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When a hospital admits a Medicaid patient in Georgia, two interlocking financial frameworks determine how the hospital gets paid for the stay. The first is the Diagnosis Related Group payment methodology, which translates the clinical complexity of the admission into a prospectively determined per-stay payment. The second is the hospital cost report, which is the foundational annual financial document that anchors the base rate, validates the cost-to-charge ratios used in outlier calculations, drives Disproportionate Share Hospital allotments, supports Upper Payment Limit gap calculations, sustains Graduate Medical Education payment determinations, and provides the data foundation for managed care rate-setting. Together, the cost report and the DRG payment system are the financial infrastructure underneath every dollar of Medicaid hospital payment in Georgia. This guide translates that framework so families and hospital staff can understand how the system works, why payment varies across facilities and admissions, and why hospital advocacy with the Department of Community Health focuses so heavily on base rate adequacy and cost report accuracy. :::
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Key takeaways
- Georgia Medicaid pays hospitals for inpatient services using the All Patient Refined Diagnosis Related Group (APR-DRG) methodology licensed from 3M, which assigns each admission to one of approximately 1,300 clinical groupings with four severity-of-illness levels and four risk-of-mortality levels.
- The hospital cost report submitted annually on Form CMS-2552-10 under 42 CFR 413 is the foundational financial document that drives base rate calculations, cost-to-charge ratios, DSH allotments, UPL gap calculations, GME payments, and supplemental payment validations.
- Each DRG payment is calculated as the DRG weight multiplied by the hospital base rate plus hospital-specific adjustments for teaching status, DSH status, rural location, trauma designation, and children's hospital status, with outlier supplements for extreme cases and transfer adjustments to prevent double payment.
- Georgia uses the Enhanced Ambulatory Patient Grouping (EAPG) methodology as the outpatient analog to APR-DRG, with similar grouping and weighting logic applied to hospital outpatient encounters.
- DCH's Office of Financial Management uses cost report data for base rate calculations, rate certification, DSH and UPL calculations, and GME determinations; the Office of Audits and Compliance audits cost reports for accuracy and methodology compliance.
- Critical Access Hospitals receive cost-based reimbursement rather than DRG-based payment, with payment set at 101 percent of allowable costs as identified in the cost report.
- Cost reports go through stages from as-filed submission through tentative settlement to final settlement, with audit adjustments potentially requiring payment recoupment or additional payment.
- Managed care plans (the four CMOs Amerigroup, CareSource, Peach State, Wellpoint) negotiate hospital rates within the federal managed care framework, with state-directed payments under 42 CFR 438.6(c) often using DRG-based methodology to ensure minimum hospital payment.
- The same cost report data anchors multiple Medicaid frameworks (DRG base rates, DSH, UPL, GME, supplemental payments, MLR validation), so hospital advocacy around cost report accuracy has broad financial implications.
- CMS Region IV oversees Georgia's hospital payment methodology through state plan amendment review, DSH audit findings review, UPL gap calculation review, and managed care state-directed payment review. :::
What this framework is and why it matters
The Medicaid hospital payment system in Georgia is not one mechanism but a stack of interconnected financial calculations that all rely on two foundational elements. The first foundational element is the Diagnosis Related Group methodology, which is the prospective payment system that translates each inpatient stay into a payment amount based on clinical characteristics. The second foundational element is the annual hospital cost report, which is the comprehensive financial document hospitals submit to determine reasonable costs of care and to anchor all rate calculations.
Without understanding these two foundational elements, the various Medicaid hospital payment programs (DRG payment for inpatient stays, Enhanced Ambulatory Patient Grouping for outpatient encounters, Disproportionate Share Hospital allotments, Upper Payment Limit supplemental payments, Graduate Medical Education payments, state-directed payments under managed care) appear as a confusing collection of disconnected programs. With the foundational understanding, the programs become a coherent system anchored in clinical complexity (DRG and EAPG groupers) and audited financial data (cost reports).
For families, this matters because the financial viability of hospitals serving Medicaid populations depends on the adequacy of these payment systems. Rural hospitals that close, urban safety-net hospitals that strain, teaching hospitals that struggle with academic mission costs, and children's hospitals that face specialty-care cost pressures all trace their financial position back to how the DRG methodology and cost report system interact with their specific patient mix and cost structure.
For hospital staff and administrators, the framework defines virtually every aspect of revenue cycle management, from coding decisions that affect DRG assignment, to charge structure decisions that affect cost-to-charge ratios, to cost report preparation that affects base rates for years to come.
The Diagnosis Related Group framework
Origin and evolution
The DRG payment methodology was developed at Yale University in the 1970s as a way to classify inpatient hospital stays into clinically coherent groupings with similar resource use. Medicare adopted DRG payment in 1983 under Section 1886 of the Social Security Act, replacing the prior cost-based reimbursement system with prospective per-stay payment.
The Medicare Inpatient Prospective Payment System (IPPS) was a fundamental shift in how hospitals were paid. Under cost-based reimbursement, hospitals submitted detailed cost data and were paid based on their actual costs of care. Under DRG payment, hospitals received a predetermined amount per stay regardless of actual costs, creating financial incentives for efficiency.
State Medicaid programs progressively adopted DRG-based methodologies over the following decades. By the 1990s, most state Medicaid programs paid hospitals using DRG-based systems, though specific groupers and adjustments varied by state.
AP-DRG and APR-DRG groupers
Two refined DRG groupers were developed to better account for the severity of patient illness:
AP-DRG (All Patient DRG). Developed by 3M, this grouper expanded the original Medicare DRG framework to better cover non-Medicare populations, particularly pediatric and obstetric cases that were less well represented in Medicare data. AP-DRG was widely adopted by state Medicaid programs in the 1990s and 2000s.
