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Diagnosis-related groups (DRGs) and medical coding

authored by added December 24, 2010 06:01 by Matt Sluzinski

Diagnosis-related groups (DRGs) are one ingredient in medical coding’s “alphabet soup” that we’ve yet to cover. They facilitate Medicare’s inpatient prospective payment system, under which the U.S. government reimburses hospitals for treating Medicare patients.

The Medicare DRG system (MS-DRG) is maintained by the Centers for Medicare and Medicaid Services (CMS) and its latest revision, version 27, has more than 750 “groups.”

Taking a step back, we should note that DRGs are themselves classified into 25 major diagnostic categories (MDCs) based on organ system (eye, respiratory, etc.). After assignment into an MDC, the patient is matched to a DRG.

By sorting patients into DRGs, the government can reimburse providers on a “per episode” basis, as all patients in a particular DRG should theoretically use similar amounts of hospital resources and therefore cost the hospital about the same amount to treat. For any particular patient, the DRG system is meant to encourage hospitals to avoid unnecessary services and procedures, since their reimbursement amount is set at a fixed level.

Prior to the 1983 implementation of the DRG system, hospitals were simply reimbursed for costs they incurred serving Medicare patients. Like everywhere else, incentives matter in health care. When providers are paid more when they do more, they tend to do more. From 1967 to 1983, Medicare enrollment rose by barely 50 percent, but spending ballooned from $3 billion to $37 billion.

Under the DRG system today, each Medicare inpatient is evaluated based on his or her principal diagnosis, surgical procedure(s), age, sex, coexisting conditions, and status at discharge. Each DRG has a weight assigned to it, which represents how resource-intensive a particular condition (on average) is for the hospital.

For example, in fiscal year 2010, viral meningitis without complications or comorbidities (MS-DRG 076) has a weight of 0.8336. Contrast that with a lung transplant (MS-DRG 007), which is weighted at 9.4543. Clearly, a patient needing the latter costs the hospital more than someone treated for the former. The initial payment amount is computed by multiplying this weight by the payment rate specific to that hospital.

After this initial computation, the payment amount is adjusted by a number of additional factors:

  • Wage conditions: Payments in high-wage areas of the U.S. are greater than those in low-wage areas.

  • Share of low-income patients: Hospitals that serve a disproportionate number of low-income patients receive add-on payments.

  • Indirect medical education: Approved teaching hospitals receive an add-on payment based on the ratio of medical residents to hospital beds.

  • New technologies: Cases that use certain technologies receive add-on payments.

  • Outlier cases: Cases with unusually high overall costs are eligible for additional payments.

So where does medical coding fit in?

Coding must be done before you can even start talking about DRGs. Diagnoses and procedures — more accurately, diagnosis and procedure codes — are two inputs for the DRG “grouper” algorithm that sorts patients into DRGs.

And as we’ve discussed before, improperly coded or undercoded cases can negatively impact how a private insurance company reimburses a provider for services rendered; so too can it affect DRG classification. When the assigned medical codes understate the severity of a patient’s condition — and therefore assign the patient into a lower-paying DRG — providers get underreimbursed.

Capturing every legitimate diagnosis and procedure maximizes reimbursement, regardless of whether it’s so the government can assign a Medicare patient to a DRG or so a private insurer can reimburse using a fee-for-service model.

Good medical coding is good business.

Stop leaving money on the table. pmFAQtory can help you optimize your coding and billing efforts. Get in touch with us today.

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Dear Mr. Sluzinskin Your article was very informative. I am an RN CPC certified and would like to transition into the coding field. How can I get educated legitimately on diagnostic related groups since I have 20+ years experience? Jody Pay

  • by Jody Pay on February 11, 2012 17:29

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