Medicare Severity Diagnosis Related Group (MS-DRG)

Key facts

Payment system

Medicare Inpatient Prospective Payment System (IPPS)

Legal basis

Social Security Act Section 1886(d); regulations at 42 CFR Part 412

Introduced

Fiscal year 2008, replacing the earlier CMS-DRGs

Update cycle

Annual IPPS rulemaking, effective October 1

Inputs

ICD-10-CM diagnoses, ICD-10-PCS procedures, discharge status, other claim data

What is an MS-DRG?

Under the Inpatient Prospective Payment System (IPPS), Medicare pays a general acute care hospital a set amount for each discharge rather than for each day or service. The MS-DRG is the classification that decides which amount applies: stays expected to use similar hospital resources fall into the same group.

Diagnosis Related Groups were first used for Medicare payment in 1983. CMS adopted the MS-DRG version in fiscal year 2008 to better reflect how sick patients are, and it publishes updated group definitions and grouper software each year.

How MS-DRGs are assigned and paid

Grouper software applies a fixed logic to the codes and other data on the hospital claim:

• Major Diagnostic Category: the principal diagnosis places most stays into one of 25 categories, largely by body system; certain very costly procedures, such as transplants, are grouped first.
• Surgical or medical: operating room procedures coded in ICD-10-PCS move the stay into a surgical group.
• Severity: many base groups split into up to three levels, with a major complication or comorbidity (MCC), with a complication or comorbidity (CC), or without either.
• Payment: each MS-DRG has a relative weight, multiplied by a hospital base rate adjusted for local wages, plus add-ons such as outlier, teaching and disproportionate share payments.

Why MS-DRGs matter

MS-DRGs link clinical coding to hospital revenue and volume data:

• Hospital revenue per inpatient case depends on coding accuracy, so MS-DRG shifts are a focus of audits and clinical documentation programs.
• Medicare inpatient utilization files report discharges and payments by hospital and MS-DRG, a common starting point for sizing procedure volumes by facility.
• Device and drug companies examine whether the MS-DRG payment covers a new product and, if not, may seek a new technology add-on payment.
• Many Medicaid programs and commercial payers also pay hospitals by DRG, often using other groupers such as APR-DRGs rather than MS-DRGs.

Limitations of MS-DRG data

MS-DRGs apply to acute care hospitals paid under IPPS. Critical access hospitals and inpatient psychiatric, rehabilitation and long-term care hospitals are paid under other methods, and Maryland hospitals operate under a separate state model. Medicare MS-DRG data therefore does not describe all inpatient care, even for Medicare patients.