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Through calculations and comparison with experimental results, we verify that loss introduced by an etched photonic crystal in a vertical-cavity surface-emitting laser (VCSEL) contributes significantly to the transverse optical confinement and supported modes. The optical loss is examined theoretically using a simple waveguide model from the scalar Helmholtz equation. The modal loss of fabricated lasers is extracted from the observed spectral-mode splitting. The effect of modal loss on the slope efficiency and modal behavior is examined. The model is found to be consistent with experimental measurements, and provides a means of accurate design of single-mode photonic crystal VCSELs.