Health Policy 109 (2013) 290–300

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Health Policy
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Improving patient-level costing in the English and the German ‘DRG’

system
Matthias Vogl a,b,∗
a
Helmholtz Zentrum München, German Research Center for Environmental Health, Institute of Health Economics and Health Care Management, Munich,
Germany
b
Ludwig-Maximilians-Universität München, Munich School of Management, Institute of Health Economics and Health Care Management & Munich Center
of Health Sciences, Munich, Germany

a r t i c l e i n f o a b s t r a c t

Article history: Objectives: The purpose of this paper is to develop ways to improve patient-level cost
Received 9 May 2012 apportioning (PLCA) in the English and German inpatient ‘DRG’ cost accounting systems,
Received in revised form 3 September 2012
to support regulators in improving costing schemes, and to give clinicians and hospital
Accepted 21 September 2012
management sophisticated tools to measure and link their management.
Methods: The paper analyzes and evaluates the PLCA step in the cost accounting schemes
Keywords:
of both countries according to the impact on the key aspects of DRG introduction: trans-
Hospital costing
Accounting parency and efficiency. The goal is to generate a best available PLCA standard with enhanced
Cost apportioning accuracy and managerial relevance, the main requirements of cost accounting.
Payment by results Results: A best available PLCA standard in ‘DRG’ cost accounting uses: (1) the cost-matrix
Healthcare resource groups from the German system; (2) a third axis in this matrix, representing service-lines or clinical
Diagnosis related groups pathways; (3) a scoring system for key cost drivers with the long-term objective of time-
driven activity-based costing and (4) a point of delivery separation.
Conclusion: Both systems have elements that the other system can learn from. By combining
their strengths, regulators are supported in enhancing PLCA systems, improving the accu-
racy of national reimbursement and the managerial relevance of inpatient cost accounting
systems, in order to reduce costs in health care.
© 2012 Elsevier Ireland Ltd. All rights reserved.

1. Introduction: DRG patient-level costing
Both the English health care resource group (HRG) sys-
tem [1] and the German diagnosis related groups system
(G-DRG) [2] is used for national reimbursement calculation,
and they influence management decisions in hospitals. The
accuracy of reimbursement and the practical relevance of
the standardized cost accounting schemes are dependent
on precise case-based cost apportioning. DRGs serve as
∗ Correspondence address: Helmholtz Zentrum München, German
Research Center for Environmental Health, Institute of Health Economics
and Health Care Management (IGM), P.O. Box 1129, 85758 Neuherberg,
Germany. Tel.: +49 89 3187 2608; fax: +49 89 3187 3375.
E-mail address: matthias.vogl@helmholtz-muenchen.de
the basis for budgeting and cost control in hospital man-
agement [3]. Thus, the full costs of the complete cycle of
care for a medical condition should be addressed through
accurate costing systems [4]. Comparative research on
DRG costing standards started in 2006 [5,6] and has been
developed recently in Europe and the U.S. [7,8]. Currently,
bottom-up micro-costing is the preferred method in terms
of accuracy and managerial relevance in the hospital and
general accounting literature [9–12]. But there is still a
lack of understanding on how to measure health care costs
accurately [7]. Imprecise costing systems make reason-
able clinical and economic management impossible, as well
as obstructing a reduction in health care costs. Thus, this
paper proposes a best available costing standard based on
national guidelines, to maximize accuracy and managerial

