The Diagnosis Related Group (DRG) uses ICD-9-CM diagnosis, procedure codes, and demographic information about the patient to sort inpatient hospital admission into one of originally 467 groups. The number grew to about 538 clinically related groups where it classifies similar consumption of hospital resources and the length of stay. This system was adopted by Medicare in 1983 to reimburse hospitals for inpatient admissions. Some hospitals are excluded from this form of reimbursement such as psychiatric hospitals, rehab facilities, long term and cancer hospitals. The CMS administers the DRG system and issues all the guidelines for it. DRG’s are updated on October 1st every year. This includes base rates, wage directories, establishment of new DRG’s and elimination of others.
On October 1st, 2007, CMS established a new set of codes known as Medicare Severity Diagnosis Related Groups (MS-DRGs). These codes are more specific and take into account the severity of a patient’s illness and the resources used. As a result, a more suitable reimbursement is issued. There is about 750 MS-DRGs and 538 DRGs.
The payment method used by Medicare for hospitals is known as DRG weight of one. Payments are made per admission where the hospital and payor agree on a base rate that is multiplied by DRG weight to determine reimbursement. Length of stay don’t factor in unless there is an outlier case.
The Ambulatory Payment Classification (APC) system uses Current Procedural Terminology (CPT) and Healthcare Common Procedure Coding System (HCPCS) to classify outpatient hospital admissions into clinically related groups that reflect the extent of care administered. It was established by Medicare in 2000, and certain hospitals are excluded from APC reimbursement such as Maryland Hospitals, critical access hospitals, Indian Health Service Hospitals. APCs are updated each year by CMS. There are approximately 700 procedural APCs and 350 drug APCs. Patient can have multiple APCs on one claim, although multiple surgeries are paid the full APC amount for the highest APC, and all others are paid at 50% of the APC rate.
Outpatient visits usually vary in the type of services and thus payments are harder to set up based on a per visit basis. Initially Medicare paid physicians based on the charges and the difference was paid by the patient. In 1975, physician fees were limited by the Medicare Economic Index (MEI). The Omnibus Budget Reconciliation Act of 1989 introduced the Medicare Fee Schedule, limited the billing of Medicare beneficiaries, and established the Medicare Volume Performance Standards (MVPS). The Medicare Fee Schedule was implemented in 1992 and listed 7,000 services that can be billed for. The pricing of these services is based upon Resource Based Relative Value Scale (RBRVS) with three Relative Value Units (RVUs) mostly affecting the price. RVUs are established by a private group of physicians. The VPS was replaced by a Sustainable Growth Rate (SGR) in 1998 in an effort to control spending. When spending exceeds the target, reimbursement rates are decreased by adjusting the Conversion Factor for RVUs. The fee schedule for all physician services based on CPT code – the same reimbursement applies regardless of the physician’s specialty – only difference is geographic adjustments. Furthermore, the components of RBRVS include physician work (55% of total cost), practice expense (42%), and professional liability insurance (PLI) expense (3%)