DRG vs. CPT vs. HCPCS: A Medtech Founder's Guide to Billing Code Types

Every medtech founder eventually sits in a meeting where somebody says the word code and everyone nods, and it becomes clear an hour later that three people in the room meant three different things. CPT, HCPCS and DRG are not synonyms and they are not tiers of the same system. They answer different questions, they are maintained by different bodies, and they determine payment in different care settings.

Here is the map, without the acronym fog.

The one-line version

CPT says what was done. HCPCS Level II says what was supplied. DRG says what the hospital stay as a whole was worth.

A single patient encounter can involve all three at once: a physician performs a procedure (CPT), the facility supplies a device or drug used during it (HCPCS Level II), and if the patient is admitted, the whole inpatient stay resolves to one payment bundle (DRG).

CPT: the procedure language

CPT, Current Procedural Terminology, is maintained by the American Medical Association and describes services and procedures performed by clinicians. It is the language of the physician fee schedule and of hospital outpatient claims.

CPT has three categories. Category I codes are the payable ones, five digits, with assigned relative value units that drive Medicare payment. Category II codes are optional performance-measurement codes. Category III codes are temporary codes for emerging technology; they can be reported but carry no assigned RVUs, so payment is discretionary and frequently denied.

For most device and software companies, CPT is the battleground. A Category I code requires evidence of widespread use and published clinical efficacy, which takes years. Category III is the usual first stop, and living in Category III for three to five years is normal rather than a failure. If your product is AI-enabled, this is the system that explains why so few AI procedures have their own payable code.

HCPCS Level II: the supply and item language

HCPCS, the Healthcare Common Procedure Coding System, has two levels. Level I is CPT. Level II is the separate alphanumeric set maintained by CMS for things CPT does not describe: durable medical equipment, prosthetics, orthotics, supplies, most drugs and biologicals administered in a facility, ambulance services, and a range of items and services delivered outside the physician office.

If you sell a physical product that a patient takes home, or an item a facility bills separately from the procedure, HCPCS Level II is your code system. The application process runs through CMS on published cycles rather than through the AMA, the evidence bar is different, and the code itself does not guarantee coverage — a code tells payers what the item is, not that they must pay for it.

New codes and revisions are published in the quarterly HCPCS update. Getting on that list early matters, because distributors, group purchasing organisations and hospital supply chains often cannot transact cleanly without one.

DRG: the inpatient bundle

MS-DRG, the Medicare Severity Diagnosis Related Group, is not a code you apply for. It is a classification that CMS assigns to an entire inpatient admission based on the principal diagnosis, secondary diagnoses, procedures performed, and patient characteristics such as complications and comorbidities. Each DRG carries a weight, and the weight times the hospital base rate produces one payment for the whole stay.

This is the part founders most often get wrong. In the inpatient setting, your device is almost never paid for separately. It is an input cost inside a fixed payment. A hospital that buys your product is spending money it does not get back unless the product shortens length of stay, avoids a complication, prevents a readmission, or shifts the case into a higher-weighted DRG for legitimate clinical reasons.

That changes the sales conversation entirely. Under DRG, your buyer is a cost centre, and the case you have to make is economic: what does this save, and how fast. There are narrow exceptions — the New Technology Add-on Payment provides temporary extra payment for genuinely novel, costly technologies that meet substantial clinical improvement criteria — but they are time-limited and hard to win.

Which one applies to you

Ask two questions. Where is the patient, and what is being paid for.

Inpatient hospital: DRG governs. Your product is inside the bundle. Build the economic case.

Hospital outpatient department: the outpatient prospective payment system pays by ambulatory payment classification, driven largely by CPT and HCPCS codes on the claim. Many items are packaged into the procedure payment rather than paid separately; whether yours is packaged or separately payable is the whole question. CMS has proposed a dedicated structure for algorithm-driven software in this setting, which we covered in the CY2027 Software as a Medical Service piece.

Physician office or clinic: the physician fee schedule pays by CPT, with practice expense components that sometimes absorb the cost of supplies.

Patient home, durable equipment, supplies: HCPCS Level II, with its own fee schedules and supplier enrolment requirements.

Clinical laboratory: a separate system again, the Clinical Laboratory Fee Schedule, with its own rate-setting rules under PAMA.

What to do with this

Decide your setting before you decide your code strategy, because the setting determines which system you are even playing in. Then confirm whether an existing code already describes what you do — selling into an established code is faster than creating one, and it is the route most successful products take.

If no code fits, plan for the wait. Category III to Category I is a multi-year evidence programme, and it has to be sequenced alongside your regulatory work rather than after it. Our market access guide sets out that sequence, and the FDA pathways guide covers the clearance side. If Europe is in scope, the EU MDR and UKCA guide is the companion piece.

Finally, do not assume the American answer is the first answer. Several European systems have named routes with faster guaranteed payment for software, compared side by side in our international reimbursement pathways article.

MedTech Compass scores markets on regulatory and payment friendliness together, and DevicePath helps with classification and pathway mapping.

This article is general strategic awareness, not legal, coding or reimbursement advice. Code sets and payment rules change annually; confirm the current position before relying on it.

Sources

Healthcare Common Procedure Coding System, Centers for Medicare and Medicaid Services

HCPCS Quarterly Update, Centers for Medicare and Medicaid Services

Acute Inpatient Prospective Payment System, Centers for Medicare and Medicaid Services

MS-DRG Classifications and Software, Centers for Medicare and Medicaid Services

Hospital Outpatient Prospective Payment System, Centers for Medicare and Medicaid Services

CPT Appendix S: Taxonomy for artificial intelligence in medical services and procedures, American Medical Association