APPENDIX 1: Principles for Construction of Australian
Refined Diagnosis Related Groups (AR-DRGs)
Qingsheng Zhou, Philip Hoyle, Vera Dimitropoulos, and Richard Madden1’2
Background
Diagnosis Related Groups (DRGs) have a long history of development in Australia,
commencing with the release of the Australian National DRG (AN-DRG) classification in July
1992. Coinciding with the introduction of the First Edition of the International Statistical
Classification, Tenth Revision, Australian Modification (ICD-10-AM), the Australian Refined
DRGs (AR-DRGs) replaced the AN-DRGs in 1998. Using ICD-10-AM and the Australian
Classification of Health Interventions (ACHI) as a basis, the AR-DRGs were developed to
reflect Australian clinical practice and use of hospital resources. The AR-DRGs are used by
both public and private hospitals to provide better management, measurement and
payment for high quality and efficient health care services. The Independent Hospital Pricing
Authority (IHPA) now uses AR-DRGs to set the Australian National Efficient Price (NEP) for
health services.
The AR-DRGs classify units of hospital output. The classification is designed to group
inpatient stays into clinically coherent categories of similar levels of care complexity as
judged by diagnostic, intervention and patient characteristics (outputs) that consume similar
amounts of resources (inputs).
The AR-DRG classification consists of a broad partition of health episodes into Adjacent
DRGs (ADRGs). Each ADRG may then be split into several Diagnosis Related Groups (DRGs)
based on clinical complexity or other variables.
1
Qingsheng Zhou, Vera Dimitropoulos, and Richard Madden are from National Centre for Classification in
Health (NCCH), The University of Sydney. Philip Hoyle is NCCH’s Principal Clinical Advisor and Director of
Medical Services, Northern Beaches Health Service. They are part of Australian Consortium for Classification
Development (ACCD). They alone are responsible for the content and writing of the paper.
2
The authors wish to acknowledge helpful advice and comments received from several members of ACCD’s
Data Technical Group.
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A new AR-DRG version is made available every two years. A modified version of AR-DRG 6.0
(Version 6.0x) is now in use as a national reference point for public hospital pricing in
admitted services. AR-DRG Version 7.0, released in October 2012, has 406 ADRGs that are
split into 771 DRGs (see Table 1).
The Australian Consortium for Classification Development (ACCD) has been commissioned
to review Version 7.0 and to make recommendations for future AR-DRG versions. One of
the tasks is to review the ADRG splits.
This paper outlines a set of principles that are considered important to provide overall
guidance for constructing AR-DRGs. Moving forward, the principles outlined will act as a
guide to the refinement of the splitting methodology for future AR-DRG versions.
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Table 1 Major Diagnostic Categories and the AR-DRG ranges covered by each:
MDC
MDC Description
# of unique codes
ADRG (3 dgts)
AR-DRG range First dgt
Total
Pre Major procedures where the principal diagnosis may be associated with any MDC
1 Diseases and disorders of the nervous system
2 Diseases and disorders of the eye
3 Diseases and disorders of the ear, nose, mouth and throat
4 Diseases and disorders of the respiratory system
5 Diseases and disorders of the circulatory system
6 Diseases and disorders of the digestive system
7 Diseases and disorders of the hepatobiliary system and pancreas
8 Diseases and disorders of the musculoskeletal system and connective tissue
9 Diseases and disorders of the skin, subcutaneous tissue and breast
10 Endocrine, nutritional and metabolic diseases and disorders
11 Diseases and disorders of the kidney and urinary tract
12 Diseases and disorders of the male reproductive system
13 Diseases and disorders of the female reproductive system
14 Pregnancy, childbirth and the puerperium
15 Newborns and other neonates
16 Diseases and disorders of the blood and blood forming organs and immunological disorders
17 Neoplastic disorders (haematological and solid neoplasms)
18 Infectious and parasitic diseases
19 Mental diseases and disorders
20 Alcohol/drug use and alcohol/drug induced organic mental disorders
21 Injuries, poisoning and toxic effects of drugs
22 Burns
23 Factors influencing health status and other contacts with health services
