure or it doesn’t impact DRG assignment, does the medical DRG allow for movement i.e., can patients be put into different groups based on the presence or absence of a complicating condition (CC) or major complicating condition (MCC)
• If so, check to see if any of the remaining diagnoses, which are now considered “secondary diagnoses” are CCs or MCCs
• Finalize the working DRG
• If the procedure code is in the same MDC/body system as the principal diagnosis assign the new surgical MS-DRG (this is the most common scenario and is often referred to as a “match”)
• If the procedure code is not in the same MDC/body system a different process is used to assign the surgical MS-DRG

The MS-DRG system is based on the assumption that if there is a “reimbursable” medical intervention/procedure that the case/claim will remain in the same body system (MDC) as the principal diagnosis will apply. However, there are occasions when the principal procedure is not related to the principal diagnoses because it is associated with a different MDC/body system as in the example you describe, which will require you to take some additional steps, including:

• Turn to the start of “DRGs Associated with All MDCs.”
• Scan the procedure codes listed under  DRG 984 Prostatic O.R. Procedure Unrelated to PDX to try to locate the applicable procedure code.  These are codes that range from 60.0 to 60.99 within ICD-9-CM Vol. 3. If the applicable code is found under DRG 984 then the case will fall within a DRG referred to as a “triplet” where either a CC or a MCC can “move” the DRG. Check the remaining diagnoses codes to see if any are classified as a CC or MCC and finalize the working DRG based on the value of the applicable secondary diagnoses resulting in a final DRG between 986 and 984

Your example of a principal diagnosis of pneumonia (respiratory system MDC) with a procedure of a TURP will fall into one of these DRGs because the TURP is not a procedure located within the respiratory MDC/body system, but is classified as a prostate procedure and found under DRG 984. Your final MS-DRG assignment will depend on the presence or absence of secondary diagnose classified as a CC or MCC.

If the procedure code is not found under DRG 984, scan the procedure codes listed under  DRG 987 Nonextensive O.R. Procedure Unrelated to PDX  to try to locate the applicable procedure code. These codes span several pages within the DRG Expert. If the applicable code is found under DRG 987 then the case will fall within a DRG referred to as a “triplet” where either a CC or a MCC can “move” the DRG. Check the remaining diagnoses codes to see if any are classified as a CC or MCC and finalize the working DRG based on the value of the applicable secondary diagnoses resulting in a final DRG between 987 and 989.

If the procedure code is not found under DRG 984 or DRG 987 and it was not associated with a page when referencing a procedure index or if it was found,  it  was in a different MDC/body system than the PDX then the assumption is the case/claim belongs in DRGs 981-983. This final step requires a leap of faith since it is based on a process of elimination where this is the “last resort” for DRG assignment. These DRGs are heavily scrutinized by external auditors as assignment within these DRGs can erroneously inflate reimbursement if the case was improperly assigned. As above, this is a DRG is a “triplet” where either a CC or a MCC can “move” the DRG. So check the remaining diagnoses codes to see if any are classified as a CC or MCC and finalize the working DRG based on the value of the applicable secondary diagnoses.

Editor’s Note:  Cheryl Ericson, MS, RN, CCDS, CDIP, answered this question. At the time of this article's original release, she was the CDI Education Director for HCPro Inc.

More Like This

Acdis update: ahima 2024 conference right around the corner, check out the agenda, 2024 cdi week q&a preview: query metrics and technology, news: icd-10-cm codes can be used to identify incident stroke events, study finds, news: long-term study correlates biomarkers with 30-year female cardiovascular health.

• Type 2 Diabetes
• Heart Disease
• Digestive Health
• Multiple Sclerosis
• Diet & Nutrition
• Health Insurance
• Public Health
• Patient Rights
• Caregivers & Loved Ones
• End of Life Concerns
• Health News
• Thyroid Test Analyzer
• Doctor Discussion Guides
• Hemoglobin A1c Test Analyzer
• Lipid Test Analyzer
• Complete Blood Count (CBC) Analyzer
• What to Buy
• Editorial Process
• Meet Our Medical Expert Board

How a DRG Determines How Much a Hospital Gets Paid

Medicare and certain private health insurance companies pay for hospitalizations of their beneficiaries using a diagnosis-related group (DRG) payment system . This article will explain how the DRG system works, and how it determines the payment amounts that hospitals receive.