APR-DRG (All Patient Refined DRG). Also developed by 3M, this grouper further refined AP-DRG by adding severity-of-illness (SOI) and risk-of-mortality (ROM) subclasses. Each APR-DRG has four SOI levels (1 representing minor, 2 moderate, 3 major, 4 extreme) and four ROM levels (1 minor through 4 extreme). The SOI/ROM dimensions capture clinical complexity that base APR-DRG alone misses.
Georgia uses APR-DRG. The grouper assigns each inpatient stay to one of approximately 1,300 APR-DRGs based on principal diagnosis, secondary diagnoses, procedures performed, age, sex, and discharge status. The SOI and ROM dimensions then further subdivide each APR-DRG to reflect the severity of illness and risk of mortality.
How DRG assignment works in practice
When a Georgia Medicaid patient is admitted to a hospital, the clinical care is documented in the medical record. At discharge, coding staff assign:
- A principal diagnosis (the condition determined to be the reason for admission)
- Secondary diagnoses (other conditions affecting the stay)
- Procedures performed during the stay
- Discharge status (routine discharge, transfer, death, etc.)
This coded data is transmitted on the discharge claim using ICD-10 (International Classification of Diseases) codes for diagnoses and ICD-10-PCS or CPT codes for procedures. The APR-DRG grouper processes the claim and assigns:
- An APR-DRG number
- A severity-of-illness level (1-4)
- A risk-of-mortality level (1-4)
The combination determines the relative weight applied to the base rate.
DRG weights
Each APR-DRG has an associated relative weight reflecting the average resource intensity of cases in that grouping. Higher weight indicates more complex and resource-intensive cases.
For example, a routine vaginal delivery without complications might have a relative weight near 0.5, while an extreme-severity sepsis admission with multiple organ failure might have a relative weight above 5.0. The same hospital with the same base rate would receive ten times more for the sepsis admission than for the routine delivery, reflecting the dramatically different resource intensity.
DCH updates relative weights periodically based on newer claims data. Weight updates can shift payment between hospital types with material implications, so weight updates are typically subject to extensive consultation with hospitals.
The hospital cost report
CMS-2552-10 form
The hospital cost report is submitted annually on Form CMS-2552-10. This is a multi-hundred-page financial document that covers the hospital's full fiscal year and includes:
Financial statement data. Balance sheet, income statement, and cash flow data covering the entire hospital enterprise.
Detailed cost data by cost center. The hospital is divided into cost centers (routine inpatient, intensive care units, operating room, radiology, pharmacy, laboratory, emergency room, etc.). For each cost center, the cost report includes:
- Direct costs (salaries, supplies, contracts)
- Allocated costs (administrative and general, maintenance, depreciation)
- Statistics for allocation (square feet, FTEs, patient days)
Charge data by cost center. Total billed charges for services delivered in each cost center.
Statistics. Total patient days, discharges, outpatient visits, FTEs, beds, and other operational metrics.
Cross-walks between cost centers. Mappings between the cost report cost centers and the hospital's general ledger.
Apportionment between payers. Allocation of costs between Medicare, Medicaid, other payers, and self-pay based on charges, days, or other allocation bases.
DSH calculation worksheets. Calculation of Medicaid utilization, low-income utilization, DSH eligibility, and uncompensated care costs.
Indirect Medical Education and Direct GME calculations. For teaching hospitals, calculations of full-time equivalent residents, allowable costs, and payment under IME and Direct GME methodologies.
Wage index data. Geographic wage data used in payment adjustments.
42 CFR 413 cost report regulations
42 CFR 413 is the federal regulation that governs the cost report framework. Key sections:
42 CFR 413.5 establishes the cost determination framework, including the principle that allowable costs are the necessary and proper costs of providing care to Medicare beneficiaries (extended to Medicaid).
42 CFR 413.9 defines reasonable cost as the cost actually incurred excluding any part of incurred cost found to be unnecessary in the efficient delivery of needed health services.
42 CFR 413.20 sets financial requirements for provider participation including accounting standards, audit requirements, and reporting requirements.
42 CFR 413.24 defines cost report financial data requirements including the basis of accounting, the contents of the cost report, and the format requirements.
42 CFR 413.40 establishes inpatient cost limits.
Cost-to-charge ratios
The cost report yields cost-to-charge ratios (CCRs) by cost center, calculated as cost divided by charges. CCRs vary across cost centers (typically lower for high-charge cost centers like pharmacy and radiology, higher for routine cost centers).
CCRs are used extensively in Medicaid hospital payment:
- Outlier payment calculations. When estimating cost from charges for outlier determination, CCRs convert billed charges to estimated cost.
- DSH uncompensated care calculations. Uncompensated care cost is calculated by applying CCRs to charges for uninsured patients.
- UPL gap calculations. The gap between Medicare-equivalent payment and actual Medicaid payment is calculated using cost report data including CCRs.
- Cost-based reimbursement for Critical Access Hospitals. CAH payment is based on cost report cost data.
CCRs are highly sensitive to cost allocation methodology. Aggressive allocation choices can inflate or deflate CCRs with material implications for multiple payment calculations.
Settled vs unsettled cost reports
Cost reports go through stages:
As-filed. The initial submission by the hospital, typically due 150 days after fiscal year end.
Tentative settlement. Preliminary review by the Medicare Administrative Contractor (MAC) or state auditor, typically resulting in adjustments to as-filed data.
Final settlement. After audit, adjudication, and any administrative appeals, the cost report reaches final settlement.
Cost reports can take several years to reach final settlement. Many financial calculations use as-filed or tentative-settlement data with later reconciliation if final settlement amounts differ.
Georgia inpatient hospital payment methodology
DCH APR-DRG-based methodology
Georgia's DCH pays inpatient hospital services using APR-DRG methodology with these components:
Step 1: APR-DRG assignment. Each stay is grouped using the 3M APR-DRG grouper based on the discharge claim data, yielding an APR-DRG number and SOI/ROM levels.
