Introduction

Objective of the study

The characteristic of health services, being an example of universal services1, is associated
with a number of features (such as information asymmetry, adverse selection, risk selection
and moral hazard) that lead to market failures and the presence of externalities or
monopolization2. These features are universal for health care in virtually all socio-economic
systems. Characteristics of health services combined with their extraordinary social
importance requires the need of their regulation by the state.

One of the primary areas of possible state interference is the organization of the pricing
process. Pricing of health services are all activities performed to determine the price of
individual health services and to update them. State interference in this area may include the
determination of pricing procedure and the appointment of the institution responsible for this
process. The price of each of health services in such conditions is determined ex ante or ex
post and applies to all transactions between the payer and all providers.

The analysis of international experience shows that under regulated pricing often involves
setting prices on the basis of information on the costs of their provision3. Previous research
conducted by the author on the pricing of health services have shown that the proper basis for
determining the prices of such services is cost information set using cost accounting model
that meets certain criteria, including the rules of causality, efficiency and neutrality4.

Traditionally the analysis of the role of cost information in pricing of health services applies
only to how should the cost of service provision be determined. The research focus on the
methodology of cost accounting used in the pricing process. They show that the most accurate
cost accounting models, that guarantee the highest accuracy of pricing, are based on a bottom-

1
Defined as public services which are regulated and controlled by the state in order to ensure certain
conditions of their provision. See M. Raulinajtys-Grzybek, Rola rachunkowości regulacyjnej w procesie wyceny
usług powszechnych w Europie [The role of regulatory accounting in pricing of universal services in Europe],
Studia Prawno-Ekonomiczne, 86/2012, pp. 253-273.
2
See J.E. Stiglitz, Public sector economics, PWN, Warszawa 2004, s. 369-384; E. Nojszewska, System ochrony
zdrowia w Polsce [Health care system in Poland], Wolters Kluwer Polska, Warszawa 2011, pp. 23-26.
3
M. Raulinajtys-Grzybek, Rola rachunkowości regulacyjnej …, op.cit., HealthBasket reports,
http://www.ehma.org/?q=node/81.
4
More on cost accounting criteria in: M. Raulinajtys-Grzybek, Cost information as the basis for pricing of
healthcare services financed from public funds, in: J. Chluska (ed.), Cost management in the enterprises under
globalization part II, Sekcja Wydawnicza Wydziału Zarządzania Politechniki Częstochowskiej, Częstochowa
2012, pp. 101-123.

9
up microcosting approach, according to which the cost of each service is determined based on
its actual process5.

This traditional approach ignores the problem of how much costs the pricing itself, treating it
as an exogenous factor. Inclusion of the institutional approach in the analysis involves
identifying what are the transaction costs of the pricing process and which factors affect them.
Each pricing transaction, which does not take place in the open market, requires the
establishment of appropriate institutions resulting in positive transaction costs. The level of
transaction costs depends e.g. on the number of subjects involved in the pricing or on the type
of cost data collected. Some authors link the transaction costs in health care with institutional
arrangements, although their works are limited mostly to the specific situation in health care –
the organization of coordinated care6.

The study is the result of the research on the transaction costs of the pricing of health services.
Due to the fact that the regulations in terms of pricing include activities that lead to price-
setting of a good (health service), costs associated with these activities should be treated as
transaction costs. According to the assumptions of classical economics, the price should be set
at the intersection of the supply and demand curve under the assumption of full information
and rationality of market participants.

The primary objective of the study is to identify the transaction costs occurring during the
pricing of health services (and relate these cost to the institutional environment and the
organization of pricing transaction) and characterize the factors that affect the level of
transaction costs – to present the force and direction of the relationship between each of the
factors and the level of transaction costs.

