Design and development of the Diagnosis

Related Group (DRG)

Prospective payment rates based on Diagnosis Related Groups (DRGs) have been established
as the basis of Medicare’s hospital reimbursement system. The DRGs are a patient classification
scheme which provides a means of relating the type of patients a hospital treats (i.e., its case mix)
to the costs incurred by the hospital. The design and development of the DRGs began in the late
sixties at Yale University. The initial motivation for developing the DRGs was to create an
effective framework for monitoring the quality of care and the utilization of services in a hospital
setting. The first large-scale application of the DRGs was in the late seventies in the State of New
Jersey. The New Jersey State Department of Health used DRGs as the basis of a prospective
payment system in which hospitals were reimbursed a fixed DRG specific amount for each patient
treated. In 1982, the Tax Equity and Fiscal Responsibility Act modified the Section 223 Medicare
hospital reimbursement limits to include a case mix adjustment based on DRGs. In 1983
Congress amended the Social Security Act to include a national DRG-based hospital prospective
payment system for all Medicare patients.

The evolution of the DRGs and their use as the basic unit of payment in Medicare’s hospital
reimbursement system represents a recognition of the fundamental role which a hospital’s case
mix plays in determining its costs. In the past, hospital characteristics such as teaching status and
bed size have been used to attempt to explain the substantial cost differences which exist across
hospitals. However, such characteristics failed to account adequately for the cost impact of a
hospital’s case mix. Individual hospitals have often attempted to justify higher cost by contending
that they treated a more “complex” mix of patients; the usual contention being that the patients
treated were “sicker.” Although there has been a consensus in the hospital industry that a more
complex case mix results in higher costs, the concept of case mix complexity had historically
lacked a precise definition. The development of the DRGs provided the first operational means of
defining and measuring a hospital’s case mix complexity.

The concept of case mix complexity

The concept of case mix complexity initially appears very straightforward. However, clinicians,
administrators and regulators have often attached different meanings to the concept of case mix
complexity depending on their backgrounds and purposes. The term case mix complexity has
been used to refer to an interrelated but distinct set of patient attributes which include severity of
illness, prognosis, treatment difficulty, need for intervention and resource intensity. Each of these
concepts has very precise meaning which describes a particular aspect of a hospital’s case mix.
• Severity of illness. Refers to the relative levels of loss of function and mortality that may be
experienced by patients with a particular disease.
• Prognosis. Refers to the probable outcome of an illness including the likelihood of
improvement or deterioration in the severity of the illness, the likelihood for recurrence and
the probable life span.
• Treatment difficulty. Refers to the patient management problems which a particular illness
presents to the health care provider. Such management problems are associated with

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October 01, 2016
 Design and development of the Diagnosis Related Group (DRG)

illnesses without a clear pattern of symptoms, illnesses requiring sophisticated and technically
difficult procedures and illnesses requiring close monitoring and supervision.
• Need for intervention. Relates to the consequences in terms of severity of illness that lack of
immediate or continuing care would produce.
• Resource intensity. Refers to the relative volume and types of diagnostic, therapeutic and
bed services used in the management of a particular illness.

When clinicians use the notion of case mix complexity, they mean that the patients treated have a
greater severity of illness, present greater treatment difficulty, have poorer prognoses and have a
greater need for intervention. Thus, from a clinical perspective case mix complexity refers to the
condition of the patients treated and the treatment difficulty associated with providing care. On the
other hand, administrators and regulators usually use the concept of case mix complexity to
indicate that the patients treated require more resources which results in a higher cost of
providing care. Thus, from an administrative or regulatory perspective case mix complexity refers
to the resource intensity demands that patients place on an institution. While the two
interpretations of case mix complexity are often closely related, they can be very different for
certain kinds of patients. For example, while terminal cancer patients are very severely ill and
have a poor prognosis, they require few hospital resources beyond basic nursing care.

In the past, there has sometimes been confusion regarding the use and interpretation of the
DRGs because the aspect of case mix complexity measured by the DRGs has not been clearly
understood. The purpose of the DRGs is to relate a hospital’s case mix to the resource demands
and associated costs experienced by the hospital. Therefore, a hospital having a more complex
case mix from a DRG perspective means that the hospital treats patients who require more
hospital resources but not necessarily that the hospital treats patients having a greater severity of
illness, a greater treatment difficulty, a poorer prognosis or a greater need for intervention.

