The comparison of the measures for total margin and total margin net of DSH payments shows that while there is an overall correlation between the measures, the choice of measure has implications for individual hospitals, particularly those with the lowest margin levels. We believe total margin net of DSH payments is most consistent measure for evaluating how well DSH payments are targeted toward financially vulnerable safety net hospitals.
The composite measure identifies a somewhat different set of hospitals as financially vulnerable. The relationship between serving low-income patients and performance on this measure is not as strong as the relationship between low-income patients and total margins net of DSH. Similarly, the relationship between the composite index and current DSH funding is not as strong. This may be attributable in part to our choice of measures and the equal weighting given each measure. While we include the composite index rankings as a hospital class variable, we believe total margin net of DSH payments should be given more weight as an evaluation tool since, of the financial indicators we examined, it is most directly related to the impact of providing uncompensated care.
The individual measures of financial viability are relative stable from year to year. In particular, the consistency of the 1-year and 3-year total margin figures suggests that only one of the measures is needed in the analysis of alternative allocation methodologies. The three-year measure has the advantage of allowing us to include some hospitals for which we are missing FY 1998 margin data and of smoothing out some year-to-year differences for some hospitals. These advantages are most important if margins are taken into account in the allocation formula (rather than being used solely as an evaluation tool). There are, however, disadvantages to using the 3-year average. The first is the need to impute the FY 1997 and FY 1999 DSH payments in determining total payments net of DSH payments. The second is the partial completeness of the FY1999 cost report files and their "as filed" status. We are missing about 20 percent of the cost reports beginning in FY 1999. Given the funding reductions in the Balanced Budget Act of 1997, the use of a two-year average for some hospitals and a three-year average for others could bias the results. Using the FY1998 margins also simplifies our analysis of alternative allocation policies for FY 1998 DSH funds. Therefore, we use only the FY 1998 margins net of DSH funds in our simulations in Chapters 7 and 8.