Medicare bases its payments for in-patient hospital stays on which of more than 500 diagnosis-related groups the patient's case fits. The Centers for Medicare and Medicaid Services calculates Medicare payment rates on the assumption that all patients in the same DRG should cost the hospital the same amount. The use of DRG-based payments is supposed to control costs better than writing the hospital a blank check.
Assigning a DRG
The CMS analyzes statistics for each DRG to see how much treatment patients in that group require. When the hospital submits a bill, the CMS normally assigns a patient to a single DRG. The CMS selects the DRG based on the diagnosis that got the patient admitted to the hospital, any secondary diagnoses, the procedures the hospital performed, and the patient's status when she checks out. Age and sex may also factor in.
Calculating the Rate
To start its calculations, the CMS sets basic labor and non-labor payments for a hospital stay. It then multiplies those payments by a weighting factor based on the DRG. The DRG multiplier depends on how much treatment patients in that group require. For example, a hospital treating someone with kidney failure gets a higher multiplier than when it treats a patient with less dangerous kidney problems. The CMS adjusts the multipliers annually as new treatments or procedures affect the statistics for different DRGs.