Patient classification
Given that the purpose of the DRGs is to relate a hospital’s case mix to its resource intensity, it
was necessary to develop an operational means of determining the types of patients treated and
relating each patient type to the resources they consumed. While all patients are unique, groups
of patients have demographic, diagnostic and therapeutic attributes in common that determine
their level of resource intensity. By developing clinically similar groups of patients with similar
resource intensity, patients can be aggregated into meaningful patient classes. Moreover, if these
patient classes covered the entire range of patients seen in an inpatient setting, then collectively
they would constitute a patient classification scheme that would provide a means of establishing
and measuring hospital case mix complexity. The DRGs were therefore developed as a patient
classification scheme consisting of classes of patients who were similar clinically and in terms of
their consumption of hospital resources.

During the process of developing the DRG patient classification scheme, several alternative
approaches to constructing the patient classes were investigated. Initially, a normative approach
was used which involved having clinicians define the DRGs using the patient characteristics
which they felt were important for determining resource intensity. There was a tendency for their
definitions to include an extensive set of specifications, requiring information which might not
always be collected through a hospital’s medical information system. If the entire range of patients
were classified in this manner, it would ultimately lead to thousands of DRGs, most of which

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 Design and development of the Diagnosis Related Group (DRG)

described patients seen infrequently in a typical hospital. It, therefore, became evident that the
process of DRG definition would be facilitated if data from acute care hospitals could be examined
to determine the general characteristics and relative frequency of different patient types. In
addition, statistical algorithms applied to this data would be useful to suggest ways of forming
DRGs that were similar in terms of resource intensity. However, it was also discovered that
statistical algorithms applied to historical data in the absence of clinical input would not yield a
satisfactory set of DRGs. The DRGs resulting from such a statistical approach, while similar in
terms of resource intensity, would often contain patients with a diverse set of characteristics which
could not be interpreted from a clinical perspective. Thus, it became apparent that the
development of the DRG patient classification scheme required that physician judgment,
statistical analysis and verification with historical data be merged into a single process. It was
necessary to be able to examine large amounts of historical data with statistical algorithms
available for suggesting alternative ways of forming DRGs but to do so in such a way that
physicians could review the results at each step to insure that the DRGs formed were clinically
coherent.

Basic characteristics of the DRG patient classification

scheme
Given the limitations of previous patient classification schemes and the experience of attempting
to develop DRGs with physician panels and statistical analysis, it was concluded that in order for
the DRG patient classification scheme to be practical and meaningful it should have the following
characteristics:
1. The patient characteristics used in the definition of the DRGs should be limited to information
routinely collected on hospital abstract systems.
2. There should be a manageable number of DRGs which encompass all patients seen on an in-
patient basis.
3. Each DRG should contain patients with a similar pattern of resource intensity.
4. Each DRG should contain patients who are similar from a clinical perspective (i.e., each class
should be clinically coherent).

Restricting the patient characteristics used in the definition of the DRGs to those readily available
insured that the DRGs could be extensively applied. Currently, the patient information routinely
collected includes age, principal diagnosis, secondary diagnoses and the surgical procedures
performed. Creating DRGs based on information that is only collected in a few settings or on
information which is difficult to collect or measure would have resulted in a patient classification
scheme which could not be applied uniformly across hospitals. That is not to say that information
beyond that currently collected might not be useful for defining the DRGs. As additional
information becomes routinely available it must be evaluated to determine if it might result in
improvements in the ability to classify patients.

Limiting the number of DRGs to manageable numbers (i.e., hundreds of patient classes, not
thousands) insures that for most of the DRGs, a typical hospital will have enough experience to
allow meaningful comparative analysis to be performed. If there were only a few patients in each
DRG, it would be difficult to detect patterns in case mix complexity and cost performance and to
communicate the results to the physician staff.

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 Design and development of the Diagnosis Related Group (DRG)

The resource intensity of the patients in each DRG must be similar in order to establish a
relationship between the case mix of a hospital and the resources it consumes. Similar resource
intensity means that the resources used are relatively consistent across the patients in each
DRG. However, some variation in resource intensity will remain among the patients in each DRG.
In other words, the definition of the DRG will not be so specific that every patient is identical, but
the level of variation is known and predictable. Thus, while the precise resource intensity of a
particular patient cannot be predicted by knowing to which DRG he belongs, the average pattern
of resource intensity of a group of patients in a DRG can be accurately predicted.

