Understand Hospital Transfer DRG Revenue Challenges to Overcome Them
Hospital transfer DRG revenue issues continue to challenge providers as patients move to other facilities or transition into home healthcare. These transfers can significantly alter reimbursement, creating financial risk if coding and discharge status are not aligned with Medicare rules. Were the right codes used to avoid underpayments? Could a government audit flag overpayments?
Let’s take a closer look at how this process works and how the government views it.
What are transfer DRGs?
Under the Post-Acute Care Transfer (PACT) rule, specific DRGs are subject to reduced per diem payments if a patient is discharged early to a qualifying post-acute setting. For FY 2026, 280 MS-DRGs are subject to this policy. This is a critical area for revenue integrity, as nearly 41% of all Medicare inpatient discharges are followed by post-acute services. For surgical cases, that figure rises to 47%, according to MedPAC’s 2025 Data Book.
Hospitals struggle to confirm whether their internal teams or vendors have recovered all available transfer DRG underpayments. Part of the challenge is that many solutions overlook cases where post-acute care doesn’t qualify for transfer DRG payments. Because Medicare pays these claims, often closing them with a zero balance, it’s difficult for providers to ensure they’ve captured all earned revenue.
Government guidance constantly changes
Medicare's rules don't stay static. As Medical Learning Network explains, for FY 2025, CMS reviewed MS-DRGs against post-acute care transfer policy criteria using FY 2022 MEDPAR data and updated which DRGs are subject to the transfer and special payment policies. Several DRGs were added, others were deleted or renumbered, and some will no longer be subject to the transfer reduction policy. These changes in the FY 2025 IPPS Final Rule underscore how frequently government guidance evolves and why providers must stay vigilant.
What the OIG found
The Office of Inspector General (OIG) has repeatedly flagged overpayments related to the PACT policy. A 2023 report found that Medicare could save millions if it implements an expanded hospital transfer payment policy for discharges to post-acute care.
“An expanded hospital transfer policy for discharges to PAC would result in significant cost savings to the Medicare program, and Medicare transfer payments would exceed hospital costs to provide care for most of the claims hospitals submit to Medicare,” according to OIG. “Of the 100 claims in our sample, 99 could have had transfer payments that were based on a reduced per diem rate (rather than the full payment) that would have resulted in net Medicare cost savings of $1 million.”
Why these audits matter
What exactly is the government looking for in these audits that, if not met, can result in fines, staff time costs and revenue reduction?
That’s defined in the Post-Acute Care Transfer Policy, which reads: "An acute-care hospital transfers a beneficiary to a post-acute-care setting when it stabilizes the beneficiary´s acute condition and the beneficiary requires further treatment. Section 4407 of the Balanced Budget Act of 1997, P.L. No. 105-33, added subparagraph 1886(d)(5)(J) to the Act to establish the Medicare post-acute-care transfer policy, and CMS promulgated implementing regulations at 42 CFR sections 412.4(c), (d), and (f). The intent of this transfer policy is to avoid providing an incentive for a hospital to transfer a beneficiary to a post-acute-care setting early (before the beneficiary’s acute condition is stabilized) to minimize its costs while still receiving the full MS-DRG payment. Using a graduated per diem rate, Medicare adjusts the payment to the hospital to approximate the reduced cost for a beneficiary who has been transferred to a post-acute-care setting."
The emphasis is added on the intent of the transfer policy, because that is where many hospitals get stuck with Medicare payment adjustments. A specific example is given in the report detailing how, during five of the 58 inpatient claims that Medicare improperly paid, the hospitals originally billed the claims correctly. However, the hospitals later rebilled the claims with a revised patient discharge status code to receive the full MS-DRG payment.
Medicare Advantage payers also follow similar transfer policies. All these different Medicare Advantage payers involved in billing requirements add additional complexities when keeping up with transfer DRG compliance.
The complexity behind every code
In a CMS publication "Acute Care Hospital Inpatient Prospective Payment System MLN,” CMS explains how Medicare reduces payment in some cases when a patient has a short length of stay (LOS) and is transferred to another acute care hospital, or in certain circumstances, transitions to a post-acute care setting.
This transfer policy applies to patients assigned to one of the MS-DRGs that are subject to this policy who transfer to a skilled nursing facility, long term care hospital, inpatient rehabilitation facility, inpatient psychiatric facility, cancer hospital, children’s hospital or receive home health care from a home health agency or hospice care by a hospice program. CMS states that Medicare reduces DRG payments when:
The patient’s LOS is at least one day less than the geometric mean DRG LOS
The hospital transfers the patient to another IPPS-covered acute care hospital, or for certain MS-DRG patients, a post-acute setting
The hospital transfers the patient to a hospital not participating in the Medicare Program
The hospital transfers the patient to a CAH
[LOS = Length of Stay. DRG = Diagnosis Related Group. IPPS = Inpatient Prospective Payment System. A Medicare Severity-Diagnosis Related Group (MS-DRG) is a system of classifying a Medicare patient’s hospital stay into various groups to facilitate payment of services. The Critical Access Hospital (CAH) designation is designed to reduce the financial vulnerability of rural hospitals and improve access to healthcare by keeping essential services in rural communities.]
The acronyms alone require constant awareness and education on the part of hospital financial teams.
Condition codes are special two-digit codes hospitals may append to Medicare claims to indicate specific circumstances that affect payment under Medicare’s Hospital Inpatient Prospective Payment System (IPPS), particularly when patients are discharged to a home with home health services. Under Medicare’s post-acute care transfer policy, a hospital that discharges a patient to home with home health services must report the appropriate discharge status code and may include a condition code to reflect the relationship of the continuing care to the inpatient stay.
For example, Condition Code 42 is used when home health services are provided but are not related to the condition treated during the hospital stay, while Condition Code 43 applies when continuing care is related but no home health services are furnished within three days of discharge. Including the correct condition code helps ensure accurate payment, potentially preserving the full Medicare Severity-Diagnosis Related Group (MS-DRG) payment, and aligns with Medicare’s coding and billing requirements.
Get ahead of revenue risk
We see many hospitals struggle to manage transfer DRG compliance amid shifting rules, audits and coding demands. That’s where R1 can help. Learn more about our solutions for recovering revenue across Fee-for-Service (FFS), Medicare Advantage (MA) and Indirect Medical Education (IME)/shadow billing programs.
