OBJECTIVE: The economic burden of dementia combined with financial crisis in public health systems makes studying costs of dementia very important. In Germany only one “bottom-up”-study (150 patient records) of office based physicians demonstrated the burden of dementia disease. Our study is the first one in Germany using social health insurance data to demonstrate the costs of dementia for the social health insurance. METHOD: Direct costs incurred in the outpatient sector for diagnosis and treatment of dementia were calculated by means of analysis of health insurance data from the statutory health insurance fund (AOK) of the region Dresden/Riesa. At a defined date (1st July 1993) a random sample of 7490 insured persons were selected from the AOK master file. The following data was covered: personal data, prescription sheets, claim forms with diagnosis, diagnostic and therapeutic procedures. Information about hospital treatment was available from 1st and 2nd quarter of 1994. Plain-text diagnosis was transferred into ICD 10 code. Demented patients were identified by ICD items F00 to F09 and I60 to I69. A control group of non-demented patients identical to the dementia group in terms of age and sex was selected from the AOK sample using the matched pair method (two controls for each case). RESULTS: 327 of 7490 insured persons were diagnosed as demented (one-year prevalence: 4.4 %). Diagnostic procedures and non-pharmacological care interventions were ordered significantly more often in cases than in controls. 79.2 % cases vs. 44.2 % controls were prescribed at least one of the drugs associated with dementia. Office based physicians are more often visited by demented than by non-demented patients (23 vs. 90 visits per year). Hospitalization rate in cases was higher than in controls (11,0 vs. 5,1 %). This data allowed calculation of the total direct costs covered by social health insurance in one year for a demented patient: EUR 4080,64 (diagnostics EUR 1128,52; medication EUR 1906,94; non-pharmacological care intervention EUR 107,18; hospital EUR 977,13). Compared with controls the following attributed costs per case per year were found: Total EUR 823,80 (diagnostics EUR 247,22; medication EUR 387,65; non-pharmacological care interventions EUR 93,30; hospital EUR104,64) CONCLUSION: The data indicated, that demented patients are not treated properly. Recommendations for rational treatment of dementia should be implemented in the outpatient setting.