Since one of the major applications of the DRGs is as a means of communicating with the
physician community, the patients in each DRG must be similar from a clinical perspective. In
other words, the definition of each DRG must be clinically coherent. The concept of clinical
coherence requires that the patient characteristics included in the definition of each DRG relate to
a common organ system or etiology and that a specific medical specialty should typically provide
care to the patients in the DRG. For example, patients who are admitted for a D&C or a
Tonsillectomy are similar in terms of most measures of resource intensity such as length of stay,
preoperative stay, operating room time and use of ancillary services. However, different organ
systems and different medical specialties are involved. Thus, the requirement that the DRGs be
clinically coherent precludes the possibility of these types of patients being in the same DRG.

A common organ system or etiology and a common clinical specialty is a necessary but not
sufficient requirement for a DRG to be clinically coherent. In addition, all available patient
characteristics which medically would be expected to consistently affect resource intensity should
be included in the definition of the DRG. Furthermore, a DRG should not be based on patient
characteristics which medically would not be expected to consistently affect resource intensity.
For example, patients with appendicitis may or may not have peritonitis. Although these patients
are the same from an organ system, etiology and medical specialist perspective, the DRG
definitions must form separate patient classes, since the presence of peritonitis would be
expected to consistently increase the resource intensity of the appendicitis patients. On the other
hand, sets of unrelated surgical procedures cannot be used to define a DRG since there would
not be a medical rationale to substantiate that the resource intensity would be expected to be
similar.

The definition of clinical coherence is, of course, dependent on the purpose for the formation of
the DRG classification. For the DRGs, the definition of clinical coherence relates to the medical
rationale for differences in resource intensity. If, on the other hand, the purpose of the DRGs
related to mortality, the patient characteristics which were clinically coherent and, therefore,
included in the DRG definitions might be different. Finally, it should be noted that the requirement
that the DRGs be clinically coherent caused more patient classes to be formed than would be
necessary for explaining resource intensity alone.

Formation of the DRGs

The process of forming the DRGs was begun by dividing all possible principal diagnoses into 23
mutually exclusive principal diagnosis areas referred to as Major Diagnostic Categories (MDC).
Two new MDCs were created in the eighth version of the DRGs. The 25 MDCs are listed in table
1.

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 Design and development of the Diagnosis Related Group (DRG)

The MDCs were formed by physician panels as the first step toward insuring that the DRGs would
be clinically coherent. The diagnoses in each MDC correspond to a single organ system or
etiology and in general are associated with a particular medical specialty. Thus, in order to
maintain the requirement of clinical coherence, no final DRG could contain patients in different
MDCs. In general, each MDC was constructed to correspond to a major organ system (e.g.,
Respiratory System, Circulatory System, Digestive System) rather than etiology (e.g.,
malignancies, infectious diseases). This approach was used since clinical care is generally
organized in accordance with the organ system affected, and not the etiology. Thus, diseases
involving both a particular organ system and a particular etiology (e.g., malignant neoplasm of the
kidney) were assigned to the MDC corresponding to the organ system involved. However, not all
diseases or disorders could be assigned to an organ system-based MDC and a number of
residual MDCs were created (e.g., Systemic Infectious Diseases, Myeloproliferative Diseases and
Poorly Differentiated Neoplasms). For example, the infectious diseases food poisoning and
Shigella dysenteriae are assigned to the Digestive System MDC while pulmonary tuberculosis is
assigned to the Respiratory System MDC. On the other hand, infectious diseases such as miliary
tuberculosis and septicemia which usually involve the entire body are assigned to the Systemic
Infectious Disease MDC.

Once the MDCs were defined each MDC was evaluated to identify those additional patient
characteristics which would have a consistent effect on the consumption of hospital resources.
Since the presence of a surgical procedure which required the use of the operating room would
have a significant effect on the type of hospital resources (e.g., operating room, recovery room,
anesthesia) used by a patient, most MDCs were initially divided into medical and surgical groups.
The medical-surgical distinction is also useful in further defining the clinical specialty involved.

Patients were considered surgical if they had a procedure performed which would require the use
of the operating room. Since the patient data generally available does not precisely indicate
whether a patient was taken to the operating room, surgical patients were identified based on the
procedures which were performed. Physician panels classified every possible procedure code
based on whether the procedure would in most hospitals be performed in the operating room.

