Diagnosis-related groups

What are diagnosis-related groups?

A diagnosis-related group (DRG) is a statistical method used by health insurance companies to categorize the costs of hospitalization and patients’ hospital stay for the purpose of reimbursement.

Deeper definition

The diagnosis-related group system classifies in-patient stays into categories for the purpose of payment. Most health insurance companies as well as Medicare use this system to determine how to reimburse hospitals for a procedure. This means that hospitals get paid according to the diagnosis of the admitted patients.

If a health care provider treats a patient for a cost less than the stated DRG payment for the treated condition, the difference becomes part of the hospital’s profit. On the other hand, if the hospital spends more on the treatment than stipulated by the DRG, then the extra expense is a loss to the hospital. This system encourages efficient patient care practices, thereby controlling the costs of health care.

Before this system, hospitals used to charge every service, drug, and room stay for the number of days a patient stayed in the hospital. This turned out to be costly, since some hospitals offered inefficient services just to increase the bill. For instance, some hospitals would hospitalize patients for a longer period than required to gain from the room charge. This severely impacted health care costs, motivating the government to formulate procedures and legislation to control the inflated costs.

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Diagnosis-related groups example

Mr. Jim and Mr. John were both admitted to the same hospital for malaria treatment. Mr. Jim was treated and discharged after two days, while Mr. John’s hospitalization lasted seven days. Despite the extra money spent by the hospital to treat Mr. John for additional days, the insurer pays the hospital an equal amount for both patients, since their diagnosis was in the same category.

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