How does a DRG payment system work?

The diagnosis-related group (DRG) payment system is designed to provide a fixed reimbursement amount for inpatient hospital stays based on the patient's diagnosis. Under this system, each patient's admission is assigned to a specific DRG based on their medical conditions and the treatments they receive. This classification determines the payment amount hospitals will receive from Medicare and other insurers, regardless of the actual costs incurred during the patient's stay.

This approach incentivizes hospitals to manage resources efficiently and encourages quicker patient recovery since they receive a predetermined payment. It contrasts with other payment models, which may be influenced by the duration of treatment or the specific costs incurred for each patient. Therefore, the mechanism of providing a fixed payment based on diagnosis allows for consistency and predictability in hospital funding.