Neither the current DSH allocation policies nor the alternatives that we examined in the analysis target DSH payments in a way that is strongly correlated with net income. This is an issue that warrants further investigation and understanding. The different Medicare formulae and the Medicaid DSH program's flexibility may provide mechanisms to target financially vulnerable hospitals in a way that a single formula-driven allocation may not. Targeting financially vulnerable safety net hospitals may require taking into consideration more factors than the amount of care a hospital provides to low-income patients. A multi-variate analysis of the factors affecting a hospital's financial risk and its overall financial status using a broader set of hospitals could help identify additional factors that should be considered in an allocation policy.
Allocations based on the proportion of care provided to low-income patients (e.g. revenues) result in very different distributions than an allocation based on financial risk (Medicaid shortfalls, uncompensated care and bad debt). Financial risk, however, is not the same as financial viability (i.e., total margins net of DSH payments). Some hospitals with substantial financial risk also have positive margins. The results across all three states highlighted the need to clarify the policy goals for DSH funding. The key issue is the extent to which subsidies should be given to hospitals that serve low-income patients but do not incur financial risk or are able to cover their risk with other revenues. A closer examination of the hospitals with substantial gains or losses in moving from an allocation policy based on serving low-income patients to incurring financial risk might help clarify the issues. This examination should consider the role of other federal subsidies such as the Medicare indirect teaching adjustment in explaining why some hospitals with substantial financial risk appear to be in a strong financial position.