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.
On hospital cost-and-quality pages, Diagnosis Related Group (DRG) carries a specific technical meaning that often differs from how the term is used in clinical practice or general medical writing. The definition here is the CMS-file usage. On the LakeQuality value rubric, Diagnosis Related Group (DRG) is one of the inputs (directly or indirectly) to the combined cost-and-quality grade. Understanding how the term is computed at CMS — what counts and what does not — is part of reading hospital pages defensibly.
Each hospital page on LakeQuality surfaces the specific Diagnosis Related Group (DRG) value for that facility (when CMS reports one), so the general definition here translates into a concrete data point on the per-hospital pages you actually use.
How It Works
DRGs are the foundation of hospital payment under Medicare's Inpatient Prospective Payment System (IPPS), introduced in 1983 to replace cost-based reimbursement. CMS currently uses Medicare Severity DRGs (MS-DRGs), a refined system with approximately 750 codes that account for patient severity at three levels: no complications (CC-free), with complication/comorbidity (CC), and with major complication/comorbidity (MCC). Instead of paying for each individual service, Medicare assigns each admission to one MS-DRG and pays a fixed amount based on national standardized costs, adjusted for local wage index, teaching status (IME), disproportionate share (DSH), and outlier cases. Typical 2025 Medicare DRG payments illustrate the spread: DRG 470 (major joint replacement without MCC) pays roughly $13,000-$16,000 to the hospital; DRG 216 (cardiac valve procedures with MCC) pays $55,000-$75,000; DRG 003 (ECMO or tracheostomy with major procedure) exceeds $200,000. Chargemaster prices for the same stays can run 3-10x the DRG rate: Cleveland Clinic might bill $65,000 gross for a knee replacement that HCA collects $14,500 for from Medicare. Commercial payers typically pay 150-250% of the Medicare DRG rate through negotiated multipliers. Each MS-DRG carries a relative weight: pneumonia without CC sits near 0.7, simple cardiac arrhythmia near 0.8, and major burn with skin graft near 8.5. When a hospital discharges a patient whose actual cost exceeds a fixed-loss threshold, CMS pays an outlier supplement covering 80% of costs above the threshold.
Related Terms
- Chargemaster (Charge Description Master), A hospital's master list of prices for every item and service, from a single aspirin to a heart transplant, 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 acute-care hospital inpatient stays, paying a fixed amount per MS-DRG rather than reimbursing each individual service.
- Case Mix Index (CMI), A measure of the average complexity and resource intensity of a hospital's Medicare patients, calculated as the average MS-DRG relative weight across discharges.
- MS-DRG (Medicare Severity DRG), The severity-adjusted version of the DRG system used by Medicare since 2007, expanding groupings to capture complication and comorbidity burden and refine payment accuracy.
- UB-04 Claim Form, The standardized hospital billing form (also called CMS-1450) used by hospitals and other institutional providers to bill Medicare, Medicaid, and commercial insurers for facility services.
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About This Definition
This definition is part of the HospitalCostData Hospital Pricing Glossary, 47 terms explaining hospital costs, quality ratings, and healthcare billing. Written for patients, journalists, researchers, and healthcare professionals.