0168-8510/$ – see front matter © 2012 Elsevier Ireland Ltd. All rights reserved.
http://dx.doi.org/10.1016/j.healthpol.2012.09.008
 M. Vogl / Health Policy 109 (2013) 290–300
relevance, supporting regulators, clinicians and health care
management.
New English and German national costing systems were
introduced in 2003/04 for the calculation of case-based flat
rate reimbursement [13,14]. Since then, differentiated cost
apportioning based on actual resource use has become a
prerequisite for economically and medically sound DRGs
in both countries. While the G-DRG system refined its
patient-level bottom-up micro-costing system, two paral-
lel systems that are used for reimbursement calculation,
according to the cost accounting abilities of the partic-
ipating hospitals, evolved within the English payment
by results (PbR) system: (1) The mandatory top-down
approach allocates all general ledger costs to departments
or specialties. To further disaggregate to the services deliv-
ered, key cost drivers from hospitals that have introduced
sophisticated, voluntary costing schemes are used [15]. (2)
A more sophisticated, patient-based, bottom-up approach,
promoted by the Department of Health, is the patient-level
information and costing system (PLICS) [16], inspired by
activity-based costing. The calculation scheme run by the
Institute for the Hospital Remuneration System (InEK) and
PLICS run by the Department of Health are the two most
sophisticated systems developed for reimbursement cal-
culation in England and Germany. While the InEK scheme
is the only reimbursement calculation scheme permitted
and the common standard in Germany, PbR offers more
options. However, PLICS is the only patient-based reim-
bursement calculation officially defined as yet. Thus, these
two schemes are naturally the subject of comparison.
A third, but management-oriented scheme, the service-
line reporting/management (SLR/M), can be based on either
the top-down (1) or the bottom-up (2) costing approach,
and is only as good as the underlying costing approach.
It is a costing system up to the level of specialties, func-
tional areas, or pathways, where a service-line comprises
a certain patient group, staff, financing, and infrastructure
[17]. SLR is promoted by Monitor, the independent regu-
lator of NHS foundation trusts [17]. The calculation course
of top-down SLR is in general very similar to the volun-
tary “level 4 calculation” (the attribution of direct, indirect,
and overhead costs to services, procedures, or cases accord-
ing to the reference costing manual), as promoted by the
Department of Health, which is therefore equated with SLR
here [15]. However, in contrast to the G-DRG scheme and
the PbR reference cost manual, PLICS or SLR, although pro-
moted by the Department of Health and Monitor are not the
national standard yet. Further costing concepts are in place
to support hospital management in both countries. How-
ever, they are not used for reimbursement decisions and are
not part of national guidelines or straightforward imple-
mentation. Thus, these concepts are not explicitly analyzed
here. The most important concept that this paper does not
deal with, as it focuses on reimbursement relevant full cost
approaches, is contribution margin accounting in marginal
costing. Although of great managerial relevance, imple-
mentation of marginal costing would interact with national
guidelines and thus has to be performed separately. Even
so, the paper deals indirectly with some practical con-
cepts (e.g. SLR/M for performance management by Monitor
[17] or info/cost cubes, introduced by costing software
291
providers [18]), as they are a consequence of combining the
most sophisticated elements of G-DRG and PbR costing.
The implementation of the schemes in PbR is not
supervised or assessed restrictively, and is not case-based.
Monitor and the Audit Commission only supervise general
implementation, while the InEK in Germany checks plau-
sibility restrictively and case-based [17,19,20]. Whereas
all calculating hospitals in Germany receive a calculation
compensation for each case passing plausibility checks,
standard PbR calculation is mandatory. Still, the cost
accounting systems of both countries can be compared
well, as the underlying philosophy (activity-based patient-
level costing) of the G-DRG costing system is quite similar
to the English PLICS standard. However, costing manual
details and their practical implementation differ signif-
icantly (step-by-step costing manual in G-DRG costing,
rough guidelines in PbR costing).
The effect of cost accounting methods in different DRG
systems on health care quality is already identified [21].
The effect of patient-level cost accounting on the trans-
parency and efficiency of inpatient health care has still to be
analyzed. The patient-level cost apportioning mechanism,
although the most influential step in DRG cost account-
ing, has not yet been addressed in detail in the literature.
As this is the most difficult and resource intensive step in
cost accounting, the English, as well as the German system
offer several options to perform this stage [15,16,22,23].
Neither the German nor the English system can currently be
characterized as a best available standard in patient-level
cost apportioning. Although the practical implementation
and especially the costing manual standards of the G-
DRG system seem to be ahead in terms of accuracy and
implementation, some highly relevant details for improv-
ing patient-level cost apportioning were introduced with
PLICS and SLR/M in the English system. Thus, the systems
can complement one another to a best available costing
standard.
“How can standardized DRG cost accounting schemes
be improved further?” is still an unanswered question in
the hospital cost accounting literature and a current topic
of discussion on using SLR/M (top-down or bottom-up
based) and/or PLICS in English cost accounting and man-
agement, and also in the U.S. or German health care system
[7,24,25]. Practical approaches to cost apportioning are
essential to support regulators and to give clinicians and
hospital management sophisticated tools that mirror the
problems of decision-makers effectively, as health care
costs are increasing.
2. Conceptual framework and method
This paper claims not to analyze the whole inpatient
cost accounting systems of England and Germany for
national tariff calculation (therefore see [13,14,26,27]). It
focuses on the most controversial and demanding stage:
cost apportioning at patient-level. The conceptual frame-
work for this study is the G-DRG cost accounting scheme
according to the InEK handbook for calculation [8] and
the publications from the Department of Health and Mon-
itor on PbR costing and management schemes (SLR/M
and PLICS) [15–17,22]. The aim of the paper is to offer
292 M. Vogl / Health Policy 109 (2013) 290–300
solutions for enhanced cost apportioning accuracy to reg-
ulators and solutions for enhanced managerial relevance
to clinicians and hospital management. The basis of the
recommendations is the costing standards that are used
for reimbursement calculation in England and Germany,
which therefore have some kind of national costing guide-
line, and thus have official legitimation by e.g., the InEK in
Germany or the Department of Health to enable a broadly
accepted comparison.
First, patient-level cost apportioning is described and
analyzed for both the G-DRG and the PbR cost account-
ing schemes. Second, a comparative analysis detects the
parts in which each system is best, and offers solutions for
a best available patient-level cost apportioning standard,
with respect to accuracy and managerial relevance, the
requirements of a cost accounting system, based on lead-
ership, demand, decision, and behavior orientation [28].
The solution for a best available standard is based on
the logically highest costing accuracy and highest man-
agerial relevance of the costing system, with respect to
practical implementation abilities. Third, patient-level cost
apportioning is evaluated according to the impact on the
two major objectives of DRG/HRG introduction: increas-
ing transparency and efficiency [29,30]. The goals of DRG
introduction and the requirements for a best available cost-
ing standard are strongly related (Table 1). Transparency
is related to accuracy, and efficiency is related to man-
agerial relevance. Thus, the evolution goals of health care
costing are maximum accuracy and maximum managerial
relevance (clinical and economic). Sub-criteria, by which
the best available standard is evaluated, are derived from
standard costing literature [11,31] and have also evolved
in the health care costing literature [5,27,32] (see Table 1
and Suppl. 1).
3. English patient-level cost apportioning
The mandatory HRG costing scheme follows a top-down
approach and is defined by the costing manual from the
Department of Health [15], summarized by Epstein et al.
[14,26]. General ledger costs are apportioned until costs
are distributed to high-level control totals. Thus, costs are
apportioned directly to specialties, services or patients. If
this is impossible (e.g., for indirect costs and overheads),
cost pools consisting of related apportioned costs and
related direct cost-centers are set up to allocate and appor-
tion costs to specialties, services or patients on a time or
condition basis, according to the key cost driver of the
cost pool (service/activity statistics). The high-level control
totals then merge the costs attributed directly to specialties
and the costs apportioned over cost pools. Finally, the high-
level control totals are disaggregated to the type of point
of delivery: inpatient elective, inpatient non-elective, day
case, critical care, etc. The disaggregated high-level control
totals are the basis for national tariff calculation and the
endpoint of the mandatory calculation of all providers.
The more precise voluntary calculation, the basis for
resource profiles for HRGs, can be carried out in two differ-
ent ways: (1) by the standard voluntary “level 4 calculation”
possibly including SLR (mostly top-down); or (2) by PLICS
(bottom-up) [16]. Predefined cost pools like critical care or
ward (standard for PLICS) apply to all patient types (see the
right and bottom axes in Fig. 1) [16]. Costs on direct cost-
centers are allocated to patients (PLICS) or service-lines
(SLR), based on key cost drivers for intermediate products
such as radiography or operations. In PLICS, different mate-
riality by quality scores (MAQS) are assigned for cost pools,
representing the quality of the allocation methodology for
that cost pool, to measure overall cost apportioning qual-
ity (see the underlined key cost drivers in the cost-matrix
in Fig. 1) [16]. PLICS naturally attributes 100% of costs by
key cost drivers. Some costs (such as pharmacy and drug
costs for the ward pool or prosthesis in the operating the-
atre cost pool) on cost-centers or cost categories have to be
excluded and rearranged in the cost pool allocation, as the
cost pool concept does not completely conform to the cost-
theoretical separation of cost-centers and cost categories of
general ledger costs. The underlying philosophy (patient-
level and activity-based costing) of cost apportioning in
PLICS is the same as in the G-DRG scheme, described in
the following in Section 4 and Fig. 1.
Concerning SLR based on top-down costing (or level 4
calculation), a minimum of 80% of total costs and activity
has to be attributed to HRGs by direct, indirect, and over-
head costs for a successful calculation. Missing costs are
aggregated later at patient level for PLICS or finished con-
sultant episodes level for SLR/M to calculate standard costs
for an HRG. The grade of detail and methodology used to
calculate the resources needed for intermediate products is
not standardized and is based on the opportunities of the
feeder systems available. Intermediate products are usu-
ally linked to key cost drivers, developed from underlying
service/activity statistics or resource profiles, and are nec-
essary to distribute costs based on the underlying activity in
the service-line. Possible key cost drivers or relative value
units (RVUs) are actual usage, average usage, duration, or
service weights. Service-line and pathway are used as syn-
onyms here to assure a better understanding of the idea for
both clinicians and management. Both focus on a particular
medical condition and have clinicians in charge. Whereas
the service-line concept puts an emphasis on responsibil-
ity, pathways put an emphasis on the course of care.
4. German patient-level cost apportioning
Before the patient-level cost apportioning on all direct
cost-centers (patient contact) is performed, all DRG-
relevant costs on indirect cost-centers (no patient contact,
e.g., management) are apportioned to direct cost-centers
in a way that takes the service exchange between indi-
rect cost-centers and direct cost centers into account. Cost
drivers for the apportioning of costs between cost-centers
(e.g., the number of cases for the apportioning of adminis-
trative costs) follow the method of causation, and general
apportioning methodology has to be accurate [31].
The complete patient-level cost apportioning part of
the G-DRG cost accounting scheme can be described in a
single cost-matrix (Fig. 1). The scheme is mandatory for
all hospitals participating in the G-DRG calculation pro-
cess [20,23]. To create a uniform and clearly arranged
cost-matrix for every case, all cost-centers are allocated to
one of eleven cost-center groups, and all cost categories
 M. Vogl / Health Policy 109 (2013) 290–300 293

