Payment Reimbursement and Managed Care

8 ways healthcare providers can smooth the DRG audit process

February 25, 2022 7:56 pm
Lauren Coleman
Mackenzie S. Wallace, JD

Healthcare providers should not only expect payers to routinely perform audits of their diagnosis-related group (DRG) coding; they also should be fully prepared to respond proactively to the audit process.

It’s no surprise that healthcare providers do not look forward to being audited. It’s an inevitable part of  working with government or private payers. So the question is not whether but  when the next audit will happen.

Audits of  diagnosis-related group (DRG) coding, in particular, can cause significant headaches for providers. Such audits are document-intensive, require significant time from claims follow-up staff  and can quickly overwhelm a hospital with their sheer volume. It’s therefore imperative for providers to be fully prepared for DRG audits, to be able to mount a well-organized response and have the best possible chances for a successful appeal or resolution.

Key elements of an effective audit response process

To ensure they are well-prepared to respond to any type of  payer DRG audit, whether from a government or a commercial payer, providers should develop an audit-response process that encompasses the following eight steps.

Establish pre-audit measures.  clearly, the most important preventive measure in preparing for any possible DRG audit is to ensure physicians and other clinical staff  provide thorough and accurate documentation for each patient’s service. To support a coded DRG for billing, clinical documentation is needed to justify each of  the diagnoses and services/procedures performed. Thus, the provider should insist that the documentation be thorough, because without it, there is no way to refute a downgrade.

To solidify this requirement, the provider also should create and implement a compliance plan and program with processes to support high-quality documentation of  coding and to increase the likelihood of  positive operational process and successful future audit outcomes.

2 Understand the landscape. Providers should review the contract terms and policies referenced by the payer and use them as a basis for preparing an appropriate standard response to an audit.

3 Identify specific repeated downgrades. Providers will benefit by identifying specific DRGs that are most prone to being downgraded. Most payers target certain DRGs or diagnosis codes. By taking note of  those codes, a provider can bucket them and thereby review, appeal and resolve them more efficiently.

Resolving DRG downgrade issues requires several considerations, with the goal being to slow the volume of  claims in which these downgrades occur. These considerations include the following:

  • Identifying the full scope of  the DRG downgrade issue to gain perspective on how much effort will be required to address it.
  • Tracking DRG downgrade issues at the account level, so that all impacted accounts and dollars can be identified.
  • Tracking the downgrades in aggregate to gain a perspective on volume by year and by DRG.
  • Tracking the DRG that the claim was downgraded to on an account-by-account basis, where possible, given that payers also often target certain DRGs or diagnosis codes as the ones to which they are downgrading the billed codes. This information can be found in the letters sent by the payer or its vendor in which it downgrades the DRG.

For example, several payer-vendors target malnutrition diagnoses, asserting that the clinical documentation does not support malnutrition and that, therefore, the diagnosis code related to malnutrition should be removed from the claim. Doing so downgrades the DRG, meaning the claim now groups (with the remaining diagnosis and procedure codes) to a DRG that reimburses a lower amount. If  the provider can identify all claims impacted by that specific, lower-paying diagnosis code, those claims can be aggregated, and then reviewed, appealed and pursued with the payer.  This type of  collective review is much more efficient than having staff review each individual claim.

Even if  the tracking cannot get to the specific diagnosis code level, some amount of  tracking allows the provider to identify service areas targeted by payers. Once the provider has identified the specific codes that are repeatedly downgraded, it can evaluate the volume of  such downgrades in buckets and escalate them as needed.

4 Create processes to address downgrades related to specific DRGs. Again, staying on top of  medical record requests and subsequent appeals is challenging. Slowing the volume of claims related to a specific-DRG downgrade issue starts with informing the claims follow-up staff about the issue and instructing them on how to identify it and what to do about it.  raising their awareness of  this issue is important because, as already noted, staying on top of  medical record requests and subsequent appeals is challenging. (The trigger is usually a letter from a specific vendor, on behalf  of  a payer, requesting medical records.)

Hospitals also should consider assigning a point person within the organization to oversee processes created to address DRG and other types of  audits.  This individual’s role could include fine-tuning the process — for instance, by developing ideas on how to mitigate negative audit findings.

The point person also could research the types of  DRGs the payer or its vendor is most inclined to want to downgrade and the means it is using to identify claims targeted for a downgrade (e.g., through the use of  an algorithm). This approach could help the hospital predict the likelihood of  specific future reviews.

