An Inpatient Prospective Payment System Overview: Diagnosis Related Groups

Vol. 16 •Issue 5 • Page 6
CCS Prep!

An Inpatient Prospective Payment System Overview: Diagnosis Related Groups

Besides understanding the assignment of diagnoses and procedure codes, coding professionals are expected to understand how those codes interact with other components in the billing process to determine reimbursement. In addition, candidates sitting for the certified coding specialist (CCS) exam are expected to understand the regulatory guidelines and reporting requirements for hospital acute care inpatient services. Although not all inpatient services are reimbursed via the Medicare inpatient prospective payment system (IPPS), the focus of this article is limited to those services. This article will provide an overview of Diagnosis Related Groups (DRGs), Medi- care’s IPPS for acute care inpatient hospital stays. The reimbursement system was implemented for Medicare reimbursement throughout the country in 1983 and has been updated annually on October 1st since. There are provisions to allow for updates in April of each year. However, this has not occurred to date.

Before going into the actual structure of the DRG payment system, an understanding of the Uniform Hospital Discharge Data Set (UHDDS) elements used in the system is necessary.


The UHDDS definitions are used by acute care hospitals to report inpatient data elements in a standardized manner. The UHDDS data elements used in the DRG classification system are described below. Proper DRG assignment and resulting reimbursement is dependent on reporting these elements correctly.

Diagnoses: All diagnoses that affect the current hospital stay are to be reported.

Principal diagnosis is defined as “that condition established after study to be chiefly responsible for occasioning the admission of the patient to the hospital for care.”

Other (Additional) diagnoses are defined as “all conditions that coexist at the time of admission, that develop subsequently, or that affect the treatment received and/or the length of stay.”

Diagnoses that are related to an earlier episode of care, which have no bearing on the current hospital stay, are to be excluded. For reporting purposes the definition for ‘other diagnoses’ is interpreted as additional conditions that affect patient care in terms of requiring clinical evaluation; therapeutic treatment; diagnostic procedures; extended length of hospital stay; or increased nursing care and/or monitoring.

Procedures: All significant procedures are to be reported. Significant procedures are those that are surgical in nature; carry a procedural risk; carry an anesthetic risk; or require specialized training.

The principal procedure is one that was performed for definitive treatment rather than one performed for diagnostic or exploratory purposes, or was necessary to take care of a complication. If there appear to be two procedures that meet the above definition, then the one most related to the principal diagnosis should be selected as the principal procedure.

Under IPPS all procedures potentially affecting payment must be reported.

The DRG System

The DRG classification system is the most widely utilized system for classifying acute care inpatients and measuring case mix. Case mix is a means of defining and measuring the types of patients a hospital treats. DRGs group cases that are clinically similar and consume similar resources. One DRG is assigned to each inpatient stay. DRGs are assigned using the principal diagnosis, additional diagnoses, the principal procedure and additional procedures, age, sex and discharge status. Diagnoses and procedures assigned by using ICD-9-CM codes determine the DRG assignment. There- fore, accurate and complete ICD-9-CM coding by HIM professionals is essential for correct DRG assignment and subsequent reimbursement. A DRG is assigned as follows:

With some exceptions, all principal diagnoses are divided into one of 25 Major Diagnostic Categories (MDC) that generally correspond to a single organ system. Exam- ples of MDCs include:

MDC 1 Diseases and Disorders of the Nervous System

MDC 2 Diseases and Disorders of the Eye

MDC 3 Diseases and Dis-orders of the Ear, Nose, Mouth and Throat

MDC 4 Diseases and Disorders of the Respiratory System

MDC 5 Diseases and Dis-orders of the Circulatory System

Pre-MDC DRG: Because some patient groups are extremely resource intensive, they are put into a separate DRG group, before MDC assignment, based on the OR procedure rather than principal diagnosis. This group is called pre-MDC DRGs. Pre-MDC DRGs include organ transplants, bone marrow transplants and tracheostomy cases. If a procedure places a case into a Pre-MDC DRG, the DRG is assigned outside of the MDC. For example, DRG 103, Heart Transplant or Implant of Heart Assist System, is assigned based on the procedure performed pre-MDC. The principal diagnosis is not taken into consideration.

Operating Room (OR) Procedures: If a case is not assigned to a pre-MDC DRG, patients are then classified by whether or not they had an operating room procedure within each MDC. It is important to note that in some instances there are also non-operating room procedures that may affect the DRG assignment and may also be taken into consideration. If an operating procedure was performed, the case is then classified by the type of procedure. There is a surgical hierarchy within each MDC and, in most instances, patients with multiple procedures are assigned to the most resource-intensive DRG. An example of an OR DRG is DRG 545, Revision of Hip or Knee Replacement.

