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Economic Analysis of Nursing Shortage


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An economic analysis of the looming shortage of Registered Nursing staff in the United States.

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Economic Analysis of Nursing Shortage

  1. 1. Ricky Robbins ECON 5980 Economic Effect of the Nursing Shortage The US has been experiencing a steady decline in the ratio of nurses to patients. “Estimates of average nurse vacancy rates at hospitals range from 10.2 percent to 13 percent, with one in seven hospitals reporting more than 20 percent (Spetz and Given).” This gap in healthcare provision will only be magnified in the next 20 years as the entire “baby boomer” generation enters retirement. People, as a general rule, need more medical care in later years of life. Typically, employment in the nursing field has been cyclical, as with any profession, going through periods of shortage and surplus. The vast majority of registered nurses (RNs) are members of the baby boomer demographic. As the US has a large influx of retiring nurses, there will be a massive shortage in the healthcare field. With the current economic status and employment state, there is not sufficient inflow of new Registered Nurses to replace all those who will retire in the near future. Registered Nurses make up the largest segment of the healthcare profession (Georgia Nurses Association). With all these nurses going into retirement, we will have a strong need for new entrants into the nursing profession. How can we fix this problem? In the late 20th and early 21st century United States, there has been a steady decline in the number of Registered Nurses in the medical field. This paper will discuss the reasons for the shortage, from both an economic and medical perspective, the effects of the shortage and also possible solutions for the shortage. Several economists, as well as professionals looking at the medical field, have analyzed this shortage. This paper will discuss some of the research already performed by economists, describing an economic model as 1
  2. 2. Ricky Robbins ECON 5980 Economic Effect of the Nursing Shortage well as report a case study from a best practice hospital in the Midwestern United States. This paper proceeds as follows. The following section describes the aging nurse population and employment trends in the nursing profession over the past ten years. Details are given on US salary data for registered nurses. Common detractors for new potential new nurses will be discussed along with some demographic trends in the labor supply. One important aspect of the shortage, the lack of teaching faculty in schools of nursing, is detailed. After, the report will explain what it means to have a shortage in an economy and some overall reasons for this shortage in the United States. I further detail some economic statistical evidence of how the US may be experiencing a shortage of nursing professionals in the next few decades. The United States healthcare field has been plagued by the effect of monopsony markets in healthcare labor employment. This will be defined in the mid-section of the paper. A best practice hospital’s strategy is explained as a possible “model” for ways to overcome the looming shortage. The paper concludes with theoretical information on the shortage and proposed solutions The Nursing Profession and Employment Data The median age of the nursing population in the United States is rising. For instance “In March 2004, the average age of the RN population was estimated to be 46.8 years of age, more than a year older than the average age of 45.2 years estimated in 2000; and more than 4 years greater than in 1996 when the average age was 42.3 years (Rosseter, 2006, pg 3).” These nurses 2
  3. 3. Ricky Robbins ECON 5980 Economic Effect of the Nursing Shortage will need to be replaced as the supply of Registered Nurses enters retirement. The chart on the following page pictures the change in the age distribution of RN’s from 1980 to 2004. The age gap can easily be viewed here. For instance, “in 2000, an estimated 31.7 percent of all RNs were under the age of 40; in 2004 only 26.6 percent of all RNs were estimated to be under the age of 40 (American Nurses Association).” The problems are magnified because as all these nurses are retiring and leaving the workforce, the “baby-boomer” generation retiring increases the need for nursing services. The changes in the age of the majority of nurses can be viewed over the last 20 years in the chart pictured below. 3
