The use of cost accounting methodologies to determine prices in German health care

In many sectors of the health care system, prices at which providers are reimbursed by payers are not determined by the market mechanism, but rather by a defined administrative process. Depending on the sector, prices are set "politically" and are negotiated between different actors or are calculated according to a defined procedure, considering cost data from a sample of providers. The selected approach for price setting determines decisively, to which extent prices for certain services reflect the actual costs incurred for these services. A lack of reflection of actual costs can lead to unintended incentives for providers and therefore have implications on the allocative efficiency. Our analysis shows that in Germany's inpatient and outpatient sector, cost data is increasingly considered for price setting while in other sectors such as long-term care and rehabilitation, the use of cost data is still very limited. However, DRG-cost-weights in the inpatient sector insufficiently reflect actual costs incurred. Thus, decision makers in the German health care system rely more on cost data for price setting and improving the accuracy of cost calculations in order to increase allocative efficiency.