Major diagnostic categories (MDCs) are 23 mutually exclusive categories into which all possible principal diagnoses fall. The diagnoses in each category correspond to a single body system or aetiology, broadly reflecting the speciality providing care. Each category is partitioned according to whether or not a surgical procedure was performed. This preliminary partitioning into major diagnostic categories occurs before a diagnosis related group is assigned.

The Australian refined diagnosis related groups (AR-DRGs) departs from the use of principal diagnosis as the initial variable in the assignment of some groups. A hierarchy of all exceptions to the principal diagnosis-based assignment to a MDC has been created. As a consequence, certain AR-DRGs are not unique to a MDC. This requires both a MDC and an AR-DRG to be generated per patient.