German Labor costs Material costs Infrastructure

cost-matrix costs

Cost

Implants and grafts

Material individual
Drugs individual
category

Drugs general

Non-medical
Physicians

technical
groups

Medical/

Material

Medical
Nursing

staff
Cost-
center
groups

Weighted
minutes Weighted
Care days minutes
Actual Ward
Weighted
Ward visits/ minutes/ Care days actual - Care days
minutes
minutes/ weighted usage/ Emergency
days minutes/ RVU/ days department
minutes/ study
days

Weighted hours
Actual
Intensive Weighted
usage/unit Weighted hours
care Actual minutes/weighted minutes/minutes/days hours Critical care
costs

Weighted Special
Dialysis Weighted dialysis - Weighted dialysis
dialysis procedure suites

Weighted
Weighted
Actual usage surgery
surgery times Weighted surgery
unit costs times and
and setup time Weighted surgery times times and setup
setup time
and setup time time
Operating unit costs/
fee for service/
rooms Actual average HRG/ fee for Actual
weighted time/ fee for service/weighted fee for service/
usage/ average service/ usage/unit Operating
time/study time/time/study based weighted time/
based unit costs procedure/ weighted costs time/study based
theatres
study based time/time/
actual study based actual
usage/ usage/
Anesthesia RVU/ Anesthesia RVU/
Anesthesia Anesthesia times Anesthesia times
times days/ times minutes/
study - Time in study based
Delivery Time in - based Time in delivery
Time in delivery ward delivery
ward delivery ward ward
ward