An additional objective of this study is to link the conclusions about the level of transaction
costs to the conclusions regarding the accuracy of the cost-based pricing in health care. The

5
M. Raulinajtys-Grzybek, Cost accounting models used for price-setting of health services - An international
review, Health Policy, 118(3), 2014, pp. 341-353; T.D. West, A. Balas, D.A. West, Contrasting RCC, RVU, and ABC
for managed care decisions, Healthcare Financial Management, 50(8), 1996, pp. 54-61; D. Negrini et al., The
cost of a hospital ward in Europe: is there a methodology available to accurately measure the costs?, Journal of
Health Organization and Management, 18(2-3), 2004, pp. 195-206; S. Wordsworth et al., Collecting unit cost
data in multicentre studies. Creating comparable methods, The European Journal of Health Economics, 6(1),
2005, pp. 38-44.
6
See e.g. M. Place et al., An Analysis of the Transaction Costs of Total Purchasing Pilots. National Evaluation of
Total Purchasing Pilot Projects, Working Paper, King’s Fund, London 1998; A. Street et al., The Management
and Transaction Costs of Total Purchasing, in: N. Mays et al., The Purchasing of HealthCare by Primary Care
Organizations. An Evaluation and Guide to Future Policy, Open University Press, Buckingham 2001; S. Wyke et
al., Should General Practitioners Purchase Health Care for Their Patients? The Total Purchasing Experiment in
Britain, Health Policy, 65(3), 2003, pp. 243-259.

10
accuracy of the pricing system is related to the degree to which the price structure reflects the
actual cost structure of the health services. The institutional approach will add up to the
existing research on the importance of cost information for the pricing of health services.

The main research thesis is: The organization of the pricing of health services influences
the level of transaction costs of this process. The main research questions, based on which
the study was designed, were:

• What factors influence the level of transaction costs?

• What causes the occurrence of transaction costs of pricing?
• What characterizes the pricing systems in health care in different countries?
• How is the level of transaction costs correlated to the accuracy of pricing?
• What are the different stages of the pricing transaction and what resources are
involved in this transaction?

The content of the book

The structure of the book is as follows.

In the first chapter the health care has been characterized with particular emphasis on the
features that are associated with market failures in this area, as well as justify state
intervention. It also presents possible forms of intervention, including the regulation of
pricing system. The purpose of this chapter is to present arguments that are used to justify
state interference in the area of price-setting of health services.

The second chapter presents the pricing from the institutional perspective. For this purpose
the concept of transaction costs has been defined. The transaction costs occurring within
different transactions in health care have been classified - including the transaction costs of
the pricing transaction.

The third chapter is an introduction to the empirical part of the study. A detailed presentation
of the pricing issues has been made in the context of the whole reimbursement process, which
is defined as an organization of the way the funds flow from the payer to providers. The
organization of pricing is the result of how the reimbursement mechanism operates and what
the basic pricing objects on health care market.

The fourth chapter presents an empirical analysis of the pricing documentation from sixteen
countries. The purpose of the chapter is to characterize the pricing process and highlight the
differences between the analyzed countries.

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The fifth chapter completes the analysis of the pricing system in each country (as described in
the third and fourth chapters) by adding the dimension of transaction costs. In this chapter the
author compared the transaction costs in different countries as well as combined the
conclusions regarding the level of transaction costs with the conclusions on the accuracy of
the cost-based pricing system.

In the sixth chapter the author attempted to operationalize the transaction costs associated
with the pricing transaction. The case study method was used for this purpose. The exemplary
transaction was ad hoc price-setting of selected inpatient services held in Poland. Transaction
costs in this aspect are presented from the microeconomic perspective by including both the
costs incurred by the data providers as well as the pricing institution.

Research methods
The study on the identification of transaction costs is qualitative and consists of two basic
steps:

• characterizing of the transaction costs that occur during a pricing transaction in sixteen
countries studied, which perform cost-based pricing,

• exemplification of transaction costs in a selected country based on interviews with

representatives of the pricing institution and on the basis of a personal participation in the data
provision at the premises of one health care provider.

The first stage of the study included the analysis of available documentation on the pricing of
health services. In six countries (Australia, Austria, England, Germany, Sweden and the
United States) the analysis included both primary and secondary sources. In other cases, only
the secondary data sources have been used. Due to the fact that the national reports used were
prepared in the framework of research projects conducted by recognized international
organizations (the HealthBasket project was directed by the European Health Management
Association, and the EuroDRG project - by the European Observatory on Health Systems and
Policies) the level of reliability of secondary sources appears to be sufficient for the purpose
of this analysis.

Linking information on factors affecting the level of transaction costs with the factors that
determine the accuracy and precision of the pricing (that is – factors that determine the best
reflection of the cost structure in the price structure) required to carry out a supplementary
study. This study aimed to rank the factors identified as significant for transaction cost in
terms of their relevance for pricing accuracy. For this purpose, the survey method has been

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