Table 1. Major Diagnostic Categories

MDC Description
1 Diseases and Disorders of the Nervous System
2 Diseases and Disorders of the Eye
3 Diseases and Disorders of the Ear, Nose, Mouth and Throat
4 Diseases and Disorders of the Respiratory System
5 Diseases and Disorders of the Circulatory System
6 Diseases and Disorders of the Digestive System
7 Diseases and Disorders of the Hepatobiliary System and Pancreas
8 Diseases and Disorders of the Musculoskeletal System and
Connective Tissue
9 Diseases and Disorders of the Skin, Subcutaneous Tissue and
Breast

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 Design and development of the Diagnosis Related Group (DRG)

MDC Description
10 Endocrine, Nutritional and Metabolic Diseases and Disorders
11 Diseases and Disorders of the Kidney and Urinary Tract
12 Diseases and Disorders of the Male Reproductive System
13 Diseases and Disorders of the Female Reproductive System
14 Pregnancy, Childbirth and the Puerperium
15 Newborns and Other Neonates with Conditions Originating in the
Perinatal Period

16 Diseases and Disorders of the Blood and Blood Forming Organs and
Immunological Disorders
17 Myeloproliferative Diseases and Disorders, and Poorly Differentiated
Neoplasm
18 Infectious and Parasitic Diseases (Systemic or Unspecified Sites)
19 Mental Diseases and Disorders
20 Alcohol/Drug Use and Alcohol/Drug Induced Organic Mental
Disorders
21 Injuries, Poisonings and Toxic Effects of Drugs
22 Burns
23 Factors Influencing Health Status and Other Contacts with Health
Services
24 Multiple Significant Trauma
25 Human Immunodeficiency Virus Infections

Thus, closed heart valvotomies, cerebral meninges biopsies and total cholecystectomies would
be expected to require the operating room while thoracentesis, bronchoscopy and skin sutures
would not. If a patient had any procedure performed which was expected to require the operating
room that patient would be classified as a surgical patient. A complete list of all the procedures
expected to require the operating room is contained in Appendix E.

Once each MDC was divided into medical and surgical categories, then, in general, the surgical
patients were further defined based on the precise surgical procedure performed while the
medical patients were further defined based on the precise principal diagnosis for which they
were admitted to the hospital. The general structure of a typical MDC is shown by the tree
diagram found at the end of this chapter (figure 1). In general, specific groups of surgical
procedures were defined to distinguish surgical patients according to the extent of the surgical
procedure performed. For example, the procedure classes defined for the Endocrine, Nutritional
and Metabolic MDC are amputations, procedures for obesity, skin grafts and wound
debridements, adrenal and pituitary procedures, parathyroid procedures, thyroid procedures,
thyroglossal procedures and other procedures relating to Endocrine, Nutritional or Metabolic
diseases.

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 Design and development of the Diagnosis Related Group (DRG)

Since a patient can have multiple procedures related to their principal diagnosis during a
particular hospital stay, and a patient can be assigned to only one surgical class, the surgical
classes in each MDC were defined in a hierarchical order. Patients with multiple procedures
would be assigned to the surgical class highest in the hierarchy.

Thus, if a patient received both an extraction of endometrium (D&C in ICD-9-CM) and a resection
of uterus (hysterectomy in ICD-9-CM), the patient would be assigned to the hysterectomy surgical
class. It should be noted that as a result of the surgical hierarchy the ordering of the surgical
procedures on the patient abstract has no influence on the assignment of the surgical class and
DRG. Appendix D lists the surgical hierarchy for each MDC.

In general, specific groups of principal diagnoses were defined for medical patients. Usually the
medical classes in each MDC would include a class for neoplasms, symptoms and specific
conditions relating to the organ system involved. For example, the medical classes for the
Respiratory System MDC are ventilator support, pulmonary embolism, infections and
inflammations, neoplasms, chest trauma, pleural effusion, pulmonary edema and respiratory
failure, chronic obstructive pulmonary disease, simple pneumonia and pleurisy, interstitial lung
disease, pneumothorax, bronchitis and asthma, respiratory signs and symptoms and other
respiratory diagnoses.

In each MDC there is usually a medical and a surgical class referred to as “other medical
diseases” and “other surgical procedures,” respectively. The “other” medical and surgical classes
are not as precisely defined from a clinical perspective. The other classes would include
diagnoses or procedures which were infrequently encountered or not well defined clinically. For
example, the “other” medical class for the Respiratory System MDC would contain the diagnoses
“other somatoform disorders” and “congenital malformation of the respiratory system,” while the
“other” surgical class for the female reproductive MDC would contain the surgical procedures
“excision of liver” (liver biopsy in ICD-9-CM) and “inspection of peritoneal cavity" (exploratory
laparotomy in ICD-9-CM).

The “other” surgical category contains surgical procedures which, while infrequent, could still
reasonably be expected to be performed for a patient in the particular MDC. There are, however,
also patients who receive surgical procedures which are completely unrelated to the MDC to
which the patient was assigned. An example of such a patient would be a patient with a principal
diagnosis of pneumonia whose only surgical procedure is a destruction of prostate (transurethral
prostatectomy in ICD-9-CM). Such patients are assigned to a surgical class referred to as
“unrelated operating room procedures.” These patients are ultimately never assigned to a well-
defined DRG.

