Starting in the s, DRGs changed how Medicare pays hospitals. The idea is that each DRG encompasses patients who have clinically similar diagnoses, and whose care requires a similar amount of resources to treat.
The DRG system is intended to standardize hospital reimbursement, taking into consideration where a hospital is located, what type of patients are being treated, and other regional factors. The implementation of the DRG system was not without its challenges. The reimbursement methodology has affected the bottom line of many private hospitals, leading some to channel their resources to higher-profit services. Still, DRGs remain the structural framework of the Medicare hospital payment system.
To come up with DRG payment amounts, Medicare calculates the average cost of the resources necessary to treat people in a particular DRG, including the primary diagnosis, secondary diagnoses and comorbidities, necessary medical procedures, age, and gender.
That base rate is then adjusted based on a variety of factors, including the wage index for a given area. A hospital in New York City pays higher wages than a hospital in rural Kansas, for example, and that's reflected in the payment rate each hospital gets for the same DRG. For hospitals in Alaska and Hawaii, Medicare even adjusts the non-labor portion of the DRG base payment amount because of the higher cost of living.
Adjustments to the DRG base payment are also made for hospitals that treat a lot of uninsured patients and for teaching hospitals. The DRG payment system encourages hospitals to be more efficient and takes away their incentive to over-treat you. However, it's a double-edged sword. Medicare has rules in place that penalize a hospital in certain circumstances if a patient is re-admitted within 30 days. This is meant to discourage early discharge, a practice often used to increase the bed occupancy turnover rate.
Additionally, in some DRGs, the hospital has to share part of the DRG payment with the rehab facility or home healthcare provider if it discharges a patient to an inpatient rehab facility or with home health support. Since those services mean you can be discharged sooner, the hospital is eager to use them so it's more likely to make a profit from the DRG payment.
However, Medicare requires the hospital to share part of the DRG payment with the rehab facility or home healthcare provider to offset the additional costs associated with those services. The IPPS payment based on your Medicare DRG also covers outpatient services that the hospital or an entity owned by the hospital provided you in the three days leading up to the hospitalization. Sign up for our Health Tip of the Day newsletter, and receive daily tips that will help you live your healthiest life.
Value Health Care Services. Centers for Medicare and Medicaid Services. Updated October Medicare Learning Network. Acute care hospital inpatient prospective payment system.
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The NAIC oversees insurance regulation and provides resources for consumers. Glossary D Diagnosis-related groups Diagnosis-related groups Diagnosis-related groups is a health-care term you should know.
What are diagnosis-related groups? Deeper definition The diagnosis-related group system classifies in-patient stays into categories for the purpose of payment. In general, a DRG payment covers all charges associated with an inpatient stay from the time of admission to discharge. The DRG includes any services performed by an outside provider. DRGs categorize patients with respect to diagnosis, treatment and length of hospital stay. The assignment of a DRG depends on the following variables:.
DRG payment is based on the care given to and resources used by a "typical" patient within the group. When the cost of treating a specific patient is unusually high compared to a typical patient in the same DRG classification, the case is referred to as an outlier.
Many facility contracts include provisions employing a different methodology of calculating payment in outlier situations. When a facility contract includes a DRG outlier provision, outlier cases processed under the provisions are identified by an outlier threshold based on covered charges. Providers should refer to their facility's Participating Agreement for details on the outlier threshold and payment methodology as it applies to their facility.
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