How a DRG Determines How Much a Hospital Gets Paid

Medicare and certain private health insurance companies pay for hospitalizations of their beneficiaries using a diagnosis-related group (DRG) payment system.

When you've been admitted as an inpatient to a hospital, that hospital assigns a DRG when you're discharged, basing it on the care you needed during your hospital stay. The hospital gets paid a fixed amount for that DRG, regardless of how much money it actually spends treating you.

If a hospital can effectively treat you for less money than Medicare pays for your DRG, then the hospital makes money on that hospitalization. If the hospital spends more money caring for you than Medicare gives it for your DRG, then the hospital loses money on that hospitalization.

Black woman doctor talking to patient in hospital
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What Does DRG Mean?

DRG stands for diagnosis-related group. Medicare's DRG system is called the Medicare severity diagnosis-related group, or MS-DRG, which is used to determine hospital payments under the inpatient prospective payment system (IPPS). It's the system used to classify various diagnoses for inpatient hospital stays into groups and subgroups so that Medicare can accurately pay the hospital bill.

The idea behind DRGs is to ensure that Medicare reimbursements adequately reflect "the fundamental role which a hospital’s case mix (the type of patients the hospitals treats, and the severity of their medical issues) plays in determining its costs" and the number of resources that the hospital needs to treat its patients.

The diagnoses that are used to determine the DRG are based on ICD-11 codes or ICD-10 codes (the ICD-11 codes went into effect in 2022, but some areas are still using ICD-10 codes). Additional codes were added to that system in 2021, to account for the COVID-19 pandemic.

DRGs have historically been used for inpatient care, but the 21st Century Cures Act, enacted in late 2016, required the Centers for Medicare and Medicaid Services to develop some DRGs that apply to outpatient surgeries. These are required to be as similar as possible to the DRGs that would apply to the same surgery performed on an inpatient basis.

Medicare and private insurers have also piloted new payment systems that are similar to the current DRG system, but with some key differences, including an approach that combines inpatient and outpatient services into one payment bundle. In general, the idea is that bundled payments are more efficient and result in better patient outcomes than fee-for-service payments (with the provider being paid based on each service that's performed)

Figuring Out How Much Money a Hospital Gets Paid for a Given DRG

In order to figure out how much a hospital gets paid for any particular hospitalization, you must first know what DRG was assigned for that hospitalization. In addition, you must know the hospital’s base payment rate, which is also described as the "payment rate per case." You can call the hospital’s billing, accounting, or case management department and ask what its Medicare base payment rate is.

Each DRG is assigned a relative weight based on the average amount of resources it takes to care for a patient assigned to that DRG. You can look up the relative weight for your particular DRG by downloading a chart provided by the Centers for Medicare and Medicaid Services following these instructions:

  1. Go to the CMS payment systems webpage.
  2. Scroll down to "FY 2022 Final Rule and Correcting Amendment Tables" (note that this is for Fiscal Year 2022)
  3. Download Table 5 ("MS-DRGs, Relative Weighting Factors and Geometric and Arithmetic Mean Length of Stay").
  4. Open the file that displays the information as an Excel spreadsheet (the file that ends with “.xlsx”).
  5. The column labeled “weights” shows the relative weight for each DRG.

The average relative weight is 1.0. DRGs with a relative weight of less than 1.0 are less resource-intensive to treat and are generally less costly to treat. DRG’s with a relative weight of more than 1.0 generally require more resources to treat and are more expensive to treat. The higher the relative weight, the more resources are required to treat a patient with that DRG. This is why very serious medical situations, such as organ transplants, have the highest DRG weight.

To figure out how much money your hospital got paid for your hospitalization, you must multiply your DRG’s relative weight by your hospital’s base payment rate.

Here’s an example with a hospital that has a base payment rate of $6,000 when your DRG’s relative weight is 1.3:

$6,000 X 1.3 = $7,800. Your hospital got paid $7,800 for your hospitalization.

How a Hospital’s Base Payment Rate Works

The base payment rate is broken down into a labor portion and a non-labor portion. The labor portion is adjusted in each area based on the wage index. The non-labor portion varies for Alaska and Hawaii, according to a cost-of-living adjustment.

Since healthcare resource costs and labor vary across the country and even from hospital to hospital, Medicare assigns a different base payment rate to each and every hospital that accepts Medicare. For example, a hospital in Manhattan, New York City probably has higher labor costs, higher costs to maintain its facility, and higher resource costs than a hospital in Knoxville, Tennessee. The Manhattan hospital probably has a higher base payment rate than the Knoxville hospital.

Other things that Medicare factors into your hospital’s blended rate determination include whether or not it’s a teaching hospital with residents and interns, whether or not it’s in a rural area, and whether or not it cares for a disproportionate share of the poor and uninsured population. Each of these things tends to increase a hospital’s base payment rate.

