Input Pricing Under the Prospective Payment System (PPS)
As discussed in a precious article about PPS, we discussed labor, nonlabor, and capital costs. The purpose of this brief discussion is to explain the elements in more detail, especially because of its interrelationship with the wage index computed on S-3, Part II and Part III.
The labor portion of the DRG generally includes all labor-related costs. For instance, direct salaries, wages, and fringe benefits.
But what about the nonlabor portion? Nonlabor costs including supplies, drugs, utilities, and the nonlabor portion of contracts. This may also includes purchased service fees i.e. audit, legal, and accounting.
Capital costs are generally the costs of fixed and movable equipment and buildings. It also includes rent and interest expense.
Fore information, please see Wang et al., Management Strategies and Financial Performance in Rural and Urban Hospitals, 25 J. of Medical Sys. 241 (2001).
Also, take a look at Allen G. Herkimer, Understanding Hospital Financial Management 51 (2nd ed. 1986).