  4. 4. Ricky Robbins ECON 5980 Economic Effect of the Nursing Shortage Wages in different nursing settings are presented in the table below, obtained from the Bureau of Labor Statistics. Employment services (Nurse recruiters, etc.) $63,170 General medical and surgical hospitals 53,450 Home health care services 48,990 Offices of physicians 48,250 Nursing care facilities 48,220 Many employers offer flexible work schedules, childcare, educational benefits, and bonuses. The table above reiterates that the demand on nurse’s time, mental wellness, and stress levels drive the wage rate required to retain nurses higher. Through the year 2014, employment of registered nurses is expected to grow faster than the average occupation. Because the occupation is quite large, many new jobs will result and this supply and demand effect will have the nursing field creating the second largest number of new jobs among all occupations (Bureau of Labor Statistics). Out of all healthcare jobs, nursing takes the vast majority, with 2.4 million jobs. Registered Nurses from all types of facilities: hospitals carrying the largest percentage going from 59.1% of the RN population in 2000 to 56.2% in 2004, nursing homes and extended care facilities employing above 6% of nurses, community and public health settings decreased their nursing employment from 18.3% in 2000 to 14.6% in 2004, nursing education rose to 2.6% and ambulatory care settings at 11.5% in 2004; earned a median annual salary of $52, 330 with the lowest 10% earning less than $37,300 and the highest 10% earned more than $74,760 in May of 2004 (US Bureau of Labor Statistics). For the future of nursing to look bright, wages 4
  5. 5. Ricky Robbins ECON 5980 Economic Effect of the Nursing Shortage will have to rise to clear the market. 5
  6. 6. Ricky Robbins ECON 5980 Economic Effect of the Nursing Shortage The Health Resources and Services Administration has looked at the current number of nursing professionals and the aging US population and estimated the increased need for nurses in the not so distant future. It is concluded that the RN shortage will continue to grow, under the current trends, due to “a growing and aging US population, high demand for highest quality of care, an RN workforce at or approaching retirement age and difficulties attracting new nurses and retaining the existing workforce (Health Resources and Services Administration).” The growth in the need for nurses will have quite a notable increase as expressed in the table on the following page, also obtained from the HRSA: 6
  7. 7. Ricky Robbins ECON 5980 Economic Effect of the Nursing Shortage Projected Number of and Demand for Licensed Registered Nurses, 2000-2020 Licensed RNs Licensed RNs FTE Licensed RN Projected Demand Active in Nursing Workforce for FTE Licensed RNs 2000 2,697,000 2,249,000 1,891,000 2,001,500 2020 2,705,000 2,163,000 1,808,000 2,824,900 Graphically: 7
  8. 8. Ricky Robbins ECON 5980 Economic Effect of the Nursing Shortage The graph below provides another view of the need until 2020. This bar graph below provides another way of looking at the shortage we will likely be experiencing in the United States, as it depicts the number of projected open or unfilled nursing positions by 2020. This information was taken from Johnson and Johnson Services, Inc. Over the past five years, there were over 100,000 vacant positions in healthcare. Healthcare will be an ever growing job market, with an unending need. Subsequently, the career outlook is excellent for the nursing field. (Johnson and Johnson Services, Inc., 2002-2006). 8
  9. 9. Ricky Robbins ECON 5980 Economic Effect of the Nursing Shortage The aging workforce in the United States contributes to the aforementioned growth in the need for nurses. As we move into the 21st century, the “baby-boomer” generation is coming into retirement. A “baby- boomer” is defined as someone born between 1946 and 1964. This definition implies that as of 2007, baby boomers will be between the ages of 43 and 61. This large aging population’s health needs will increase dramatically, on average, in retirement. Another reason hospitals may not be able to attract nurses is built into the economy. In a one-hospital locale, it may be easy for a hospital to drive down the wages of its registered nurse staff. In a city or region with 2 or more hospitals, the hospital with the lower wages will have a hard time attracting nurses from the labor market. In this situation, hospital administrators may work together, unlawfully, to set the wage rates for the entire market location. This collusion is strictly outlawed and will have a detrimental effect on the labor market for RNs. If wages can’t adjust to a shortage using the normal economic laws of supply and demand, no new entrants will be drawn into the market and all end up losing out. Education A serious factor that is further confounding the shortage in the supply of Registered Nurses is the lack of nursing faculty in the schools and colleges of nursing. The table below from further spells out the severity of the educational faculty shortage: 9
