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What are Diagnosis Related Groups (DRGs)?

The Social Security Act created a system of payment for the operating costs associated with Medicare Part A hospital inpatient stays. This system is based on set rates and is referred to as the Inpatient Prospective Payment System (IPPS). As a part of this system, each case is categorized into a Medicare Severity — Diagnosis Related Group (MS-DRG).

Patients who have similar clinical characteristics and similar treatment costs are assigned to an MS-DRG. The MS-DRG is linked to a fixed payment amount based on the average treatment cost of patients in the group. Patients can be assigned to an MS-DRG based on their diagnosis, surgical procedures, age, and other information. Hospitals provide this information on their Medicare claim, and Medicare uses this information to decide how much the hospitals should be paid.

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