DRG (diagnosis-related group)

What does DRG (diagnosis-related group) mean?

A diagnosis-related group puts hospital stays into groups with similar diagnoses, procedures and expected use of resources. The payer then pays the hospital a set rate per admission for that group, whatever the actual length of stay or cost. US Medicare introduced DRG-based payment in 1983, and many other systems, including Germany, Australia and Abu Dhabi, use similar methods. Example: if the DRG rate for a hip replacement is 15,000 and the hospital's cost is 13,000, it keeps 2,000; if complications raise the cost to 17,000, it loses 2,000. This rewards efficiency and shorter stays, unlike fee-for-service payment, which pays for each item of care.