Using Diagnosis Related Groupings: FAQ for Facilities

Diagnosis related groupings (DRGs) are categories used by Medicare and health insurance companies to set fixed reimbursement amounts for inpatient stays. The rates are based on national average costs for treating similar conditions. Though the system has been in place federally since 1983, it’s become more complex, refined, and data-driven over the years.

The use of diagnosis groupings was a significant shift for the healthcare system, and in many ways hospitals are still adapting. Because coverage is based on averages, hospitals are under pressure to treat patients within a budget. Deviations in the course of a hospital stay can amount to expenses that won’t get reimbursed, transferring financial risk from the insurer to the hospital. Documentation is crucial, because misclassifying a condition as less severe than it actually is can amount to thousands in lost dollars per case.

This article provides an overview of the model and how it emerged. We’ll discuss the different classification systems and when they’re typically applied. We’ll also review current strategies for working with diagnosis groups, like AI-driven validation audits that protect against revenue loss. Though the model has introduced many challenges, it promotes streamlined operations and high documentation standards. A thorough understanding is crucial to the financial stability of your facility.

The History of Diagnosis Related Groups in Healthcare

One of the biggest shifts that the U.S. healthcare system has seen in the past century was the establishment of the Medicare prospective payment system (PPS) in 1983. Under this federal policy, an early diagnosis related group list was introduced. The groupings classified patients according to their clinical condition, such as:

• Heart failure and shock
• Angina pectoris
• Fracture of femur
• Extensive burns without an operating room procedure

Each category was linked to a fixed “price tag” regarding how much the condition should cost the hospital to treat. This payment system was a significant departure from the prior model, which allowed hospitals to request reimbursement for whatever costs they had incurred over the course of treatment. The system radically shifted how hospital finances operated.

What Are DRGs Contributing? The Purpose of the Approach

Prospective payments are a cost control measure. The model promotes streamlined care by discouraging excessive tests and therapies that would merely increase the hospital bill without benefiting the patient. In theory, when a hospital provides efficient, quality care that achieves a treatment aim for less than the DRG payment, they profit. Expensive, excessive hospital resource usage or poor-quality care that costs more than the allotted payment leads to revenue leakage.

Frequently Asked Questions About DRGs: Definitions, Examples, and More

When first introduced, the concept of using national averages to determine reimbursements was relatively simple. That’s no longer the case. Today’s healthcare providers contend with many complexities related to DRG diagnosis categories. These complexities impact the care that providers deliver to patients. Let’s look at some of the most common questions on the topic.

How have the groupings changed over the years?

Diagnosis categories have evolved toward more granularity. In the 1990s, two major flaws in the system were identified and addressed:

• A lack of accuracy and applicability to the population aged 0-64
• A lack of consideration for the severity of the illness

An alternative system was developed, called the All Patient Refined Diagnosis Related Groupings (APR-DRGs). This system is often used for infants, children, and adults under the age of 65, as well as for those with markedly complex conditions.

What is the MS-DRG?

Another major change happened in 2007, with the introduction of the Medicare Severity Diagnosis Related Groupings (MS-DRGs). This system involves an expanded number of categories as well as three severity levels:

• With major complication or comorbidity (MCC)
• With complication or comorbidity (CC)
• Without CC or MCC

When is the APR-DRG classification system used instead of the MS-DRG system?

In general, hospitals bill according to the payer’s preferred classification system. For example, Medicare requires the use of the MS-DRG list. State Medicaid programs and private payers increasingly mandate the use of the APR-DRG list for many conditions. Some private payers’ claims processes involve a mix of both classification systems.

How is DRG determined?

The patient’s clinical story determines the category that they’re put into for billing purposes. Clinical notes are vital for accurately telling this story. Medical billers are often responsible for translating clinical notes and data into diagnosis related group codes that accurately reflect the resources used.

If a patient’s stay is under-coded, the hospital may receive a payment that is far less than what they actually spent while delivering patient care. Specialized software, such as the CMS MS-DRG Grouper software, may be used to facilitate the process.

What is DRG auditing?

Some facilities perform audits before issuing claims, to flag missing data and correct weaknesses in their grouping codes. While the process may incorporate AI-driven tools, it’s considered best practice to keep a human in the loop. Proactive auditing is designed to protect facilities against insurer-run audits which scrutinize claims for potential downgrades.

What are some diagnostic related groups examples?

Here are examples of frequently utilized codes from a recent version of the MS-DRG list:

• 291: Heart failure and shock with MMC
• 871: Septicemia or severe sepsis without mechanical ventilation, greater than 96 hours with MMC
• 885: Psychoses

What are DRG weights and how do they factor into payments?

To calculate the amount that the hospital would be reimbursed for a Medicare beneficiary, the grouping’s base rate is multiplied by a DRG relative weight. This numeric value is designed to reflect the expected resource usage of the case relative to the average resources used in the treatment of all other Medicare cases.

In broad terms, this is because some conditions demand significantly more or less hospital resource usage than others. The Centers for Medicare and Medicaid Services (CMS) updates the weights annually to reflect changes in clinical pathways, evolving technologies, and other factors.

What is a DRG relative weight example?

For example, let’s say there are seven DRGs for newborns, each with a corresponding DRG relative weight. A normal newborn grouping could have an assigned relative weight of 0.17 because this condition is expected to use far fewer hospital resources than other conditions.

In contrast, an infant who is born more than 26 weeks early, with very low birth weight, or in respiratory distress could have an assigned weight of 5.26. This is because the condition of the infant indicates that hospital resource usage will be roughly five times that of the average condition.

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