California Statutes from October 2010 added Section 14105.28 to the Welfare and Institutions Code which mandated the design and implementation of a new payment methodology for hospital inpatient services provided to Medi-Cal beneficiaries based upon diagnosis related groups (DRGs). 

Payment by DRGs will encourage access to care, reward efficiency, improve transparency, and improve fairness by paying similarly across hospitals for similar care.  Payment by DRGs will also simplify the payment process, encourage administrative efficiency, and base payments on patient acuity and hospital resource needs rather than length of stay.

Statute Link  Link to LegInfo for current statute. 

Effective July 1, 2013, this new DRG payment methodology will replace the previous payment methods of negotiated rates for contract hospitals.  Contract negotiations are handled by the Office of the Selective Provider Contracting Program (SPCP) housed within DHCS (previously negociated by the California Medical Assistance Commission (CMAC)), and also replace the cost based reimbursement methodology of non-contract hospitals; both of which utilize a per diem type of payment methodology.

The SPCP or contract hospital reimbursement was established legislatively in 1982 and operated under a federal waiver.  DHCS contracts and negotiates per diem rates with hospitals under the Medi-Cal SPCP. Hospitals may have one or more rates depending on the services offered and the contract terms.

Non-contract hospitals are reimbursed based on Medi-Cal allowable, audited costs. Hospitals are paid interim rates using a cost-to-charge ratio that is based on the most recently submitted cost report.  A cost settlement process reconciles the difference between interim payments and the allowable costs of providing services.  DHCS has a three-year period to complete the settlment via the audit process.

Contact Information

For all questions, comments, concerns, or to add your email address to the DRG listserve, please utilize the DRG mailbox and email us at DRG@dhcs.ca.gov.