MS-DRG Overview
Medicare Severity Diagnosis Related Groups (MS-DRGs) are used to classify inpatient hospital stays into groups based on clinical similarity and expected resource consumption. MS-DRGs are the basis for the Inpatient Prospective Payment System (IPPS) used by Medicare to reimburse acute care hospitals.
How DRGs Are Assigned
The DRG grouper software assigns each case to a DRG based on several data elements:
- Principal diagnosis: The condition established after study to be chiefly responsible for the admission
- Secondary diagnoses: Additional conditions affecting the patient's care during the stay
- Principal procedure: The procedure performed for definitive treatment (most related to the principal diagnosis)
- Secondary procedures: Other significant procedures performed during the stay
- Age and sex of the patient
- Discharge status: Where the patient went after discharge (home, skilled nursing facility, transfer, etc.)
Complication and Comorbidity Levels
| Level | Abbreviation | Description | Impact on Payment |
|---|---|---|---|
| No CC/MCC | - | No qualifying complications or comorbidities | Base DRG weight (lowest payment) |
| CC | Complication or Comorbidity | Secondary diagnosis that increases resource use moderately | Higher DRG weight (moderate payment) |
| MCC | Major Complication or Comorbidity | Secondary diagnosis that significantly increases resource use | Highest DRG weight (highest payment) |
Many MS-DRGs have three tiers (with MCC, with CC, without CC/MCC) to reflect the severity of illness and resource consumption.
APR-DRGs
All Patient Refined DRGs (APR-DRGs) expand on the MS-DRG system and are used by many state Medicaid programs and some commercial payers.
- Include four subclasses of severity of illness (SOI): Minor, Moderate, Major, Extreme
- Include four subclasses of risk of mortality (ROM): Minor, Moderate, Major, Extreme
- Cover all patients, not just Medicare beneficiaries
- Used for quality reporting, case-mix analysis, and risk adjustment
Prospective Payment Systems (PPS)
| PPS | Setting | Payment Unit | Classification System |
|---|---|---|---|
| IPPS | Acute care inpatient hospitals | Per discharge | MS-DRGs |
| OPPS | Hospital outpatient departments | Per service/procedure | APCs (Ambulatory Payment Classifications) |
| MPFS | Physician services | Per service | CPT/HCPCS codes with RVUs (Relative Value Units) |
| SNF PPS | Skilled nursing facilities | Per diem (daily rate) | PDPM (Patient Driven Payment Model) |
| HH PPS | Home health agencies | Per 30-day period | PDGM (Patient Driven Groupings Model) |
| IRF PPS | Inpatient rehabilitation facilities | Per discharge | CMGs (Case Mix Groups) |
| IPF PPS | Inpatient psychiatric facilities | Per diem | DRG-based with per diem adjustments |
| LTCH PPS | Long-term care hospitals | Per discharge | MS-LTC-DRGs |
DRG Payment Calculation
The IPPS payment for each case is calculated as:
Payment = DRG Relative Weight x Base Rate (adjusted for geographic factors)
- Relative weight: Reflects the average resources required for cases in that DRG compared to the average for all cases
- Base rate: Standardized amount adjusted for wage index, cost-of-living, and other geographic factors
- Add-on payments: Additional payments for teaching hospitals (IME/GME), disproportionate share hospitals (DSH), and outlier cases with extraordinarily high costs
- Transfer cases: Payments may be adjusted when a patient is transferred to another acute care facility before completing the expected length of stay
Other Reimbursement Methodologies
| Method | Description | Examples |
|---|---|---|
| Fee-for-Service | Payment for each individual service provided | Traditional indemnity insurance |
| Fee Schedule | Predetermined list of fees for specific services | Medicare Physician Fee Schedule (MPFS) |
| Capitation | Fixed per-member per-month (PMPM) payment regardless of services provided | Managed care organizations, HMOs |
| Per Diem | Fixed daily rate for each day of care | Some hospital contracts, SNFs |
| Charge-Based (Discounted) | Percentage of the provider's billed charges | Some commercial payer contracts |
| Bundled Payment | Single payment for all services related to a treatment or condition over a defined period | CMS Bundled Payments for Care Improvement (BPCI) |
| Value-Based | Payment tied to quality outcomes and performance measures | MIPS, ACOs, Hospital Value-Based Purchasing |
| Global Payment | Single payment covering all services during a surgical episode (pre-op, intra-op, post-op) | Surgical global periods |
Key Exam Tips
- The principal diagnosis drives DRG assignment - accurate documentation and coding are essential
- CCs and MCCs significantly impact reimbursement - this is why CDI programs focus on documentation specificity
- OPPS uses APCs, not DRGs - each APC has a relative weight and a national payment rate
- Capitation shifts financial risk to the provider - providers are incentivized to keep patients healthy and reduce utilization
- Value-based purchasing ties a portion of payment to quality measures and patient outcomes