DRG (Diagnosis-Related Group)

A DRG is the way hospitals get paid for an inpatient stay. Instead of billing every aspirin and every hour of nursing, the stay is assigned to one of about 770 groups based on the main diagnosis, the procedures done, and how sick the patient was. Each group carries one fixed payment. Medicare invented the system in 1983, and most commercial plans and self-funded employers use a version of it for inpatient contracts today.

The idea is that a hospital is paid the same for an uncomplicated knee replacement whether the patient stays two days or four, which gives the hospital a reason to be efficient. In practice the DRG number is only part of the bill. A hospital's DRG rate is a multiplier of a base rate it negotiates with each carrier, so the same DRG 470 (a joint replacement without major complications) can be paid $22,000 at one Texas hospital and $58,000 at another under the same carrier. Two other things matter. First, the DRG covers only the hospital; the surgeon, the anesthesia group and any consulting doctors bill their professional fees separately. Second, a stay that is classified as observation instead of inpatient is not paid by DRG at all, which changes both the hospital's payment and what the patient owes.

The takeaway: for any planned hospital admission, ask for the DRG your case will fall under and the contracted DRG rate for your plan at that hospital. It is a single number, and it is the biggest single line on the bill.