Cardiac Point Point

diagnostics/ Point
system/duratio system/
therapy Point system/duration system/duration
n duration
minutes/RVU/study Special
Endoscopic based minutes/RVU/ procedure suites
diagnostics/ minutes/ RVU/ minutes/
study based
therapy study based RVU/study

Radiology Point
Point system Actual Point system
Point system system
usage/unit
Laboratories actual usage/ costs actual usage/
actual usage/RVU actual
RVU RVU
usage/RVU

Point
Point
system/
Further Point system/duration system/duration
duration Other
diagnostics/
diagnostics
therapy actual usage/RVU actual usage/
actual
RVU
usage/RVU
Pharmacy services Implants *English cost
Therapies -
and drugs Prosthesis pools (PLICS)
* The cost pools outpatients, pathology, and non-clinical income are not shown in the cost-matrix as there is no equivalent/calculation in the G-DRG matrix;
key cost drivers corresponding to the PbR system are underlined

Fig. 1. Common costing framework in English and German DRG costing. Notes: The bold area indicates the common costing framework. The top and
left axes indicate the standardized German breakdown (cost-centers and cost categories). The right and bottom axes indicate the standardized English
breakdown (cost pools). Cost-centers and cost categories in each system are merged to the cost-center groups, cost category groups, or cost pools shown
in the cost-matrix. Costs are allocated to cases according to the key cost drivers for cost modules or cost pools shown in the cost-matrix. Underlined key
cost drivers belong to the English scheme.
Source: [16,23].
294 M. Vogl / Health Policy 109 (2013) 290–300

Table 1
The impact of patient-level cost apportioning on transparency and efficiency in the analyzed costing schemes.

Major objectives of DRG/HRG introduction and related Do the analyzed costing schemes achieve major objectives concerning
assessment criteria of standard cost accounting and accuracy level and managerial relevance? Author’s evaluation:
DRG costing literature:

Transparency (corresponding costing SLR PLICS G-DRG “Best available standard”

requirement: enhanced accuracy, evaluation
based on accuracy level)

(1) The ability to improve participation ++ + − +

rates in the calculations [27].
(2) The accurate disclosure of the standard −− 0 ++ ++
costing measures: cost categories,
cost-centers, and cost units, and the
ability to calculate at different
aggregation levels [11,31].
(3) The calculation with accurate key cost − + ++ ++
drivers for a transparent allocation of
direct and indirect costs [11].

Efficiency (corresponding costing requirement: SLR PLICS G-DRG “Best available standard”
enhanced managerial relevance, evaluation based on
managerial relevance)

(4) The reduction in variance of costs in + + + ++ Expected

DRGs, achieved by cost accounting
[20,41].
(5) The ability to reduce health care costs 0 + + ++
and resource use, managerial relevance
[22,30,62,63].
(6) Coordination and linkage between + 0 0 ++
clinical and economic management
(physician and management
perspective) [4]. The ability to calculate
service-lines or clinical pathways.

Categories: objective not achieved − −− 0 + ++ objective achieved.

