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 more than 20 major body systems and subdivides them into almost 500 groups for the purpose of Medicare reimbursement. 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. Gillian I. Russell, Terminology, in FUNDAMENTALS OF HEALTH LAW 1, 12 (American Health Lawyers Association 5th ed., 2011).
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).
Excerpt from Barry D. Alexander et al., Medicare, in FUNDAMENTALS OF HEALTH LAW 81, 111 (American Health Lawyers Association 5th ed., 2011).