The process of defining the surgical and medical classes in an MDC required that each surgical or
medical class be based on some organizing principle. Examples of organizing principles would be
anatomy, surgical approach, diagnostic approach, pathology, etiology or treatment process. In
order for a diagnosis or surgical procedure to be assigned to a particular class, it would be
required to correspond to the particular organizing principle for that class. For example, in the
Urinary System MDC a surgical group was formed for all patients with a procedure on the urethra
(i.e., organizing principle based on anatomy). This surgical group was then further divided based
on whether the procedure performed was transurethral (i.e., organizing principle based on
surgical approach).

Figure 1 displays the basic structure of the DRG. Until the eighth version, the first step in the
determination of the DRG had been the assignment of the appropriate MDC based on the
principal diagnosis. The eighth version of the DRGs contained the first departure from the use of

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 Design and development of the Diagnosis Related Group (DRG)

principal diagnosis as the initial variable in DRG assignment, when the initial step in DRG
assignment was based on procedure (PRE MDC). If a patient has a heart transplant or implant of
heart assist system, ECMO or tracheostomy, liver transplant and/or intestinal transplant, bone
marrow transplant, lung transplant simultaneous pancreas/kidney transplant, or pancreas
transplant, then the patient is assigned to these DRGs independent of the MDC of the principal
diagnosis. Heart, intestinal, liver, bone marrow, lung, pancreas/kidney and pancreas transplants
are very resource intensive and can be performed for diagnoses in many different MDCs.
Tracheostomies are performed primarily for patients on long term ventilator support and therefore
such patients are very resource intensive. The eighth version also created two new MDCs for
patients with multiple trauma (MDC 24) and patients with an HIV infection (MDC 25). Assignment
to MDC 24 and 25 is based on both principal and secondary diagnoses. An assignment to MDC
24 is based on the presence of two or more significant traumas in different body systems (e.g. a
fractured skull and a fractured femur). Assignment to MDC 25 is based on a principal diagnosis of
an HIV infection or a principal diagnosis of an HIV related complication combined with a
secondary diagnosis of an HIV infection (e.g. principal diagnosis of pneumocystosis and a
secondary diagnosis of an HIV infection).

Once the medical and surgical classes for an MDC were formed, each class of patients was
evaluated to determine if complications, comorbidities, the patient’s age or discharge status
consistently affected the consumption of hospital resources. Physician panels classified each
diagnosis code based on whether the diagnosis, when present as a secondary condition, would
be considered a substantial complication or comorbidity. A substantial complication or comorbidity
was defined as a condition, that because of its presence with a specific principal diagnosis would
cause an increase in length of stay by at least one day in at least 75 percent of the patients. For
example, sarcoidosis of lung, chronic obstructive pulmonary disease and pneumococcal
pneumonia are considered substantial complications or comorbidities for certain diseases, while
nontoxic diffuse goiter and essential hypertension are not. Each medical and surgical class within
an MDC was tested to determine if the presence of any substantial comorbidities or complications
would consistently affect the consumption of hospital resources. For example, the presence of
complications or comorbidities was not significant for patients receiving a median nerve release
(carpal tunnel release in ICD-9-CM) but was very significant for patients with arrhythmia and
conduction disorders. The same basic list of complications and comorbidities are used across
most DRGs. However, depending on the principal diagnosis of the patient, some diagnoses in the
basic list of complications and comorbidities may be excluded if they are closely related to the
principal diagnosis. For example, urinary retention is a complication or comorbidity for a patient
admitted for congestive heart failure but not for a patient admitted for enlarged prostate. In
addition, in some cases such as newborns or acute myocardial infarction patients, special
complications and comorbidity definitions were used in defining the DRGs.

The final variable used in the definition of the DRGs was the patient discharge status. Separate
DRGs were formed for newborns if the patients were transferred to another acute care facility. In
addition, separate DRGs were formed for patients with alcoholism or drug abuse who left against
medical advice and for acute myocardial infarction patients and newborns who died.

For versions 2-24 of the DRGs, the further subdivisions of some medical and surgical DRGs was
primarily based on the presence or absence of a CC or pediatric age (0-17). For example, in DRG
version 24 there were 115 pairs of DRGs subdivided based on the presence or absence of a CC
and 43 pediatric DRGs (age 0-17). Beginning with version 25 the use of CCs and patient age was
completely revised. The revisions were so extensive that the version 25 DRGs were renamed to
be the Medicare Severity DRGs (MS-DRGs).

