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Diagnostic Related Group Inpatient Hospital Reimbursement. Annual Update Process Presented by: APS Healthcare August 1, 2008. Overview. DRG payment per discharge = DRG Weight x Peer Group Base Rate + Outlier Adjustment DRG Weight, Base Rate, and Outlier Adjustment are updated annually.

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diagnostic related group inpatient hospital reimbursement

Diagnostic Related Group Inpatient Hospital Reimbursement

Annual Update Process

Presented by: APS Healthcare

August 1, 2008

  • DRG payment per discharge =

DRG Weight x Peer Group Base Rate

+ Outlier Adjustment

  • DRG Weight, Base Rate, and Outlier Adjustment are updated annually.


drg classification system
DRG Classification System
  • DRG Groupers classify hospital discharges based on clinical characteristics and resource consumption
  • DRGs encompass all inpatient stays
  • Information for DRG assignment is available on uniform billing claim forms


drg classification system4
DRG Classification System
  • DRGs are assigned hierarchically:
    • High-cost procedures independent of Major Diagnostic Category (MDC) (e.g. transplants)
    • MDC (dependent upon diagnosis code)
      • Procedure within MDC
        • Other patient characteristics
      • Or, if no procedure, principle diagnosis within MDC
        • Other patient characteristics


drg grouper version is updated annually
DRG Grouper Version is Updated Annually
  • CMS Grouper update available in August (Version 25, Aug. 2007)
  • Enhanced for Medicaid to expand neonate DRGs from 7 to 20 DRGs based on birthweight, discharge status, and operating room procedures


grouper data collection
Grouper Data Collection
  • Three years of inpatient hospital discharges
    • Most recent 3 SFYs with 9-month claim lag
    • FFS claims and managed-care encounters
  • All acute care hospital inpatient discharges.
  • Excludes Indian Health Service, Children’s Medical Center (Bethany), JD McCarty, George Nigh rehabilitation and psychiatric hospitals. RTCs also excluded.


drg payment formula
DRG Payment Formula

The formula for a DRG payment is:



(DRG Relative Weight)


(Hospital Base Rate)


(Outlier Adjustment)


drg relative weight
DRG Relative Weight
  • Claim “charges” converted to “cost” using cost-to-charge ratios (computed from CMS cost reports for last 3 years)
  • DRG Relative Weight =

Average Cost of Discharges per DRG ÷ Average Cost of All Discharges


hospital base rate
Hospital Base Rate
  • A different rate is computed for each cost-related peer group
  • Peer groups are chosen to minimize cost variation within groups and maximize variation between groups
  • Peer group classification is updated each year based on current hospital characteristics and average costs


hospital classification data
Hospital Classification Data

Obtained from CMS

H ealthcare

C ost

R eport

I nformation

S ystem


five classification variables obtained from hcris
Five Classification VariablesObtained from HCRIS
  • Critical Access Hospital/Not C.A.
  • Large/Small Hospital < 300 beds
  • Teaching/Non-teaching Hospital
  • Sole Community Hospital/Not S.C.
  • Urban/Rural Hospital (from HCRIS or PPS Impact File Geographic Reclassification)

These variables and cost-to-charge ratios are

updated and verified with letters to

Administrators in August.


peer grouping procedure
Peer Grouping Procedure
  • The independent contribution to cost is estimated for each of the five variables using multiple regression to analyze average cost (net of DRG-related cost.)
  • 32 different types of hospital are created from all combinations of the five variables.
  • The regression equation is used to compute the predicted average cost for each type of hospital.
  • The cumulative percentage distribution of predicted cost is divided into five quintiles.


32 hospital types and 5 hospital cost groups
32 Hospital Types and 5 Hospital Cost Groups






The 32 types are arranged from lowest to highest average cost, and grouped into five quintiles by cumulative percent of cost.


peer group base rate calculation procedure
Peer-Group Base Rate Calculation Procedure
  • Use the observed distribution of discharges across the 32 hospital types to compute the weighted-average predicted cost for each peer group.
  • The relative base rate is the ratio of the peer group average to the over-all average.
  • The absolute base rate is determined by iterative proportional fitting: DRG payments for all discharges are computed and the base rates are incremented proportionally until the sum of DRG payments equals the total approved budget.


hospital base rate peer groups 2008
Hospital Base-Rate Peer Groups (2008)

Peer Relative Absolute

Group Hospitals Base Rate Base Rate

1 1 95.30% $3,957

2 107 97.33% $4,042

3 138 98.58% $4,094

4 88 102.58% $4,260

5 176 106.21% $4,411


outlier adjustment
Outlier Adjustment
  • Hospitals receive an additional payment if cost remaining after DRG payment is greater than $27,000.
  • Payment is equal to 70% of remaining cost after the $27,000 threshold is met
  • Payment is modeled after CMS Medicare adjustment


about aps health intelligence
About APS Health Intelligence
  • DRG Annual Weight Setting
  • Program Evaluation Design and Implementation
  • Performance Measurement and Quality Assurance Services
  • Survey Development and Administration
  • Fraud and Abuse Detection
  • Health Policy Analysis
  • APS Has Been Working with OHCA since 2001


contact information
Contact Information
  • APS contacts (608) 258-3350:
    • Spencer Anthony, MA
      • SAnthony@APShealthcare.com
    • Karyn Kriz, MPA
      • KKriz@APShealthcare.com
    • Don Libby, Ph.D.
      • DLibby@APShealthcare.com