  10. 10. Ricky Robbins ECON 5980 Economic Effect of the Nursing Shortage Qualified Applicants Turned Away Academic Year by Nursing Schools in the US 2002-2003 5,283 2003-2004 18,105 64.8% (nearly two-thirds) of respondents to a survey conducted by the American Association of Colleges of Nursing (AACN) around 2003 said the main reason qualified they turned away qualified applicants from their undergraduate nursing education programs was due to a shortage of faculty. Some problems that schools and colleges of nursing have continuously run into is a lack of qualified nursing educators at the Masters or Doctorate level to teach college level courses. Some nurses fear this may cause administration to lower the qualifications for new nursing faculty (American Association of Colleges of Nursing). Work Load/Detractors Some detractors from the nursing field for new entrants is it is a very high stress work-load, a strict set of qualifications for licensing and long wait periods for admittance into training programs and schools. quot;Everyday the nurse confronts stark suffering, grief and death as few other people do. Many nursing tasks are mundane and unrewarding. Many are, by normal standards, distasteful and disgusting. Others are often degrading; some are simply frightening (P. Hingley, Nursing mirror, No. 159, 1984).quot; Much of the work 10
  11. 11. Ricky Robbins ECON 5980 Economic Effect of the Nursing Shortage related stress in nursing comes from the conflict of different roles and a work overload. One of the main tasks of the RN is to “get the patient better.” This often times conflicts emotional support. Several reports have been done on the consequences of these nursing shortages. “Patient outcomes and medical errors have received the most attention, and several major studies have demonstrated that reduced nurse staffing is associated with increased inpatient mortality, post surgical complications, hospital-acquired infections, and other negative outcomes (Spetz and Given).” Lack of Diversity One area that has been severely lacking in the nursing employment field is diversity. Nursing in the United States has traditionally been seen as a profession for white females. As we move on into the future, males and members of diverse ethnic groups have been entering the nursing profession in greater numbers than ever. This gender/racial stereotype makes itself quite evident in the healthcare profession today, pictured in the pie chart below, which represents out of all males in the nursing profession, what small percentage are of a race other than non-Hispanic white. 11
  12. 12. Ricky Robbins ECON 5980 Economic Effect of the Nursing Shortage Only about 6% of all US nurses in 2001 were male. Of this 6%, only 14% were members of diverse ethnic groups. This imbalance of representation in the nursing field is quite dismal considering the recent growth in the minority population. Data from the US Census Bureau’s American Community survey showed a growing population of immigrants. In 46 of the US states, and the District of Columbia, the percentage of immigrants increased from 11.1 percent in 2000 to 12.4 percent in 2005 (Report: Diversity Growing in Nearly Every State). Though discrimination in the nursing field has eased in recent years, it still exists. Many men will not enter the nursing profession because of the assumption that males in nursing are feminine or those assumptions point to a 12
  13. 13. Ricky Robbins ECON 5980 Economic Effect of the Nursing Shortage profession with a sexual preference. While many men do experience the disparate treatment as registered nurses, others have broken through the stigma of discrimination and become very successful. “Mark Buike, RN, feels at ease and confident as a male nurse. Buike, a Nurse II in the pediatrics ICU at Jackson Memorial Hospital in Miami, said that any door he has wanted to walk through has been open to him (Hilton).” Monopsony The definition of a shortage in the economy is “quantity demanded is greater than quantity supplied at the market price (Lane and Gohmann, 1995, pg. 644).” One can see the possibility of a shortage presenting itself in the United States when examining data from the US Bureau of Labor Statistics. One economic explanation for this shortage comes from the