Direct Answer
Medicare pays hospitals for inpatient admissions using a Diagnosis-Related Group (DRG) system that groups patients into clinically similar categories and assigns each category a weight reflecting the expected resource intensity of care. The hospital receives a single DRG payment for the entire admission — regardless of actual costs incurred (with exceptions for outlier payments). Accurate coding of the principal diagnosis, secondary diagnoses (particularly complications and comorbidities), and ICD-10-PCS procedures determines the DRG assignment and therefore the payment.
Table of Contents
How DRG Assignment Works
The MS-DRG (Medicare Severity-Diagnosis Related Group) system assigns each inpatient discharge to one of over 700 DRG categories. DRG assignment is driven by: the principal diagnosis (the condition after study that chiefly occasioned the admission); the presence of Major Complications or Comorbidities (MCCs) or Complications and Comorbidities (CCs) among secondary diagnoses; significant procedures coded with ICD-10-PCS; and patient age and discharge status in certain DRG categories. Each DRG has a relative weight — higher weights mean higher payment. The actual payment is: DRG Weight × Hospital Base Rate (adjusted for wages, teaching status, and DSH) = Hospital Payment.
MCC and CC: Their Impact on DRG
Many DRGs exist in three tiers: the base DRG (no MCC or CC), the CC tier (the patient has one or more qualifying complications/comorbidities), and the MCC tier (the patient has one or more major complications/comorbidities). Moving from the base DRG to the CC or MCC tier substantially increases the DRG weight — and therefore the payment. For example, a principal diagnosis of CHF exacerbation might assign to DRG 293 (heart failure, no CC) with a weight of 0.7, while the same principal diagnosis with respiratory failure (an MCC) assigns to DRG 291 (heart failure with MCC) with a weight of 1.9 — a 170% increase in payment for the same base diagnosis.
CCs and MCCs must be legitimately documented in the clinical record and coded by facility coders — they cannot be added for billing purposes without clinical documentation support. This is where CDI programs add critical value: ensuring that conditions present in the clinical record (respiratory failure, sepsis, malnutrition, pressure ulcers, etc.) are explicitly documented and coded.
Principal Diagnosis Selection
Inpatient principal diagnosis is the condition established after study to be chiefly responsible for occasioning the admission. When two or more diagnoses could equally serve as the principal diagnosis, the UHDDS (Uniform Hospital Discharge Data Set) guidelines allow coding either as principal. The choice can affect DRG assignment — in cases where the choice of principal diagnosis changes the DRG, the coder must select the diagnosis that most accurately represents the primary reason for the admission based on clinical documentation. Coding conventions (such as the Grouper logic's treatment of certain code combinations) also affect which diagnoses can serve as principal.
Outlier Payments
For cases with unusually high resource utilization (costs that exceed the DRG payment by a defined threshold — currently a fixed loss threshold above the DRG amount), Medicare makes an outlier payment in addition to the DRG payment. Outlier payments cover a percentage (typically 80%) of costs above the threshold. Outlier payments are reported on cost reports and are subject to retrospective settlement — hospitals that receive outlier payments may have those payments adjusted when actual cost data is audited. Outlier cases trigger heightened audit scrutiny because they represent high-cost outliers that may attract RAC and MAC attention.
Hospital Revenue Cycle Considerations
The hospital inpatient revenue cycle is more complex than physician billing — it involves: clinical documentation improvement to ensure diagnostic and procedural coding captures case complexity; case management and utilization review to support appropriate admission status (inpatient vs. observation); charge capture across all departments involved in the inpatient stay; ICD-10-PCS procedure coding for significant procedures; and discharge coding and bill hold management to ensure coding is complete before claim submission. The UB-04 claim form used for hospital billing includes revenue codes, service dates, and accommodations charges that have no equivalent in professional billing.
FAQ
What is the difference between Medicare and commercial DRG payment?
Medicare uses the MS-DRG system exclusively for inpatient hospital payment. Commercial payers may use MS-DRGs (often at negotiated percentages of the Medicare DRG amount), APR-DRGs (All Patient Refined DRGs, a severity-based DRG system used by many commercial payers and Medicaid programs), or entirely different reimbursement methodologies (percent of charges, per diem, case rate). The DRG grouper logic, relative weights, and payment formulas can differ significantly between Medicare and commercial payer DRG systems — a hospital's commercial contracts should be reviewed to understand exactly which DRG system and which weight tables apply.
Can a hospital be paid more than the DRG amount?
The DRG amount represents the base payment. Additional payments are available for: outlier cases (as described above); indirect medical education (IME) adjustment for teaching hospitals; DSH (disproportionate share hospital) payment for hospitals with high Medicaid/uninsured patient volumes; and new technology add-on payments for new devices or procedures approved for add-on status by CMS. Together these adjustments can significantly increase a hospital's actual payment above the base DRG amount. In practice, academic medical centers and safety net hospitals often have effective payment rates substantially above the base DRG amount due to these adjustments.
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