are allocated to one of ten cost category groups (the
top and left axes in Fig. 1). Direct costs (compulsory
for implants, transplants, drugs, blood products, costly
external services, material sets, etc.) are allocated to the
patient according to documented utilization. In some cases,
an allocation according to a defined clinical distribution
model – a uniform distribution of costs on cases with the
same operations/procedures triggered by the article – is
allowed.
To allocate overhead costs and costs on primary cost-
centers that are not documented as patient based, defined
key cost drivers (weighted or un-weighted) in the cost
modules are used (see the key cost drivers in the cost-
matrix in Fig. 1). An un-weighted calculation is the uniform
distribution of costs on cases without case-related ser-
vice/activity statistics. The un-weighted calculation has
the disadvantage that services are weighted equally, inde-
pendent of actual resource use. Therefore, this possibility
is limited to a few modules in the cost-matrix, where
a weighted calculation is difficult to achieve (Fig. 1).
The weighted calculation of allocation bases, claimed in
most cost modules, requires case-related service/activity
statistics for each cost-center to distribute costs to cases.
Examples of compulsory key cost drivers for the allocation
of medical staff costs in cost modules are differentiated
operating room minutes, days on the ward, or point sys-
tems for diagnostics and radiology. It has to be emphasized
that the calculation of allocation bases is done at the
level of primary cost-centers/categories, not at the level of
cost-center/category groups, to get an exact allocation
based on the principle of causation.
5. Comparison of the patient-level cost
apportioning methodologies
To compare the G-DRG scheme and the PbR scheme,
only organizations that perform PLICS (and in some cat-
egories SLR) can be compared. According to a Chartered
Institute of Management Accountants study, 17% of all
providers in the PbR system participating in the survey
currently use highly detailed PLICS systematics; this is
comparable to the 16% of calculation hospitals in the G-
DRG system [20,33]. The remainder uses SLR or only the
mandatory costing guidelines, both less accurate, and not
patient based [33]. Since the G-DRG introduction in 2004,
the number of calculating hospitals in Germany rose from
144 to 261 in 2011, representing 8–16% of hospitals that
qualify for calculation [20,34]. Structure, ownership and
size of the calculating hospitals do not exactly represent
the German hospital market [27]. In general, there is an
overrepresentation of large and medium-sized hospitals
and an overrepresentation of private-non-profit and pub-
lic hospitals compared to private for-profit hospitals [20].
Over time, there were only minor changes of structure,
ownership, and size of calculating hospitals [20,34–40]. As
PLICS and SLR are recommendations but no official stan-
dards in England, official numbers on structure, ownership
and size are not available concerning the costing standard.
 M. Vogl / Health Policy 109 (2013) 290–300
However, surveys showed that 4% of English hospitals were
using PLICS only, 13% were using SLR and PLICS, and 55%
were using SLR in 2008 [33]. Foundation trusts were more
likely to have PLICS and/or SLR implemented than Non-
Foundation Trusts [33], possibly also allowing conclusions
on the representativeness concerning size and efficiency of
PLICS/SLR hospitals.
Currently both the PbR and the G-DRG costing scheme
reach a reduction in variance of cost (specified by the
DRG-grouping process and the calculated costs for each
DRG) of about 80% [20,41]. This indicates similar statisti-
cal performance of both cost accounting schemes at a high
level. While the InEK scheme excludes non-DRG-relevant
expenses and cost categories such as most amortizations,
private physician liquidation, capital costs, tax, insurance,
interest, and research and teaching, the PbR scheme is
closer to a full cost approach, as it excludes no com-
plete cost categories, but only special services explicitly
[42]. While in the PbR scheme the best available costing
standard should take all service areas into account, the
G-DRG scheme especially has to take capital costs into
account (currently developed [43,44]), to generate a more
valuable full cost approach independent from the fund-
ing source. One would intuitively think that activity-based
bottom-up costing is best, but not all studies fully confirm
that [24,45]. All costing schemes have still deficits concern-
ing transparency and efficiency that can be analyzed based
on their costing concepts (see Table 2).
6. A best available patient-level cost apportioning
standard
Materiality by quality score/relative value units/key cost
drivers. Participation rates in patient-level cost accounting
of around 16–17% in the PbR and G-DRG systems cause rep-
resentativeness issues in reimbursement calculation. The
technical and most common reason for non-participation
is that hospitals do not have the cost accounting prereq-
uisites to calculate accurately at the patient-level [7]. The
PbR system uses a stepwise integration of all providers in a
partially standardized accounting process according to the
individual accounting abilities of each provider (manda-
tory level 1–3, SLR and/or level 4, and PLICS). The G-DRG
system only offers participation at highest cost accounting
standards, following the detailed step-by-step manual, or
exclusion from national cost accounting. Each cost mod-
ule within the G-DRG cost-matrix uses relatively accurate,
unique key cost drivers, but offers only a few options
(see Fig. 1). This leads to a high level of standardiza-
tion, but gives no incentive to further improve the system
and raises an insuperable hurdle for many hospitals. In
comparison, PLICS uses the materiality by quality scores
(MAQS) to implement key cost drivers with different accu-
racy. Health authorities are able to enforce a certain MAQS
and incentivize hospitals to improve accounting systems
step-by-step, without excluding less advanced systems.
Introducing a system such as the MAQS can improve trans-
parency by labeling the accuracy of each calculation and
improve efficiency by enhanced measures and manage-
ment (see Table 2). Financial incentives according to MAQS
can be used to enforce an improvement in key cost drivers,
295
Cost-center groups G-DRG cost-matrix
y on x and y axis:
Ward see Fig. 1 for details
Intensive care
Operating rooms
…
Radiology
x
Cost category groups
Service-line 1 / pathway 1
Service-line 2 / pathway 2
…
z PbR service-lines (SLR)
Fig. 2. Three-dimensional cost-matrix. Notes: The three-dimensional
cost-matrix adds the PbR service-lines as a third dimension to the
G-DRG cost-matrix. It can be used at several aggregation levels (hos-
pital/department/DRG/patient). It combines service-line reporting and
patient-level costing to improve responsibility, allocation, and capacity
utilization.
as they are far from optimal in many cost modules in the
G-DRG cost-matrix and in the PLICS scheme.
Time-driven activity-based costing. TDABC for health care
