Diagnosis Related Group (DRG)
A classification system that groups hospital inpatient stays into categories based on diagnosis, procedures, and patient complexity — used by Medicare to determine how much a hospital gets paid.
How It Works
DRGs are the foundation of hospital payment under Medicare's Inpatient Prospective Payment System (IPPS). Instead of paying hospitals for each individual service (fee-for-service), Medicare assigns each hospital stay to a DRG and pays a fixed amount based on the national average cost for that DRG, adjusted for local wage levels, teaching status, and other factors. There are approximately 750 DRGs, each representing a clinically coherent group of patients who consume similar amounts of hospital resources. For example, DRG 470 covers major joint replacement without complications — one of the most common hospital procedures in the United States.
Related Terms
- Chargemaster (Charge Description Master) — A hospital's master list of prices for every item and service — from aspirin to surgery — typically containing tens of thousands of line items with prices that bear little relation to actual costs.
- Inpatient Prospective Payment System (IPPS) — Medicare's payment system for hospital inpatient stays — paying a fixed amount per DRG rather than reimbursing each individual service.
- Case Mix Index (CMI) — A measure of the average complexity and resource intensity of a hospital's patients — higher CMI means the hospital treats sicker, more complex patients.
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About This Definition
This definition is part of the HospitalCostData Hospital Pricing Glossary — 25 terms explaining hospital costs, quality ratings, and healthcare billing. Written for patients, journalists, researchers, and healthcare professionals.