Step 2: DRG weight application. The APR-DRG weight is multiplied by the hospital's base rate to yield the base payment.
Step 3: Hospital-specific adjustments. Additional adjustments apply for teaching status, DSH status, rural location, trauma designation, and children's hospital status.
Step 4: Outlier payments. For extremely high-cost cases, outlier payment supplements the DRG payment to protect against catastrophic loss.
Step 5: Transfer adjustments. When patients transfer between facilities, payment is adjusted to prevent double payment for the same care.
Step 6: Final payment determination. Base payment plus hospital-specific adjustments plus outlier payment minus transfer adjustment equals final payment.
DCH base rate calculation
The base rate is the dollar amount that, when multiplied by an APR-DRG weight, yields the base payment for a stay. The base rate is calculated using:
- Total Medicaid inpatient costs from cost reports
- Total case-mix-adjusted Medicaid discharges
- Cost report data converted to a per-discharge basis
- Adjusted for inflation between the cost report year and the payment year
- Adjusted for state policy decisions (rebasing percentage, percentage adjustment for budget reasons)
The base rate is updated periodically through rebasing using newer cost report data. Between rebasing cycles, the base rate may be updated by inflation index or by policy adjustments.
Hospital advocacy with DCH focuses heavily on base rate adequacy. The base rate is the central variable driving Medicaid inpatient revenue, so a small percentage change in base rate has material financial implications across the entire hospital industry.
Hospital-specific adjustments
Several adjustments modify the base DRG payment to reflect hospital characteristics:
IME (Indirect Medical Education) adjustment. Teaching hospitals receive higher payment per DRG to reflect the additional costs of training residents. The adjustment is calculated as a function of the resident-to-bed ratio. Academic medical centers (Augusta University Medical Center, Emory University Hospital, Grady Memorial Hospital, the Medical College of Georgia teaching hospitals) receive substantial IME adjustments.
DSH adjustment to DRG payment. Hospitals serving high proportions of Medicaid and uninsured patients may receive higher DRG payments as part of their core payment methodology. Note that this is separate from the DSH supplemental payment program under Section 1923 of the Social Security Act, which provides additional lump-sum or per-discharge payments to qualifying DSH hospitals.
Rural adjustment. Rural hospitals may receive higher base rates or special methodology recognition to address fixed cost structures that are difficult to spread over lower patient volumes. Critical Access Hospitals receive separate cost-based methodology entirely.
Trauma adjustment. Hospitals with trauma-center designation (Level I, II, III) may receive additional payment recognizing trauma readiness costs (24/7 trauma surgeon availability, specialized equipment, trauma team activation).
Children's hospital adjustment. Children's hospitals (Children's Healthcare of Atlanta, others) receive specialized methodology recognizing pediatric specialty costs that adult-focused APR-DRG weights may not fully capture.
Outlier payments
For cases where actual hospital costs vastly exceed the DRG payment, outlier payments supplement payment. The outlier calculation:
Step 1: Estimate cost. The hospital's cost-to-charge ratio is applied to billed charges to estimate cost.
Step 2: Determine outlier threshold. The threshold is the DRG payment plus a fixed-loss amount (e.g., $50,000 to $100,000 depending on policy calibration).
Step 3: Compare cost to threshold. If estimated cost exceeds the threshold, the case qualifies for outlier payment.
Step 4: Calculate outlier payment. The outlier payment is a percentage (typically 75-80 percent) of the cost above the threshold.
Step 5: Final payment. Total payment equals DRG payment plus outlier payment.
Outlier payments protect hospitals from catastrophic financial loss on extreme cases. Without adequate outlier policy, hospitals could face ruinous losses on cases like prolonged ICU stays with multiple complications.
Transfer adjustments
When a patient transfers to another acute care facility during their stay, payment is adjusted to prevent double payment for the same care.
Transferring hospital. Receives a per-diem payment rather than full DRG payment. The per-diem is calculated as the DRG payment divided by the geometric mean length of stay for the DRG, multiplied by the actual number of days at the transferring hospital, with adjustments to account for higher resource use early in the stay.
Receiving hospital. Receives full DRG payment for the continued stay, assigned to whatever DRG ultimately applies.
Transfer adjustments are particularly important for tertiary care hospitals that receive complex transfers from community hospitals.
Georgia outpatient hospital methodology
EAPG-based methodology
Georgia pays hospital outpatient services using the Enhanced Ambulatory Patient Grouping (EAPG) methodology developed by 3M. EAPG is the outpatient analog to APR-DRG.
EAPG groups outpatient services into clinical groupings with associated weights. Each outpatient encounter is grouped and paid based on the EAPG weight multiplied by the hospital's outpatient base rate.
EAPG includes several features that distinguish it from simpler outpatient methodologies:
Grouping by procedure and diagnosis. EAPG considers both the procedures performed and the diagnoses to assign appropriate groupings.
Bundling of related services. Services that are typically performed together (e.g., laboratory tests, basic imaging) are bundled into the EAPG payment rather than separately paid.
Consolidation of multiple visits. Multiple visits on the same day for related care are consolidated into a single EAPG payment.
Discounting of secondary procedures. When multiple procedures are performed, secondary procedures are discounted to reflect efficiency.
Packaging of certain ancillary services. Routine ancillary services (basic supplies, routine pharmacy) are packaged into procedure payments rather than separately paid.
Outpatient base rate
The outpatient base rate is calculated similarly to inpatient base rate using cost report outpatient cost data. The base rate is multiplied by the EAPG weight to yield outpatient payment.
