How Your DRG Is Determined

Medicare and many health insurance companies pay hospitals using DRGs, or diagnostic related groupings. This means the hospital gets paid based on the admitted patient’s diagnosis and prognosis, rather than based on what it actually spent caring for the hospitalized patient.

This article will explain how DRGs are determined and how this affects your medical bills.

If a hospital can treat a patient while spending less money than the DRG payment for that illness, the hospital makes a profit. If, while treating the hospitalized patient, the hospital spends more money than the DRG payment, the hospital will lose money on that patient’s hospitalization. This is meant to control healthcare costs by encouraging the efficient care of hospitalized patients.

Why You Should Care How a DRG Is Determined

If you’re a patient, understanding the basics of what factors impact your DRG assignment can help you better understand your hospital bill, what your health insurance company or Medicare is paying for, or why you’ve been assigned a particular DRG.

If you’re a physician rather than a patient, understanding the process of assigning a DRG can help you understand how your documentation in the medical record impacts the DRG and what Medicare will reimburse for a given patient’s hospitalization. It will also help you understand why the coders and compliance personnel ask you the questions they ask.

Steps for Determining a DRG

This is a simplified run-down of the basic steps a hospital’s coder uses to determine the DRG of a hospitalized patient. This isn’t exactly how the coder does it; in the real world, coders have a lot of help from software.

1. Determine the principal diagnosis for the patient’s admission.
2. Determine whether or not there was a surgical procedure.
3. Determine if there were any secondary diagnoses that would be considered comorbidities or could cause complications. A comorbid condition is an additional medical problem happening at the same time as the principal medical problem. It might be a related problem, or totally unrelated.

These steps are illustrated in a flow chart on page 15 of this CMS document. The DRG will also reflect various nuances related to the patient's healthcare needs, including the severity of the condition, the prognosis, how difficult or intensive the treatment is, and the resources necessary to treat the patient.

An Example

Let’s say elderly Mrs. Gomez comes to the hospital with a broken femoral neck, known more commonly as a broken hip. She requires surgery and undergoes a total hip replacement. While she’s recovering from her hip surgery, her chronic heart problem flares up and she develops acute systolic congestive heart failure. Eventually, her physicians get Mrs. Gomez’s heart failure under control, she’s healing well, and she’s discharged to an inpatient rehab facility for intensive physical therapy before going back home.

Mrs. Gomez’s principal diagnosis would be a fracture of the neck of the femur. Her surgical procedure is related to her principal diagnosis and is a total hip replacement. Additionally, she has a major comorbid condition: acute systolic congestive heart failure.

When the coder plugs all of this information into the software, the software will spit out a DRG of 469, entitled “Major Joint Replacement or Reattachment of Lower Extremity With MCC.” The "MCC" stands for "major complication or comorbidity" and it's applicable in this case because of the cardiovascular problems that Mrs. Gomez experienced during her hospital stay.

More About Step 1: Principal Diagnosis

The most important part of assigning a DRG is getting the correct principal diagnosis. This seems simple but can be tough, especially when a patient has several different medical problems going on at the same time. According to the Centers for Medicare and Medicaid Services (CMS), “The principal diagnosis is the condition established after study to be chiefly responsible for the admission.”

The principal diagnosis must be a problem that was present when you were admitted to the hospital; it can’t be something that developed after your admission. This can be tricky since sometimes your physician doesn’t know what’s actually wrong with you when you’re admitted to the hospital.

For example, maybe you’re admitted to the hospital with abdominal pain, but the doctor doesn’t know what’s causing the pain. It takes her a bit of time to determine that you have colon cancer and that colon cancer is the cause of your pain. Since the colon cancer was present on admission, even though the physician didn’t know what was causing the pain when you were admitted, colon cancer can be assigned as your principal diagnosis.

There are also times when a patient is admitted to the hospital with two or more conditions that each meet the definition of principal diagnosis. There are protocols in place that the doctor and coders use to ensure that the conditions are actually equally qualified to be the principal diagnosis, but if they are, both conditions are coded but either one can be selected as the principal diagnosis.

More About Step 2: Surgical Procedure

Although this seems cut and dry, like most things about health insurance and Medicare, it’s not. There are a couple of rules that determine if and how a surgical procedure impacts a DRG.