When you've been admitted as an inpatient to a hospital, that hospital assigns a DRG when you're discharged, basing it on the diagnosis you received and the treatment that you needed during your hospital stay. The hospital gets paid a fixed amount for that DRG, regardless of how much money it spent treating you.

If a hospital can effectively treat you for less money than Medicare pays for your DRG, then the hospital makes money on that hospitalization. If the hospital spends more money caring for you than Medicare gives it for your DRG, then the hospital loses money on that hospitalization.

What Does DRG Mean?

DRG stands for diagnosis-related group. Medicare's DRG system is called the Medicare severity diagnosis-related group, or MS-DRG, which is used to determine hospital payments under the inpatient prospective payment system (IPPS). It's the system used to classify various diagnoses for inpatient hospital stays into groups and subgroups so that Medicare can accurately pay the hospital bill.

The idea behind DRGs is to ensure that Medicare reimbursements adequately reflect " the fundamental role which a hospital’s case mix (the type of patients the hospitals treats, and the severity of their medical issues) plays in determining its costs " and the number of resources that the hospital needs to treat its patients.

The diagnoses that are used to determine the DRG are based on ICD-11 codes or ICD-10 codes (the ICD-11 codes went into effect in 2022, but some areas are still using ICD-10 codes). Additional codes were added to that system in 2021 and 2022, to account for the COVID-19 pandemic, and a 20% MS-DRG add-on payment was added during the pandemic when hospitals treated COVID-19 patients.

DRGs have historically been used for inpatient care, but the 21st Century Cures Act, enacted in late 2016, required the Centers for Medicare and Medicaid Services to develop some DRGs that apply to outpatient surgeries. These are required to be as similar as possible to the DRGs that would apply to the same surgery performed on an inpatient basis.

Medicare and private insurers have also piloted new payment systems that are similar to the current DRG system, but with some key differences, including an approach that combines inpatient and outpatient services into one payment bundle. In general, the idea is that bundled payments are more efficient and result in better patient outcomes than fee-for-service payments (with the provider being paid based on each service that's performed).

Figuring Out How Much Money a Hospital Gets Paid for a Given DRG

In order to figure out how much a hospital gets paid for any particular hospitalization, you must first know what DRG was assigned for that hospitalization. In addition, you must know the hospital’s base payment rate, which is also described as the "payment rate per case." You can call the hospital’s billing, accounting, or case management department and ask what its Medicare base payment rate is.

Each DRG is assigned a relative weight based on the average amount of resources it takes to care for a patient assigned to that DRG. You can look up the relative weight for your particular DRG by downloading a chart provided by the Centers for Medicare and Medicaid Services following these instructions:

• Go to the CMS payment systems webpage .
• Scroll down to "FY 2024 Final Rule and Correcting Amendment Tables" (note that this is for Fiscal Year 2024)
• Download Table 5 ("MS-DRGs, Relative Weighting Factors and Geometric and Arithmetic Mean Length of Stay").
• Open the file that displays the information as an Excel spreadsheet (the file that ends with “.xlsx”).
• The column labeled “weights” shows the relative weight for each DRG.

The average relative weight is 1.0. DRGs with a relative weight of less than 1.0 are less resource-intensive to treat and are generally less costly to treat. DRGs with a relative weight of more than 1.0 generally require more resources to treat and are more expensive to treat. The higher the relative weight, the more resources are required to treat a patient with that DRG. This is why very serious medical situations, such as organ transplants , have among the highest DRG weight.

To figure out how much money your hospital got paid for your hospitalization, multiply your DRG’s relative weight by your hospital’s base payment rate.

Here’s an example with a hospital that has a base payment rate of $6,000 when your DRG’s relative weight is 1.3:

$6,000 X 1.3 = $7,800. Your hospital got paid $7,800 for your hospitalization.

How a Hospital’s Base Payment Rate Works

The base payment rate is broken down into a labor portion and a non-labor portion. The labor portion is adjusted in each area based on the wage index. The non-labor portion varies for Alaska and Hawaii, according to a cost-of-living adjustment.