Unrelated OR procedures
Error DRGs
Total
Note: 130 ADRGs have no splits (DRGs ending with Z)
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A01Z-A41Z
B01Z-B81B
C01Z-C63B
D01Z-D67Z
E01A-E75C
F01Z-F75C
G01A-G70B
H01A-H64B
I01Z-I76C
J01Z-J67B
K01Z-K64B
L01A-L67C
M01Z-M64Z
N01Z-N62B
O01A-O65B
P01Z-P67D
Q01Z-Q62B
R01A-R64Z
S60Z-T64B
U40Z-U68Z
V60Z-V64Z
W01Z-X64B
Y01Z-Y62B
Z01A-Z65Z
801A-801C
901Z-963Z
A
B
C
D
E
F
G
H
I
J
K
L
M
N
O
P
Q
R
S-T
U
V
W-X
Y
Z
8
9
11
33
16
21
22
40
20
13
51
18
17
20
12
13
9
17
5
8
8
10
7
17
6
8
1
3
406
Surgical
Other
DRG7
(4 dgts)
Medical
10
1
7
3
12
23
4
12
1
8
2
3
17
21
4
15
10
3
7
6
2
5
29
1
21
10
8
11
1
5
8
3
9
6
1
5
10
3
5
4
8
9
2
3
4
4
1
1
6
1
9
7
9
1
3
1
7
3
1
6
1
3
188
27
191
18
68
20
35
49
82
46
31
88
38
34
40
18
19
19
36
12
19
19
13
8
31
10
12
3
3
771
Principles
The AR-DRG classification should be developed with maximum regard to the clinical
attributes of the patient, and with minimum regard to who is providing the service or the
setting in which it is provided. To achieve this balance, the following principles are applied:




Clinically coherent
o patient demographics
o diagnoses (principal and additional)
o interventions
Reasonably homogeneous in resource use
o episodes within a DRG have relatively similar (not necessarily identical) level of
resource utilisation
o ADRGs, and DRGs within an ADRG, are as distinctive as possible from each other,
reflecting genuine and material differences
Classification soundness
o statistically robust
o reasonably balanced branches
o sufficient volume and cost variances in new splitting
o stable over time, with changes only made in response to significant clinical
changes (often caused by technology advancement) or cost variations.
Operationally acceptable and robust
o understandable by and acceptable to a wide range of users involved in the
planning and delivery of care
o reasonably robust with respect to changes in management and organisational
arrangements of the health system
o not encouraging inappropriate behaviours in patient treatment and management
practices within the health system.
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Discussion
These principles have been developed after consideration of the following questions:
1. The relationship between AR-DRG and activity based funding
Activity based funding (ABF) is a way of funding hospitals whereby they get paid for the
number and mix of patients they treat.
Figure 1: The AR-DRG classification is one of the essential building blocks of ABF.3
Distinction must be made between the role of AR-DRGs and funding instruments within the
context of this relationship. The DRG splits should be driven only by clinical coherence,
resource use homogeneity and the statistical soundness of groups. In so doing DRGs
provide information that clearly signifies high and low cost activities. The AR-DRG system
therefore potentially creates incentives or disincentives for certain organisational,
administrative and clinical behaviours.
AR-DRGs also serve a broader use than ABF. Users of the AR-DRG classification system
include clinical coders, clinicians, managers, researchers, epidemiologists, public health
officials, state and territory health agencies, health funds, public and private hospitals,
3
IHPA (2014) Activity Based Funding, see Independent Hospital Pricing Authority Publishing Website, accessed
on 10/4/2014. (
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health economists and statisticians. The classification has been widely used for hospital
performance reforting.
The pricing mechanism (as opposed to the classification system per se) is best suited to
dealing with the broad range of policy issues such as fairness, quality, sustainability,
efficiency and innovations of health care.4 Suitably designed funding instruments can also
manage some associated risks and promote desirable behaviours.
2. Hierarchy across the principles
The various principles do not always align, nor are the outcomes of their application
consistent. A split into two homogeneous sub-groups may appear to be justified, based on a
statistical analysis of their demographic characteristics, disease conditions and (possibly) key
interventions, applying relevant statistical criteria (or benchmarks). However the basis for
the split may not be clinically clear, or the variables used to determine the split may
themselves contravene one of the principles (such as encouraging inappropriate behaviours
in patient treatment and management practices).