Unrelated OR procedure DRG: Within the Medicare DRG system there are three DRGs for unrelated operating room procedures. These DRGs are assigned when the case has no OR procedures related to the principal diagnoses within the MDC for the procedure. Unrelated OR procedure DRGs are as follows:

DRG 468, Extensive Unrelated OR Procedure

DRG 477, Non-extensive Unrelated OR Procedure

DRG 476, Unrelated Prostatic Procedure

Principal diagnosis: If no OR procedure is performed, the case is classified onto medical categories by the principal diagnosis. Medical categories include neoplasms, specific conditions related to the anatomical site, symptoms and other diagnoses. For example, DRG 14 Intracranial Hemorrhage or Cerebral Infarc- tion is assigned based on the principal diagnosis because no OR procedure is performed.

In the Medicare DRG system, each case may be further analyzed for age, sex, discharge disposition and/or the presence of a complication or comorbidity (CC) and the DRG is assigned.

A CC is defined as a secondary diagnosis that increases the length of stay by at least one day for 75 percent of the cases. The Centers for Medicare and Medicaid Services (CMS) is responsible for developing the list of recognized CC diagnoses. Examples of CCs include angina, urinary tract infection, congestive heart failure and decubitus ulcer. Conditions such as essential hypertension and dermatitis are not on the CC list. Some CCs are excluded be- cause they are too closely related to the principal diagnoses. This is called the CC Exclusion List. For example, urinary retention is a CC for a patient with congestive heart failure. How- ever, urinary retention is not a CC for patients with benign prostatic hypertrophy. Examples of DRGs that utilize CC and/or age include DRG 1, Craniotomy Age > 17 With CC, and DRG 497, Spinal Fusion Except Cervical With CC.

There are three diagrams posted with this article on our Web site at www.advanceweb .com/him to provide examples of the generic DRG decision process or decision tree, as well as the decision trees for MDC 2, Diseases and Disorders of the Eye.

DRG Reimbursement

In most instances, hospitals are paid a set fee for treating all patients in a DRG, regardless of the actual cost for that case. Each DRG is assigned a weight. The weight is used to adjust for the fact that different types of patients consume different resources and have different costs. Groups of patients who are expected to require above average resources have a higher weight than those that require fewer resources. The weight equals the average cost of patients in a particular DRG divided by the national average cost of treating any Medicare patient. Examples of DRGs and their weights are as follows:

DRG Weight




PROC EXC ORBIT AGE 0-17 1.1990



IRIS & LENS 1.4719

DRG 43 HYPHEMA 0.4250





Weights are updated regularly to reflect changes in medical practice patterns, use of hospital resources, diagnostic and procedural definitions and DRG assignment criteria.

To arrive at the reimbursement that a hospital will receive for a particular DRG, the hospital’s base rate is multiplied by the DRG weight. In the most simplified terms, the hospital base rate identifies the reimbursement that a hospital would receive for treating the average patient.

In general, all cases that group to the same DRG in the same facility will produce identical payments regardless of the length of stay. However, additional payments are made for those cases that generate extremely high costs when compared to average cases in the same DRG. These cases are called cost outliers. The additional payment is intended to protect hospitals from large financial losses due to unusually expensive cases. There are also extra payments for procedures deemed as new technology. Some services are eligible for the new technology add-on payment if they meet the criteria established by CMS.

Transfer Policies

Hospitals will receive adjusted reimbursement if Medicare patients are transferred to another acute care facility or to a post-acute care facility. The transfer policies were put into effect to prevent inappropriate early transfers. For patients transferring from one acute care facility to another, the hospital that transfers the patient is paid a DRG-based per-diem rate. The receiving facility receives the full DRG payment.

The post-acute care transfer policy pertains to discharges from an acute care setting to a skilled nursing facility (SNF), home health agency (HHA) or PPS-exempt facility. This policy also adjusts the acute care or trans- ferring hospital’s reimbursement to a DRG-based per-diem rate. This payment reflects the reduced lengths of stay arising from the transfer. As of Oct. 1, 2006, 182 DRGs are subject to the post-acute transfer policy. An example of a DRG that meets the post-acute care transfer criteria is DRG 498 Spinal Fusion of Cervical Spine without CC.

Medicare Code Edits (MCE)

Medicare uses MCE in the processing of IPPS claims. The MCE is used to validate ICD-9-CM codes, to identify coding inconsistencies, and to detect incorrect billing data. To determine an appropriate DRG, the patient’s age, sex, discharge status, principal diagnosis, secondary diagnoses and procedures performed must be reported accurately. The MCE are used by CMS to make sure the Medicare DRG and resulting payment is valid and accurate.