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 Design and development of the Diagnosis Related Group (DRG)

Except for new diagnosis codes that were added to ICD-9-CM after FY1984 (e.g., HIV), the CC
list of diagnoses used in the DRGs remained virtually identical to the original CC list used in
FY1984. As a result of the changes that occurred in hospitals during the first 22 years of PPS, the
CC list had lost much of its power to discriminate hospital resource use. Better coding of
secondary diagnoses, stricter criteria for extended hospital stays, increased availability of post
acute care services and the shift to outpatient care resulted in most patients (nearly 80 percent)
admitted to hospitals having a CC. Therefore, in version 25 (MS-DRGs) the diagnoses comprising
the CC list were completely redefined. The revised CC list is primarily comprised of significant
acute disease, acute exacerbations of significant chronic diseases, advanced or end stage
chronic diseases and chronic diseases associated with extensive debility. In general, most
chronic diseases were not included on the revised CC list. For a patient with a chronic disease, a
significant acute manifestation of the chronic disease was required to be present and coded for
the patient to be assigned a CC. The revision of the CC list reduced the number of Medicare
patients with a CC from approximately 80 percent to 40 percent.

In addition, to the revision of the CC list, each CC was also categorized as a major CC or a CC
(i.e., non major CC) based on relative resource use. Approximately, 12 percent of all diagnoses
codes were classified as a major CC, 24 percent as a CC and 64 percent as a non CC.
Diagnoses closely associated with mortality (ventricular fibrillation, cardiac arrest, shock and
respiratory arrest) were assigned as a major CC if the patient lived but as a non CC if the patient
died.

The major CC, CC and non CC categorization was used to subdivide the surgical and medical
DRGs into up to three levels with a patient being assigned to the most extreme level (e.g., a
patient with an MCC and a CC is assigned to the MCC level). Before subdividing the medical and
surgical DRGs into CC levels all the pediatric age distinctions were removed from the DRGs. To
create the MS-DRGs, individual DRGs were subdivided into three, two or one level depending on
the CC impact on resources used for that patient. The two way subdivision either created a
separate level for just the major CC patients or a separate level for the non CC patients. The CC
levels relate to the relative severity of illness of the patient. In the MS-DRG version 25, 152 DRGs
had 3 CC levels, 107 DRGs had two CC levels and 76 DRGs had no CC levels resulting in 745
MS-DRGs which is a net increase of 207 DRGs over the 538 in version 24. The following table
provides the MS-DRG version 34.0 subdivisions:

Table 2. MS-DRG v34.0 subdivisions

Base MS-DRGs Split Type Total MS-DRGs

154 3-way 462
44 2-way MCC/CC and no 88
CC
65 2-way MCC and CC/no 130
CC
77 No split 77
340 Total Base [blank] 757 Total MS-DRGs

In MS-DRG version 34.0 there are 71,486 diagnoses and 75,789 procedures.

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 Design and development of the Diagnosis Related Group (DRG)

The Deficit Reduction Act of 2005 (P.L.109-171) requires CMS to eliminate any increase in
payment due to the occurrence of selected post admission complications, known as Hospital
Acquired Conditions (HACs). HACs are harmful events (e.g. accidental laceration during a
procedure) or negative outcomes (e.g. decubitus ulcer) that result from the processes of care and
treatment rather than from a natural progression of underlying illness. Under the Medicare
inpatient prospective payment system, the occurrence of an HAC can result in a higher payment
because the presence of the HAC diagnosis may cause the patient to be assigned to a higher-
paying MS-DRG, in effect financially rewarding poor quality care.

When IPPS was implemented the standard claim form did not contain a specification of whether a
secondary diagnosis was present on admission (POA). The Deficit Reduction Act requires
hospitals to report a POA indicator for all diagnoses beginning in fiscal year 2008. The reporting
of the POA indicator allows complications that occur post admission to be identified. The Deficit
Reduction Act requires that the post admission complications selected as HACs be (1) high cost,
high volume, or both; (2) be a CC or Major CC in MS-DRGs and (3) be reasonably preventable
through the application of evidence-based guidelines. For Fiscal Year 2009, CMS designated 12
conditions as HACs:

