Table 5.3 summarizes the FY 1998 values for the financial indicators. Included is both a simple mean across all facilities and a dischargeweighted mean. For comparison purposes, we include the cutoff value for the 10th percentile of hospitals as well as the median value for hospitals with Standard and Poor bond ratings of BBB+/BBB/BBB. The 10th percentile cutoffs are substantially below the median for the BBB rated hospitals. The latter are generally comparable to the median values for all hospitals.
Measure  Definition  Unweighted Mean  Discharge Weighted Mean  10th Percentile  Median for BBB rated hospitals* 

Total margin  (Net income [net patient revenue + other revenue  total operating expenses other expenses]) / total revenues  2.1%  4.7%  9.51%  3.7% 
Total margin net of DSH  (Net income  DSH)/ (total revenuesDSH)  0.2%  1.9%  12.98%  N/A 
Current ratio  total current assets/ total current liabilities  2.43  2.36  .89  1.96 
Cash flow to total debt  (net income + depreciation)/( total current liabilities + total longterm liabilities)  .274  .294  0.093  .171 
Fixed asset turnover  Net patient revenues/ total fixed assets.  2.56  2.21  1.13  2.16 
* Source: CHIPS, 2001.

Yeartoyear stability of the indicators of financial vulnerability

We found that the indicators of financial vulnerability are fairly stable across the three fiscal years. We summarize in Table 5.4 the correlation across fiscal years for each of the indicators. The current ratio and fixed asset turnover rate are somewhat more stable than the margin and cash flow to debt ratio.
Table 5.4
Financial Indicators: Correlation Across Fiscal YearsFY1997 to FY 1998 FY 1998 to FY 1999 Simple correlation Spearman rank correlation Simple correlation Spearman rank correlation Total margin .62 .70 .70 .74 Total margin net of DSH .65 .72 .70 .75 Current ratio .78 .81 .81 .83 Cash flow to total debt .65 .70 .67 .74 Fixed asset turnover rate .83 .84 .83 .84 To further explore the crossyear dynamics, we also divided each series of indicators into 10 equal parts (deciles), following the ranking for that series from hospitals with the weakest values to hospitals with the strongest values for the indicator. Thus, the first deciles always contain hospitals with the weakest values for the indicator. We then constructed transition matrices for each yeartoyear pair within the series. These matrices show in detail by deciles how the hospitals from the first year become redistributed in the second year. The decile redistributions mirror the statistical relationships described above, but provide more precise and detailed pictures of these relationships.
To illustrate, we show in Table 5.5 the matrix comparing hospital deciles for FY 1997 and FY 1998 for total margin net of DSH payments. Each row represents a decile (498 hospitals) of rankings in FY1997 while each column represents a decile (494 hospitals) of rankings in FY1998. Only 240 of the 498 hospitals (48%) that ranked in the first decile in FY1997 also ranked in the first decile in FY 1998. The percent of hospitals moving to the second and third deciles were 19% and 8 %, respectively. The remainder were either dispersed across the remaining deciles (12%) or were not reported in the FY 1998 data (13%). Of the 494 hospitals in the first decile in FY 1998, 16 % had been in the second decile in FY1997 and 12% had been in the third. Nine percent were not reported in the FY 1997 data. Thirtynine percent of the hospitals that were reported in both years fell below the 50th percentile in both years (1904 out of 4855).
Table 5.5
Comparison of Hospital Yearto Year Placement in Deciles
Total Margin Net of DSH: 1997 to 1998
19971998 transition matrix (hospitals); first decile has the lowest margins 19981997 Decile 1 2 3 4 5 6 7 8 9 10 Discontinued 1 240 95 38 16 10 8 6 7 4 11 63 2 79 151 116 57 29 19 13 5 8 8 14 3 58 96 107 93 59 27 12 17 9 10 10 4 24 38 88 102 119 62 35 9 8 7 7 5 13 39 51 91 95 91 55 28 21 11 3 6 4 30 25 61 76 113 97 48 27 10 7 7 9 13 18 33 56 85 100 113 51 18 3 8 7 6 19 15 16 49 104 141 98 36 7 9 8 14 16 16 11 28 44 88 181 89 4 10 10 4 10 9 19 6 25 36 84 284 11 New 42 8 6 1 4 6 3 2 3 10 19971998 transition matrix (percentages), first decile has the lowest margins 1998 1997 Decile 1 2 3 4 5 6 7 8 9 10 Discontinued 1 48% 19% 8% 13% 2 16% 30% 23% 11% 6% 4% 3 12% 19% 21% 19% 12% 5% 4 5% 8% 18% 20% 24% 12% 7% 5 8% 10% 18% 19% 18% 11% 6% 4% 6 6% 5% 12% 15% 23% 19% 10% 5% 7 4% 7% 11% 17% 20% 23% 10% 4% 8 4% 10% 21% 28% 20% 7% 9 6% 9% 18% 36% 18% 10 4% 5% 7% 17% 57% New 49% 9% 7% 5% 7% 4% 4% 12% Note: Only values greater than 3% are shown; 3% discontinued facilities in old total; 2% new facilities in new total


