BACKGROUND This study aims to explore hospital responses to incentives under the China Healthcare Security Diagnosis-Related Group (CHS-DRG) system, the first nationwide DRG-based bundled payment initiative in China, which is designed to stimulate the integration of health services and then contain the medical expenditure inflation. METHODS Zooming in all insured cases during November 2021 to September 2022, we assessed the impacts of CHS-DRG program under the regional global budget with price adjustment in Tianjin, China upon costs and its underlying mechanism through a difference-in-differences (DID) strategy. A total of 932 354 cases were admitted in the intervention group and 608 940 were in control. Key outcomes included per-admission spending, out-of-pocket payments, reimbursements and total monthly healthcare expenditures from a societal perspective. Additionally, the monthly number of admissions per hospital was analyzed to assess care intensity, while length-of-stay and 30-day readmission rates were employed to examine treatment efficiency and care quality. Robustness checks and common trends tests were performed to validate the findings. RESULTS The implementation of CHS-DRG led to a significant reduction in per-admission spending by 1.63% (P = 0.002) encompassing decrease in reimbursements of 2.45% (P < 0.001) and out-of-pocket payments of 2.50% (P < 0.001), which was mainly attributable to the cost structure changes, including declines in drug and treatment costs alongside increased spending on diagnostic tests. Notably, the comparative contraction of inpatient admissions was found (-10.90%, P = 0.006). All these in turn led to a 11.96% savings (P = 0.019) in monthly total healthcare expenditure born on the society, approximating to 6.86 million CNY per hospital. There was no evidence of reduction in length-of-stay or detrimental impact on care quality. Indications of patient selection, cost-shifting and up-coding were observed. CONCLUSIONS The study contributed a valuable learning experience for the design of DRG-based bundled payments with developing countries and underscored the importance of monitoring on provider behaviors to mitigate unintended consequences arising from strategic adaptations to the incentive mechanism, even the ongoing reform has initially achieved a short-term success in moderating the growth of healthcare expenditures.