Each October, Medicare assigns every hospital a new base payment rate. In this way, Medicare can tweak how much it pays any given hospital, based not just on nationwide trends like inflation, but also on regional trends. For example, as a geographic area becomes more developed, a hospital within that area may lose its rural designation.

In 2020, the Centers for Medicare and Medicaid Services approved 24 new technologies that are eligible for add-on payments, in addition to the amount determined based on the DRG.

Are Hospitals Making or Losing Money?

After the MS-DRG system was implemented in 2008, Medicare determined that hospitals' based payment rates had increased by 5.4% as a result of improved coding (i.e., not as a result of anything having to do with the severity of patients' medical issues).

So Medicare reduced the base payments rates to account for this. But hospital groups contend that the increase due to improved coding was actually only 3.5% and that their base rates had been reduced by too much, resulting in $41.3 billion in lost revenue from 2013 to 2028.

Hospitals in rural areas are increasingly struggling, with hospital closures in rural areas becoming more common in recent years. There are also indications that even well-established, heavily trafficked hospitals are losing money in some areas, but that's due in part to an overabundance of high-priced technology, replicated in multiple hospitals in the same geographic location, and hospital spending on facility and infrastructure expansions.

The largest nonprofit hospitals, however, earned $21 billion in investment income in 2017, and some big hospital systems have continued to profit throughout the COVID pandemic. But other hospitals have seen reductions in their profit margins.

The challenge is how to ensure that some hospitals aren't operating in the red under the same payment systems that put other hospitals well into the profitable realm. That's a complex task, though, involving more than just DRG-based payment systems, and it promises to continue to be a challenge for the foreseeable future.


When a patient with Medicare (or many types of private insurance) is hospitalized, a diagnostic related category (DRG) code is assigned based on the patient's condition. There are numerous factors that go into determining the DRG for each patient, and each DRG has a different relative weight, depending on the resources that are generally needed to provide care for someone with that DRG.

Each hospital also has a blended base rate, which is based on a variety of factors, including location, patient demographics, whether it's a teaching hospital, etc. The relative weight of the DRG is multiplied by the hospital's base rate to determine how much the hospital will be paid for that patient.

A Word From Verywell

Although there's a complex formula that determines how much a hospital gets paid for each patient, you don't have to know the details of exactly how it works. From a patient perspective, the most important details are ensuring that the hospital is in-network with your health plan, and understanding how your health plan's cost-sharing works.

An inpatient stay will generally result in having to pay your deductible, and maybe meeting your plan's annual out-of-pocket cap. You'll want to understand how much those expenses are, so that you're not caught off guard when the bills arrive.

13 Sources
Verywell Health uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Research Data Assistance Center. International Classification of Disease (ICD) Codes in Medicare Files.

  2. Centers for Medicare and Medicaid Services. 2021 ICD-10-CM. COVID-19 Update.

  3. Centers for Medicare and Medicaid Services. MS-DRG Classifications and Software. Background.

  4. Centers for Medicare and Medicaid Services. Bundled Payments for Care Improvement (BPCI) Initiative.

  5. Centers for Medicare and Medicaid Services. Acute Inpatient PPS.

  6. Centers for Medicare and Medicaid Services. Acute Inpatient PPS.

  7. Centers for Medicare and Medicaid Services. Fiscal Year (FY) 2021 Medicare Hospital Inpatient Prospective Payment System (IPPS) and Long Term Acute Care Hospital (LTCH) Final Rule (CMS-1735-F). September 2, 2020.

  8. Dobson DaVanzo & Associates, LLC. Estimate of Federal Payment Reductions to Hospitals Following the ACA 2010-2028. Estimates and Methodology. American Hospital Association. 2018.

  9. Health Resources & Services Administration. Hospital Closings Likely to Increase. October 2017.

  10. Pearl R. Why Major Hospitals Are Losing Money By The Millions. Forbes. November 7, 2017.

  11. White MC. Hospitals made $21B on Wall Street last year, but are patients seeing those profits? NBC News. February 7, 2018.

  12. Levey, Noam. Kaiser Health News. Some hospitals rake in high profits while their patients are loaded with medical debt. September 2022.

  13. Kaufman Hall. A Special Workforce Edition of the National Hospital Flash Report. May 2022.

Additional Reading
  • Federal Register, Medicare Program; Hospital Inpatient Prospective Payment Systems for Acute Care Hospitals and the Long-Term Care Hospital Prospective Payment System Policy Changes and Fiscal Year 2016 Rates; Revisions of Quality Reporting Requirements for Specific Providers, Including Changes Related to the Electronic Health Record Incentive Program; Extensions of the Medicare-Dependent, Small Rural Hospital Program and the Low-Volume Payment Adjustment for Hospitals, 8/17/15. 

By Elizabeth Davis, RN
Elizabeth Davis, RN, is a health insurance expert and patient liaison. She's held board certifications in emergency nursing and infusion nursing.