Blog, Revenue Cycle

The Background and Impact of Medicare Transfer DRG Payments

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Medicare Transfer DRGs account for 41.6% of all Medicare discharges. The impact to U.S. hospitals is in the hundreds of millions of dollars per year.


The Centers for Medicare and Medicaid Services (CMS) pays for Medicare inpatient hospital care on the basis of Diagnosis Related Groups (DRGs). In the 1990s, it became apparent to CMS that certain cases with short hospital stays were being reimbursed at the full DRG rate even though they were being transferred to another healthcare provider to complete treatment and recovery. Because they felt Medicare was paying twice for the treatment of certain patients, CMS officials adopted the Post-Acute Transfer (PACT) rule.

Certain DRGs (known as Transfer DRGs) are paid under the Medicare Post-Acute Care Transfer Rule. In federal fiscal year 1999, there were ten DRGs subject to the Transfer Rule. At that time, the financial impact was minor. However, in subsequent years the number of DRGs impacted by the rule was repeatedly increased, to the point where there are 275 DRGs affected today.

Discharge status assignment

In a significant number of cases, patients are not treated as planned after being transferred, or an inaccurate discharge status code is assigned to the claim. These factors result in an unwarranted reduction in the transferring hospital’s Medicare payment.

From the inception of the Transfer Rule, CMS acknowledged that errors can occur with discharge status assignment. They also discussed their plans for edits by the Medicare contractors to identify “overpayment” situations after the receipt of claims from the hospital and post‐acute providers. Audits by the Office of Inspector General (OIG) confirmed that hospitals were significantly overpaid and edits were finally implemented.

CMS made it clear from the start that the development of edits would only apply to overpayments; hospitals would have to perform their own validation of proper discharge status code assignment to detect underpayments.

In the past few years, CMS has developed the Recovery Audit Contractor (RAC) program to identify overpayments and underpayments for claims, including those impacted by the Transfer Rule. This is a controversial issue, as ironically the RACs identify underpayments through a computer algorithm and do not validate level of care with post‐acute providers. Therefore the RACs are ”recovering” Transfer DRG underpayments that are not in compliance with Medicare regulations.

To continue reading about the history and impact of Medicare Transfer DRG payments, click through to Slideshare to download a slide presentation.

Other Transfer DRG Resources:

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