Fee for services (FFS) is the prevailing method of payment in most Chinese public hospitals. Under this retrospective payment system, medical care providers are paid based on medical services and tend to over-treat to maximize their income, thereby contributing to rising medical costs and uncontrollable health expenditures to a large extent. Payment reform needs to be promptly implemented to move to a prospective payment plan. The diagnosis-related group (DRG)-based case-mix payment system, with its superior efficiency and containment of costs, has garnered increased attention and it represents a promising alternative. This article briefly describes the DRG-based case-mix payment system, it comparatively analyzes differences between FFS and case-mix funding systems, and it describes the implementation of DRGs in China. China's social and economic conditions differ across regions, so establishment of a national payment standard will take time and involve difficulties. No single method of provider payment is perfect. Measures to monitor and minimize the negative ethical implications and unintended effects of a DRG-based case-mix payment system are essential to ensuring the lasting social benefits of payment reform in Chinese public hospitals.