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Diagnosis-related group (DRG) is a system to classify hospital cases into one of originally 467 groups. The 467th group was "Ungroupable". This system of classification was developed as a collaborative project by Robert B Fetter, PhD, of the Yale School of Management, and John D Thompson, MPH, of the Yale School of Public Health. The system is also referred to as "the DRGs", and its intent was to identify the "products" that a hospital provides. One example of a "product" is an appendectomy. The system was developed in anticipation of convincing Congress to use it for reimbursement, to replace "cost based" reimbursement that had been used up to that point. DRGs are assigned by a "grouper" program based on ICD (International Classification of Diseases) diagnoses, procedures, age, sex, discharge status, and the presence of complications or comorbidities. DRGs have been used in the US since 1982 to determine how much Medicare pays the hospital for each "product", since patients within each category are clinically similar and are expected to use the same level of hospital resources. DRGs may be further grouped into Major Diagnostic Categories (MDCs). DRGs are also standard practice for establishing reimbursements for other Medicare related reimbursements such as to home healthcare providers.
The original objective of diagnosis related groups (DRG) was to develop a classification system that identified the "products" that the patient received. Since the introduction of DRGs in the early 1980s, the healthcare industry has evolved and developed an increased demand for a patient classification system that can serve its original objective at a higher level of sophistication and precision. To meet those evolving needs, the objective of the DRG system had to expand in scope. Today, there are several different DRG systems that have been developed in the US. They include:
- Medicare DRG (CMS-DRG & MS-DRG)
- Refined DRGs (R-DRG)
- All Patient DRGs (AP-DRG)
- Severity DRGs (S-DRG)
- All Patient, Severity-Adjusted DRGs (APS-DRG)
- All Patient Refined DRGs (APR-DRG)
- International-Refined DRGs (IR-DRG)
The system was created[when?][why?] by Robert Barclay Fetter and John D. Thompson at Yale University with the material support of the former Health Care Financing Administration (HCFA), now called the Centers for Medicare & Medicaid Services (CMS).
DRGs were first implemented in New Jersey, beginning in 1980 with a small number of hospitals partitioned into three groups according to their budget positions - surplus, breakeven, and deficit - prior to the imposition of DRG payment.
The New Jersey experiment continued for three years, with additional cadres of hospitals being added to the number of institutions each year until all hospitals in New Jersey were dealing with this prospective payment system.
DRGs were designed to be homogeneous units of hospital activity to which binding prices could be attached. A central theme in the advocacy of DRGs was that this reimbursement system would, by constraining the hospitals, oblige their administrators to alter the behavior of the physicians and surgeons comprising their medical staffs. Hospitals were forced to leave the “nearly risk-free world of cost reimbursement” and face the uncertain financial consequences associated with the provision of health care.
Moreover, DRGs were designed to provide practice pattern information that administrators could use to influence individual physician behavior.
DRGs were intended to describe all types of patients in an acute hospital setting. The DRGs encompassed elderly patients as well as newborn, pediatric and adult populations.
The prospective payment system implemented as DRGs had been designed to limit the share of hospital revenues derived from the Medicare program budget, and in spite of doubtful results in New Jersey, it was decided in 1983 to impose DRGs on hospitals nationwide.
In that year, HCFA assumed responsibility for the maintenance and modifications of these DRG definitions. Since that time, the focus of all Medicare DRG modifications instituted by HCFA/CMS has been on problems relating primarily to the elderly population.
In 1987, New York state passed legislation instituting DRG-based payments for all non-Medicare patients. This legislation required that the New York State Department of Health (NYS DOH) evaluate the applicability of Medicare DRGs to a non-Medicare population. This evaluation concluded that the Medicare DRGs were not adequate for a non-Medicare population. Based on this evaluation, the NYS DOH entered into an agreement with 3M to research and develop all necessary DRG modifications. The modifications resulted in the initial APDRG, which differed from the Medicare DRG in that it provided support for transplants, high-risk obstetric care, nutritional disorders, and pediatrics along with support for other populations. One challenge in working with the APDRG groupers is that there is no set of common data/formulas that is shared across all states as there is with CMS. Each state maintains its own information.
In 1991, the top 10 DRGs overall were: normal newborn, vaginal delivery, heart failure, psychoses, cesarean section, neonate with significant problems, angina pectoris, specific cerebrovascular disorders, pneumonia, and hip/knee replacement. These DRGs comprised nearly 30 percent of all hospital discharges.
The history, design, and classification rules of the DRG system, as well as its application to patient discharge data and updating procedures, are presented in the CMS DRG Definitions Manual (Also known as the Medicare DRG Definitions Manual and the Grouper Manual). A new version generally appears every October. The 20.0 version appeared in 2002.
