Knee replacement is a common surgical procedure performed to relieve pain and disability from degenerative osteoarthritis. This study evaluates the ability of ten European diagnosis-related group (DRG) systems to explain variations in costs or in length of stay for knee replacements. We assessed three different models in predicting variation of cost and length of stay. The first model, MD, included only DRG groups as explanatory variables; the second, MP, used a set of patient-level variables; and the third, MF, included all variables from both MD and MP. The total number of DRGs used to group knee replacement is low, ranging from two to six. All DRG systems except one differentiate between primary knee replacement and revision surgery. Considerable differences exist in the rate of revision surgery. There is also high variation in mean cost (from € 3809 to € 8158) and in mean length of stay (LoS) (from 4.2 to 13.6 days). The explanatory power of DRGs varies from 21.5 to 72.5% with values of around 40% in most countries of the study. Findings suggest that DRG systems could be enhanced either by the inclusion of patient-level variables, by the use of measures of clinical outcome or by improving cost and administrative information. Copyright © 2012 John Wiley qqqamp; Sons, Ltd.