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Protecting Hospital Revenue in 2026: Why DRG Downgrades and Clinical Validation Denials Demand Different Strategies

By   Leslie C. Murphy and Mark Anishchenko
01.27.26
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Hospitals are facing a steady rise in payment disputes over their assignment of a Diagnosis Related Group (DRG). These disputes fall into two general categories: coding-based DRG downgrades and clinical validation denials. While the denials may look similar, they stem from different issues and require distinct strategies to prevent revenue loss.

Coding-based DRG downgrades occur when a payor unilaterally changes or removes ICD‑10 codes from a claim, which then triggers a change in the DRG assignment and reduces reimbursement. These downgrades focus on whether the ICD-10 code was properly assigned and sequenced based on the medical record, ICD‑10 Official Guidelines and AHA Coding Clinic, as appropriate.

Clinical validation denials do not challenge the accuracy of ICD-10 code assignment. Instead, the payor argues that an assigned ICD-10 code lacks clinical support. In these cases, the payor disputes the treating physician's clinical basis for certain diagnoses, which may result in changing or removing ICD-10 codes, triggering a change in the DRG assignment and reducing reimbursement. These denials often involve the payor's medical policies or clinical criteria, which may differ from the clinical judgment exercised by the treating provider. A common example is sepsis, where cases documented under the broader Sepsis‑2 criteria may be denied when payors apply the narrower Sepsis‑3 criteria.

Why the Distinction Matters

The two denial types require different responses. Coding-based downgrades are best handled by coders and clinical documentation specialists who review the medical record and the applicable ICD‑10 guidelines to prepare appeals based on coding documentation rules. Clinical validation denials require review of the medical record by a clinician, rather than a coder. This review should also include an analysis of the payor's clinical criteria or medical policies, if applicable, and any standards the hospital has contractually agreed to follow.

Early recognition of the difference between coding-based DRG downgrades and clinical validation denials is critical for hospitals to allocate resources efficiently. For example, coding-based DRG downgrades do not typically require clinical evaluation, instead only requiring validation of the accuracy of the ICD-10 coding. Conversely, clinical validation denials are effectively challenges to the treating physician's diagnosis, so treating a clinical validation denial as a coding-based DRG downgrade will potentially result in the provider's appeal omitting the necessary clinical evidence required to overturn the denial. Hospitals should match the strategy to the denial: use coding expertise for coding‑based downgrades and reserve clinician reviews for cases that challenge the diagnosis itself.

Appeal Considerations

  • Coding-based downgrades: Keep arguments centered on authoritative coding rules, supported by clear medical record documentation and DRG logic. Escalate through coder review and formal dispute resolution as allowed by contract, if necessary.
  • Clinical validation denials: Build structured appeals protocols, including targeting the most frequent and/or high-weight DRGs denials that are often the focus of payors, which include:
    • Sepsis: DRGs 871-873
    • Acute kidney injury / renal failure: DRGs 682-684
    • Malnutrition / nutritional disorders: DRGs 951-953
    • Encephalopathy / stroke related conditions: DRGs 064-066

For both denial types, pay close attention to deadlines and appeal submission requirements, which vary by payor and can range from 30 days to one year. Missing these timelines can forfeit the provider's right to formal dispute resolution. This includes timely objections to post‑payment audits and recoupments.

Why Early 2026 Is the Time to Act

With payors increasingly focused on cost reduction and engaging outside vendors to expand pre‑payment and post‑payment DRG audits, the beginning of the year presents an opportunity to evaluate and strengthen denial management. Hospital revenue teams should:

  • Analyze 2025 denial data by type, DRG, and diagnosis to pinpoint trends and priority targets.
  • Refine appeal strategies for 2026 to ensure each dispute type is met with the right response: coding specialists for downgrades, clinicians for validation denials.
  • Strengthen documentation via pre-bill validation for high-risk DRGs and concurrent CDI for targeted diagnoses.
  • Track and train staff on payor-specific criteria and deadlines to reduce missed opportunities.

How DWT Can Help

DWT's managed care team represents hospitals and health systems in legal challenges to payor denials. We partner with revenue cycle teams in all phases of the dispute process, from evaluating claims in prelitigation to advocating on behalf of clients in formal dispute resolution proceedings.

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