A simplified version goes like this: Mr. Koff and Mr.

A simplified version goes like this: Mr. Koff and Mr. Flemm were both admitted to the same hospital for treatment of pneumoniaLinks to an external site.. Mr. Koff was treated and released in 2 days. Mr. Flemm’s hospitalization lasted 10 days. Since Mr. Koff and Mr. Flemm have the same diagnosis, they have the same DRG. Based on that DRG, Medicare pays the hospital the same amount for Mr. Koff as it does for Mr. Flemm even though the hospital spent more money providing 10 days of care to Mr. Flemm than providing 2 days of care to Mr. Koff. With a DRG, Medicare pays for a hospitalization based on the diagnosis the patient was hospitalized to treat, not based on how much the hospital did to treat the patient, how long the patient was hospitalized, or how much the hospital spent caring for the patient. In the case of Mr. Koff, the hospital may have made a small profit. The DRG-based payment was probably a little bit larger than the actual cost of Mr. Koff’s two-day stay. In the case of Mr. Flemm, the hospital probably lost money. It surely cost the hospital more to care for Mr. Flemm

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