1. Foreign object retained after surgery

2. Air embolism

3. Blood incompatibility

4. Pressure ulcers – stages III and IV

5. Falls and trauma

6. Catheter-associated urinary tract infection (UTI)

7. Vascular catheter-associated infection

8. Surgical site infection – Mediastinitis following Coronary Artery Bypass Surgery (CABG)

9. Manifestations of poor glycemic control

10. Deep vein thrombosis (DVT) /pulmonary embolism (PE) following total knee replacement or
hip replacement

11. Surgical site infection following bariatric surgery

12. Surgical site infection following certain orthopedic procedures of spine, shoulder or elbow

For Fiscal Year 2013, two additional HACs were added:

13. Surgical site infection following cardiac device procedures

14. Iatrogenic pneumothorax with venous catheterization.

If an HAC diagnosis is present at admission, it will continue to be classified as a CC or major CC

and allowed to affect the MS-DRG assignment. However, if the HAC diagnosis is not present at

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 Design and development of the Diagnosis Related Group (DRG)

admission, it will no longer be classified as a CC or major CC and will not affect MS-DRG
assignment. The exclusion of an HAC diagnosis from MS-DRG assignment does not necessarily
mean the MS-DRG will change. Some MS-DRGs are not differentiated by the presence of a CC
or Major CC. For such MS-DRGs the exclusion of an HAC diagnosis will have no impact on MS-
DRG assignment. Further, if in addition to an HAC diagnosis there are non-HAC diagnoses
present that are a CC or major CC, the exclusion of the HAC diagnosis may not change the MS-
DRG. Beginning in Fiscal Year 2009, HAC diagnoses are excluded from MS-DRG assignment.

The actual process of forming the DRGs was highly iterative, involving a combination of statistical
results from test data with clinical judgment. At any point during the definition of the DRGs there
would often be several patient characteristics which appeared important for understanding the
impact on hospital resources. The selection of the patient characteristics to be used and the order
in which they would be used was a complex task with many factors examined and weighed
simultaneously. A complete list of the MS-DRGs is contained in Appendix A in the MS-DRG
definitions manual.

There are several MS-DRGs which contain patients whose medical record abstracts contain
clinically inconsistent or invalid information. For example, there are MS-DRGs for patients for
whom all their operating room procedures performed are unrelated to the major diagnostic
category of the patient’s principal diagnosis. Typically, these are patients admitted for a particular
diagnosis requiring no surgery, who develop a complication unrelated to the principal diagnosis
and have an operating room procedure performed for the complication or have a diagnostic
procedure performed for another concurrent diagnosis. The unrelated operating room procedures
have been divided into three groups based on hospital resource use: extensive, prostatic and
non-extensive. For example, a patient with a principal diagnosis of congestive heart failure who
develops acute cholecystitis and whose only procedure is a resection of gallbladder
(cholecystectomy in ICD-9-CM) will be assigned to the extensive unrelated procedure MS-DRG
since a cholecystectomy is considered an extensive procedure. However, if a patient has a
principal diagnosis of arrhythmia and has a diagnostic excision of breast (breast biopsy in ICD-9-
CM) discovered while in the hospital, the patient will be assigned to the non- extensive unrelated
MS-DRG since the biopsy is considered a non-extensive procedure. Finally, a patient with
enlarged prostate who develops urinary obstruction while hospitalized for a medical problem such
as pneumonia, will be assigned to the prostatic unrelated procedure MS-DRG if a destruction of
prostate is performed. The complete definition of unrelated operating room procedures is
contained in Appendix F.

When a principal diagnosis is coded which, although it is a valid ICD-10-CM code, is not precise
enough to allow the patient to be assigned to a clinically coherent MS-DRG the patient is
assigned to a diagnosis invalid as principal diagnosis MS-DRG. For example, ICD-10-CM code
O2690 is an unspecified complication of pregnancy with the episode of care unspecified. Thus,
this diagnosis code does not indicate the type of complication nor whether the episode of care
was antepartum, postpartum or for delivery. Since the MS-DRG definitions assign patients to
different sets of MS-DRGs depending on whether the episode of care was antepartum,
postpartum or for delivery, a patient with a principal diagnosis of O2690 must be assigned to the
diagnosis invalid as principal diagnosis MS-DRG.

It should be noted that patients with a principal diagnosis not typically considered a reason for
hospitalization such as Z413 (ear piercing) are not assigned to the diagnosis invalid as principal
diagnosis MS-DRG but are assigned a MS-DRG in the MDC most related to the diagnosis.

