The way the digital stations around here work, is they broadcast both - and the receiver in my car seem to be intelligent enough to downgrade if the digital signal is too weak.
Basically, the radio starts off sounding like poo as it starts off in analog, but then as it 'locks in' (for lack of a better term) it switches over to digital and thus sounds much better. If I drive into a tunnel or such, the digital signal will drop and the radio will (without gap, mind you) drop back to analog, and switch back up when the digital signal is again stable.
I think what it does is it receives both, and keeps a running error talley on the digital stream. It uses this to determine if the signal is stable enough to use. I would expect even better performance if the streams were buffered for a second or two, but this isn't the case (at least the analog signal isn't - verified with my "real" radio)