Published in the HFMA New Jersey newsletter, Garden State Focus, Fall 2025 | Authors: Meghan Mackenzie & Tracey Flowers of Hackensack Meridian Health and Charlotte Hadland of Aspirion.
The Growing Threat of DRG Downgrades
Hackensack Meridian Health (HMH), along with healthcare providers nationwide, is confronting a significant increase in diagnosis-related group (DRG) downgrades—a problem that creates substantial financial and operational pressures on already tight profit margins. DRG downgrades occur when payers retroactively reduce the classification initially assigned by providers based on diagnosis, resulting in lower reimbursement than expected. These downgrades are driven by retrospective clinical validation audits, particularly aggressive among Medicare Advantage plans, where payer reviewers question physician diagnoses weeks after treatment without ever examining the patient. This creates a troubling paradox where patients receive appropriate care, but providers are denied fair payment for that care.
The Million-Dollar Impact on Health Systems
The financial consequences of DRG downgrades extend far beyond immediate revenue losses, with many health systems experiencing millions of dollars in annual impact. The challenge is compounded by the difficulty of quickly identifying downgrades, as claims rarely contain clear indicators that an audit has occurred. Administrative costs escalate as staff spend hours preparing appeals for individual cases, while payment delays disrupt cash flow. Common targets for downgrades include diagnoses like sepsis, acute respiratory failure, metabolic encephalopathy, and acute kidney failure—conditions where clinical judgment may differ from documentation-based review.
Building a Comprehensive Defense Strategy
HMH has implemented several proactive strategies to address DRG downgrades through enhanced contract negotiations, process optimization, and clinical standardization. The organization analyzes historical downgrade data before contract renewals, establishes protective language with clear DRG classification terminology, and negotiates limits on medical record requests to prevent excessive retroactive reviews. Internally, HMH has collaborated with medical executives, clinical documentation improvement teams, and coding staff to develop clear clinical guidelines for frequently denied diagnoses, create targeted physician education, and implement integrated audit workflows that proactively attach supporting documentation for high-risk diagnoses before billing.
Looking ahead, HMH remains committed to combating DRG downgrades through their multifaceted approach combining data intelligence, strengthened contracts, optimized processes, and strategic technology partnerships. The organization monitors regulatory developments such as California’s “Physicians Make Decisions Act” and pending litigation against insurers using AI-powered review algorithms. As DRG downgrades continue increasing across the healthcare landscape, HMH emphasizes that the era of accepting complex denials as inevitable is over—healthcare organizations must take a stand, educate themselves on best practices, and implement comprehensive strategies to protect their revenue and ensure fair reimbursement for the care they provide.
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