providers, as currently promoted by Kaplan and Porter,
should be the long-term objective for both cost apportion-
ing schemes [7,11]. Especially with regard to indirect or
infrastructure costs, the English and the German systems
have much room for improvement with TDABC. In some
high-cost modules such as the operating room, TDABC can
actually be performed well in PLICS and the G-DRG scheme,
and has already shown managerial relevance in the health
care field [7,46]. Key cost drivers in the G-DRG scheme for
operating rooms already represent a nearly ideal TDABC
[23]. The necessary steps to improve activity-based cost-
ing in the operating room as an example are described by
Chapman and Kern [32]. TDABC has to be performed at least
at the level of single cost-centers (standard in G-DRG cal-
culation) to improve accuracy and managerial relevance.
An example: standard x-ray and advanced magnetic res-
onance tomography (MRT) do not have the same cost of
capacity when calculating the capacity cost rate for radiol-
ogy. Later on, cost-centers can be combined to cost-center
groups (e.g., radiology), as in the G-DRG cost-matrix. Trans-
parency and efficiency are improved by a more accurate
time-driven measure, enabling improved capacity utiliza-
tion and pathway management.
Patient-level information and costing system/service-line
reporting. The most important step in improving the
G-DRG and the PbR cost apportioning scheme is to com-
bine the idea of service-lines with the cost-matrix at
patient-level (see Fig. 2). Although service-line calcula-
tion does not look like the most advanced micro-costing
approach compared with bottom-up PLICS, it has one
big advantage: whereas PLICS or the G-DRG system
calculate the whole stay of a patient, independent of
296 M. Vogl / Health Policy 109 (2013) 290–300
Table 2
Definition and comparison of costing concepts.
Concept Definition
Cost-center A division of an organization that adds to its costs, e.g. a
ward of a hospital.
Cost category Kinds of costs in cost-centers, e.g., medical or nursing cost.
Cost pool Major cost groups in the PLICS scheme [16].
PLICS Patient-level information and costing system. All direct and
indirect costs of a stay are apportioned to the patient based on
the actual resource use of the patient (activity-based costing)
[16]. Key cost drivers to apportion direct costs are shown in
Fig. 1. PLICS in PbR and the G-DRG cost accounting scheme
make a calculation at different aggregation levels possible
(provider/department/DRG/patient), providing variable
granularity for diverse questions.
SLR/M Service-line reporting/management can be based on either the
top-down (e.g., mandatory costing) or the bottom-up (e.g.,
PLICS) costing approach. It is a costing system up to the level of
specialties, functional areas, or pathways, where a service-line
comprehends a certain patient group, staff, financing, and
infrastructure. SLR shows the financial and operational picture
of a service-line, whereas SLM offers further managerial
accounting. [17]
MAQS Materiality by quality score. A tool in the PLICS scheme to
assess the quality of key cost drivers to provide consistent
methodology and quality of cost apportioning in cost pools. An
example: care costs in critical care (medical salaries D 100 and
nursing salaries D 200) can be apportioned by either minutes
(gold standard: 100%) or bed days (silver standard: 50%). The
hospital has the ability to apportion nursing salaries by the
gold standard but medical salaries only by the silver standard.
The MAQS for the cost pool critical care is then:
(D 100 × 50% + D 200 × 100%)/(D 100 + D 200) = 83% [16]
RVU/key cost Relative value units. A weighting that reflects the resources
driver used for a certain service or procedure. It usually corresponds
to the key cost drivers to apportion cost in a cost pool. A
hypothetical example: endoscopy is worth double the amount
of points as sonography. [16]
TDABC Time-driven activity-based costing. A highly accurate allocation
with time as the dominant cost driver (or RVU) for each single
resource used [11].
Point of delivery The point of delivery separation, such as elective,
emergency, intensive care, etc. discloses costs for each
point of delivery.
Use in PbR and G-DRG schemes
PbR: see cost pools in Fig. 1(cost pools do not
follow the cost-theoretical separation between
cost categories and cost-centers).
G-DRG: see cost modules based on cost-centers
and cost categories in Fig. 1.
The G-DRG matrix with cost-centers and cost
categories is more distinct and at the same time
more flexible than PbR cost pools.
PbR: The PLICS system discloses costs at least
separated into the cost pools shown in Fig. 1. In
PLICS, a standard cost-matrix does not exist yet.
G-DRG: The G-DRG cost accounting scheme
enforces a more detailed disclosure in a
cost-matrix at patient-level.
The general concept of PLICS and G-DRG costing
is similar.
PbR: The service-line reporting focuses solely on
the costing of the service-line or clinical pathway,
which hardly allows other aggregation levels. A
disclosure of cost-centers or cost categories
beyond service-lines is not intended in SLR.
G-DRG: The concept of service-lines does not
exist in the G-DRG scheme. Only the complete
stay is calculated.
Service-lines make costing more relevant for the
area of accountability of single physicians and
support clinical pathway thinking.
PbR: Initial points for the allocation of costs to
cases are the cost pools. Concerning the allocation
of direct costs to cases, services, or procedures,
many options for key cost drivers, related to the
MAQS are offered.
G-DRG: Initial points for the allocation of costs to
cases are the cost modules. Concerning the
allocation of direct costs on cases, services, or
procedures, the cost modules in the G-DRG matrix
have very restricted choices of key cost drivers.
PbR is flexible while it defines the quality of the
allocation process. The G-DRG system is static,
offering high quality allocation.
PbR: The system uses SLR and PLICS in hospitals
to provide updates for key cost drivers and the
corresponding service/activity statistics or RVUs
every year (reference costs).
G-DRG: The system uses only actual
service/activity statistics of the calculating
hospital. However, key cost drivers in some cost
modules are derived from “historical” point
systems, originally developed for physician
reimbursement (see Fig. 1).
The G-DRG scheme is thus more accurate
concerning the calculation methodology but, out
of date in the preliminary definition of key cost
drivers.
PbR (PLICS) and the G-DRG scheme already use
TDABC in some cost pools or cost modules (see
the time-driven key cost drivers in Fig. 1).
TDABC is applicable in all cost modules/pools to
improve accuracy.
PbR: Yes
G-DRG: No
Used to represent different cost and service
structures of cases according to their point of
delivery.
 M. Vogl / Health Policy 109 (2013) 290–300
coherent services and procedures, the service-line calcu-
lation follows the principle of specialties and functional
areas, or clinical pathways. Clinical pathways are a con-
tinuous trend and have shown improvements in costs