In 2007, author Rick Mayes described DRGs as:
|“||...the single most influential postwar innovation in medical financing: Medicare's prospective payment system (PPS). Inexorably rising medical inflation and deep economic deterioration forced policymakers in the late 1970s to pursue radical reform of Medicare to keep the program from insolvency. Congress and the Reagan administration eventually turned to the one alternative reimbursement system that analysts and academics had studied more than any other and had even tested with apparent success in New Jersey: prospective payment with diagnosis-related groups (DRGs). Rather than simply reimbursing hospitals whatever costs they charged to treat Medicare patients, the new model paid hospitals a predetermined, set rate based on the patient's diagnosis. The most significant change in health policy since Medicare and Medicaid's passage in 1965 went virtually unnoticed by the general public. Nevertheless, the change was nothing short of revolutionary. For the first time, the federal government gained the upper hand in its financial relationship with the hospital industry. Medicare's new prospective payment system with DRGs triggered a shift in the balance of political and economic power between the providers of medical care (hospitals and physicians) and those who paid for it - power that providers had successfully accumulated for more than half a century."||”|
CMS DRG version 25 revision 
As of October 1, 2007, with version 25, the CMS DRG system resequenced the groups, so that for instance "Ungroupable" is no longer 470 but is now 999. To differentiate it, the newly resequenced DRG are now known as MS-DRG.
Before the introduction of version 25, many CMS DRG classifications were "paired" to reflect the presence of complications or comorbidities (CCs). A significant refinement of version 25 was to replace this pairing, in many instances, with a trifurcated design that created a tiered system of the absence of CCs, the presence of CCs, and a higher level of presence of Major CCs. As a result of this change, the historical list of diagnoses that qualified for membership on the CC list was substantially redefined and replaced with a new standard CC list and a new Major CC list.
Another planning refinement was not to number the DRGs in strict numerical sequence as compared with the prior versions. In the past, newly created DRG classifications would be added to the end of the list. In version 25, there are gaps within the numbering system that will allow modifications over time, and also allow for new MS-DRGs in the same body system to be located more closely together in the numerical sequence.
MS-DRG version 26 revision 
MS-DRG Grouper version 26 took effect as of October 1, 2008 with one main change: implementation of Hospital Acquired Conditions (HAC). Certain conditions are no longer considered complications if they were not present on admission (POA), which will cause reduced reimbursement from Medicare for conditions apparently caused by the hospital.
MS-DRG version 27 revision 
See also 
- Case mix index
- Diagnosis codes
- Medical classification
- Ambulatory Patient Group, similar to DRG but for outpatient care
- Risk of mortality (ROM)
- Severity of illness (SOI)
- Pay for Performance
- Fetter RB, Shin Y, Freeman JL, Averill RF, Thompson JD (1980) Case mix definition by diagnosis related groups. Medical Care 18(2):1–53
- Fetter RB, Freeman JL (1986) Diagnosis related groups: product linemanagement within hospitals. Academy of Management Review 11(1):41–54
- Baker JJ (2002) Medicare payment system for hospital inpatients: diagnosis related groups. Journal of Health Care Finance 28(3):1–13
- Lessons of the New Jersey DRG Payment System
- Eastaugh SR (1999) Managing risk in a risky world. Journal of Health Care Finance 25(3):10
- Kuntz L, Scholtes S, Vera A (2008) DRG Cost Weight Volatility and Hospital Performance. OR Spectrum 30(2): 331-354
- "Most Frequent Diagnoses and Procedures for DRGs, by Insurance Status". Agency for Health Care Policy and Research. Retrieved 2006-04-22.
- Mayes, Rick (January 2007). "The Origins, Development, and Passage of Medicare's Revolutionary Prospective Payment System" (abstract). Journal of the History of Medicine and Allied Sciences (Oxford University Press) 62 (1): pp. 21–55. doi:10.1093/jhmas/jrj038. ISSN 1468-4373. PMID 16467485. Retrieved 2009-04-06.
- Official CMS website
- Agency for Healthcare Research and Quality (AHRQ).
- DRG and ICD (Canada) from the MCHP research unit of the University of Manitoba's Faculty of Medicine.
- Diagnosis Related Groups (DRGs) and the Medicare Program - Implications for Medical Technology (PDF format). A 1983 document found in the "CyberCemetery: OTA Legacy" section of University of North Texas Libraries Government Documents department.
- Mayes, Rick, "The Origins, Development, and Passage of Medicare's Revolutionary Prospective Payment System" Journal of the History of Medicine and Allied Sciences Volume 62, Number 1, January 2007, pp. 21-55