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Diagnosis-related group (DRG) is a system to classify hospital cases into one of approximately 500 groups, also referred to as DRGs, expected to have similar hospital resource use, developed for Medicare as part of the prospective payment system. DRGs are assigned by a "grouper" program based on ICD diagnoses, procedures, age, sex, discharge status, and the presence of complications or comorbidities. DRGs have been used in the US since 1983 to determine how much Medicare pays the hospital, since patients within each category are similar clinically and are expected to use the same level of hospital resources. DRGs may be further grouped into Major Diagnostic Categories (MDCs).


The original objective of diagnosis related group (DRG) was to develop a patient classification system that related types of patients treated to the resources they consumed. Since the introduction of DRGs in the early 1980’s, 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 by Robert Barclay Fetter and John Devereaux Thompson at Yale Universitymarker with the material support of the former Health Care Financing Administration (HCFA), now called the Centers for Medicare and Medicaid Services (CMS).

DRGs were first implemented in New Jerseymarker, 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 the Garden State 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. 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 Health Department (NYHD) 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 NYDH 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:

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

MS-DRG Grouper version 27 will take effect as of October 1, 2009. Changes involved are mainly related to Influenza A virus subtype H1N1.


  1. Lessons of the New Jersey DRG Payment System

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