How a DRG Determines How Much a Hospital Gets Paid

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Medicare and certain private health insurance companies pay for hospitalizations of their beneficiaries using a DRG payment system. Each time you’re admitted as an inpatient to a hospital, that hospital assigns a DRG to that admission. The hospital gets paid a fixed amount for that DRG, regardless of how much money it actually spends treating you. If a hospital can effectively treat you for less money than Medicare pays it for your DRG, then the hospital makes money on that hospitalization.

If the hospital spends more money caring for you than Medicare gives it for your DRG, then the hospital loses money on that hospitalization.

Learn more about this in “DRG 101: What Is a DRG & How Does It Work?

In order to figure out how much a hospital gets paid for any particular hospitalization, you must first know what DRG was assigned for that hospitalization. In addition, you must know the hospital’s blended rate. Call the hospital’s billing, accounting, or case management department and ask what its Medicare blended rate is.

Figuring Out How Much Money a Hospital Gets Paid for a Given DRG

Each DRG is assigned a relative weight based on the average amount of resources it takes to care for a patient assigned to that DRG. You can look up the relative weight for your particular DRG by downloading a chart provided by the Centers for Medicare and Medicaid Services following these instructions:

  1. Go to this web page on the CMS website.
  2. Scroll down to the bottom of the page. Locate the area entitled “Downloads.”
  3. Download table 5.
  4. Open the file that displays the information as an Excel spreadsheet (the file that ends with “.xlsx”.)
  5. The column labeled “weights” shows the relative weight for each DRG.

    The average relative weight is 1.0. DRGs with a relative weight of less than 1.0 are less resource-intensive to treat and are generally less costly to treat. DRG’s with a relative weight of more than 1.0 generally require more resources to treat and are more expensive to treat. The higher the relative weight, the more resources are required to treat a patient with that DRG.

    To figure out how much money your hospital got paid for your hospitalization, you must multiply your DRG’s relative weight by your hospital’s blended rate. Here’s an example with a hospital that has a blended rate of $6,000 when your DRG’s relative weight is 1.3:

    $6,000 X 1.3 = $7,800. Your hospital got paid $7,800 for your hospitalization.

    How Does a Hospital’s Blended Rate Work?

    Since health care resource costs and labor vary across the country and even from hospital to hospital, Medicare assigns a different blended rate to each and every hospital that accepts Medicare. For example, a hospital in Manhattan, New York City probably has higher labor costs, higher costs to maintain its facility, and higher resource costs than a hospital in Knoxville, Tennessee.

    The Manhattan hospital probably has a higher blended rate than the Knoxville hospital.

    Other things that Medicare factors into your hospital’s blended rate determination include whether or not it’s a teaching hospital with residents and interns, whether or not it’s in a rural area, and whether or not it cares for a disproportionate share of the poor and uninsured population. Each of these things tends to increase a hospital’s blended rate.

    Each October, Medicare assigns every hospital a new blended rate. In this way, Medicare can tweak how much it pays any given hospital based not just on nationwide trends like inflation, but also on regional trends. For example, as a geographic area becomes more developed, a hospital within that area may lose its rural designation.

    Sources:

    Federal Register, Medicare Program; Hospital Inpatient Prospective Payment Systems for Acute Care Hospitals and the Long-Term Care Hospital Prospective Payment System Policy Changes and Fiscal Year 2016 Rates; Revisions of Quality Reporting Requirements for Specific Providers, Including Changes Related to the Electronic Health Record Incentive Program; Extensions of the Medicare-Dependent, Small Rural Hospital Program and the Low-Volume Payment Adjustment for Hospitals, 8/17/15. 

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