and efficiency in multiple studies [47,48]. The introduc-
tion of pathways likely improves the quality of care,
increases the participation of physicians in costing [49],
reduces costs [47] and summarizes coherent services and
procedures. Thus, they have a higher explanatory power to
the physician in charge than the calculation of the whole
stay [7], as the clinical and economic relevance of the
scheme are linked. This accordingly improves comprehen-
sion among clinicians and management. For example, a
patient has a complicated heart operation and an appen-
dectomy during a stay. As the heart operation is the
dominant and most expensive procedure in the PbR or
the G-DRG systems, the DRG refers mainly to the heart
operation. A more detailed splitting in DRGs is undesir-
able in both systems because of manageability. Even so, the
difference in resource utilization and costs in such cases
can be analyzed by service-line reporting, which calcu-
lates the costs of several clinical pathways during a single
stay separately. The DRG stays the same, but non-intended
DRG costs can be disclosed and excluded. This leads to a
more accurate reimbursement calculation, while improv-
ing the managerial relevance of the system for clinicians.
The complicated heart operation and the appendectomy
then appear immediately as individual items, for example
in the cost module physician costs/operating room in the
cost-matrix, representing a service-line or pathway “major
heart operation” and a pathway “minor abdomen surgery”.
Thus, transparency is improved by a more accurate mea-
sure of the stay, and efficiency is improved by enabling
clinicians to manage the patient’s pathway in accordance
with their specialty and not in accordance with the general
stay, which they are only partly responsible for. Interac-
tion among responsible clinicians on economic issues and
interactions between clinicians and management are the
intended consequences. Few interactions between clini-
cians in charge are seen as one of the central problems in
German health care [25].
Cost-center/cost category/cost pool. Compared with the
few recommended cost pools in PLICS, the G-DRG cost-
matrix has more managerial relevance, as it discloses the
most relevant cost-center groups and cost category groups,
for which persons in charge can be found. A detailed step-
by-step manual enforces its implementation. Transparency
is logically improved. PLICS hospitals usually already use
similar matrices [17], and some hospitals even use PLICS
and SLR in parallel [33]. But a default cost- and resource-
allocation matrix and a detailed manual are still missing
in the English scheme. Cost pools, containing elements of
cost-centers and cost categories, are currently too impre-
cise to serve as a basis for transparent and efficient costing.
However, this is the first step to a standardized cost
accounting system that uses a patient-based cost-matrix
(see Fig. 1), but introduces a third axis to display the
service-lines/pathways within the stay of the patient (see
Fig. 2). The sequence of specialties and the related services
or procedures that the patient is exposed to during his stay
are shown on the third axis.
297
Point of delivery. The point of delivery separation can
lead to a great reduction in the variance of costs, otherwise
not reasonably mapped in the DRG grouping process. So
far many diagnoses and procedures can appear under the
same DRG, although hospitalization conditions are very dif-
ferent, such as for emergency fracture of the femoral neck
or hip osteoarthritis, which can both result in the standard
DRG for elective hip joint endoprostheses in the G-DRG sys-
tem. As PLICS and G-DRG calculations are patient-based, a
separation such as elective and emergency has implicitly
already occurred in the calculation. A separate disclosure of
point of delivery, adapted from the English PbR, is therefore
easy to achieve in the G-DRG system and logically improves
transparency and efficiency. Different case structures and
severities among hospitals are then displayed more accu-
rately. The point of delivery disclosure enables a reduction
in unintended DRG-splitting and keeps the system man-
ageable [50], while refining the grouping process.
To summarize, an ideal patient-level cost apportioning
in DRG/HRG cost accounting, using elements of both the
English PbR and the G-DRG costing, would: (1) enforce a
detailed and standardized cost-matrix (see Fig. 1), includ-
ing a detailed step-by-step manual on the procedural
methods as in the G-DRG system, (2) introduce a third axis
in this matrix (see Fig. 2) to separate clinical pathways
within a stay, which can be based on calculation proce-
dures such as the service-line reporting in the PbR system,
(3) enforce a scoring system for key cost drivers in the
cost-matrix to include more hospitals in the calculation,
but similarly enforce and improve a disclosed standard
of allocation, with the long-term objective of TDABC in
each cost module and (4) use point of delivery separation,
such as elective and emergency. Calculation modalities for
the introduction of all four steps already exist in the PbR
and the G-DRG systems. Enforcement of these four tasks
is only missing in the implementation of national costing
standards. Each of the four tasks can be introduced inde-
pendently from each other. They do not interact and have
proven to be technically mature in practice in either the
PbR or the G-DRG scheme.
7. Advantages and limitations of the best available
standard
Without this best available standard, the mea-
surement of process efficiency in terms of capacity
utilization is weak. Transparency is limited. Resource
planning and management at several aggregation lev-
els (customers/products/channels/segments/processes) is
a characteristic of a high-quality cost apportioning
methodology [11]. The best available standard enables
similar aggregation levels in hospitals: patient/DRG/DRG
group/department/service-line. However, there are costing
recommendations that are difficult to achieve in practice.
The introduction of MAQS and changes in the accepted key
cost drivers for cost modules will lead to discussions, as
different perceptions of the right estimate of the relative
value of services exist. High compliance and engagement
of clinicians and management are essential to implement
advanced activity-based costing at patient-level [32]. A
straight forward TDABC is just as accurate and reduces
298 M. Vogl / Health Policy 109 (2013) 290–300
compliance issues [11]. A detailed TDABC in combination
with SLR requires strong interaction between the cost-
ing department, clinicians, nurses and supportive services
to identify and disclose service-lines or pathways with
their services and processes. Standard pathways have to
be developed for general conditions. Work cycles and pro-
cesses for cost drivers and service-lines have to be defined
in a time-consuming process. Single services and pro-
cesses are already captured as a result of the nature of
patient-level costing. But they have to be labeled in order
to be allocated to the right service-line and the clinician