Consistency across the indicators for the same fiscal year

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 longterm 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 indicatorsTotal 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 crossindicator 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. Twentytwo 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
CrossIndicator Comparison of Hospital Placement
in Deciles Total Margin vs. Total Margin Net of DSH, 1998Hospitals (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


Summary by Classes of Hospitals

Table 5.8 summarizes the main financial indicators by lowincome patient utilization and three categories of hospitals based on the decile rankings for: FY 1998 total margins net of DSH, the threeyear average of total margins net of DSH, and the 3year average composite index. (See Appendix C for summaries of the financial indicators by other hospital classes). Columns 3 and 4 report the discharge weighted means for FY 1998 total margin and total margin net of DSH payments, respectively. For hospital classes with positive margins, the differences in total margins and total margins net of DSH are slight compared to the differences for hospitals with negative margins. For example, for hospitals with total margins net of DSH between 10% and 20%, the average total margin (net of DSH) increases from 14.0% to 7.0 % when DSH payments are taken into account.
Column 5 reports the 3year average (dischargeweighted) ranking for each hospital class based on margins net of DSH payments. The average dischargeweighted ranking is in the 54.8 percentile of hospitals. Column 6 shows the dischargeweighted average rankings for FY 1998 total margins net of DSH. The average rankings for each hospital class for FY 1998 are very similar to the rankings for a threeyear average. Column 7 reports the weighted average rankings based on the threeyear composite index are reported in Column 7.
Across the various utilization measures for lowincome populations, the financial indicator rankings of the hospitals serving a higher proportion of lowincome patients are lower than those of hospitals serving a relatively low proportion of lowincome patients. However, the changes in rankings as the proportion of lowincome patients increases are not consistently monotonic. For example, rankings based on total margins net of DSH are lower for hospitals with a lowincome patient ratio between .40 and .60 than for hospitals with low income patient ratios between .60 and .80.^{2} Our decision to remove only the federal share of Medicaid DSH in computing the margin may contribute to this result.
The relationship between Medicaid utilization and margins is evident in the lower rankings for hospitals with higher Medicaid utilization (and may be indicative of Medicaid shortfalls and uncompensated care). The dischargeweighted average ranking for hospitals one standard deviation above the mean Medicaid utilization for the state is 38.0% compared to 58.1% for those within one standard deviation from the mean. Overall, the difference in rankings across lowincome patient categories is greater using total margins net of DSH than the composite index. For example, the mean composite index ranking for hospitals one standard deviation above the mean Medicaid utilization rate is 41.7% compared to 52.6 % for those within one standard deviation from the mean.
Columns 811 report the distribution of FY1998 Medicare and Medicaid (federal share only) DSH funds. Key findings include the following:
 Except for the 32 hospitals with lowest margins (50 to 70 percent), the average FY 1998 DSH payment per discharge increases as the total margin net of DSH decreases.
 Across the total margin net of DSH deciles, the average FY 1998 DSH payment to the hospitals in Decile 1 is nearly twice the average payment to the hospitals in the Decile 2. Using the deciles for the 3year average net of DSH payments, the average per discharge DSH payment in Decile 1 is $1,378 compared to $701 in Decile 2. The concentration of DSH payments in Decile 1 is attributable to Medicaid payments. The average payment per discharge decreases with each decile through the eighth decile. The average DSH payment per discharge for hospitals in Deciles 910 is slightly larger than the payment to hospitals in Deciles 67.
 Medicaid DSH payments are more concentrated than Medicare payments in the hospitals in the lower margin deciles. Using the 3year average margin deciles, 61 percent of Medicare DSH and 82% of Medicaid DSH payments are concentrated in the hospitals in Deciles 15. Thirtyfive percent of Medicaid DSH payments go to hospitals in Decile 1 compared to 12% of Medicare DSH payments.
 While the average DSH payment per discharge declines as the composite index decile increases, the differences in payments across these deciles are not as great as those for the total margin deciles. The overall concentration of DSH payments in Deciles 15 is similar to the finding with respect to the total margin deciles (60% of Medicare DSH and 82% of Medicaid DSH). However, only 13.1% of Medicaid DSH payments go to hospitals in Decile 1 of the composite index.
Table 5.9 summarizes the financial indicators by state using the same columns as Table 5.8.
2. The lowincome patient ratio for this analysis is defined as the percentage of inpatient days attributable to Medicare SSI and Medicaid (nonMedicare) patients.

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