MS-DRGs: how Medicare groups inpatient hospital claims

What is an MS-DRG?

An MS-DRG is one of the groups CMS uses to classify inpatient discharges for payment under the IPPS. The CMS MS-DRG page says that under the IPPS, "we pay for inpatient hospital services on a rate per discharge basis that varies according to the DRG to which a beneficiary's stay is assigned."

42 CFR 412.60(c) says CMS assigns each discharge to only one DRG, based on the patient's age, sex, principal diagnosis, secondary diagnoses, procedures performed and discharge status, regardless of how many conditions were treated. The CMS page adds that classification uses the principal diagnosis, up to 24 additional diagnoses and up to 25 procedures, reported with ICD-10-CM and ICD-10-PCS codes since October 1, 2015.

The FY 2027 IPPS final rule, published August 4, 2026 at 91 FR 49570 and effective October 1, 2026, adopts ICD-10 MS-DRG Grouper Version 44 and the Version 44 Definitions Manual. Appendix A of that manual lists 768 MS-DRG numbers and marks each medical (M) or surgical (P). CMS also issues an April grouper update; the CMS page lists Version 43.1, effective April 1, 2026.

How does an MS-DRG determine payment?

The MS-DRG's relative weight scales the hospital's base rate. CMS describes the weight as the average resources needed for cases in that DRG, relative to the average for all DRGs. The payment formula multiplies a hospital's payment rate per case by that weight.

The FY 2027 final rule spells out the steps. Step 1 finds the MS-DRG and its relative weight from Table 5. Step 2 selects the standardized amount. Step 3 computes the federal operating rate as the weight times the labor-related and nonlabor-related amounts, adjusted by the wage index and cost-of-living factor, then times one plus the indirect medical education factor and 0.25 times the disproportionate share factor. Capital costs have their own formula.

Weights and rates move every fiscal year. 42 CFR 412.60(b) caps the reduction of a DRG's weight at 10 percent compared with the prior year. For FY 2027 the rule updates the national standardized amount by 2.3 percent, a 3.2 percent market basket increase less a 0.9 percentage point productivity adjustment, for hospitals that report quality data and are meaningful EHR users. Table 1A and Table 5 on the CMS site carry the dollar amounts and weights, and hospital-level rates differ.

In that example one documented MCC moves payment from $4,900 to $12,600 for the same patient and bed days. The gap in real families is smaller, but the direction is the same. Outliers, transfers and add-ons sit on top of the base payment.

How is the principal diagnosis chosen?

The principal diagnosis is the condition established after study to be chiefly responsible for the inpatient admission. Section II of the ICD-10-CM Official Guidelines for FY 2027 quotes the Uniform Hospital Discharge Data Set definition: "that condition established after study to be chiefly responsible for occasioning the admission of the patient to the hospital for care." The same section says the circumstances of admission always govern, and the ICD-10-CM conventions in the Tabular List and Index take precedence over the guidelines.

The choice matters because the Definitions Manual assigns each diagnosis code to a major diagnostic category, so the principal diagnosis picks the MS-DRG family before severity is applied. 42 CFR 412.60(c)(3) adds a safeguard: when the data show a surgical procedure unrelated to the principal diagnosis, the bill is returned to the hospital for validation and reverification.

A stay that starts in outpatient surgery or observation follows the same definition. Section II.J of the guidelines applies it to a patient admitted after outpatient surgery. If the patient was an outpatient first, the three-day payment window folds the earlier services into the claim, and the two-midnight rule decides whether the stay is inpatient at all.

Which UB-04 fields feed the MS-DRG grouper?

The grouper reads the principal diagnosis in FL 67, other diagnoses in FLs 67A to 67Q, procedures in FL 74 and FLs 74A to 74E, and discharge status in FL 17.

Chapter 25 warns that entering any diagnosis other than the principal diagnosis in FL 67 may cause the wrong DRG and incorrect payment, even when another diagnosis is more severe. Check FL 67 before release.

How do CCs and MCCs change MS-DRG payment?

A CC or MCC is a secondary diagnosis that signals a more complicated stay and moves the case into a higher-paying tier. Appendix C of the Version 44 Definitions Manual lists every code defined as a complication or comorbidity (CC) or a major complication or comorbidity (MCC) when it is used as a secondary diagnosis. Part 1 of that appendix holds 15,113 CC codes and 3,357 MCC codes.

Specificity decides the tier. In Version 44, I50.23 acute on chronic systolic heart failure is an MCC, while I50.9 heart failure, unspecified does not appear in the Part 1 list of CC and MCC codes. J18.9 pneumonia, unspecified organism is an MCC as a secondary diagnosis, but as the principal diagnosis it is the reason for the stay, not a severity code.

Three exclusions limit the effect. A principal-diagnosis exclusion makes a CC or MCC count only as a non-CC when it is closely related to the principal diagnosis. Part 2 lists codes that count as a major CC only when the patient is discharged alive. Part 3 lists diagnoses that cannot act as a CC or MCC in the DRGs where they are part of the grouping logic.

Reportable secondary diagnoses must meet the guideline test in Section III: clinical evaluation, therapeutic treatment, diagnostic procedures, extended length of stay, or increased nursing care and monitoring. Section III.B says abnormal findings are not coded unless the provider indicates their clinical significance, and it is appropriate to ask the provider whether a finding should be added. For inpatient stays, Section III.C says an uncertain diagnosis at discharge, such as "probable" or "suspected," is coded as if it existed.

What is a DRG validation review, and how do you challenge a DRG?

DRG validation is a review of whether the diagnoses and procedures on the claim support the DRG paid. 42 CFR 476.71(a)(4) tells quality improvement organizations (QIOs) to review, through DRG validation, "the validity of diagnostic and procedural information supplied by the hospital." Section 476.71(c)(1) has the QIO review a random sample of discharges each quarter and send corrected information to the contractor when the hospital's was wrong.

A hospital can ask for a review of the DRG itself. 42 CFR 412.60(d) gives the hospital 60 days after the notice of the initial DRG assignment to request review and submit more information. The intermediary decides whether to change it, and a change to a higher-weighted DRG goes to the QIO. After the 60 days, the hospital may not submit more information or revise the claim.

For a payment denial or an audit downcode, the usual Medicare path applies. A redetermination is due within 120 calendar days of receiving the notice under 42 CFR 405.942, and the Medicare appeal levels page covers the levels that follow. Transfers have their own rules: 42 CFR 412.4(c) treats a discharge to a hospital or unit excluded from the IPPS, a skilled nursing facility, home health beginning within 3 days, or hospice as a transfer when it is assigned to a qualifying DRG, which is why the discharge status code matters. See discharge status codes and payment.

Do commercial payers use MS-DRGs?

Commercial plans pay by their contract, and the contract names the payment method and, for a DRG-based method, the grouper and version. The MS-DRG system described here governs Medicare payment under the IPPS.

Read the payment methodology in each contract and confirm the grouper version and effective date. Our billing and coding audits team compares the DRG on the remittance with the codes on the claim, and our hospital and facility billing team handles the claim end to end. For the outpatient side of Medicare payment, see OPPS and APCs.

If this rule is costing you claims, our medical coding team can help, and UB-04 revenue and condition codes explains the claim fields the grouper reads.