What Is a Medicare Diagnosis Related Group (DRG), and Why Does It Matter for Beneficiaries?

A Medicare diagnosis related group (DRG) affects the pre-determined amount that Medicare pays your hospital after an inpatient admission. Understanding what it means can help you gain insight into the cost of your care.

As you probably know, healthcare is filled with acronyms. Although you may be familiar with many of them, here’s one that probably isn’t on your radar: DRG (diagnosis related group).

A DRG dictates how much Medicare pays the hospital if you’re admitted as an inpatient. However, keep in mind that your DRG does not affect what you owe for an inpatient admission when you have Medicare Part A coverage, assuming you receive medically necessary care and that your hospital accepts Medicare.

What exactly is a Medicare DRG?

A Medicare DRG (often referred to as a Medicare Severity DRG) is a payment classification system that groups clinically-similar conditions that require similar amounts of inpatient resources. It’s a way for Medicare to easily pay your hospital after an inpatient stay.

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Your Medicare DRG is based on your severity of illness, risk of mortality, prognosis, treatment difficulty and need for intervention as well as the resource intensity necessary to care for you.

Here’s how it works:

  • Medicare pays your hospital a pre-determined amount for all of your health care costs based on the DRG that the hospital assigns to your specific hospital stay.
  • This DRG includes payment for all of the services you receive while in the hospital (e.g., x-rays, MRIs and any surgeries). It also includes any supplies you use (e.g., bandages, alcohol swabs or bedpans).
  • Your hospital therefore doesn’t need to bill for every individual item or service it provides to you, because it’s all rolled up into the DRG based payment.

In addition, your Medicare DRG also covers outpatient services that the hospital (or an entity owned by the hospital) provides you in the three days leading up to your hospitalization.

How is a Medicare DRG determined?

A Medicare DRG is determined by the diagnosis that caused you to become hospitalized as well as up to 24 secondary diagnoses (otherwise known as complications and comorbidities) you may have. Medical coders assign ICD-10 diagnosis codes to represent each of these conditions.

Any procedures you undergo while in the hospital may also affect your DRG. Medical coders also assign ICD-10 procedure codes for each procedure you have.

Finally, your age, gender and discharge status disposition (i.e., whether you went home after discharge or to another care setting such as an inpatient rehabilitation facility) can also affect Medicare DRG assignment.

Each DRG is weighted and has an associated average length of stay (i.e., the number of days an average patient stays in the hospital for that diagnosis and/or procedure). Each DRG weight has an associated dollar amount (known as the DRG base rate). This DRG base rate is adjusted based on a variety of factors, including the wage index in a given area.

For example, hospital A in New York City pays higher wages than hospital B in rural Oklahoma, thus the DRG based payment rate for same DRG will be higher for hospital A when all other factors remain the same. Similar adjustments are made for hospitals that treat a lot of uninsured patients and for teaching hospitals.

If you require extra hospital resources because you are particularly sick, your hospital may also receive an outlier payment that goes above and beyond the normal DRG based payment. It could also receive an add-on payment if your physician uses certain types of new medical services and technologies.

Something else to know: In some cases, if you acquire a condition while in the hospital (known as a hospital acquired condition), your hospital will be paid less for treating you. Some examples include Stage III and IV pressure ulcers, vascular catheter-associated infection, and air embolism. This is to incentivize hospitals to keep you safe while you receive care.

What is an example of a Medicare DRG?

For example, let’s say you’re admitted to the hospital to undergo a knee replacement. Your hospital will be paid for all of your healthcare costs based on Medicare DRG 470. However, if you’re admitted instead due to simple pneumonia, your hospital will be paid for your health care costs based on Medicare DRG 195.

In 2021, DRG 195 had a relative weight of 0.6650 in while DRG 470 had a relative weight of 1.8999. The higher-weighted DRG reflects the more invasive nature of the knee replacement and resources required for the procedure and post-surgical care.

To view a complete list of DRGs for 2022, including relative weights and geometric mean lengths of stay, visit the CMS Website.

Why were DRGs created?

The DRG system was created to standardize hospital reimbursement for Medicare patients while also taking regional factors into account.

Another goal was to incentivize hospitals to become more efficient. If your hospital spends less money taking care of you than the DRG payment it receives, it makes a profit. If it spends more than the DRG payment, it loses money.

Are there inherent flaws in the DRG system?

Yes, there are some flaws. For example, your hospital may channel its resources to higher-profit services. However, this is changing as hospitals shift toward new payment models that focus on paying one amount for all of your care over a period of time rather than for each specific service you receive.

The goal with these new payment models is to reward high-quality care and positive outcomes — and to keep you healthy and out of the hospital.

Another flaw with the DRG system is that your hospital may be tempted to discharge you sooner than it should so it doesn’t lose money. However, Medicare has rules in place that penalize hospitals in certain circumstances if a patient is readmitted within 30 days.

This deters premature discharges and helps ensure Medicare patients are discharge only when they are truly ready to go home or to another post-discharge care setting.

Are DRGs only for Medicare?

No, some private insurers use DRGs as well, though their specific DRG calculations might be different.

What else do I need to know about DRGs?

DRGs are updated annually, and the pre-determined amounts associated with each DRG may change from year to year. In 2021, hospitals use Medicare DRG version 39.1.

Finally, your hospital’s billing department should be able to answer any questions you have about specific DRGs that were assigned for your hospital stay.

Medicare Advantage plans include out-of-pocket spending limits

Medicare beneficiaries may have the option of enrolling in a Medicare Advantage plan (Medicare Part C) that covers all of the benefits offered by Original Medicare (Parts A and B) but is offered by a private insurance company.

Medicare Advantage plans can include benefits that Original Medicare doesn't include. All Medicare Advantage plans are required to include an annual out-of-pocket spending limit, which Original Medicare doesn't offer.

Inpatient hospital care costs can add up quickly, depending on your diagnosis related group and the services you receive. The out-of-pocket spending limit of an Medicare Advantage plan can help protect you from potentially high hospitalization costs.

If you want to learn more about how a Medicare Advantage plan could help offer the benefits you need, call  to speak with a licensed insurance agent today or compare plans online, with no obligation to enroll.

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About the author

Lisa Eramo is an independent health care writer whose work appears in the Journal of the American Health Information Management Association, Healthcare Financial Management Association, For The Record Magazine, Medical Economics, Medscape and more.

Lisa studied creative writing at Hamilton College and obtained a master’s degree in journalism from Northeastern University. She is a member of the American Health Information Management Association, American Academy of Professional Coders, Society of Professional Journalists, Association of Health Care Journalists and the American Society of Journalists and Authors.

Lisa currently resides in Cranston, Rhode Island with her wife and two-year-old twin boys.



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