In the early 1990s, DRG based hospital financing was introduced into some hospital districts in Finland. The 1993 state subsidy reform decentralising all hospital financing to municipalities, and the aim of improving productivity, were the driving forces for introducing DRG. This study addresses the pros and cons of DRG in hospital financing in the Finnish health care system and puts forward several solutions to avoid potential problems. We consider the objectives and optimal features of hospital financing systems in the context of the public health care system, where the public sector owns and finances hospitals. We analyse impacts of introducing different types of DRG based hospital financing systems, taking into account earlier experiences in countries such as Sweden and Norway, as well as Finnish system specific features. DRG could assist the Finnish municipalities to compare quality, costs and prices of services between hospitals, and related cost information might help them budget expenditure more accurately. System specific features mean that traditional uses of DRG in hospital pricing are not feasible in Finland. But some benefits of DRG could be exploited, for instance in the controlled contracts between municipalities and hospitals.