Medicare’s Cost-Saving Plan for Hospitals
A Diagnosis-Related Group, abbreviated as DRG, is a system of classifying a patient’s hospital stay into various groups in order to facilitate payment of services.
The DRG system separates all of the potential disease diagnoses into 20+ body systems, and then subdivides those systems into 450+ groups. Fees are assessed through by factoring the body system and groups affected with the amount of hospital resources required to treat the condition. The result is a fixed rate for patient services known as DRG.
Created to Stem Growing Medicare Costs
The DRG system was created collaboratively through Yale University’s Schools of Management and Public Health in order to classify the care that hospitals provide. Since 1982, DRGs have been used to determine how much Medicare pays a hospital or home healthcare provider for each service that is given. Since Medicare patients are similar in age and can be generally expected to use the same level of hospital or healthcare resources, the DRG system has replaced the health insurance industry’s cost-based reimbursement system which matchesallowable costs defined by government policy with actual patient costs.
According to the Agency for Health Care Policy and Research, the top 10 DRGs in 1991 were: normal newborn, vaginal delivery, heart failure, psychoses, cesarean section, neonate with significant problems, angina pectoris, specific cerebrovascular disorders, pneumonia and hip replacement/knee replacement.
All-Patient and Medicare DRGs Today
In 1987, the DRG system became the All-Patient DRG (AP-DRG) system, and incorporates billing for patients other then those covered by Medicare. In addition to use of hospital resources, current changes in AP-DRG classification now includes severity of illness, risk of mortality, prognosis, treatment difficulty and need for intervention. The APR-DRG system is now commonly used by many private payers and some state Medicaid programs. The Centers for Medicare & Medicaid Services (CMS), however, uses the Medicare Severity-DRG (MS-DRG.)