If you’ve ever tried to figure out how hospitals were reimbursed for their services, there’s a good chance you found the process at least slightly complicated. To make matters even more interesting, recent health care diagnoses changes effective this month have added another layer of complexity.

To understand where we are today, it helps to first take a step back into the 1970’s. At this time, Medicare wanted to address the drastically different payments they were making to hospitals across the country for patients with similar demographics and diagnosis. Yale University created a pilot project using DRGs, or Diagnosis Related Groups, as a monitoring tool for the cost of services provided for Medicare patients.

The pilot turned into a widely used system in 1983, and has since seen some modifications over the years. A DRG assignment determines the payment level the hospital will receive for a patient stay. The intent of the over 500 DRGs is to motivate hospitals to be more efficient with the way they deliver services, while also supporting fair compensation, taking into account new technology and inflation, monitoring the quality of care across hospitals, and also helping to resolve problems with treatment. With the introduction of DRGs, Medicare began to cap payment to hospitals, regardless of what the hospitals charged.

Like most things related to Medicare, DRGs are not entirely straightforward. At their core, DRGs’ largest impact is changing the hospital reimbursement process from a fee-for-service model to paying according to a value-based classification system. All services provided between hospital admission and discharge are bundled together into one episode of care.  

The DRG classification system is driven by the diagnosis code, and further tailored by looking at factors including patient demographics, operating procedures, diagnosis-procedure combination, average length of stay, location, local wage tax, and the presence of complications. For example, a 66 year-old male is admitted to a San Francisco Bay Area hospital for appendicitis, and has an appendectomy associated with an abscess. His DRG assignment that the hospital will get reimbursement for will be based on these factors.

Despite the concerted effort to improve the accuracy of patient costs, DRGs have also introduced unintended consequences. While bundling reimbursements based on multiple factors to create standards seems like a good practice, many patients’ needs are unique and simply don’t fit into the the DRG parameters. If a provider feels a patient should to stay in the hospital longer and receive additional tests than is suggested by a DRG, the reimbursement may not cover the added costs.

A potential aid to ensuring DRGs are as accurate as possible is understanding the patient diagnosis in more detail. As many hospitals and providers are aware, the ICD transition that went into effect on October 1, 2015 does increase the level of detail for each diagnosis by migrating from roughly 13,000 ICD-9 codes to 68,000 ICD-10 codes.

CMS believes it will take two years to effectively recalibrate payments to hospitals with the additional specificity ICD-10 provides, and for good reason. Currently, there is no efficient way to harness the more detailed information available in the additional 55,000 codes, since there isn’t yet a substantial amount of data to adjust the payments accordingly.

The methodology of how a patient diagnosis is established has changed in many cases. ICD-10 uses additional factors called “axes of classification” for a more comprehensive approach to determine the appropriate diagnosis. For example, ICD-10, takes the etiology, or cause of the condition or disease, into consideration in addition to body system affected. The physician performing the appendectomy on the previously mentioned patient would be able to code the diagnosis associated with the performed procedure more accurately. This level of detail helps determine the proper level of care, and subsequent Medicare reimbursement to the hospital.

Since the diagnosis codes have the biggest impact on DRG classification, the more accurate the diagnosis, the better. The ICD-9 to ICD-10 conversion has caused its fair share of headaches for hospitals, providers, and billers. But, the ICD-10 codes also have the ability to course-correct the incorrect payments due to the lack of detail provided in ICD-9 codes.

DRGs have evolved a great deal in the past few decades. They are proving to be an important tool to help facilitate appropriate payments and render a more complete view of a patient stay.