Background <p>Controlling the escalation of healthcare costs is a critical issue in China, which has led to a shift in the health insurance payment system from Fee-for-Service (FFS) to Diagnosis-Related Groups (DRGs). While DRGs contribute to cost containment, they also introduce moral hazards such as upcoding and undertreatment, which threaten the sustainability of insurance funds and public health.</p> Methods <p>This study conducted a lab-in-the-field experiment with real physicians to simulate the operation of FFS and DRGs payments, incorporating the uncertainty of medical outcomes.</p> Results <p>The results indicate that DRGs reduce overtreatment but increase the risks of upcoding and undertreatment, particularly under conditions of uncertainty, leading to greater losses for insurance funds. Most physicians demonstrated a strong altruistic inclination, prioritizing case severity over fairness and efficiency. However, the conflict between financial incentives and professional ethics creates a dilemma where adherence to medical norms may compromise patient welfare under the DRGs system.</p> Conclusions <p>This research underscores the necessity of regulatory interventions to address these moral hazards, thereby safeguarding our healthcare system and public health.</p>