Diagnosis Related Group Hospital Inpatient Payment Methodology

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

History of DRG

Senate Bill 853 (Statutes of 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).

DRG Payment Method

The DRG reimbursement methodology replaced the previous payment method for all private hospitals with admissions on or after July 1, 2013, and for non-designated public hospitals with admissions on or after January 1, 2014.

A per diem payment method is used for payment of rehabilitation services and administrative day services rendered by DRG hospitals.

Previous Payment Method 

Under previous payment method, 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. 

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

Contact Us

 For DRG-related questions, comments and concerns, or to subscribe to the DRG ListServ, please email us at DRG@dhcs.ca.gov.

DRG Information

To find out about DRG specific information,  please select from the pages below:

Last modified date: 6/16/2022 5:06 PM