Diagnosis Related Groups (DRGs) are a patient classification system designed to standardize how hospitals categorize and manage inpatient care. The system groups similar patient cases expected to utilize comparable levels of hospital resources. DRGs were initially developed to relate the types of patients a hospital treats to the costs incurred, establishing a common language for describing the hospital’s “product.” This classification tool organizes the complexity of patient care, allowing for the comparison and analysis of efficiency and resource use across different hospitals. It is fundamental for administrative functions, cost management, and resource allocation within the healthcare sector.
How Diagnosis Related Groups Are Determined
The assignment of a patient to a specific DRG occurs through medical coding after the patient is discharged. The process begins by identifying the patient’s principal diagnosis, the condition chiefly responsible for the hospital admission, documented using codes from the International Classification of Diseases (ICD) system.
The system then incorporates other factors to refine the DRG assignment and reflect case complexity. A primary element is the presence of secondary diagnoses, specifically complications or comorbidities (CCs) and major complications or comorbidities (MCCs). These additional conditions significantly affect the resources required for treatment and can shift the case into a higher-weighted DRG.
The DRG assignment also considers surgical procedures performed, documented using procedure codes, and patient demographic factors such as age and sex. Sophisticated software known as a “grouper” uses these coded inputs—diagnosis codes, procedure codes, and demographic data—to assign the appropriate DRG. Accurate documentation by clinicians directly determines the correctness of the final DRG and the corresponding resource intensity level.
The Role of Diagnosis Related Groups in Hospital Payment
DRGs were first introduced by the Medicare program in the United States in 1983. This implementation established the Inpatient Prospective Payment System (IPPS), moving the healthcare industry away from the traditional fee-for-service (FFS) model. Under FFS, hospitals were paid for every service provided, offering no incentive to control costs.
The IPPS replaced FFS with a Prospective Payment System (PPS), where the DRG provides a single, predetermined, fixed payment for the entire hospital stay. This payment is calculated by multiplying the DRG’s assigned relative weight by a standardized base payment rate set by the government. The relative weight reflects the average resources consumed by patients within that specific DRG compared to the average case.
The hospital receives the fixed payment regardless of the actual costs incurred in treating that specific patient. This creates an economic incentive: if the hospital’s costs are less than the DRG payment, the hospital keeps the difference. Conversely, if costs exceed the fixed payment, the hospital must absorb the loss. This financial structure encourages efficiency and fiscal responsibility by bundling all services into a single payment.
How Diagnosis Related Groups Influence Hospital Operations
The economic framework created by DRGs fundamentally changed how hospitals manage patient care and resources. Since payment is fixed per case, hospitals are strongly incentivized to provide care as efficiently as possible to keep their costs below the predetermined DRG rate. This pressure has led to a major focus on managing the patient’s Length of Stay (LOS), as every day a patient remains hospitalized adds to the cost without increasing the payment.
Hospitals actively track metrics like the Geometric Mean Length of Stay (GMLOS), which is the number of days assigned to a DRG, to ensure patients are discharged promptly. This management necessitates the development of standardized care pathways and protocols to reduce variation and optimize resource utilization for common conditions. The emphasis on efficiency also drives hospitals to invest heavily in robust Clinical Documentation Improvement (CDI) programs.
Accurate documentation ensures that the patient’s full severity of illness is captured, leading to the assignment of the highest appropriate DRG and corresponding payment. However, the strong financial incentive to minimize costs can create potential risks, such as the possibility of premature discharge or a practice known as “upcoding,” where providers may select a higher-paying DRG than is clinically warranted. To mitigate this, the system incorporates penalties for readmissions within a short timeframe, which encourages hospitals to ensure patients are truly stable before discharge.