Payment
What are Medicare DRGs for Hospital Payment?
Medicare pays hospitals for inpatient payments based on the DRG system. Hospital charges do not mean much for most patients.
In 1983, Medicare replaced cost based reimbursement with the Prospective Payment System (PPS), where hospitals would be paid for inpatient care based on a specified payment based on the illness of the patient and the resources that were required to treat them.
Patients were assigned to categories, known as Diagnosis Related Groups, or DRGs, based why they were admitted to the hospital. The DRG system was developed at Harvard University in the 1970s, and Medicare adapted the system in order to incentivize hospitals to reduce cost.
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