First, Medicare defines what counts as a surgical procedure for the purposes of assigning a DRG, and what doesn’t count as a surgical procedure. Some things that seem like surgical procedures to the patient having the procedure don’t actually count as a surgical procedure when assigning your DRG.

Second, it’s important to know whether the surgical procedure in question is in the same major diagnostic category as the principal diagnosis. Every principal diagnosis is part of a major diagnostic category, roughly based on body systems.

If Medicare considers your surgical procedure to be within the same major diagnostic category as your principal diagnosis, your DRG will be different than if Medicare considers your surgical procedure to be unrelated to your principal diagnosis. In the above example with Mrs. Gomez, Medicare considers the hip replacement surgery and the fractured hip to be in the same major diagnostic category.

More About Step 3: Comorbid Conditions and Complications

Since it uses more resources and likely costs more to care for a patient like Mrs. Gomez who has both a broken hip and acute congestive heart failure than it does to care for a patient with a broken hip and no other problems, the DRG protocol takes this into account.

A comorbidity is a condition that existed before admission, and a complication is any condition that occurred after admission, not necessarily a complication of care. 

Medicare even distinguishes between major comorbid conditions like acute congestive heart failure or sepsis, and not-so-major comorbid conditions like an acute flare-up of chronic COPD. This is because major comorbid conditions require more resources to treat than not-so-major comorbid conditions do. In cases like this, there may be three different DRGs, known as a DRG triplet:

1. A lower-paying DRG for the principal diagnosis without any comorbid conditions or complications.
2. A medium-paying DRG for the principal diagnosis with a not-so-major comorbid condition. This is known as a DRG with a CC or a comorbid condition.
3. A higher-paying DRG for the principal diagnosis with a major comorbid condition, known as a DRG with an MCC or major comorbid condition.

If you’re a physician getting questions from the coder or the compliance department, many of these questions will be aimed at determining if the patient was being treated for a CC or MCC during his or her hospital stay in addition to being treated for the principal diagnosis.

If you’re a patient looking at your bill or explanation of benefits and your health insurance company pays for hospitalizations based on the DRG payment system, you’ll see this reflected in the title of the DRG you were assigned.

A DRG title that includes “with MCC” or “with CC” means that, in addition to treating the principal diagnosis you were admitted for, the hospital also used its resources to treat a comorbid condition during your hospitalization. The comorbid condition likely increased the resources the hospital had to use to treat you, which is why the hospital was paid more than they would have received if you'd only had a single diagnosis and no comorbid conditions.

Hospital Base Rates and DRG Relative Weights

DRGs are assigned a relative "weight," which reflects how resource-intensive it is to treat the patient. The average weight is 1.0. DRGs with weights above 1 require more resources, while DRGs with weights below 1 are, in general, less costly to treat.

In addition, each hospital has a base rate, which is determined based on factors such as location (labor and overhead costs are higher in some areas than in others), whether it's a teaching hospital, whether it's in a rural and/or underserved area, and the percentage of uninsured patients the hospital sees.

The DRG's relative weight and the hospital's base rate are both included int the formula that determines how much the hospital will get paid.

Summary

When a Medicare patient is hospitalized, a diagnostic-related category (DRG) code is assigned based on the patient's condition (private insurers can also use DRGs or similar coding protocols). DRGs are based on the patient's principal diagnosis (ie, the primary reason they're admitted to the hospital), any surgical procedures, and any comorbidities that complicate the treatment or add to the resources needed to care for the patient.

DRGs are assigned a relative weight, reflecting how costly/resource intensive the treatment is. And hospitals also have different base rates, reflecting various factors that impact their overhead costs.

The DRG and the hospital's base rate are both taken into account during the billing and payment process, and are used to determine how much the hospital will be paid. The patient's share of the bill will generally depend on the specifics of their health plan and whether they have supplemental coverage.

A Word From Verywell

Although the DRG determination process is complex, you don't have to know the details of exactly how it works. As far as the patient is concerned, the important details include using an in-network hospital and understanding how your health plan's cost-sharing works (deductible, coinsurance, and out-of-pocket maximum are the factors that generally come into play with inpatient care). And if you have Medicare and are going to need follow-up care in a skilled nursing facility, you'll also want to understand the difference between inpatient and observation care.