A Diagnosis-Related Group (DRG) is a statistical system of classifying any inpatient stay into groups for the purposes of payment. The DRG classification system divides possible diagnoses into 25 major body systems and subdivides them into one of 747 groups for the purpose of Medicare reimbursement. DRG grouper system has been used by Medicare since 1983 to reimburse hospitals for inpatient admissions. Factors used to determine the DRG payment amount include the diagnosis involved as well as the hospital resources necessary to treat the condition. Also used by a few states for all payors and by many private health plans (usually non-HMO) for contracting purpose. Hospitals are paid a fixed rate for inpatient services corresponding to the DRG group assigned to a given patient. There are 25 major diagnostic categories (MDCs), which are each organized into two sections: Surgical – this section classifies all surgical conditions based upon operating room procedures, and Medical – this section classifies all diagnostic conditions based upon diagnosis codes. MDCs are mutually exclusive and in general are organized by major body system and/or associated with a particular medical specialty.
Beginning in 2007, CMS overhauled the DRG system with the development of “severity-adjusted DRGs.” Specifically, beginning in October 2007, CMS began to replace DRGs with “Medicare-severity DRGs” or “MS-DRGs” through a three-year phase-in period that blended payment under the old DRG system and the MS-DRG system.
While there are similarities between the two systems in the existence or absence of complications or co-morbidities, the MS-DRG system adds a third category – “Major complications and/or co-morbidities.” Cases are classified into MS-DRGs for payment based on the principal diagnosis, up to eight additional diagnoses, and up to six procedures performed during the stay. In a small number of MS-DRGs, classification is also based on the age, sex, and discharge status of the patient. The diagnosis and discharge information is reported by the hospital using codes from the IC-9-CM (the International Classification of Diseases, 9th Edition, Clinical Modification).
Certain types of hospitals are excluded from Medicare’s DRG reimbursement system; these include psychiatric hospitals or units, rehabilitation hospitals or units, children’s hospitals, long-term care hospitals and cancer hospitals.
Centers for Medicare and Medicaid Services administers the DRG system and issues all rules and changes.