DCH cost report oversight
Cost report submission
Hospitals submit annual cost reports to DCH using a format derived from CMS-2552-10 with state-specific supplements. Submission timelines:
- Initial filing typically 150 days after fiscal year end
- Extensions available for cause
- Supplemental data may be required for state-specific calculations
- Electronic submission through DCH's hospital financial reporting system
DCH Office of Financial Management
The Office of Financial Management (OFM) uses cost report data extensively for:
- Base rate calculations and periodic rebasing
- Rate certification with the contracted state actuary
- DSH allotment calculations and DSH audit support
- UPL gap calculations for supplemental payments
- GME payment calculations
- Outlier payment calibration (setting fixed-loss thresholds)
- CCR derivation for use in multiple programs
- Coordination with managed care rate-setting
DCH Office of Audits and Compliance
The Office of Audits and Compliance (OA&C) audits cost reports including:
- Validation against the hospital's general ledger
- Allocation methodology review (verifying that costs are allocated correctly between cost centers)
- Apportionment between Medicare, Medicaid, other payers
- DSH calculation accuracy (Medicaid utilization, low-income utilization, uncompensated care)
- IME and GME calculation accuracy
- Subcontractor cost reasonableness (when costs are paid to related parties)
- Related party transactions (ensuring transactions are at fair market value)
Audit findings may result in adjustments that affect not just the audited cost report year but subsequent year base rate calculations and supplemental payment determinations.
Coordination with CMS-2552-10
The Medicare cost report (CMS-2552-10) is the foundational document; Georgia's Medicaid-specific cost report supplements use Medicare data plus additional state-required information. DCH coordinates with the Medicare Administrative Contractor (MAC) responsible for Georgia hospitals to ensure consistency between Medicare and Medicaid cost report data.
Final settlement
Cost reports go through tentative and final settlement. The final settlement process includes:
- Resolution of audit findings
- Administrative appeals if the hospital disputes audit adjustments
- Final adjudication of all open issues
- Final reconciliation of any payment amounts that depended on cost report data
Audit adjustments may require:
- Payment recoupment if the hospital received excess payment based on overstated costs
- Additional payment if the hospital was underpaid based on understated costs
- Adjustments to subsequent year base rates if the audit reveals systematic methodology issues
How cost reports feed into multiple Medicaid frameworks
Cost reports are not just used for DRG base rates. They feed into many Medicaid frameworks:
Rate-setting (42 CFR 438.4-438.7)
Managed care actuarial rate-setting uses cost report data as one input alongside encounter data, demographic trends, and policy adjustments. The state actuary uses cost report data to validate that managed care plans have adequate revenue to pay hospitals at rates consistent with the underlying cost structure.
DSH (Section 1923, 42 CFR 447 Subpart F)
DSH allotments and DSH audit are heavily dependent on cost report data. The DSH audit under the Medicaid Disproportionate Share Hospital audit framework reconciles Medicaid shortfalls (the difference between Medicaid costs and Medicaid payments) and uncompensated care costs (costs for uninsured patients) using cost report data.
UPL (42 CFR 447.272)
The Upper Payment Limit gap is calculated as the difference between what Medicare would have paid for Medicaid services (estimated using cost report data) and what Medicaid actually paid. Supplemental payments are made up to the UPL to bring total Medicaid payment closer to Medicare-equivalent levels.
GME (Section 1903 SSA, state-directed payments)
Graduate Medical Education payment calculations use cost report data on residents, allowable costs, and full-time equivalents. IME adjustments to DRG payment are calculated from cost report resident-to-bed ratios.
State-directed payments (42 CFR 438.6(c))
State-directed payments often use cost report-based methodologies. For example, a hospital quality incentive program may pay per discharge using cost-report-derived base amounts.
MLR oversight (42 CFR 438.8)
Cost report data on hospital costs is used to validate that managed care plans are paying hospitals at rates consistent with the cost structure. If managed care plans are paying hospitals dramatically below cost while operating at low MLR, this can trigger oversight scrutiny.
Managed care DRG passthrough
When Medicaid is delivered through managed care plans (the four CMOs in Georgia: Amerigroup, CareSource, Peach State, Wellpoint), DRG methodology operates within the managed care framework rather than as direct fee-for-service payment.
Default methodology
Managed care plans negotiate rates with hospitals. Plans may use:
- DRG-based methodology (mirroring fee-for-service)
- Per diem methodology
- Negotiated case rates
- Bundled payments for specific episodes (e.g., maternity, joint replacement)
- Value-based payment arrangements (shared savings, episode bundles)
The negotiation between CMOs and hospitals is a major business activity affecting hospital financial viability.
State-directed payments using DRG
Georgia uses state-directed payments under 42 CFR 438.6(c) to require CMOs to pay hospitals at minimum DRG-based amounts. The hospital pass-through arrangement directs that capitation revenue flow through the CMO to the hospital based on DRG-derived formulas, ensuring that the underlying APR-DRG methodology continues to define hospital payment even within managed care.
Pass-through under 42 CFR 438.6(c)(2)
Certain managed care arrangements include pass-through payments that flow capitation through to hospitals based on DRG-derived formulas. Pass-through is subject to specific federal limits and conditions that have been refined in the 2016 and 2024 Managed Care Final Rules.
Encounter data validation
Encounter data submitted by CMOs to DCH supports validation that DRG-derived rates were actually paid. The encounter data shows the DRG assignment, payment amount, and other details for each managed care inpatient stay. DCH uses encounter data to verify managed care payment patterns against DRG methodology expectations.
Critical Access Hospitals
A small number of Georgia hospitals are designated Critical Access Hospitals (CAHs) under the Medicare Rural Hospital Flexibility Program. CAHs:
- Have 25 or fewer beds
- Average length of stay 96 hours or less for acute care
- Located in rural areas
- Provide 24-hour emergency services
Medicaid reimbursement for CAHs is cost-based rather than DRG-based, with payment set at 101 percent of allowable costs as determined from the cost report. The 101 percent reflects a small margin above cost to support viability.
