Staff turnover in nursing homes has been studied for many decades, with researchers focusing on the organizational and staff characteristics contributing to it and its impact on quality of care. It has been assumed by most that it is also costly. This study is the first, to our knowledge, to show that the association between turnover and costs is negative; i.e. on net, turnover is associated with cost savings. Our ability to detect this relationship is due to two factors: we estimated the net relationship between turnover and costs, accounting for both direct and indirect costs, and we employed instrumental variables techniques to address the potential endogeneity between costs and turnover.
One should not be surprised by this finding. If turnover were on net costly, rational nursing home managers would have identified and at least attempted to implement strategies to eliminate it, because by doing so they would have saved money (and possibly improved quality). In the long run, rational economic agents are expected to operate at the minimum of their cost curve, and any practice that deviates from it will not be sustained. The fact that turnover has persisted for decades is an indication that for the majority of nursing homes it is part of their cost minimizing strategy. Our finding only confirms this.
Furthermore, we find that the net cost impact of turnover is not negligible. An increase in turnover of ten percentage points, e.g. from 50% to 60%, is associated with a 2.9% cost savings, close to $170,000 annually for an average facility. A nursing home choosing between operating at the 25th percentile versus the 75th percentile of turnover, i.e. between 38% and 78%, would experience a cost saving of $668,252 ceteris paribus.
We should note several limitations of this study. First, it is possible that the relationship between costs and turnover is not linear, and that the negative marginal costs decline and eventually, at high turnover rates, taper off and perhaps even turn positive. Unfortunately, we were unable to estimate a nonlinear relationship between turnover and costs with the IV estimation procedure and the data available to us. However, the large number of nursing homes exhibiting high rates of turnover over many years suggests, as we discuss above, that this is a long term equilibrium phenomenon which is consistent with a negative relationship to costs. This study was also limited to California nursing homes. Results may not generalize to other states that have other payment systems and other programs directed towards turnover.28
However, again we note the fact that turnover is wide spread throughout the country and has persisted overtime in other states as well. Another limitation is directly related to our methodology. Our approach yields an estimate of the overall net costs associated with turnover, and as such accounts for both the direct and indirect costs associated with it. The advantage of this method is that it offers a comprehensive assessment of the cost impact of turnover, and we believe that it is this that allows identification of the cost savings associated with turnover. The limitation, however, is that it does not offer any insights into the individual components that make up the total cost savings and cannot provide any direct policy guidance.
Our findings raise two questions. First, are high turnover rates indeed detrimental to quality of care and hence should they be the target of policies aimed at decreasing them? And, second, assuming that the answer to the first question is in the affirmative, given our findings about the costs to nursing homes that are associated with turnover, what policies are likely to be successful in reducing turnover rates?
Addressing the first question is outside the scope of this paper. Further research that investigates the causal relationship between quality of care, resident health outcomes and quality of life, and turnover rates is needed. And while research to date has shown an association between high turnover and poor quality,6, 20, 42–44
to our knowledge there are no studies that have examined these issues accounting for the potential endogeneity between quality and turnover. Hence the causal relationship between turnover and quality of care is unknown.
The answer to the second question, namely which polices are likely to be effective in reducing turnover rates, depends on the magnitude of the net cost impact of turnover. Our finding suggests that such policies have to have a substantial impact on cost. For example, if one were to consider the use of turnover statistics as a quality measure to be included in report cards, such as the CMS Nursing Home Compare, such a policy is likely to be effective only if its impact as a deterrent to demand can be expected to be substantial. However, experience to date with consumers’ response to Nursing Home Compare45
and nursing homes actions in response to reported low quality scores46
suggest that the impact of public quality reporting in shaping demand is small. Similarly, experience to date with state reimbursement programs that target payment for staffing has not yielded much. Zinn14
reports that in Michigan, by 2003, turnover has decreased only from 75% to 68% since the implementation of a wage pass-through in 1990, and in Kansas it decreased from 120% to 116% since a 1998 implementation of a wage pass-through. Schnelle at el.,17
in a more recent study, found that a California experiment with a reimbursement system increasing staffing wages, benefits and other retention enhancing initiatives was actually associated with an increase in turnover. The General Accounting Office4
reported that in 1999 30 states were addressing nurses’ aides recruitment and retention through task forces, initiatives and research. A survey by the Iowa Legislative Fiscal Bureau in the same year identified 6 states with pass-through initiatives.7
Despite these efforts, high turnover rates persist.
Our findings suggest that current policy initiatives may be insufficient in magnitude to incentivize nursing homes to address the issue, given the financial implications of turnover. Future policy efforts need to recognize the complex relationship between turnover and costs and take it into account when designing incentives to decrease it.