Analysis of the Joint Distribution of Disproportionate Share Hospital Payments. Consistency across the indicators for the same fiscal year

09/01/2002

We report the Spearman rank correlations across the indicators for FY 1998 in Table 5.6. Total margin net of DSH is highly correlated with the cash flow to total debt indicator. Both measures are driven largely by net revenues. At the same time, the relationship between these two measures and the remaining two - current ratio and fixed asset turnover - is much weaker or nonexistent. This reflects the fact that balance sheet dynamics, especially the long-term one, may not necessarily coincide with the dynamics of current net revenues. Finally, current ratio and fixed asset turnover also appear to be independent of one another. In sum, the weak correlation between most of the financial indicators supports the theoretical understanding that each indicator provides a measure of a different domain of a hospital's financial viability (profitability, liquidity, capital structure, and asset efficiency) and should be thus considered jointly in evaluating a hospital's overall financial health. We are not concerned by the correlation between total margin net of DSH and total cash flow to debt since both reflect what we believe is the most important measure of financial viability: net income. Including both indicators is a way of giving greater weight to net income.

Table 5.6
FY 1998 Financial Indicators: Spearman rank correlation between indicators
  Total margin net of DSH Current ratio Cash flow to total debt Fixed asset turnover rate
Total margin net of DSH 1.00 .30 .77 -0.04
Current ratio .30 1.00 .42 -0.05
Cash flow to total debt .77 .42 1.00 0.04
Fixed asset turnover rate -0.04 -0.05 0.04 1.00

To further explore the cross-indicator dynamics among the indicators of financial vulnerability, we also divided each series into 10 equal parts (deciles), following the ranking for that series from hospitals with the weakest values of an indicator to hospitals with the strongest values of the indicator. We then constructed comparison matrices for each pair of indicators. To illustrate, we show in Table 5.7 the matrix comparing the FY 1998 deciles for total margin with total margin net of DSH. The results confirm that while the first and tenth deciles are relatively stable, a number of hospitals move into a different decile when the total margin is adjusted for DSH payments. Twenty-two percent of the hospitals in the first decile for total margin move to the second decile of the total margin net of DSH ranking. About 90 percent of the hospitals (2215 of 2470) in the 50th percentile or lower on the total margin ranking are also in the 50th percentile or lower on the total margin net of DSH ranking.

Table 5. 7
Cross-Indicator Comparison of Hospital Placement 
in Deciles Total Margin vs. Total Margin Net of DSH, 1998
Hospitals (N); First deciles have the lowest ratios                                                                                             TMnDSH
TM                      
Decile 1 2 3 4 5 6 7 8 9 10
1 387 107                
2 49 262 183              
3 24 59 187 224            
4 12 19 57 153 253          
5 8 15 23 59 134 254 1      
6 7 7 23 34 58 139 226      
7 3 11 8 10 28 72 197 165    
8 1 6 8 9 12 20 49 261 128  
9 2 7 5 4 7 5 16 63 327 58
10 1 1   1 1 4 5 5 39 436
New         1          
Hospitals (Percentage); First deciles have the lowest ratios                                                                             TMnDSH
TM Decile 1 2 3 4 5 6 7 8 9 10
1 78% 22%                
2 10% 53% 37%              
3 5% 12% 38% 45%            
4   4% 12% 31% 51%          
5     5% 12% 27% 51%        
6     5% 7% 12% 28% 46%      
7         6% 15% 40% 33%    
8           4% 10% 53% 26%  
9               13% 66% 12%
10                 8% 88%
New         100%          
Note: Only values greater than 3% are shown

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