CAH cost-based methodology is fundamentally different from APR-DRG methodology and is one of the key financial supports for the smallest rural hospitals in Georgia.
CMS Region IV oversight
CMS Region IV (based in Atlanta) oversees Georgia's hospital payment methodology through multiple channels:
- State plan amendment review when DCH proposes methodology changes
- DSH audit findings review and DSH allotment reconciliation
- UPL gap calculation review for supplemental payment programs
- GME payment review
- Managed care state-directed payment review under 42 CFR 438.6(c)
- Cost report compliance review (in coordination with the MAC)
- Audit and review of methodology consistency with federal rules
CMS Region IV oversight ensures that Georgia's hospital payment methodology complies with federal requirements and reflects sound payment policy.
Practical implications for Georgia hospital payment
Base rate adequacy is the central advocacy issue
Hospital advocacy with DCH focuses heavily on base rate adequacy. The base rate is the central variable driving Medicaid inpatient revenue, so a small percentage change has material financial implications. Rebasing using older cost report data is a frequent target of hospital advocacy because cost inflation between the rebasing year and the current payment year erodes real payment value.
Severity adjustment helps complex hospitals
APR-DRG severity adjustment ensures hospitals serving sicker patients receive higher payment. Academic medical centers, children's hospitals, and tertiary care centers handling complex cases benefit from the SOI/ROM dimensions of APR-DRG. Without severity adjustment, these hospitals would be systematically underpaid relative to community hospitals handling lower-complexity cases.
Outlier payments protect against catastrophic cases
Outlier payments are essential for hospitals to be willing to take complex transfers and treat catastrophic cases. Without adequate outlier policy, hospitals could face financial ruin on individual high-cost cases.
Cost report data drives multiple supplemental payment programs
The same cost report data underlies DSH allotments, UPL gap calculations, GME payments, and other supplemental payments. Hospital advocacy around cost report accuracy has broad financial implications across the entire Medicaid hospital payment system.
Cost-to-charge ratios are sensitive
CCRs are highly sensitive to cost allocation methodology. Aggressive allocation choices (charging more cost to high-charge cost centers) can inflate CCRs with material implications for outlier payments and DSH calculations. DCH and CMS auditing of CCRs focuses on allocation methodology consistency.
Managed care pass-through is contentious
Hospitals advocate for managed care plans to pay at least DRG-based amounts. The pass-through framework under 42 CFR 438.6(c) is contentious because aggressive negotiation by CMOs can lead to payment below DRG amounts in some negotiations. State-directed payments help establish floors but do not address all hospital-CMO payment dynamics.
CAH cost-based payment is a financial lifeline for the smallest rural hospitals
The 101 percent of cost methodology for Critical Access Hospitals is materially more favorable than APR-DRG payment for the smallest rural hospitals. CAH status is a significant financial support for the rural Georgia hospital landscape.
Pending policy debates
Rebasing frequency
DCH rebases hospital base rates periodically using newer cost report data. Hospitals advocate for more frequent rebasing because the lag between cost report year and payment year erodes real payment value through inflation. The state must balance hospital advocacy with budget constraints.
Outlier threshold calibration
The outlier fixed-loss threshold and marginal cost percentage are subject to ongoing calibration. A lower threshold means more cases qualify for outlier payment but reduces base rate adequacy; a higher threshold means fewer outlier payments but more concentrated risk on hospitals. Calibration is a continuous policy discussion.
APR-DRG weight updates
DCH periodically updates APR-DRG weights based on newer claims data. Updates can shift payment between hospital types with material implications, so updates are typically subject to extensive consultation with the Georgia Hospital Association and individual hospitals.
Hospital quality incentive programs
State-directed payments increasingly include quality incentive elements (30-day readmission performance, mortality benchmarks, hospital-acquired condition rates). The interaction between DRG methodology and quality incentives is evolving as states pilot more sophisticated value-based hospital payment arrangements.
Telemedicine and observation status
Increasing use of observation status, telemedicine, and outpatient procedures challenges traditional inpatient DRG methodology. Cases that previously would have been inpatient stays may now be observation or outpatient, shifting payment from DRG methodology to EAPG methodology. EAPG outpatient methodology has had to expand to accommodate the more complex outpatient services that were previously inpatient.
Hospital consolidation and methodology
Hospital consolidation across Georgia (system mergers, acquisitions of community hospitals by larger systems) raises methodology questions about cost report combination, base rate consolidation, and DSH eligibility consolidation. CMS and DCH have refined guidance over time.
Worked examples
Example 1: Marcus 65 Bulloch sepsis admission
Marcus is 65 years old and enrolled in Medicaid through the Aged, Blind, and Disabled (ABD) population in Bulloch County in rural southeast Georgia. He develops severe sepsis with multi-organ failure and is admitted to East Georgia Regional Medical Center, the regional hospital serving Bulloch County.
His admission generates the following DRG payment calculation:
- Principal diagnosis: Severe sepsis with septic shock
- Secondary diagnoses: Acute kidney injury, respiratory failure, hypotension
- Procedures: Mechanical ventilation, vasopressor administration, central line placement
- Length of stay: 9 days (5 in ICU, 4 on medical floor)
The APR-DRG grouper assigns:
- APR-DRG 720 (Septicemia and disseminated infections)
- Severity-of-illness level 4 (extreme)
- Risk-of-mortality level 4 (extreme)
The relative weight for this APR-DRG/SOI/ROM combination is approximately 3.8. With East Georgia Regional Medical Center's base rate of approximately $7,200, the base DRG payment is $7,200 × 3.8 = $27,360.
Hospital-specific adjustments apply:
- East Georgia Regional has a rural adjustment that increases payment
- East Georgia Regional has DSH adjustment to DRG payment
Adjusted DRG payment: approximately $32,000.
