Healthcare and pharma
DRG (diagnosis-related group)
A system that pays hospitals a fixed amount per admission, based on the diagnosis and treatment.
Facts checked against sources onWhat does DRG (diagnosis-related group) mean?
A diagnosis-related group puts hospital stays into groups with similar diagnoses, procedures and expected use of resources. The payer then pays the hospital a set rate per admission for that group, whatever the actual length of stay or cost. US Medicare introduced DRG-based payment in 1983, and many other systems, including Germany, Australia and Abu Dhabi, use similar methods. Example: if the DRG rate for a hip replacement is 15,000 and the hospital's cost is 13,000, it keeps 2,000; if complications raise the cost to 17,000, it loses 2,000. This rewards efficiency and shorter stays, unlike fee-for-service payment, which pays for each item of care.
Where does it come up in case interview prep?
- How healthcare systems work: patients, providers and payersLesson in Healthcare providers and payers
- How hospitals and insurers make money: costs, unit economics and operationsLesson in Healthcare providers and payers
- Main players, trends 2024 to 2026, regulation and casesLesson in Healthcare providers and payers
Related terms
- Average length of stay (ALOS)The average number of days patients stay in hospital per admission.
- CapitationPaying a provider a fixed amount per person per period, whatever care they use.
- ARPOB (average revenue per occupied bed)Hospital revenue divided by occupied bed days, a key measure for Indian hospital chains.
- Fixed costA cost that stays the same when volume changes, within a normal range.
- Loss of exclusivity (LOE)When a drug's patents and other protections end and cheaper copies can launch.
- BiosimilarA near copy of a biologic medicine, approved as having no meaningful clinical difference.
- Medical loss ratio (MLR)The share of health insurance premiums spent on medical care and quality improvement.
- PMPM (per member per month)A cost or revenue figure divided by the number of members and months, used by health plans.
Learn it in context
See DRG (diagnosis-related group) at work in a lesson from Healthcare providers and payers, with checks as you go.
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