Basics of Medicare-Severity Diagnosis Related Group (MS-DRG) 

Ahmed Abuabdou, MBBS, MBA
Vice President – Operations, ACPA

Medicare Severity Diagnosis Related Group (MS-DRG) understanding is an essential area of knowledge for us as physician advisors. While it is the most common payment methodology for inpatient level of care in the current landscape, some physicians, early career physician advisors and hospital executives might not have a good understanding of what MS-DRG is and what are the several variables which could impact the correct DRG assignment.  
Here is some basic information about MS-DRG
Diagnosis Related Group is defined as patient classification system that provides a methodology for relating the type of patients a hospital treats (i.e., its case mix) to the costs incurred by the hospital.1 
The current version of MS-DRG is v39 (accessed here: https://www.cms.gov/icd10m/version39-fullcode-cms/fullcode_cms/P0001.html) and it contains 765 DRGs. These DRGs are structured within the framework of 25 Major Diagnostic Categories (MDCs) and an extra category called pre-MDC. Most MDCs contain surgical and medical MS-DRGs, depending on what the principal diagnosis is and whether there is an operative procedure. Diagnoses are offered in the current classification system, currently International Classification of Diseases, Tenth Revision, Clinical Modification (ICD-10-CM). Procedures are recorded in the inpatient Procedure Coding System known as ICD-10-PCS. 
MS-DRG can be 3-tiered DRGs, 2-tiered DRGs, or standalone DRGs as shown in the schematic representation below: 
The anatomical components of MS-DRG include:  
1) Principal Diagnosis 
Uniform Hospital Discharge Data Set (UHDDS) defines Principal Diagnosis (PDx) as the condition established after study to be chiefly responsible for occasioning the admission of the patient to the hospital for care. This may not be identical to the admitting diagnosis (e.g., admitted for abdominal pain but, after study, PDx is determined to be acute cholecystitis). 
For the most part, the principal diagnosis drives the DRG assignment. On certain occasions where a surgical procedure is performed, or pregnancy status is reported, the principal diagnosis might not be the sole driver for the DRG assignment. Secondary diagnoses impact the DRG assignment as well by adding a CC and/or MCC when clinically valid, supported, and consistently documented. 
2) Secondary Diagnoses
UHDDS defines secondary diagnoses as all conditions that coexist at the time of admission, that develop subsequently, or that affect treatment received and / or length of stay. 
3) Comorbid Conditions or Complications 
Some secondary diagnoses are designated as risk-adjusting comorbid conditions or complications (CCs). Others considered even more serious are referred to as major comorbid conditions or complications (MCCs). CCs and MCCs indicate a higher severity of illness, risk of mortality, and intensity of resource utilization. These CCs and MCCs define many of the tiered MS-DRG sets. It only takes one CC or MCC to establish the tier. Although it is optimal to capture all the CCs/MCCs present, having more than one in a given tier does not have any greater impact. 
Examples of CCs include chronic respiratory failure (hypoxemic, hypercapnic, or combined), chronic congestive heart failure (systolic, diastolic, or combined), acute kidney injury, hyponatremia, and moderate protein-calorie malnutrition. Examples of MCCs include acute or acute on chronic respiratory failure (hypoxemic, hypercapnic, or combined), acute or acute on chronic congestive heart failure (systolic, diastolic, or combined), pneumonia, and severe protein-calorie malnutrition. 
4) Relative Weight (RW)  
RW is a measure which reflects the relative resource consumption (cost) associated with treatment of that condition as compared to the resource consumption of the average Medicare patient (by convention, defined as 1.0000). Each DRG is assigned a specific RW. The Medicare Payment Advisory Committee (MedPAC) reviews hospital claims data annually as part of IPPS annual updates resulting in changes to RW each year. In MS-DRG sets, the relative weight increases with the tier; e.g., RW of DRG with MCC > RW of DRG with CC > RW of DRG without CC or MCC.  
5) Case Mix Index (CMI) 
CMI is a numeric measure which represents the average DRG RW for that hospital. It is calculated by summing the DRG weights for all Medicare discharges and dividing by the number of discharges. It is used to find and adjust the average care cost per patient at a hospital based on the patient population demographics. For example, if a hospital’s average cost per patient is $2,000 and its annual CMI is 0.90, then the adjusted cost per patient would be $2,222.22. In general, increased capture of MCCs equates to higher CMI. Higher surgical DRGs results in higher CMI as well. To put it in simple words, higher CMI means you are treating sicker, more complex, and more resource-intensive patients. 
6) Hospital Base Rate  
Hospital Base Payment Rate (Blended Rate) is a monetary number assigned to an individual hospital that allows for adjustment according to individual characteristics of that hospital. It is recalculated annually to reflect differences in operating expenses as well as capital expenses. Factors that impact the hospital blended rate include proportion of indigent population, capital costs, wage index, urban vs rural designation, teaching vs non-teaching designation, and cost of living adjustments. The Hospital Base Rate multiplied by the RW of the MS-DRG determines the payment for a given patient encounter. 
7) Length of Stay (LOS)  
Arithmetic Mean Length of Stay (ALOS) reflects the average LOS for CMS patients who fall into a given MS-DRG. Geometric Mean Length of Stay (GMLOS) reflects the average LOS for CMS patients who fall into a given MS-DRG with patients with abnormally short or long LOS (called outliers) being removed from the calculation. In tiered DRG sets, the higher the tier, the longer the allotted LOS. 
The basic equation which explains the MS-DRG payment is shown below. While we (physicians and physician advisor community) have no direct control over what the updated hospital base rate would be every year, we have control in documenting all clinically relevant and pertinent diagnoses which can risk adjust the MS-DRG (if designated as MCC or CC) leading to a higher RW which will ultimately lead to higher reimbursement.  
In certain cases an add-on payment is included such as Disproportionate Share Hospital (DSH) adjustment for indigent population, Indirect Medical Education (IME) adjustment, and outlier payment for considerable amount of facility resources (such as drugs and technology). 
The MS-DRG and its variables such as Relative Weight (RW), Geometric Mean Length of Stay (GMLOS), designating a secondary diagnosis as Major Comorbidity / Complication (MCC) or Comorbidity / Complication (CC) among several others, are updated yearly as part of the Inpatient Prospective Payment System (IPPS) final rule (effective for discharges occurring on October 1st of each calendar year). 
Physician advisors are in a unique position to assist hospitals or health systems improve their quality metrics and reimbursement. Although improving efficiency and delivery of medical care by being good stewards of resource utilization is of the utmost importance, implementing documentation improvement strategies to optimize the DRG, risk adjustment, and reimbursement can be extremely valuable as well.. 
References: 
Dr. Abuabdou is a practicing Hospital Medicine faculty at the University of Arkansas for Medical Sciences, Little Rock, Arkansas. He serves as Associate Chief Medical Officer for UAMS Medical Center and leads its Physician Advisory Program.