DRG: Diagnosis-Related Group
A Diagnosis-Related Group (DRG) is the hospital inpatient payment classification used by Medicare and most payers, bundling all services for an admission into a single prospective payment based on clinical complexity.
What is a DRG?
Diagnosis-Related Groups (DRGs) were introduced by Medicare in 1983 as a prospective payment system (PPS) for hospital inpatient care. Rather than paying hospitals for each individual service rendered, Medicare pays a single predetermined rate for the entire hospitalisation based on the patient's principal diagnosis, secondary diagnoses, procedures performed, age, sex, and discharge status. This system incentivises efficiency and appropriate resource utilisation.
MS-DRG: Medicare Severity DRGs
The current system uses Medicare Severity DRGs (MS-DRGs), which group cases into three tiers based on complication and comorbidity (CC) status:
- MCC (Major Complication or Comorbidity): Highest relative weight and payment
- CC (Complication or Comorbidity): Intermediate relative weight
- Non-CC: Base relative weight, lowest payment
DRG Payment Calculation
Medicare DRG payment = Base Rate × Relative Weight × Geographic Adjustment (wage index). The FY2024 national average base rate is approximately $6,200 for operating costs. A DRG with a relative weight of 2.0 would generate roughly $12,400 in operating payment before geographic adjustment. High-severity DRGs (e.g., major joint replacement with MCC, relative weight ~3.5) generate substantially higher payments than base DRGs.
DRG Outlier Payments
When a case's costs significantly exceed the DRG payment threshold (the outlier threshold, typically 1.75× the DRG payment), Medicare provides additional "outlier" payments at 80% of the marginal cost above the threshold. Identifying cases approaching outlier status and ensuring complete, accurate documentation of all complications is critical to capturing appropriate reimbursement.
DRG and Case Mix Index
A hospital's Case Mix Index (CMI) is the average relative weight of all DRGs for a given period. Tracking DRG distribution over time reveals whether a hospital's patient population is becoming more or less complex — and whether documentation and coding practices are accurately capturing clinical complexity. A CMI that drops unexpectedly is almost always a coding or documentation issue rather than a genuine change in patient population.