The development and evaluation of hospital performance measures for policy analysis.

The purpose of this study was to develop and evaluate hospital performance measures to include aspects of hospital behavior beyond the traditional use of hospital profit margins for policy analysis. A number of measures have been used in the literature that are purported to reflect a variety of hospital behaviors. The reliability and validity of these and new measures were assessed using descriptive statistics and factor analysis on a sample of hospitals for a 3-year period. The sample consisted of all hospitals for which there were Medicare Cost Report and balance sheet data during the federal fiscal years 1987 through 1989. Using a subset of three hospital groups, 33 measures were evaluated, from which five were selected to represent the critical aspects of hospital performance important for policy analysis. The measures are: TEM, a new technical efficiency measure using data envelopment analysis techniques; the current ratio, depicting short-term financial performance; the ratio of longterm debt-to-net fixed assets, representing long-term viability; total margin, portraying profitability; and Medicare margin, characterizing Medicare's contribution to hospital financial position. Each represents different aspects of hospital efficiency and financially viability.