fact that the demand for nurses is rising faster than the employment rate of new RNs. “Paying a wage equal to the competitive equilibrium wage at the intersection of supply and demand (Lane and Gohmann, 1995, pg. 645),” could help to solve this problem. Other explanations for non-market-clearing wages can be explained by the high demand on a nurse’s time, labor unions and the effect of a monopsony in the labor market for nurses. With a monopsony in the labor market, you have one demander of labor. In the case of nursing, hospitals and hospital-like organizations have traditionally been the sole demanders of nursing labor in a community. As the only employer of nurses in geographic location, hospitals can pay lower wages to the RN labor force. Pictured on the 13
  14. 14. Ricky Robbins ECON 5980 Economic Effect of the Nursing Shortage following page is a graphic explanation of Monopsony in the Labor Market (Riley,tutor2u, 2006). The monopsony employer has “significant buying power” in the labor market. Hospitals can use this power to drive down wage rates. In the occurrence of a monopsony employer, the company will face an upward sloping supply curve. Students will be less willing to enter the nursing industry. Hospitals must then pay a higher wage rate to attract RNs to their facility and to 14
  15. 15. Ricky Robbins ECON 5980 Economic Effect of the Nursing Shortage attract new entrants into the nursing profession. The diagram above demonstrates that “the profit maximizing level of employment is where the Marginal Cost of Labor (MCL) equates with the marginal revenue product of employing extra workers (MRPL) (Riley, 2006, Trade Unions and Monopsony Employers).” ACL and MCL represent the labor supplies at the wage that the monopsonist offers (ACL and at the level worth the nurses skill-set (MCL). In this model, Eq employees are employed at the firm; the monopsonist chooses to pay wage level of Wq. In this case, the employer will only receive the number of employees equal to the intersection with the line ACL, which represents the lower number of employees willing to work at this level. This represents one theory of what is occurring in the nursing labor market. To help and end the nursing shortage in hospitals, administrators must decide to pay the wage rate at the profit maximizing level so nurses will enter the labor market at those hospitals. In the next section I will discuss some social reasons contributing to the economic shortage in nurses. At the turn of the century, studies have shown nurses moving away from working only in the hospital environment. Now many nurses have moved to working in physician-owned specialty facilities. These jobs are much less stressful than working in a hospital that runs 24/7 to facilitate all people within a community during all times. Typically in the physician owned practices run during the day (1st shift) and only open Monday through Friday. Based on this movement in the nursing labor, hospitals have lost their monopsonistic power. When the hospitals are not the only companies hiring nurses in a community, it 15
  16. 16. Ricky Robbins ECON 5980 Economic Effect of the Nursing Shortage can allow for the reinstatement of market competition of wages in the healthcare field. The common theme among all explanations is wages fail to adjust instantaneously, creating the likelihood of involuntary unemployment. If the monopsonistic power of the hospitals is destroyed, hospitals will be forced to offer a more competitive wage to compete with the private practices. Case Study A case study was performed by interviewing Karen V. RN, nurse recruiter from a top 100 hospital in the Midwestern United States. The interview is summarized as follows: • Q: How have you seen the effects of the nursing shortage at your hospital? • A: The shortage hasn’t really been seen at all here. It is projected that in the shortage will hit our organization in 2012. • Q: Why hasn’t your hospital been affected by the shortage? • A: A hospital in today’s market has to be good at retaining a skilled nursing workforce. Our reputation, benefits and overall company culture provide a pleasant working environment. • Q: What would be some good plans to implement for when the shortage does hit your organization? • A: You need to keep the stream of new college graduates entering the nursing workforce at your hospital by offering internships, fellowships, tuition reimbursement and so on. You also need to keep older nurses 16