Patients are assigned to an ungroupable MS-DRG if certain types of medical records errors which
may affect MS-DRG assignment are present. Patients with an invalid or non-existent ICD-10-CM

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 Design and development of the Diagnosis Related Group (DRG)

code as principal diagnosis will be assigned to the ungroupable MS-DRG. Patients will also be
assigned to the ungroupable MS-DRG if their sex, or discharge status is both invalid and
necessary for MS-DRG assignment. For example, if a patient has a non-numeric discharge status
and has a principal diagnosis of an acute myocardial infarction, the patient will be assigned to the
ungroupable MS-DRG since patients with acute myocardial infarction will be assigned to different
MS-DRGs depending on whether their discharge status is alive or died. On the other hand, if the
same patient had a principal diagnosis of hypertension, the assignment would not be to the
ungroupable MS-DRG since discharge status is not used in the determination of the MS-DRG for
hypertensive patients.

The DRGs were originally developed at the Yale University School of Organization and
Management during the 1970’s under contract to the Centers for Medicare and Medicaid Services
(formerly Health Care Financing Administration). The second version and all subsequent versions
of the DRG definitions have been updated by 3M Health Information Systems under contract with
CMS. All versions of the DRGs, since the inception of the Medicare Prospective Payment System,
are summarized in the following table.

Table 3. Grouper versions

Grouper Effective Time Period

Version
MS-DRG 34.0 10/01/2016 - 09/30/2017
MS-DRG 33.0 10/01/2015 - 09/30/2016
MS-DRG 32.0 10/01/2014 - 09/30/2015
MS-DRG 31.0 10/01/2013 - 09/30/2014
MS-DRG 30.0 10/01/2012 - 09/30/2013
MS-DRG 29.0 10/01/2011 - 09/30/2012
MS-DRG 28.0 10/01/2010 - 09/30/2011
MS-DRG 27.0 10/01/2009 - 09/30/2010
MS-DRG 26.0 10/01/2008 - 09/30/2009
MS-DRG 25.0 10/01/2007 - 09/30/2008
CMS 24.0 10/01/2006 - 09/30/2007
CMS 23.0 10/01/2005 - 09/30/2006
CMS 22.0 10/01/2004 - 09/30/2005
CMS 21.0 10/01/2003 - 09/30/2004
CMS 20.0 10/01/2002 - 09/30/2003
CMS 19.0 10/01/2001 - 09/30/2002
CMS 18.0 10/01/2000 - 09/30/2001
CMS 17.0 10/01/1999 - 09/30/2000
CMS 16.0 10/01/1998 - 09/30/1999

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 Design and development of the Diagnosis Related Group (DRG)

Grouper Effective Time Period

Version
CMS 15.0 10/01/1997 - 09/30/1998
CMS 14.0 10/01/1996 - 09/30/1997
CMS 13.0 10/01/1995 - 09/30/1996
CMS 12.0 10/01/1994 - 09/30/1995
CMS 11.0 10/01/1993 - 09/30/1994
CMS 10.0 10/01/1992 - 09/30/1993
CMS 9.0 10/01/1991 - 09/30/1992
CMS 8.0 10/01/1990 - 09/30/1991
CMS 7.0 10/01/1989 - 09/30/1990
CMS 6.0 10/01/1988 - 09/30/1989
CMS 5.0 10/01/1987 - 09/30/1988
CMS 4.0 10/01/1986 - 09/30/1987
CMS 3.0 05/01/1986 - 09/30/1986
CMS 2.0 10/01/1983 - 04/30/1986

Summary
The DRGs, as they are now defined, form a manageable, clinically coherent set of patient classes
that relate a hospital’s case mix to the resource demands and associated costs experienced by
the hospital. DRGs are defined based on the principal diagnosis, secondary diagnoses, surgical
procedures, age, sex and discharge status of the patients treated. Through DRGs, hospitals can
gain an understanding of the patients being treated, the costs incurred and within reasonable
limits, the services expected to be required. The classification of patients into DRGs is a
constantly evolving process. As coding schemes change, as more comprehensive data is
collected or as medical technology or practice changes, the DRG definitions will be reviewed and
revised.

DRG versions 2.0–32.0 were defined using the ICD-9-CM codeset. MS-DRG v34.0 was
implemented using the ICD-10-CM/PCS codeset effective October 1, 2016.

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 Design and development of the Diagnosis Related Group (DRG)

Major Surgery

Minor Surgery

Type of Surgery

Other Surgery

Surgery
Yes Unrelated to
Principal
Major Diagnosis
O.R.
Diagnostic
Procedure
Category

No
Neoplasm

Specific
Conditions
Relating to the
Organ System

Principal Diagnosis

Symptoms

Other

Figure 1: Typical DRG structure for a Major Diagnostic Category

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