Diagnosis-Related Group – DRG

While this term might throw new medical billing and coding professionals, understanding diagnosis-related groups – DRGs – is not complicated. Essentially a DRG is just a way of categorizing different medical codes.

Billing and coding professionals deal with potentially tens of thousands of different types of codes. To simplify matters, these codes – be they related to the ICD-9 or ICD-10, the Centers for Medicare and Medicaid Services (CMS), or another organization that classifies medical codes – are placed into categories for better organization.

Knowing a little about the history of DRGs will help to better understand them. The DRG originated in New Jersey – a collaboration of the predecessor of CMS and Yale University – as an attempt to standardize reimbursement rates. Analysts were looking at different hospitals in that state, and the differences between hospitals that operated on a surplus and those that were constantly operating in a deficit. What they found were varying rates of reimbursement that were all over the place.

Thus the DRG was introduced. For example, a DRG could be all males between the ages of 45-60 who had suffered heart attacks. The list of medical services provided to this group – a DRG – could be compared with other hospitals in New Jersey, and a system of rate standardization could be devised; CMS could take the median average of costs for the services provided on this list among five hospitals and make this the standard reimbursement rate for all hospitals providing these same services throughout the state.

In fact, CMS does have its own DRG system for procedures that are covered by Medicare, however calculating the reimbursement rates for medical procedures is much more involved than the example above. Luckily billing and coding professionals can leave the complex math to CMS – they just need to worry about using accurate DRG codes. When the first DRG classification system was introduced in New Jersey it had 467 categories

DRGs and Coding/Reimbursement

Fast forward to the present and evolved DRGs are required in all hospitals. Today there is no universal DRG system. Each organization – healthcare service provider or insurance company – can create its own DRGs. That being said, there are a few DRGs that are widely used among hospitals, with perhaps the most prominent being known as MS-DRG.

The MS-DRG classification and coding system starts by first dividing all the possible ailments a person could be suffering from into 25 different categories (called Medical Diagnostic Categories or MDCs) which are mostly based on different systems in the body (i.e., pertaining to the heart, lymph system, etc). A subset of codes within these initial 25 then identifies if the medical procedure is surgical or not.

The billing and coding professional is responsible for being aware of each of these categories and how to code for them appropriately. Of course this system allows for greater complexity, with coding forms allowing for second, third, and so on, ailments if a patient requires a significant amount of treatment.

Once a medical billing and coding professional has determined the proper DRG code for a procedure, it can then be converted into a monetary amount for reimbursement. The MS-DRG does this by using a baseline rate. Medical services are not actually translated directly into a monetary value, instead the baseline weight acts as a conversion factor between services and reimbursement. Technically, the baseline weight is the average hospital resource consumption per patient, which is calculated based on an equation that takes a complex range of issues into consideration.

Here is one example: say the DRG code for a knee replacement carries a relative weight code of 2.543. This relative weight code would be automatically provided in electronic coding software, or could be found by searching a database provided by the hospital. Also say hypothetically that the hospital’s baseline rate was $4,000 (meaning the average patient cost the hospital $4,000 to treat). The reimbursement rate is calculated with this equation:

(Relative rate code) X (baseline rate) = reimbursement rate

(2.543) X ($4,000) = $10,172

One count showed the following DRG groupings as representing 30 percent of all hospital discharges in the United States:

  • Child birth
  • Childbirth related issues
  • Heart failure
  • Psychoses
  • Chest pain
  • Strokes and stroke-related issues
  • Pneumonia
  • Hip and knee replacements