Background/Aims: Payments to hospital providers are not solely driven by the resource requirements of individual patients, but also reflect payment policies specific to the health care payer and hospital provider. For example, Medicare adjusts payments to hospitals according to facility and local geographic characteristics that may not be relevant to studies estimating the associations of individual patient characteristics with true costs of care. We developed a method to estimate hospital costs using the diagnosis related group (DRG) payment weights on which Medicare bases hospital payments that reflect patient medical and surgical acuity. Our purpose was to compare cost estimates for hospital stays calculated using DRG payments weights to actual Medicare hospital payments. Methods: We used Medicare Provider Analysis and Review (MedPAR) files and DRG weight tables linked to participant data from the Study of Osteoporotic Fractures (SOF) from 1992 through 2010. Participants were women age 65 and older recruited in three metropolitan and one rural area of the United States. Standardized hospital costs were estimated using DRG payment weights for 1,397 hospital stays (assigned 182 separate DRG codes) for 795 SOF participants for one year following a hip fracture. Cost estimates based on Medicare payments included Medicare and secondary insurer payments, copay and deductible amounts. Results: The mean (SD) of inpatient DRG-based cost estimates per person-year were $16,268 ($10,058) compared to $19,937 ($15,531) for MedPAR payments. The correlation between DRG-based estimates and MedPAR payments was 0.71, and 51% of hospital stays were in different quintiles when costs were calculated based on DRG weights compared to MedPAR payments. Conclusions: DRG-based cost estimates of hospital stays differ significantly from Medicare payments, which are adjusted by Medicare for facility and local geographic characteristics. These findings also may apply to studies estimating associations of individual patient characteristics with health care costs across multiple payers (such as HMORN members) who have different payment policies based in part on local geographic and health care system characteristics (including contracts between specific payers and hospital providers). DRG-based cost estimates may be preferable for analyses when hospital, payer, and local geographic variation could bias assessment of associations between patient characteristics and costs.