5 Resolve audit-document challenges. The claims follow-up staff  should always be informed as soon as possible about which entity should be supplied with the medical records — i.e., whether it is the payer or the payer’s vendor. The letter requesting the records will identify where the records should be sent. Performing this task immediately will streamline staff’s time, as it will ensure medical records are only sent once. It also may help prevent claims from being downgraded, as the payers and vendors will receive the supporting documentation quickly.

6 Streamline appeals. Follow-up staff  should be instructed always to automatically appeal the downgrade. Getting a proper appeal on file has two benefits:

  • It could expedite the downgrade’s being overturned, if  the appeal sufficiently addresses the clinical and coding elements of  the downgrade.
  • It ensures the hospital has the option of escalating its response through arbitration or litigation.

The appeal will likely need to address clinical and coding aspects of  the claim, so there should be a routing mechanism for the claims follow-up staff  to send inquiries to health information management (HIM) or coding and obtain their feedback on individual accounts or appeal letters.  The provider should consider building a template appeal letter to save time.

7 Consider litigation.  If  the issue warrants filing litigation/arbitration, the hospital should take care to follow the dispute resolution procedures within the contract (if there is one). The litigation process will take time and resources.  The health plan will likely hide behind the work of  its vendor, causing delays and unclear communication as it tries to find the justification for the actions taken.

The provider also has a high burden to meet in producing documents because voluminous medical records are required to justify the DRG as billed.  To defend and prove its position, the hospital will require expertise from clinical, coding and potentially billing/pricing areas. Its leaders should assess whether those resources are available in-house, or if  it will need to seek such expertise elsewhere.

8 Make improvements for the future. Once the volume of  DRG downgrades has slowed, and the prior claims have resolved, the provider should look to the future to prevent the problem from recurring (or at the minimum, to ensure it does not again reach a high volume).

The hospital’s managed care staff  can consider negotiating language to prevent vendors from initiating such audits without sufficiently involving the hospital.  At the very least, the managed care representatives should prevent any pre-payment audits.

Meanwhile, the provider should review its coding practices and internal audit compliance policies. Physicians may need education on how to ensure the medical records include sufficient documentation to justify all the diagnoses coded and procedures performed.

Success requires early action

DRG audits by payers are inevitable.  Yet by taking the seven steps described above providers can reduce their exposure from such audits.

Providers can best defend DRG audits with well-documented medical records and charts. But they also can improve the outcomes of  audits by ensuring their responses are well-planned, prompt and proactive. By catching a DRG downgrade issue early and tracking the details of what is happening (including which payer is downgrading the DRG and to what lower-paying DRG), a provider will be in the strongest possible position to take the appropriate steps to challenge and overturn the downgrade. 


Why DRG audits pose a challenge for providers

Over the past few years, providers have seen a rise in DRG audits from private payers. A 2020 study commissioned by Change Healthcare found that 50% of providers consider clinical validation audits and DRG coding  very  or  extremely  labor-intensive.a

Overview of the process

Here is a quick overview of the process leading up to an audit and its inherent challenges for providers:

  • The provider submits the claims to the payer.
  • Upon receipt of the claim, the payer pays the claim in full, according to the DRG billed.
  • After some time has passed, (often as much as 180 days after the claim was paid), the payer’s engaged vendor requests medical records, typically requiring the records be submitted within 30 or 60 days of the letter (on a closed-balance account).
  • The provider attempts to provide the records, and typically is challenged to do so because the account may either be closed or reside in a work queue.
  • Based upon the payer-vendor’s review of the documentation, the payer frequently determines the DRG should be downcoded. The payer issues a letter to the provider stating the provider has been overpaid and allows the provider  30 to 60 days to refute the retraction.
  • The provider sets out to appeal the determination but, again, often must deal with obstacles (e.g., the account remains closed) that make the appeal difficult to accomplish within the allotted time frame.
  • Despite the provider’s appeal, the payer upholds its decision and recoups all or a portion of the paid claim, leaving a payment amount that represents the downgraded DRG.

Benefits of a smooth audit process

As payers increasingly mount DRG audits, providers struggle to keep up, while their revenues decrease. Careful scrutiny of what occurs during such audits is paramount both for understanding the patterns that characterize the audit process and for identifying opportunities to improve documentation, coding and appeals that justify the coding.  There are two important benefits from having a smooth process in place to respond to such audits:

  • It helps the provider avoid nonpayment or a recoupment 
  • It better enables the provider to mount a successful appeal or pursuit of the claim post-appeal.


a.  Frost & Sullivan,  Payment integrity programs: A national study on the impact of DRG audits on provider sentiment and abrasion, commissioned by Change Healthcare, 2020.






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