What Is DRG in Healthcare?

The healthcare industry is broad, and patients often get confused about the costs of the services they get and what their insurance covers. That is why two Yale School of Public Health professors developed a DRG project that helps patients, healthcare providers, and insurance companies. But what is DRG in healthcare actually?

Continue reading to learn about DRG in healthcare and how Medicare pays healthcare organizations.

What Is a Diagnosis Related Group (DRG)?

A diagnosis-related group is a system used in healthcare to classify hospital inpatient stays into groups based on similar clinical characteristics and resources used. The DRG is calculated based on the patient’s primary and secondary diagnoses, other conditions, sex, age, and required medical procedures. 

DRG’s main purpose is to provide a unified way of defining the right reimbursement for hospital services. In other words, this concept aims for patients to get the care they need, and avoid unnecessary charges.

We want to point out how important it is for you, healthcare providers, to understand DRG as it directly impacts your reimbursement from payers like Medicare. As a system, DRG allows providers, to foresee the expected resources required for a particular type of patient. Also, healthcare providers can ensure they receive reimbursement for services so they can maintain financial stability.

What Is DRG in Medical Billing?

As you know, DRGs in medical billing determine the sum of money that hospitals will be reimbursed for treating patients with specific diagnoses. The main role of DRGs in medical billing and reimbursement is to establish a standardized payment method for hospital services.

Several different DRG types, like Medicare Severity Diagnosis Related Group (MS-DRG), are used for billing under Medicare’s Inpatient Prospective Payment System (IPPS). Under IPPS, Medicare and Medicaid use DRGs to define the reimbursement a hospital will receive for inpatient care to Medicare beneficiaries. 

Hospitals receive a fixed amount for each DRG, regardless of the care cost. This system motivates hospitals to provide cost-effective care. However, they are responsible for any costs that exceed the predetermined DRG rate. DRG is also important to encourage hospitals to reduce unnecessary resources. 

What Is DRG in Medical Billing

Source: unsplash.com/ Photo Contributor: National Cancer Institute

DRG Coding and Classification

Due to the purpose of DRG, it was necessary to develop specific means of determining resources used in treating patients. While all patients are unique, they still have common diagnoses and therapies.

Hence, you can develop a patient classification scheme by creating groups of similar cases. This is how DRGs were created. A patient classification scheme encompasses classes of clinically similar patients requiring similar hospital resources. This scheme helps us process medical billing and coding.

Basic characteristics of the DRG patient classification scheme

  • The patient characteristics should be based on information collected in hospital systems.
  • Each DRG should contain patients who require resources used with similar intensity.
  • Each DRG should contain patients with similar clinical cases.

Healthcare professionals assign DRGs to patient cases based on the primary and secondary diagnoses, procedures performed, and patient demographics. The first defining factor is the primary diagnosis or why a patient is hospitalized.

The secondary diagnoses, like comorbidities or complications, also impact DRGs. The procedures performed during the patient’s stay are also considered, as they have different costs.

Finally, a patient’s demographics, like age and sex, are important. This is because some conditions and procedures are more or less common among different age groups.

DRG Payment Methodologies

DRG payment methodologies include many reimbursement models that payers use. The most common DRG payment methodologies include the following:

  • Prospective payment system (PPS): Under this system, payers reimburse providers a predefined, fixed amount based on the patient’s DRG classification, regardless of the actual cost of care.
  • Value-based reimbursement: This approach connects provider reimbursement to the quality of care and patient outcomes. DRG assignment may be a crucial factor in determining value-based payments.
  • Bundled payments: This model refers to the payment for a specific episode of care. It includes multiple services and providers.

DRG Documentation and Compliance

Medical documentation is important from the compliance and reporting perspective because appropriately capturing a patient’s clinical condition influences how hospitals are reimbursed under the Medicare DRG system. Inaccurate or incomplete documentation may lead to incorrect DRG classification, underpayment or claim denials.

Compliance with CMS guidelines and coding rules is fundamental for proper DRG coding. As a healthcare provider, you should follow official coding guidelines, like ICD-10-CM and ICD-10-PCS manuals, to ensure that diagnoses, procedures, and information are documented.

You may face penalties and legal consequences if you do not comply with CNS guidelines and coding rules. So, we advise that healthcare organizations must enforce compliance programs for correct DRG and reimbursement. 

Impact of DRGs on Healthcare Delivery

DRG payment has led to less overuse of the healthcare service because it shows the financial risk to healthcare providers. That is why DRGs reduce the length of stay at the hospital, improve efficiency, and control the treatment cost.

Hospitals focus on streamlining processes, reducing unnecessary tests and procedures, and promoting early patient discharge to minimize reimbursement. Moreover, DRG-based reimbursement models impact care management strategies, as hospitals want to balance the need for efficient care delivery with the need to maintain a positive patient experience.

Impact of DRGs on Healthcare Delivery

Source: unsplash.com/ Photo Contributor: National Cancer Institute


So, what is DRG in healthcare? A DRG (diagnostic-related group) in healthcare is how healthcare insurance companies define how much to pay for your hospital stay. Instead of paying for each service, a predefined amount is set based on your DRG.

The main purpose of DRG in medical billing is to create a standardized payment method for hospital services. This system also intends to motivate hospitals to provide cost-effective care, as they are responsible for any costs exceeding the predetermined DRG rate.

DRG payment has a positive impact on the healthcare system. It reduces the overuse of healthcare services and the length of stay at the hospital, improves efficiency and controls the treatment cost.