Marcus's actual hospital costs are approximately $58,000. Cost exceeds the outlier threshold (DRG payment plus $50,000 fixed-loss amount = $82,000). Since cost is below the threshold, no outlier payment applies.
If Marcus is fee-for-service, DCH pays East Georgia Regional approximately $32,000 directly. If Marcus is enrolled in a CMO (which is uncommon for ABD adults in fee-for-service hospitals), the CMO pays East Georgia Regional, with state-directed payment arrangements ensuring the payment reflects the underlying DRG methodology.
Example 2: Eleanor 78 Atlanta hip replacement
Eleanor is 78 years old, enrolled in Medicaid as a dual-eligible (Medicare and Medicaid) Atlanta resident. Medicare is her primary payer for hospital services. She undergoes elective right hip replacement at Emory University Hospital.
For Medicare-Medicaid dual-eligibles, Medicare pays the hospital using Medicare DRG methodology. Medicaid is secondary, paying any cost-sharing obligations (Part A coinsurance, Part B coinsurance).
Eleanor's stay generates:
- APR-DRG 308 (Hip and femur procedures except major joint)
- Severity-of-illness level 1 (minor)
- Risk-of-mortality level 1 (minor)
For dual-eligible coverage, the Medicaid payment is limited to cost-sharing obligations. Medicare pays the bulk of the hospital payment. Medicaid pays the Part A coinsurance and any other cost-sharing as the secondary payer up to the Medicaid allowed amount, which is typically very limited for hospital services with Medicare primary.
This example illustrates that the DRG methodology described in this guide primarily applies to Medicaid-only patients. For dual-eligibles, Medicare DRG methodology dominates with Medicaid filling cost-sharing gaps.
Example 3: Aisha 32 Savannah delivery
Aisha is 32 years old, enrolled in Medicaid through Right from the Start Medicaid (RSM) pregnancy coverage in Savannah. She is enrolled in CareSource (a Georgia CMO). She delivers a healthy baby at Memorial Health University Medical Center.
Her delivery generates two separate DRG calculations:
Maternal delivery DRG. APR-DRG 540 (Cesarean delivery) or APR-DRG 560 (Vaginal delivery) depending on delivery type. For a routine vaginal delivery without complications:
- APR-DRG 560, SOI 1, ROM 1
- Relative weight approximately 0.55
- Memorial Health University Medical Center base rate approximately $7,500
- Base DRG payment $7,500 × 0.55 = $4,125
Newborn DRG. A separate DRG is assigned for the newborn:
- APR-DRG 626 (Neonate, birthweight > 2499g, normal newborn)
- SOI 1, ROM 1
- Relative weight approximately 0.20
- Newborn base DRG payment $7,500 × 0.20 = $1,500
Hospital-specific adjustments apply.
CareSource pays Memorial Health University Medical Center based on their negotiated rates, with state-directed payments under 42 CFR 438.6(c) ensuring the payment reflects DRG-based methodology. State-directed payment may include a maternity bundle payment that covers prenatal, delivery, and postpartum services on a bundled basis.
Example 4: Diana 35 rural Macon long stay
Diana is 35 years old, enrolled in Medicaid through Family Medicaid in Bibb County. She is admitted to Coliseum Medical Centers in Macon with severe diabetic ketoacidosis complicated by acute pancreatitis, hospital-acquired pneumonia, and prolonged ICU course.
Her stay is 28 days (18 in ICU, 10 on medical floor) with multiple complications.
The APR-DRG grouper assigns:
- APR-DRG 422 (Diabetes)
- Severity-of-illness level 4 (extreme)
- Risk-of-mortality level 3 (major)
Relative weight approximately 2.4. Coliseum Medical Centers base rate approximately $7,300. Base DRG payment $7,300 × 2.4 = $17,520. Hospital-specific adjustments increase this to approximately $20,000.
However, Diana's actual hospital costs are approximately $145,000 reflecting the prolonged ICU course. Cost exceeds the outlier threshold:
- DRG payment: $20,000
- Fixed-loss amount: $50,000
- Outlier threshold: $20,000 + $50,000 = $70,000
- Cost above threshold: $145,000 - $70,000 = $75,000
- Outlier payment (80 percent): $75,000 × 0.80 = $60,000
Total DCH or CMO payment to Coliseum Medical Centers: $20,000 DRG payment + $60,000 outlier payment = $80,000.
While $80,000 still falls short of the $145,000 actual cost, the outlier payment substantially reduces Coliseum's financial loss on this catastrophic case. Without outlier policy, the hospital would have lost $125,000 on Diana's admission.
Example 5: Tasha rural hospital cost report submission
Tasha is the Chief Financial Officer of a small rural hospital in southeast Georgia. The hospital is not designated as a Critical Access Hospital (it has 60 beds, exceeding the 25-bed CAH limit) but operates with thin margins like many rural hospitals in Georgia.
Each year, Tasha and her finance team prepare the hospital's cost report on Form CMS-2552-10. The cost report preparation involves:
Months 1-3 after fiscal year end. Compile general ledger data, reconcile financial statements, prepare cost center allocations.
Months 3-4. Apportion costs between Medicare, Medicaid, other payers, self-pay using statistical allocation. Prepare DSH calculation worksheets including Medicaid utilization, low-income utilization, and uncompensated care cost calculations.
Months 4-5. Complete IME and Direct GME worksheets (the hospital has a small family medicine residency program with three residents). Calculate wage index data.
Month 5. Finalize cost report and submit electronically to the Medicare Administrative Contractor and to DCH.
After submission, the cost report goes through:
Tentative settlement (year 1-2). The MAC reviews the as-filed cost report and proposes adjustments. Common adjustments include reallocation between cost centers, exclusion of non-allowable costs, adjustments to apportionment statistics.
Audit (year 2-3). DCH OA&C conducts an audit of the cost report, focusing on areas of state interest including DSH calculations, IME calculations, allocation methodology, and apportionment.