  17. 17. Ricky Robbins ECON 5980 Economic Effect of the Nursing Shortage working longer. The aging RN workforce has invaluable experience to pass on to the new graduates. Adjust work schedules away from the 12- hour workdays of the traditional nurse workday. • Q: What is a main barrier for young people wishing to enter a nursing education program? • A: Most nursing schools have long wait periods. Some community colleges have a 2-year waiting period after application to actually start in the program. Major universities have waiting periods based on qualifications. They take the best people first from year to year, based on grade point average. Long waiting periods are due to a lack of experienced nursing faculty to teach. Low faculty numbers provides a high burn out rate for instructors • Proposed Shortage Solutions: o Implement retention/reward programs o Maintain a happy and satisfied workforce to help embody a good reputation. o Government assistance (subsidies for students and teachers in nursing) o Hospitals participate in tuition reimbursement o Provide incentives for retired nurses to teach o Constantly analyze the return on Investment of the training programs and adjust accordingly. 17
  18. 18. Ricky Robbins ECON 5980 Economic Effect of the Nursing Shortage The results from the interview in the case study show several strategies that hospitals could implement to help reduce the shortage. The policy cannot just be put in place at one hospital for it to be effective. These strategies should be placed similarly in hospitals throughout the United States to bring about reform in the nursing labor market. The Future Policy makers in the government and other administrative roles are implementing strategies to help regulate the shortage in nurses. In 2004, California implemented laws that require hospitals to maintain a minimum nurse-to-patient ratio. Organizations such as the Joint Commission on Accreditation of Healthcare Organizations (JCAHO) monitor hospitals and supply financial incentives for hospitals to maintain minimum staffing levels of Registered Nurses. Another possible source of new nurses to the US labor market is by recruiting from other countries. Migration of a foreign nursing force will only mitigate the US nursing labor crisis in the short term and is unlikely to provide a long-term solution. International nursing laborers may be reluctant to enter the labor market in the United States because the majority of nurses in the World Health Organization also report shortages in their own country’s nursing workforce (Spetz and Given). The number of new Registered Nurses will be a function of the amount of people wishing to pursue nursing education and the capacity of institutions that teach nursing. 18
  19. 19. Ricky Robbins ECON 5980 Economic Effect of the Nursing Shortage Proposed Wage Adjustment Regression equations can be used to estimate the effect that wage increases will have on the future growth of graduates from nursing programs. In these regression equations, we will use the growth in the number of graduates from RN programs as the dependent variable and past real wage growth as the explanatory variable. Four equations are estimated to predict this future growth phenomenon. The first two equations, one with a four-year lag and the other with a three-year lag, are estimated to help determine the effect on RN graduation rates. Two additional equations are presented with past changes in the national unemployment rate as an explanatory variable, helping to realize the performance of the economy in general has affected the supply of nurses as well as the decision to pursue post-secondary education. In all these regression equations, the coefficient of lagged wage changes is 2.25-2.51 statistically significant at 10 percent. The change in the intercept is -0.022 to -0.026 and statistically insignificant. The coefficient that goes with the change in unemployment ranges from -0.097 to 0.053 is also not statistically different from 0. The R-squared statistic ranges from 0.34 to 0.60. These results demonstrate how changes in past wages are a key determinant in the number of RN graduations (Spetz and Given). Using the aforementioned coefficients in the regression calculations, it is calculated that the wage growth need for supply and demand will equate in 2020. This model is far from foolproof, given the variability of economic 19
