This paper is the first to investigate both the technical and cost efficiency of more than 1, 500 German general hospitals. It deals with two questions: (1) what is the average degree of hospital inefficiency and (2)how does this vary with ownership, patient structure, and other exogenous factors, which are neither inputs nor outputs to the production process. Identification and sepa- ration of controllable and uncontrollable sources of performance variation is essential to improve performance, also in view of public policies. The factors affecting cost and technical inefficiency will be identified by conducting a cross sectional Stochastic Frontier Analysis(SFA)which exploits the newly available and multifaceted German hospital statistics provided by the Statistical Offices of the Lander for the period from 2000 to 2003. The results of the cross sectional models will then be compared to a similarly distributed panel model. In order to compare a large number of heterogeneous hospitals, we weight the cases treated in each hospital according to their severity The weights are constructed by exploiting information about patients' diagnoses and lengths of stay. To check the robustness of the signs of the efficiency variables, we estimate their influence on both cost and technical inefficiency and compare the results over the three years under study. For the same reason, different specifications of both models with different samples are estimated. In a last step, hospital specific efficiency scores are estimated and used to compare hospital rankings across different distributional assumptions and models The German hospital industry is characterised by the simultaneous existence of ership types. Following the definition of the Statistical Offices of the Lander, three hospital types occurring in Germany are distinguished: public, non-profit, and private hospitals. Non-profit hospitals are also private, i.e. non-public, but, in contrast to private hospitals, they are run by non-profit organisations such as churches or miners'associations. Thus, in this paper the term private is used synonymously for ' private for-profit. Over the last ten years an increasing num- ber of public hospitals have been privatised in Germany. From 1992 to 2003, the share of all public hospitals has decreased from 45% to 36% whereas the share of all private hospitals has increased from 15% to 25%. The share of non-profit hospitals has remained relatively constant over the same period of time. Public funding has decreased steadily for all ownership types, which forces hospitals to invest independently. From 1972 to 2003, the ratio of hospitals'financing resources relative to all expenses of the statutory health insurance decreased from 27% to 7. 2%(Clade, 2004 Since non-profit hospitals are, by definition, not allowed to accumulate profits(except for reinvest ments), they have more difficulty than private hospitals to take up credit from the capital market On the other hand, non-profit institutions are exempt from corporation tax and pay a reduced value-added tax rate of 7% for all other goods($$3-5 UStG and $$51-68 AO). Public hospitals face similar financial difficulties where debts are still publicly compensated in most cases Inefficiency is defined as the hospitals deviation from the estimated or constructed cost or production frontier. Given exogenous input prices and demand driven outputs, the cost frontier maps minimal costs possible. Following Farrell(1957), the production frontier maps maximum feasible output given input use. This definition of inefficiency is from an input-oriented point of view since we assume output being more easily influenced by German hospitals than inputs which holds especially for the number of beds and prices. When measuring cost efficiency, it is assumed that all hospitals seek to minimise costs(Coelli et al., 2005; Kumbhakar and Lovell, 2000) imposed and it is not necessary to know input prices; input quantities are suficien Our need to be When estimating technical efficiency, no assumptions about cost minimising behaviour need to be The relative performance of public versus private producers has been examined from different theoretical perspectives(e. g. Agency and Property Rights, Public Choice, and Organisation The- ories). Following different approaches, they all conclude that private firms produce more efficiently than public firms in unregulated markets(Villalonga, 2000), partly due to the duality between profit maximising behaviour and efficiency. Regarding non-profit hospitals'behaviour, Philipson 1Krankenhausstatistik: Grund- Diagnose- und Kostendaten, 2000-2003, Antrag am Forschungsdatenzentrum der Statistischen Landesamter Nr. 254-2005This paper is the first to investigate both the technical and cost efficiency of more than 1,500 German general hospitals. It deals with two questions: (1) what is the average degree of hospital inefficiency and (2) how does this vary with ownership, patient structure, and other exogenous factors, which are neither inputs nor outputs to the production process. Identification and sepa￾ration of controllable and uncontrollable sources of performance variation is essential to improve performance, also in view of public policies. The factors affecting cost and technical inefficiency will be identified by conducting a cross sectional Stochastic Frontier Analysis (SFA) which exploits the newly available and multifaceted German hospital statistics provided by the Statistical Offices of the L¨ander for the period from 2000 to 2003.1 The results of the cross sectional models will then be compared to a similarly distributed panel model. In order to compare a large number of heterogeneous hospitals, we weight the cases treated in each hospital according to their severity. The weights are constructed by exploiting information about patients’ diagnoses and lengths of stay. To check the robustness of the signs of the efficiency variables, we estimate their influence on both cost and technical inefficiency and compare the results over the three years under study. For the same reason, different specifications of both models with different samples are estimated. In a last step, hospital specific efficiency scores are estimated and used to compare hospital rankings across different distributional assumptions and models. The German hospital industry is characterised by the simultaneous existence of various own￾ership types. Following the definition of the Statistical Offices of the L¨ander, three hospital types occurring in Germany are distinguished: public, non-profit, and private hospitals. Non-profit hospitals are also private, i.e. non-public, but, in contrast to private hospitals, they are run by non-profit organisations such as churches or miners’ associations. Thus, in this paper the term ‘private’ is used synonymously for ‘private for-profit’. Over the last ten years an increasing num￾ber of public hospitals have been privatised in Germany. From 1992 to 2003, the share of all public hospitals has decreased from 45% to 36% whereas the share of all private hospitals has increased from 15% to 25%. The share of non-profit hospitals has remained relatively constant over the same period of time. Public funding has decreased steadily for all ownership types, which forces hospitals to invest independently. From 1972 to 2003, the ratio of hospitals’ financing resources relative to all expenses of the statutory health insurance decreased from 27% to 7.2% (Clade, 2004). Since non-profit hospitals are, by definition, not allowed to accumulate profits (except for reinvest￾ments), they have more difficulty than private hospitals to take up credit from the capital market. On the other hand, non-profit institutions are exempt from corporation tax and pay a reduced value-added tax rate of 7% for all other goods (§§3-5 UStG and §§51-68 AO). Public hospitals face similar financial difficulties where debts are still publicly compensated in most cases. Inefficiency is defined as the hospital’s deviation from the estimated or constructed cost or production frontier. Given exogenous input prices and demand driven outputs, the cost frontier maps minimal costs possible. Following Farrell (1957), the production frontier maps maximum feasible output given input use. This definition of inefficiency is from an input-oriented point of view since we assume output being more easily influenced by German hospitals than inputs which holds especially for the number of beds and prices. When measuring cost efficiency, it is assumed that all hospitals seek to minimise costs (Coelli et al., 2005; Kumbhakar and Lovell, 2000). When estimating technical efficiency, no assumptions about cost minimising behaviour need to be imposed and it is not necessary to know input prices; input quantities are sufficient. The relative performance of public versus private producers has been examined from different theoretical perspectives (e.g. Agency and Property Rights, Public Choice, and Organisation The￾ories). Following different approaches, they all conclude that private firms produce more efficiently than public firms in unregulated markets (Villalonga, 2000), partly due to the duality between profit maximising behaviour and efficiency. Regarding non-profit hospitals’ behaviour, Philipson 1Krankenhausstatistik: Grund- Diagnose- und Kostendaten, 2000-2003, Antrag am Forschungsdatenzentrum der Statistischen Landes¨amter Nr. 254-2005. 2