in charge. Thus, significantly improving the MAQS is very
time-consuming, but it can be accomplished step-by-step
for each single cost module. Then not only the actual ser-
vice/activity statistics, but also the underlying key cost
drivers receive updated calculations and are most accurate.
With the MAQS, a large number of hospitals can partic-
ipate, but their contribution to reimbursement and their
compensation are dependent on calculation quality; this is
a solution to the trade-off between the representativeness
and accuracy of the calculation sample. Although a patient-
based calculation delivering RVUs for all hospitals is based
on a non-representative calculation sample in the PbR
scheme, the G-DRG calculation as a whole might not be rep-
resentative, as the participation of efficient hospitals might
lead to a decreased reimbursement level, whereas ineffi-
cient hospitals have the incentive to reach an increased
future reimbursement level with their cases. This is an
indication that the calculation sample does not represent
the German hospital market in structure, ownership and
size. However, concerning the relation of ownership and
efficiency, literature results is inconsistent, depending on
the variables and methods analyzed [51–54], which might
reduce this problem.
By performing SLR at patient-level on the basis of a
cost-matrix, cost-shifting between specialties and expos-
ing cross-subsidies are detected, and improved capacity
utilization is conveyed. The clinician can see the costs of
pathways or costs in the specialties of other clinicians who
are also responsible for the patient during their stay. In
other words, the three-axis cost-matrix is the only way a
clinician knows: (1) for what costs he is responsible during
a stay and that (2) these costs are disclosed and itemized
in detail in cost-matrixes at different aggregation levels to
give the clinician an instrument to reduce them. TDABC
in the background makes the exact origin of costs in cost
modules visible to the clinician, improving capacity uti-
lization. Although not part of a national costing guideline,
a similar three-dimensional cost-matrix with the depart-
ment as the third dimension is already in practice in the
cost accounting software of the larger German hospitals
(e.g., departments as the third dimension in cost/info cubes
[18]). English hospitals that use SLR/M and PLICS in parallel
[33] already have the prerequisites for a three-dimensional
cost-matrix as proposed, German hospitals have these pre-
requisites at least for departments, as the most relevant
cost-centers have to be implemented for each department
by law (e.g., operating room orthopedics, operating room
surgery, etc.).
Each of the partial proposals of this best available
standard is self-contained and does not influence other
elements. Further introductory risks are as yet unknown.
Such a best available standard makes most other inter-
nal calculations obsolete. It is a new scientific solution for
creating a best available patient-level cost apportioning
standard with respect to the English and German cost-
ing schemes. Regulatory conditions such as the support of
SLR/M by Monitor and the support of PLICS by the Depart-
ment of Health might limit changes in the costing schemes
and can cause political compromises. Currently English
hospitals using PLICS and a bottom-up SLR, virtually using
a G-DRG-like cost-matrix and underlying key cost drivers
are closest to the promoted scheme. To increase efficiency
incentives and quality in PbR, best practice tariffs were
introduced [55]. Best practice tariffs have a high focus on
clinical pathways. Thus, they can easily combine PLICS or
G-DRG calculation with the service-lines necessary in the
promoted best available standard. So care areas with best
practice tariffs could be the frontrunners of the best avail-
able standard.
8. Conclusion
Improving and harmonizing inpatient cost accounting
in Europe is a current topic for stakeholders in the health
policy literature, especially for regulators [8]. The analy-
sis of several DRG systems in Europe [8] shows that this
new costing scheme, combining the most sophisticated
elements from both the English PbR scheme and the G-
DRG scheme is applicable in general in many European
countries. For example, the French DRG costing scheme
[56,57] or the Dutch DBC costing scheme [58,59] is close to
the English and German schemes and could benefit from
convergence to a unified system, considering elements
of this new proposed scheme by getting more accurate
and higher clinical and managerial relevance. An appli-
cation in the U.S. is more difficult as reimbursement is
based on claims-level cost estimates and departmental
cost-to-charge ratios there [60]. Still, as Kaplan and Porter
have shown with TDABC in the U.S. costing environment
[7], a reimbursement based on sophisticated patient-level
costing with elements of the promoted scheme is also
applicable in the U.S.
The mandatory adoption of the three-dimensional
cost-matrix (see Fig. 2) with the axes cost-categories, cost-
centers, and service-lines can greatly improve G-DRG and
PbR tariff calculation, without un-intentionally extend-
ing the DRG/HRG grouping process. The annual efforts
to improve inpatient cost apportioning in England and
Germany show that neither system can be seen as a best
available standard yet or actually pays for performance
[61]. The four tasks promoted show: the PLICS standard
lacks a clear methodology; accurate and enforced instruc-
tions are missing. In particular, the cost pools are not clearly
defined. In the G-DRG system, an easy to adapt scheme
and a national standard for service-line or pathway calcu-
lation are missing. Both costing schemes fail to integrate
the physician and the management perspectives. Three
policy implications can be drawn from this “best avail-
able” patient-level cost apportioning standard to support
regulators in health care reform discussions: (1) by improv-
ing the costing scheme, the gap between actual costs and
 M. Vogl / Health Policy 109 (2013) 290–300
reimbursement is reduced, resulting in a DRG system that
is perceived to be more accurate and fair, supporting the
compliance of all stakeholders; (2) improved national cost-
ing guidelines not only support efficient reimbursement to
reduce the cost problem that policy makers face in health
care in most countries. Their managerial relevance (e.g., the
linkage between the clinical and administrative perspec-
tive, enforcing mutual responsibility and relevance) might
drive efficiency to reduce health care costs even more and
(3) the proposed best available costing standard can con-
tribute to a convergence of DRG costing schemes in Europe.
Acknowledgment
Special thanks go to Dr. Anja Kern from the Health
Management Group, Imperial College Business School, Lon-
don, for providing valuable inputs on the English costing
schemes.
Appendix A. Supplementary data
Supplementary data associated with this article can
be found, in the online version, at http://dx.doi.org/10.
1016/j.healthpol.2012.09.008.
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