  20. 20. Ricky Robbins ECON 5980 Economic Effect of the Nursing Shortage conditions. Several assumptions underlie these calculations. It is assumed that demand for Registered Nurses and exits from this labor market will not differ from the forecasts by the Bureau of Health Professionals. It is also assumed that there is no cap on the level of wage increase in nursing to encourage the necessary number of people to enter nursing education programs. Thirdly, it is assumed wages will not increase above the equilibrium level to reach full employment in the nursing field in 2020. Fourth, it is assumed that nursing schools have enough capacity to allow enough new entrants to reduce the shortage. The fifth and final assumption in this model assumes unemployment rates will not effect graduations from nursing programs. As mentioned in the model, the coefficient of change in unemployment is not distinguishable from zero in both equations (Spetz and Given). The diagram below details the forecasted wage growth needed for RN Supply and Demand to reach equilibrium by the year 2020. The wage growth needed for RNs in this model would cumulatively increase by 55-69 percent, more than doubling the spending on the nursing workforce by 2016. 20
  21. 21. Ricky Robbins ECON 5980 Economic Effect of the Nursing Shortage Forecasted Wage Growth Needed For Registered Nurse (RN) Supply And Demand To Reach Equilibrium By 2020 Regression model used for forecast Three- Three-year lag with Four-year Four-year lag with year lag unemployment lag unemployment Required yearly real 3.2% 3.5% 3.7% 3.8% wage growth, 2005– 2016 Cumulative real 55.4% 61.9% 66.3% 68.6% wage growth, 2002– 2016 Real hourly wage in $37.12 $38.77 $39.92 $40.50 2016 SOURCE: Authors’ projections based on regression equations using data from the Current Population Survey (U.S. Bureau of the Census), National League for Nursing, Bureau of Labor Statistics, and Bureau of Health Professions. NOTE: Wages are measured in 2003 dollars. The shortage in nursing professionals is hitting hospitals all over the United States. In October of 2007, the first member of the baby boomer generation began to collect her Social Security benefits. This aging population will continue to cascade into the hospital rooms and demand more nursing services. If large numbers of new nursing staff are not recruited in the near future, high stress levels due to overworking will be commonplace among all healthcare professionals. Hospitals may find recruitment much easier if wage levels will rise to meet the demand for labor. These changes will likely require a total reform of the nursing profession and how it is viewed by society. REFERENCES: AllNursingSchools. “What Percentage of American Nurses are Men.” Your Guide to Nursing Education and Careers.2007. December 3, 2007 <> 21
  22. 22. Ricky Robbins ECON 5980 Economic Effect of the Nursing Shortage American Nurses Association. “Background.” NursingWorld. 2007. November 28, 2007 < on/AboutNursing/NumbersandDemographics/Background.aspx> Associated Press. “Report: Diversity Growing in Nearly Every State.” U.S. News. August 17, 2006. December 14, 2007. <> Bureau of Labor Statistics. “Annual Wages of Nurses, doctors and other healthcare workers.” MLR: The Editor’s Desk. November 23, 1999. US Department of Labor. November 28, 2007 <> Chung, Vicki. “Men in Nursing.” Featured Stories. 2007. December 3, 2007 <> Delevan, Sybil M. & Koff, Sondra Z. “The Nursing Shortage and Provider Attitudes: A Political Perspective.” Journal of Public Health Policy, Vol. 11, No. 1. (Spring, 1990), pp. 62-80. Georgia Nurses Association. “Fact Sheet About Nurses.” 2004. <> Health Resources and Services Administration. “Severity of the RN Shortage.” Nursing News. September 27, 2007. U.S. Department of Health and Human Services. December 1, 2007 <> Hilton, Lisette. “A Few Good Men.” May 14, 2001. December 3, 2007. Nurseweek. <> Johnson and Johnson Services, Inc. “Job Opportunities.” Discover Nursing. 2006. December 1, 2007 < opportunities> Lane, Julia & Gohmann, Stephan. “Shortage or Surplus: Economic and Noneconomic Approaches to the Analysis of Nursing Labor Markets.” Southern Economic Journal, Vol. 61, No. 3. (Jan., 1995), pp. 644-653. McNeil, Paula. “The Nursing Faculty Shortage: Adding to the U.S. Nursing Shortage” December 1, 2007. December 1, 2006 < P. Hingley, Nursing mirror, No. 159, 1984. International Labour Organization. “Work Related Stress in Nursing.” SafeWork. November 10, 2000. November 29,2007 < > 22
  23. 23. Ricky Robbins ECON 5980 Economic Effect of the Nursing Shortage Riley, Geoff. “Trade Unions and Monopsony Employers.” A2 Markets & Market Systems. September 2006. tutor2u. December 1, 2007 < and-monopsony-employers.html Rosseter, Robert J. Nursing Shortage Fact Sheet. September 5, 2006. American Association of Colleges of Nursing. November 28, 2007 <> Spetz, Joanne & Given, Ruth. “The Future of the Nurse Shortage: Will Wage Increases Close the Gap?” Health Affairs. 2003. Project Hope. November 28, 2007 <> V., Karen nurse recruiter. Professional interview. Kalamazoo, MI. November 19, 2007 23