Since healthcare resource costs and labor vary across the country and even from hospital to hospital, Medicare assigns a different base payment rate to each and every hospital that accepts Medicare.

For example, a hospital in Manhattan, New York City probably has higher labor costs, higher costs to maintain its facility, and higher resource costs than a hospital in Knoxville, Tennessee. The Manhattan hospital probably has a higher base payment rate than the Knoxville hospital.

Other things that Medicare factors into your hospital’s blended rate determination include whether or not it’s a teaching hospital with residents and interns, whether or not it’s in a rural area, and whether or not it cares for a disproportionate share of the poor and uninsured population. Each of these things tends to increase a hospital’s base payment rate.

Each October, Medicare assigns every hospital a new base payment rate. In this way, Medicare can tweak how much it pays any given hospital, based not just on nationwide trends like inflation, but also on regional trends. For example, as a geographic area becomes more developed, a hospital within that area may lose its rural designation.

In 2020, the Centers for Medicare and Medicaid Services approved 24 new technologies that are eligible for add-on payments, in addition to the amount determined based on the DRG.

Are Hospitals Making or Losing Money?

After the MS-DRG system was implemented in 2008, Medicare determined that hospital-based payment rates had increased by 5.4% as a result of improved coding (i.e., not as a result of anything having to do with the severity of patients' medical issues).

So Medicare reduced the base payments rates to account for this. But hospital groups contend that the increase due to improved coding was actually only 3.5% and that their base rates had been reduced by too much with an expected $41.3 billion loss in hospital revenue from 2013 to 2028.

Hospitals in rural areas are especially struggling. More than 150 rural hospitals closed from 2005 to 2019, another 18 hospitals in 2020, and 19 hospitals from 2021 to 2023, nine of them in 2023. The Center for Healthcare Quality and Payment Reform reported in 2023 that as many as a third of rural hospitals, more than 600 facilities, remain at risk of closing in the near future.

Rural hospitals are not the only ones at risk. The pandemic triggered a workforce shortage in the healthcare industry and hospitals across the board had to pay more for contract labor and staffing to fill in those gaps. Rising rates of inflation have also increased non-labor expenses, i.e., the cost of drugs, medical equipment and supplies, building maintenance, sanitation, information technology and cybersecurity, and even food. Altogether, the American Hospital Association estimates these factors increased hospital spending to the point that more than half of hospitals had negative margins at the end of 2022.

The challenge is how to ensure that some hospitals aren't operating in the red under the same payment systems that put other hospitals well into the profitable realm. That's a complex task, though, involving more than just DRG-based payment systems, and it promises to continue to be a challenge for the foreseeable future.

When a patient with Medicare (or many types of private insurance) is hospitalized, a diagnostic related category (DRG) code is assigned based on the patient's condition. There are numerous factors that go into determining the DRG for each patient, and each DRG has a different relative weight, depending on the resources that are generally needed to provide care for someone with that DRG.

Each hospital also has a blended base rate, which is based on a variety of factors, including location, patient demographics, whether it's a teaching hospital, etc. The relative weight of the DRG is multiplied by the hospital's base rate to determine how much the hospital will be paid for that patient.

A Word From Verywell

Although there's a complex formula that determines how much a hospital gets paid for each patient, you don't have to know the details of exactly how it works. From a patient perspective, the most important details are ensuring that the hospital is in-network with your health plan, and understanding how your health plan's cost-sharing works.

An inpatient stay will generally result in having to pay your deductible, and maybe meeting your plan's annual out-of-pocket cap. You'll want to understand how much those expenses are, so that you're not caught off guard when the bills arrive.

Research Data Assistance Center. International Classification of Disease (ICD) Codes in Medicare Files .

Centers for Medicare and Medicaid Services. 2022 ICD-10-CM. COVID-19 Update.

National Institutes of Health. Changes in US Hospital Financial Performance During the COVID-19 Public Health Emergency . July 2023.

Congress.gov. H.R.34 - 114th Congress (2015-2016): 21st Century Cures Act .

Centers for Medicare and Medicaid Services. MS-DRG Classifications and Software .

