Academic journal article Health Care Financing Review

Refinement of the Medicare Diagnosis-Related Groups to Incorporate a Measure of Severity

Academic journal article Health Care Financing Review

Refinement of the Medicare Diagnosis-Related Groups to Incorporate a Measure of Severity

Article excerpt


The basic units of payment under PPS are the standardized amounts and the DRG relative weights.(1) Individual discharges are grouped in DRGs that aggregate cases with similar resource consumption and clinical patterns. Cases are assigned to a DRG based on several factors: the principal diagnosis; up to eight additional (secondary) diagnoses; up to six procedures performed during the stay; and the age, gender, and discharge status of the patient. The diagnosis and procedure information are reported by the hospital using codes from the International Classification of Diseases, Ninth Edition, Clinical Modification (ICD-9-CM) (Health Care Financing Administration, 1993). Cases may be classified to only one DRG, regardless of the number of conditions treated or services provided.(2)

A weight is calculated for each DRG which represents the average resources necessary to care for cases in that DRG relative to the average resources used to treat all cases in all other DRGs. Services provided to the patient during the course of treatment are not addressed specifically, but are included in the total charges, which are used as the measure of resource consumption. Each year, the relative weights assigned to DRGs are recalibrated based on the latest available discharge data for Medicare discharges. In general, these data are 2 years old. To determine Medicare payment for an individual episode, the standardized amount is multiplied by the relative weight of the DRG classification of the patient. Payment is based on an averaging process, as each DRG contains a range of patient costs and lengths of stay. Given a normal distribution, most cases will incur costs close to the DRG average, with some cases costing less and others costing more. Some cases will incur costs in excess of payment, and they will be balanced by cases in which payment exceeds costs.

DRG Refinements

By assigning cases to categories that are similar in terms of resource use and clinical characteristics, the intention is to establish a case-mix measure that will account for the variation in resource use among DRGs. To ensure equitable payment to hospitals, DRG groupings must be as homogeneous as possible. To the extent that classes of patients differ sufficiently from each other within the same DRG, the equity of payment based on averaging is reduced. For example, the averaging process could fail to accommodate legitimate cost differences among hospitals treating a more severely ill population, or specializing in treatment of a select, high-cost group of patients (Queen's University, 1991). The PPS was designed to promote efficiency, but not at the cost of possibly undercompensating hospitals with severely ill patients or to promote the avoidance of patients using high-level hospital resources (McMahon et al., 1992).

The attempt to ensure and maintain equitable payment has led to annual revision of the DRC,, classification system. Eleven revisions to the original DRG classifications have been made to date. Examples include adding two new MDCs (MDC 24, Multiple Significant Trauma, and MDC 25, Human Immunodeficiency Virus Infections) and splitting a DRG to increase classification specificity (DRGs 410 and 492, Chemotherapy With and Without Acute Leukemia as Secondary Diagnosis). The classifications of secondary diagnoses as CCs are routinely updated to improve within-DRG homogeneity.

Although many of the previous DRG refinements have resulted in improved variance reduction, further modifications could enhance the explanatory power of the classification system. Concerns have heightened about the ability of the DRG classification to adequately capture differences in levels of patient illness that affect resource consumption. These concerns have led to increased interest in incorporating a measure of severity of illness into the current Medicare DRG system.


For several years, HCFA has been analyzing major refinements to the DRG classification system to compensate hospitals more equitably for treating severely ill Medicare patients. …

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