Skip to: Content | Footer | Accessibility

Diagnosis Related Group Hospital Inpatient Payment Methodology

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 encourages access to care, rewards efficiency, improves transparency, and improves fairness by paying similarly across hospitals for similar care.  Payment by DRGs also simplifies the payment process, encourages administrative efficiency, and bases payments on patient acuity and hospital resources rather than length of stay.

Effective July 1, 2013, the DRG payment methodology replaced the previous payment method of negotiated rates for contract hospitals and cost-based reimbursement for non-contract hospitals.  

Per diem rates for contract hospitals were negotiated by the former Office of the Selective Provider Contracting Program (SPCP) and the California Medical Assistance Commission (CMAC).  The SPCP or contract hospital reimbursement was established legislatively in 1982 and operated under a federal waiver.  

Non-contract hospitals were reimbursed based on Medi-Cal allowable, audited costs. Hospitals were paid interim rates using a cost-to-charge ratio based on the most recently submitted cost report.  A cost settlement process reconciled the difference between interim payments and the allowable costs of providing services.  

Contact Information

For DRG-related questions, comments and concerns, or to subscribe to the DRG listserve, please email us at

Last modified on: 4/4/2014 11:42 AM