Centers for Medicare and Medicaid Services. Bundled Payments for Care Improvement (BPCI) Initiative .

Centers for Medicare and Medicaid Services. Acute Inpatient PPS .

Centers for Medicare and Medicaid Services. Fiscal Year (FY) 2021 Medicare Hospital Inpatient Prospective Payment System (IPPS) and Long Term Acute Care Hospital (LTCH) Final Rule (CMS-1735-F) . September 2, 2020.

Dobson DaVanzo & Associates, LLC. Estimate of Federal Payment Reductions to Hospitals Following the ACA 2010-2028. Estimates and Methodology. American Hospital Association .

Center for Healthcare Quality and Payment Reform (2023). Hundreds of Rural Hospitals Were at Immediate Risk of Closure before the Pandemic Hundreds More Rural Hospitals Are at High Risk of Closing in the Future .

American Hospital Association. Costs of Caring .

Federal Register, Medicare Program; Hospital Inpatient Prospective Payment Systems for Acute Care Hospitals and the Long-Term Care Hospital Prospective Payment System Policy Changes and Fiscal Year 2016 Rates; Revisions of Quality Reporting Requirements for Specific Providers, Including Changes Related to the Electronic Health Record Incentive Program; Extensions of the Medicare-Dependent, Small Rural Hospital Program and the Low-Volume Payment Adjustment for Hospitals, 8/17/15. 

By Elizabeth Davis, RN Elizabeth Davis, RN, is a health insurance expert and patient liaison. She's held board certifications in emergency nursing and infusion nursing.

Diagnosis-Related Group (DRG)

• First Online: 20 July 2023

Cite this chapter

• Peter L. Elkin 2 &
• Steven H. Brown 3 , 4  

Part of the book series: Health Informatics ((HI))

361 Accesses

Prospective payment rates based on diagnosis-related groups (DRGs) have been established as the basis of Medicare’s hospital reimbursement system. The DRGs are a patient classification scheme, which provides a means of relating the type of patients a hospital treats (i.e., its case mix) to the costs incurred by the hospital. The design and development of the DRGs began in the late 1960s at Yale University. The initial motivation for developing the DRGs was to create an effective framework for monitoring the quality of care and the utilization of services in a hospital setting. The first large-scale application of the DRGs was in the late 1970s in the State of New Jersey. The New Jersey State Department of Health used DRGs as the basis of a prospective payment system in which hospitals were reimbursed a fixed DRG-specific amount for each patient treated. In 1982, the Tax Equity and Fiscal Responsibility Act modified Section 223 Medicare hospital reimbursement limits to include a case mix adjustment based on DRGs. In 1983, Congress amended the Social Security Act to include a national DRG-based hospital prospective payment system for all Medicare patients.

This is a preview of subscription content, log in via an institution to check access.

Access this chapter

Subscribe and save.

• Get 10 units per month
• Download Article/Chapter or eBook
• 1 Unit = 1 Article or 1 Chapter
• Cancel anytime
• Available as PDF
• Read on any device
• Instant download
• Own it forever
• Available as EPUB and PDF
• Compact, lightweight edition
• Dispatched in 3 to 5 business days
• Free shipping worldwide - see info
• Durable hardcover edition

Tax calculation will be finalised at checkout

Purchases are for personal use only

Institutional subscriptions

Author information

Authors and affiliations.

Department of Biomedical Informatics, Jacobs School of Medicine and Biomedical Sciences, University at Buffalo, State University of New York, Buffalo, NY, USA

Peter L. Elkin

Knowledge Based Systems, Department of Veterans Affairs, Washington, DC, USA

Steven H. Brown

Department of Biomedical Informatics, Vanderbilt University, Nashville, TN, USA

You can also search for this author in PubMed   Google Scholar

Corresponding author

Correspondence to Peter L. Elkin .

Editor information

Editors and affiliations, rights and permissions.

