We developed two types of measures of financial vulnerability. We defined the first measure as the hospital's financial risk associated with serving low-income patients. Developed from hospital financial data for the three states, a hospital's financial risk was computed as the sum of Medicaid and local indigent care shortfalls and uncompensated care (including bad debt). For evaluation purposes, we also developed three measures of financial viability from financial data available on the Medicare cost report:
- Total margin net of Medicare DSH and the federal share of Medicaid DSH payments.
- A three-year average of total margin net of DSH.
- A composite index based on four indicators: total margin net of DSH, current ratio, cash flow to total debt, and fixed asset turnover.
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. We found that 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.
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. We used the FY1998 margins to simply our analysis of alternative allocation policies for FY 1998 DSH funds. In some analyses, we used related measures such as the ratio of revenues to expenses and income net of DSH payments.