Final settlement (year 3-4 or later). All adjustments are finalized; the cost report reaches final settlement.
The cost report data drives Tasha's hospital's:
- DRG base rate (when DCH rebases inpatient rates)
- EAPG outpatient base rate
- DSH allotment under Section 1923
- UPL gap calculations for supplemental payments
- IME adjustment to DRG payment
- Direct GME payment
The annual cost report cycle is one of the most labor-intensive activities of Tasha's finance team and one of the most consequential for the hospital's financial position.
Example 6: CMO Z passthrough to hospital under DRG methodology
A Georgia CMO contracts with a regional hospital network. Under the CMO's contract:
- The CMO receives capitation from DCH at actuarially sound rates
- The CMO negotiates payment rates with hospitals in its network
- State-directed payments under 42 CFR 438.6(c) require minimum DRG-based payment to hospitals
For a specific inpatient stay at a contracted hospital:
DRG assignment. Encounter data shows APR-DRG 462 (Inflammatory bowel disease), SOI 3, ROM 2.
Relative weight. Approximately 1.5.
DRG-based minimum payment. Based on the hospital's DRG base rate of $7,400 and applicable adjustments, the DRG-based payment would be approximately $14,000.
CMO contracted rate. The CMO and hospital have negotiated a contracted rate that uses DRG methodology with negotiated base rate. The contracted base rate is $7,200 (slightly below the fee-for-service base rate of $7,400). Contracted DRG payment: approximately $13,600.
State-directed payment. The state-directed payment arrangement requires that CMO payment plus state-directed supplement equals at least the fee-for-service DRG payment of $14,000. State-directed supplement: $14,000 - $13,600 = $400.
The hospital receives:
- $13,600 from the CMO (negotiated DRG payment)
- $400 from the state-directed payment supplement
Total hospital payment: $14,000, matching the underlying DRG methodology floor.
This worked example illustrates how state-directed payments under 42 CFR 438.6(c) preserve DRG methodology as a floor even when managed care plans negotiate lower rates. Hospital advocacy for robust state-directed payments is a major issue in Georgia hospital payment policy.
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Frequently asked questions
What is a DRG?
A Diagnosis Related Group is a clinical classification system that assigns each inpatient hospital stay to one of approximately 1,300 groupings based on the patient's principal diagnosis, secondary diagnoses, procedures, age, sex, and discharge status. Each DRG has an associated relative weight reflecting the average resource intensity of cases in that grouping. Hospitals are paid by multiplying the relative weight by a base rate, yielding a prospective per-stay payment.
What is APR-DRG?
All Patient Refined DRG is a refined DRG grouper developed by 3M that adds severity-of-illness (SOI) and risk-of-mortality (ROM) subclasses to better capture clinical complexity. Each APR-DRG has four SOI levels and four ROM levels, allowing for more precise payment based on patient severity. Georgia Medicaid uses APR-DRG for inpatient hospital payment.
How is the base rate calculated?
The base rate is calculated using total Medicaid inpatient costs from hospital cost reports divided by total case-mix-adjusted Medicaid discharges. The result is converted to a per-discharge basis, adjusted for inflation between the cost report year and the payment year, and adjusted for state policy decisions. The base rate is updated periodically through rebasing using newer cost report data.
What is the hospital cost report?
The hospital cost report is an annual financial document hospitals submit on Form CMS-2552-10 covering the hospital's full fiscal year. It includes detailed cost data by cost center, charge data, statistics, apportionment between payers, DSH calculations, IME and Direct GME calculations, and wage index data. The cost report is the foundational financial document that drives Medicare and Medicaid base rate calculations and many supplemental payment programs.
When are cost reports due?
Cost reports are typically due 150 days after the hospital's fiscal year end. Extensions are available for cause. After initial filing, cost reports go through tentative settlement (preliminary review and adjustments) and final settlement (after audit and adjudication), which can take several years.
What is a cost-to-charge ratio?
A cost-to-charge ratio (CCR) is the ratio of cost to charges for a hospital cost center, calculated from cost report data. CCRs are used in outlier payment calculations (estimating cost from charges), DSH uncompensated care calculations, UPL gap calculations, and cost-based reimbursement for Critical Access Hospitals.
What is an outlier payment?
An outlier payment is a supplemental payment to the hospital when actual hospital costs vastly exceed the DRG payment. The calculation estimates hospital cost from charges using the CCR, compares to an outlier threshold (DRG payment plus a fixed-loss amount), and pays a percentage (typically 75-80 percent) of the cost above threshold. Outlier payments protect hospitals from catastrophic loss on extreme cases.
What are transfer adjustments?
When a patient transfers to another acute care facility during their stay, payment is adjusted to prevent double payment for the same care. The transferring hospital receives a per-diem payment rather than full DRG payment, calculated from the DRG payment divided by the geometric mean length of stay. The receiving hospital receives full DRG payment.
What is EAPG?
Enhanced Ambulatory Patient Grouping is the outpatient analog to APR-DRG, also developed by 3M. EAPG groups outpatient services into clinical groupings with associated weights. Each outpatient encounter is grouped and paid based on the EAPG weight multiplied by the hospital's outpatient base rate. Georgia Medicaid uses EAPG for hospital outpatient payment.
How are teaching hospitals paid differently?
Teaching hospitals receive Indirect Medical Education (IME) adjustments to their DRG payments. The IME adjustment recognizes the additional costs of training residents and is calculated as a function of the resident-to-bed ratio. Academic medical centers like Augusta University Medical Center and Emory University Hospital receive substantial IME adjustments. Teaching hospitals also receive separate Direct GME payments for resident salary and training costs.
Why are rural hospitals paid differently?
