Germany will begin a change to per case payment by DRG from January 2003. It has selected the Australian DRG classification as the basis for patient categorisation, in preference to the many other DRG variants around the world. The main aim is increase control over expenditure. We describe some of the reasons for high levels of spending on hospital inpatient care, including the fragmented insurance system and supplier-induced demand. We summarise the reasons why Australian DRGs were selected, and note some of the benefits that will accrue for Australia.