diagnosis-related groups (DRGs)

The name applied to a federally mandated prospective payment mechanism designed to control the costs of medical and hospital care for Medicare recipients. The system is administered by the Health Care Financing Administration (HFCA). Payments made to the hospitals caring for Medicare patients are determined in advance, based on which one of 467 discrete categories of disorder—or DRG—the patient has at the time of admission, as well as on the patient's age; whether surgery is necessary; and in some cases, the presence of complications. Each category, with relevant additional factors, is equated with a flat sum. If costs for care exceed the predetermined amount, the hospital is expected to bear the excess; if they are lower than the predetermined amount, however, the hospital may keep the difference. This is supposed to encourage shorter hospital stays, a less-extensive mix of services during hospitalization, and the diminished likelihood of rehospitalization.