Rural hospitals may receive higher base rates or special methodology recognition to address fixed cost structures that are difficult to spread over lower patient volumes. The smallest rural hospitals may qualify for Critical Access Hospital status, which provides cost-based reimbursement at 101 percent of allowable costs rather than DRG-based payment.
What is a Critical Access Hospital?
A Critical Access Hospital (CAH) is a hospital designated under the Medicare Rural Hospital Flexibility Program with 25 or fewer beds, average length of stay 96 hours or less, located in a rural area, and providing 24-hour emergency services. Medicaid reimbursement for CAHs is cost-based at 101 percent of allowable costs rather than DRG-based.
How does DRG payment work for managed care patients?
For Medicaid patients enrolled in managed care plans (the four CMOs in Georgia), the CMO negotiates payment rates with hospitals. Plans may use DRG-based methodology mirroring fee-for-service, per diem, negotiated case rates, or bundled payments. State-directed payments under 42 CFR 438.6(c) often require minimum DRG-based payment to ensure the underlying methodology continues to define hospital payment within managed care.
What is the upper payment limit?
The Upper Payment Limit (UPL) under 42 CFR 447.272 is the limit on Medicaid payment to private and public hospitals, calculated as a reasonable estimate of what Medicare would have paid for the same services. The UPL is computed using cost report data. The gap between UPL and actual Medicaid payment is the basis for supplemental payment programs.
How does the cost report drive DSH?
The hospital cost report includes DSH calculation worksheets that determine Medicaid utilization, low-income utilization, DSH eligibility, and uncompensated care costs. The DSH allotment for Georgia is distributed to qualifying hospitals based on cost-report-derived calculations. DSH audit under Section 1923 reconciles Medicaid shortfalls and uncompensated care costs using cost report data.
How are children's hospitals paid?
Children's hospitals (such as Children's Healthcare of Atlanta) may receive specialized methodology recognizing pediatric specialty costs that adult-focused APR-DRG weights may not fully capture. This may include hospital-specific adjustments to DRG payment or specialized pediatric DRG weight schedules.
What is rebasing?
Rebasing is the periodic update of hospital base rates using newer cost report data. Between rebasings, base rates may be updated by inflation index. Rebasing reflects more current cost data and resets the financial baseline for hospital payment. Hospital advocacy with DCH frequently focuses on more frequent rebasing.
Who audits hospital cost reports?
The Medicare Administrative Contractor (MAC) audits cost reports for Medicare purposes. DCH's Office of Audits and Compliance audits cost reports for Medicaid purposes, focusing on areas of state interest including DSH calculations, IME calculations, allocation methodology, apportionment, and related party transactions. Both audits can result in adjustments affecting payment.
How does DCH coordinate with CMS Region IV?
CMS Region IV (based in Atlanta) oversees Georgia's hospital payment methodology through state plan amendment review, DSH audit findings review, UPL gap calculation review, GME payment review, managed care state-directed payment review, and methodology compliance review. DCH coordinates with Region IV on methodology changes and federal compliance.
Where can I get help understanding hospital billing?
For general Medicaid hospital coverage questions, contact DCH Member Services at 1-866-211-0950. For managed care hospital billing, contact your CMO (Amerigroup, CareSource, Peach State, Wellpoint). For hospital billing disputes, contact the hospital's patient financial services. For legal assistance with hospital billing issues, contact the Georgia Legal Services Program at 404-377-0701. Brevy at brevy.com provides educational information about how Medicaid hospital payment works. :::
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Contacts and resources
- DCH Medicaid Member Services: 1-866-211-0950
- Amerigroup Member Services: 1-800-600-4441
- Peach State Health Plan: 1-800-704-1484
- CareSource Georgia: 1-855-202-0729
- Wellpoint Georgia (through DCH enrollment broker): Contact DCH for current member services number
- DCH Office of Financial Management: Contact through DCH main line
- DCH Office of Audits and Compliance: Contact through DCH main line
- Georgia Hospital Association: 770-249-4500
- Georgia Department of Audits and Accounts: 404-656-2174
- Georgia Gateway: gateway.ga.gov
- DFCS eligibility offices: County-level offices throughout Georgia
- AARP Georgia: 1-866-295-7283
- 211 Georgia: 211 or 1-800-715-4225
- Georgia Legal Services Program: 404-377-0701
- Disability Rights Georgia: 404-885-1234 :::
Final notes
Georgia Medicaid hospital payment is built on two foundational frameworks that work together to translate clinical care into financial payment: the APR-DRG methodology that classifies each inpatient stay into a clinical grouping with associated payment weight, and the hospital cost report submitted annually on Form CMS-2552-10 that provides the audited financial data anchoring base rates, supplemental payment calculations, and validation of multiple Medicaid programs.
Understanding this framework is essential because hospital financial viability in Georgia (particularly for rural hospitals, safety-net urban hospitals, academic medical centers, and children's hospitals) depends on the adequacy of the underlying payment methodology and the accuracy of the cost report data that drives it. Hospital advocacy with DCH focuses heavily on base rate adequacy, rebasing frequency, outlier threshold calibration, APR-DRG weight updates, and managed care state-directed payment robustness.
For families, the framework is mostly invisible during a hospital stay. The patient experiences clinical care; the hospital documents the care; coding staff assign diagnoses and procedures; the APR-DRG grouper assigns a DRG; DCH or the CMO pays the hospital. But the invisible financial infrastructure determines whether the hospital that serves a community remains financially viable to continue serving that community.
Brevy at brevy.com is your digital ally for navigating the complex eldercare and Medicaid landscape. This guide is educational information about how Medicaid hospital payment works in Georgia. For specific billing questions about a hospital stay, contact your CMO, the hospital's patient financial services, or DCH Member Services. For legal assistance with hospital billing disputes, contact the Georgia Legal Services Program. Brevy is not legal or financial advice; consult qualified professionals for specific situations.