Reprints and permissions

Copyright information

© 2023 Springer Nature Switzerland AG

About this chapter

Elkin, P.L., Brown, S.H. (2023). Diagnosis-Related Group (DRG). In: Elkin, P.L. (eds) Terminology, Ontology and their Implementations . Health Informatics. Springer, Cham. https://doi.org/10.1007/978-3-031-11039-9_16

Download citation

DOI : https://doi.org/10.1007/978-3-031-11039-9_16

Published : 20 July 2023

Publisher Name : Springer, Cham

Print ISBN : 978-3-031-11038-2

Online ISBN : 978-3-031-11039-9

eBook Packages : Medicine Medicine (R0)

Share this chapter

Anyone you share the following link with will be able to read this content:

Sorry, a shareable link is not currently available for this article.

Provided by the Springer Nature SharedIt content-sharing initiative

• Publish with us

Policies and ethics

• Find a journal
• Track your research

Hospital Patient Financial Services

Description of coding and drg assignment.

nsforming the verbal description of disease, injuries and procedures into numerical codes. Every patient encounter will be assigned these numerical codes based on the review of the provider’s documentation. Therefore all diagnostic or procedural statements should be accurate , specific, complete and descriptive of the patient’s condition. Accurate documentation results in accurate coding which is essential to reflect the severity of illness, complexity of care provided and consumption of resources.

These codes are utilized and reported both internally and externally. Codes and the data generated from coding are used internally for reimbursement, strategic and fiscal planning, clinical research, assessment of quality, physician profiling and other clinical and administrative purposes.

These same codes and data generated from coding are reported externally to various public and private agencies, such as Medicare/ Medicaid, Texas Medical Foundation, Census Bureau, State and Local Health Departments as well as many national ranking or benchmarking institutions including but not limited to Leap Frog Group, University Healthsystem Consortium, Hospital Compare, Healthgrades and others.

All codes are assigned by highly skilled and trained individuals nationally certified to perform Coding. Code assignment is dictated by the Rules and Guidelines established and updated annually by the Federal Government. Not adhering to these guidelines for documentation and coding constitutes fraud and is subject to prosecution.

A few of these guidelines/definitions that are important for you to be familiar with are listed below:

All Diagnosis that affect the current patient encounter must documented and coded. This requirement includes conditions that coexist at the time of admission or develop subsequently and affect the treatment received and/or the length of stay. Diagnoses that relate to an earlier admission, but which have no bearing on the current admission are to be excluded from coding. Diagnosis that are suspected and are treated empirically or cannot be ruled-out are to be included as diagnostic statements in the patient’s record and coded accordingly. Signs, symptoms and observations should be documented as a diagnosis whenever possible to provide adequate substantiation of coding for severity of illness and risk of mortality.

All diagnostic statements should be accurate , specific, complete and descriptive of the patient’s condition.

Significant Procedure : A significant procedure is one that carries an operative or anesthetic risk or requires highly trained personnel or special equipment. All significant procedures are to be documented in the patient record. (see Procedure&Operative Notes)

Codes are sequenced into Diagnoses Related Groups (or DRGs) to determine reimbursement from third party payers. DRGs are determined by the principal procedure, or the principal diagnosis if no procedure exists, and the presence of other conditions.

DRGs group patients with similar resource consumption, severity of illness and length of stay into payment groups.

DRGs are used for determining reimbursement and as an indicator for other types of reporting such as budgeting, physician profiling, clinical outcomes, case mix calculation and clinical research.

Description of Outpatient Hospital Coding

Coding is transforming the verbal description of disease, injuries and procedures into numerical codes. Every patient encounter will be assigned these numerical codes based on the review of the provider’s documentation. Therefore all diagnostic or procedural statements should be accurate , specific, complete and descriptive of the patient’s condition. Accurate documentation results in accurate coding which is essential to reflect the severity of illness, complexity of care provided and consumption of resources

All codes are assigned by highly skilled and trained individuals nationally certified to perform Coding. Code assignment is dictated by the Rules and Guidelines established and updated annually by the Federal Government. Not adhering to these guidelines for documentation and coding constitutes fraud and is subject to criminal prosecution.

• Hospital Outpatient coders code the following services:
• Day Surgery that are not admitted to inpatient
• Observation encounters not changed to a full admit
• Labor&Delivery Triage
• PT/OT services
• Outpatient Lab that requires a diagnostic code for reimbursement
• Health Care
• UTMB Support Areas