Skip to Main Content


The documentation of the inpatient episode of care follows the general principles outlined in Chapter 27: Professional Billing and Coding, and is primarily a record of the patient’s clinical experience. A number of regulatory changes in the payment for hospital facility care have occurred over the past decades which subtly change the documentation requirements and may lead to increased interactions of hospitalists with others in the hospital systems such as clinical documentation improvement (CDI) and utilization review (UR) personnel. A better understanding of these regulatory changes and their impact on both facility reimbursement and patient financial liability will help the hospitalist document care more completely. In addition, there will be fewer interruptions and queries, less back-end work for facilities and fewer surprises for the patients when their hospital bills arrive.


Predetermined payment based on diagnosis

Medicare pays hospitals for inpatient services using the inpatient prospective payment system (IPPS). Although IPPS is only applicable to Medicare, the concept of prospective payment for inpatient stays has been adopted by most third party payers. The primary driver of payment in the inpatient setting is a grouping methodology, called a diagnostic related group (DRG).

The basic premise of a DRG system is prospective payment, or a predetermined, fixed amount. The original DRG system began in the early 1980s in some states, with congress implementing the IPPS for Medicare services in 1983. Prior to the introduction of the DRG system, hospital reimbursement was made on a percentage of costs, and hospitals billed for the actual costs for an inpatient admission and received a true “fee for service.”

Each DRG payment is based upon an analysis of prior claims data in regard to how much it costs, and how many resources are required on average, to treat patients of that type. There are modifications to this payment amount for hospitals based on location, the percentage of low income patients treated, teaching hospital status, and whether or not the specific case was “unusually costly.” DRGs are three digit numerical assignments which are divided into categories, called major diagnostic categories (MDCs) based upon the patient’s symptoms, comorbidities, whether the care provided was medical or surgical, the organ system affected, age, and discharge status. Each DRG was intended to be a reflection of the resources required to care for patients in specific categories, and is designed to make one single payment to cover all of the services provided by the facility during the inpatient stay.

Modification of the DRG system

There were initially many limitations to the DRG system, as it was developed for use with a Medicare population and had limited applicability to other populations of patients, most notably children and expectant mothers. As a result, many private payers began using a modification ...

Pop-up div Successfully Displayed

This div only appears when the trigger link is hovered over. Otherwise it is hidden from view.