IPPS and DRG's: What it Means

by  Christine Woolstenhulme, QMC QCC CMCS CPC CMRS
Dec 8th, 2020

Understanding hospital pricing can get complicated, so we have broken it down according to CMS and the acute Inpatient Prospective Payment System, also known as IPPS. Find-A-Code uses IPPS for inpatient pricing with our MS-DRG grouper. The following information comes from CMS.gov and answers the most common questions regarding DRGs and how the grouper pricing works with CMS.

The Inpatient Prospective Payment System (IPPS)

Section 1886(d) of the Social Security Act (the Act) sets forth a system of payment for the operating costs of acute care hospital inpatient stays under Medicare Part A (Hospital Insurance) based on prospectively set rates. This payment system is referred to as the Inpatient Prospective Payment System (IPPS).

Under the IPPS, each case is categorized into a Diagnosis-Related Group (DRG)

Each DRG has a payment weight assigned to it, based on the average resources used to treat Medicare patients in that DRG.

• The base payment rate is divided into a labor-related and nonlabor share.
• The labor-related share is adjusted by the wage index applicable to the area where the hospital is located.
• If the hospital is located in Alaska or Hawaii, the nonlabor share is adjusted by a cost of living adjustment factor.
• This base payment rate is multiplied by the DRG relative weight.

Disproportionate Share Hospital (DSH) adjustment: low-income patients

If the hospital treats a high percentage of low-income patients, it receives a percentage add-on payment applied to the DRG adjusted base payment rate. This add-on, known as the Disproportionate Share Hospital (DSH) adjustment, provides for a percentage increase in Medicare payment for hospitals that qualify under either of two statutory formulas designed to identify hospitals that serve a disproportionate share of low-income patients. For qualifying hospitals, the amount of this adjustment may vary based on the outcome of the statutory calculation.

Approved Teaching Hospital- Indirect Medical Education (IME) adjustment

If the hospital is an approved teaching hospital, it receives a percentage add-on payment for each case paid through IPPS. This add-on, known as the Indirect Medical Education (IME) adjustment, varies depending on the ratio of residents-to-beds under the IPPS for operating costs, and according to the ratio of residents-to-average daily census under the IPPS for capital costs.

Outlier Cases - unusually expensive cases

Finally, for particular cases that are unusually costly, known as outlier cases, the IPPS payment is increased. This additional payment is designed to protect the hospital from large financial losses due to unusually expensive cases. Any outlier payment due is added to the DRG-adjusted base payment rate, plus any DSH or IME adjustments.

Direct Graduate Medical Education (DGME)

Disproportionate Share Hospital (DSH)

PPS-Exempt Cancer Hospitals (PCHs)

Hospital-Acquired Condition Reduction Program (HACRP)

Indirect Medical Education (IME)

MS-DRG Classifications and Software

New Medical Services and New Technologies

Outlier Payments

Hospital Readmissions Reduction Program (HRRP)

Three Day Payment Window

Wage Index