The following 17 MCE edits are used to detect potential problems.

1 Invalid diagnosis or procedure code

2 E code as principal diagnosis

3 Duplicate of principal diagnosis

4 Age conflict

5 Sex conflict

6 Manifestation code as principal diagnosis

7 Nonspecific principal diagnosis

8 Questionable admission

9 Unacceptable principal diagnosis

10 Nonspecific OR procedure

11 Noncovered OR procedure

12 Open biopsy check

13 Bilateral procedure

14 Invalid age

15 Invalid sex

16 Invalid discharge status

17 Limited coverage


CMS uses DRG grouping, pricing and editing software to run claims through the MCE and to calculate the DRG assignment and subsequent reimbursement for every Medicare claim. The majority of acute care hospitals also use these programs to assure that they are submitting claims properly and are receiving the appropriate reimbursement.

As mentioned previously, the IPPS DRG system is updated annually on Oct. 1 to accommodate the yearly ICD-9-CM changes, as well as changes in clinical practice and resource use. Effective Oct. 1, 2005, CMS is using Version 23, which includes 526 DRGs. There will be no DRG update in April 2006 because there will be no changes.

In addition to determining the reimbursement a hospital is to receive for acute care Medicare cases, DRGs are also used to evaluate the quality of care and assist in evaluating the utilization of services provided by a hospital. Benchmarking and outcomes analysis are often performed to assess physician documentation and coding practices.

The ICD-9-CM Official Guidelines for Coding and Reporting should be reviewed for proper assignment and sequencing of principal and secondary diagnoses codes used to calculate Medicare DRG assignment. The CMS Web site also has additional resources on the IPPS at /AcuteInpatientPPS/. Take the following quiz to test your understanding of the IPPS DRG information contained in this article. n

1. An acute care hospital will always be reimbursed the same amount for all Medicare inpatients who group in the same DRG.

a. True

b. False

2. A patient is admitted to the hospital to have a colon resection performed for diverticulitis. The history and physical indicates that the patient is status post cholecystectomy 5 years earlier and had been hospitalized 1 year earlier with pneumonia. The physician documented the final diagnoses on discharge as diverticulitus, status post cholecystectomy and history of pneumonia. What diagnosis codes are assigned for this case?

a. 562.11, V54.97, V12.61

b. 562.11, V12.61

c. 562.11

3. The discharge status does not affect the DRG assignment.

a. True

b. False

4. A patient is admitted with syncope. On admission, the physical examination reveals a lump in the right breast, which is biopsied and reported as malignant. The syncope was evaluated and no cause was found. The patient was considered stable and an extended simple mastectomy is then performed. What codes must be assigned for this case?

a. 708.2, 174.9, 85.43, 85.11

b. 174.9, 708.2, 85.43, 85.11

c. 174.9, 85.43

d. 708.2, 174.9, 85.43

This month’s column has been prepared by Cheryl D’Amato, RHIT, CCS, director of HIM, and Melinda Stegman, MBA, CCS, manager of clinical HIM services at HSS, an Ingenix company ( HSS specializes in the development and use of software and e-commerce solutions for managing coding, reimbursement, compliance and denial management in the health care marketplace.

Coding Clinic is published quarterly by the AHA.

CPT is a registered trademark of the AMA.

Answers to CCS PREP!: 1. b. False: Generally this statement is true. However, there are instances when the payment will be different. For example, additional payments are made for those cases that generate extremely high costs when compared to average cases in the same DRG. These cases are called cost outliers. Hospitals may also receive different reimbursement for transfer cases and for new technology add-ons; 2. c. Only code 562.11 for the diverticulitis is coded and reported. The other conditions included in the diagnostic statement had no bearing on the current episode of care; 3. b. False. The discharge status affects the DRG assignment in a number of instances. For example, if a patient with an acute myocardial infarction expires, the DRG assignment will be different than if they were discharged alive. A newborn that dies or is transferred to another acute care facility is assigned to a different DRG than those who are not. The discharge status is also important to the pricing of the claim. If a patient is transferred to another acute care facility or to a post-acute care facility the reimbursement may be affected; 4. d. Code 708.2 is assigned first because it meets the UHDDS definition of principal diagnosis. Even though the syncope is a symptom, no cause for the syncope was found. Diagnosis code 174.9 is assigned as an additional diagnosis to report the malignant neoplasm of the breast found after admission. The first procedure in this instance is 85.43 because it meets the UHDDS definition for principal procedure. Procedure code 85.11 may be assigned but is not required. Code 85.11 does not affect IPPS payment and does not meet the definition of a significant procedure. This case will group to DRG 468 because the OR procedure is not in the same MCD as the principal diagnosis.

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