How are clinical coherence and resource homogeneity to be compared? It could be argued
that homogeneity of patient characteristics and diagnoses tends to form a basis for similar
treatments/interventions. Consequently, together they should result in similar levels of
resource use. But the reality may be different. For instance, surgical ADRGs for nominally
similar patient groups have long shown that resource use is often driven by the intervention
path chosen for the particular patient, e.g. cardiac interventions requiring a bypass and
those not requiring a bypass.
Actual resource use is influenced by a range of factors that are broader than patient
characteristics alone. Varied administrative arrangements, efficiency and market conditions,
unmeasured demographic variables and regional differences in practice may cause
variations across hospitals and jurisdictions. These factors are not included as variables in
determining DRGs (although they may be used in the pricing process). In other words,
resource use alone should not be used as the primary reason for creating new ADRGs or
splitting ADRGs; it needs to be considered along with the other principles.
In conclusion, the various principles need to be considered in conjunction, without a prespecified hierarchy.
3. Judging clinical coherence
Considered clinical input is key to decision making in constructing AR-DRGs and will be
sought as existing splits are reviewed, using a variety of methods, anchored on evidencebased advice.
4
IHPA (2014) The Pricing Framework for Australian Public Hospital Services 2014-15, Box 1, page 12.
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Clinicians initiate many revision proposals. While the exercise of clinical judgment in these
matters is necessarily subjective,5 a consensus process will control for undue influence by
particular interest groups. The process of defining clinically coherent subgroupings will seek
a consensus view consistent with the principles of avoiding inappropriate incentives,
homogeneity and stability. To ensure both generalist and specialist views are considered,
the process will include advice from clinicians with detailed knowledge of the patient groups
and activities encompassed by an ADRG (typically specialist doctors, nurses and allied health
professionals) as well as others who can ensure consistent practices across the classification.
A structured approach should start with patient variables (for example, is the proposed split
reflective of a subgroup of patients, as judged by diagnoses and demographic variables?). A
key issue here is the materiality of the various diagnoses and variables to a proposed
partition. To determine this, guiding factors are:
o Clinical materiality. Is the difference likely to be based on different care from the
baseline care represented by the ADRG? Is there overwhelming clinical advice to
encourage clinical practice to change?
o Evidence of differential resource use. Is a proposed split likely to produce DRGs
with distinctive resource intensity?
o Sufficient volume to matter.
o Implications for the broader AR-DRG system. For example, does the proposed
split create an imbalance with respect to other ADRGs?
4. New clinical pathways and AR-DRGs
The time lapse between the collection of data used to revise the AR-DRG classification and
the implementation of a revised version is approximately three years. In that time, new
clinical pathways may be introduced, whose impact on costs will therefore not be taken into
account in the revision process.
There are also from time to time new treatment options which may be more expensive than
existing ones, but through which improved patient outcomes are possible. Should allowance
be made in the AR-DRG system to encourage the adoption of the new pathway?
The AR-DRG has been constructed with a relatively small number of ADRGs. The result is a
substantial range of case costs within each ADRG. In most cases, changes in treatment
pathways over a three year period would cause the cost of treating some patients to rise,
others to fall. It would therefore not be common for any one treatment change to
substantially impact on the overall cost structure of the ADRG. As a consequence, in general
AR-DRG construction should be determined by actual data, without adjustment for
subsequent treatment pathway changes.
5
Clinical judgement and statistical analysis should not be seen as two isolated processes. In fact they are
intertwined and each challenges and validates the other, following a similar logic line.
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There may be exceptional circumstances, such as where new clinical knowledge makes past
treatment regimes inappropriate. An example would be the change in treatment protocol
for stomach ulcers following the discovery that Helicobacter pylori infection is generally
associated with these ulcers. Overwhelming clinical evidence would be essential before a
response to such a change, but the prospect cannot be ignored.
5. Not to impact on organisational or administrative practice
A poor DRG structure may induce unwanted behaviour such as restructuring existing
organisational practices so that more episodes fall in higher cost DRGs. Variables which are
amenable to administrative arrangements, where such an arrangement is not the result of
clinical logic, should not be used for constructing the AR-DRG classification.
A particular issue is the use of separate splits for same day cases. This should only be
considered where there is a clearly clinically distinguishable class of same day cases.
Conclusion
The principles set out in the paper should be used to guide the refinement of the splitting
methodology to be used in the future reviews of the AR-DRG classification.
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