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Archives of Business Review – Vol. 8, No.7
Publication Date: July 25, 2020
DOI: 10.14738/abr.87.8745.
Shin, D. Y., Weech-Maldonado, R., & Chang, J. (2020). The Relationship Between Nurse Staffing, Quality, And Financial Performance In
Hospitals. Archives of Business Research, 8(7). 513-532.
The Relationship Between Nurse Staffing, Quality, And Financial
Performance In Hospitals
Dong Yeong Shin
Department of Public Health Sciences, New Mexico State University, Las Cruces, NM.
Robert Weech-Maldonado
Department of Health Services Administration, University of Alabama at Birmingham, AL
Jongwha Chang
Department of Public Health Sciences, Department of Pharmacy Practice,
University of Texas, El Paso, TX.
ABSTRACT
Little evidence exists on the relationship of nurse staffing and quality
with financial performance in hospitals. This study aimed to measure
the relationship between nurse staffing, quality of care, and
profitability in hospitals. This study used longitudinal panel datasets
from 2006 to 2010, drawn from various datasets including the
American Hospital Association Annual Survey Database, Medicare Cost
Report, and Hospital Compare Data. This study used the random-effects
linear regression model to measure the relationship between nurse
staffing, quality, and profitability. In addition, we tested a mediating
effect of quality on the relationship between nurse staffing and
profitability. This study found nurse staffing’s significant association
with quality and profitability in hospitals. First, compared to hospitals
in the lowest quintile of RNs per 1,000 inpatient days, hospitals in the
higher quintiles had lower pneumonia readmission rates, and higher
total profit margins, operating margins, and cash flow margins. In
addition, hospitals with lower pneumonia readmission rates were
found to have higher total profit margins and cash flow margins. Lastly,
the current study found that the positive relationship between RNs per
1,000 inpatient days and total profit margin and cash flow margin was
partially mediated by pneumonia readmission rates. In conclusion, our
finding that nurse staffing is positively associated with both quality of
care and profitability in hospitals suggests that the idea of hospitals
responding to financial pressures by cutting RN resources with a goal
of greater profitability should be called into question. The influence of
lower RN staffing levels on higher profitability for hospitals is
uncertain, while it is possible that RN staff reductions may compromise
the quality of patient care.
Keywords: nurse staffing, registered nurse, quality of care, readmission rate,
profitability, total profit margin, operating margin, cash flow margin,
hospital.
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URL: http://dx.doi.org/10.14738/abr.86.8745 514
Shin, D. Y., Weech-Maldonado, R., & Chang, J. (2020). The Relationship Between Nurse Staffing, Quality, And Financial Performance In Hospitals.
Archives of Business Research, 8(7). 513-532.
INTRODUCTION
Staffing strategy involves decision making that pertains to either staffing levels (e.g., overstaffing
vs. understaffing) or staffing quality (e.g., exceptional vs. acceptable workforce quality)(Herneman
III & Judge, 2006, p. 23). Organization literature suggests that human resource (HR) practices are
closely related to organizational performance (Delaney & Huselid, 1996; Huselid, 1995).
Maintaining adequate staffing levels is a crucial organizational activity to a hospital because it can
influence quality and financial conditions. Because registered nurses’ (RNs) wages and benefits
represent a significant portion of the hospital’s operating budget, managing RN staffing levels is a
major factor in reducing hospital costs (Rivers, Tsai, & Munchus, 2005). Yet, inadequate nurse
staffing may lead to lower production efficiency and poor quality of care delivered to patients
because nurses directly take part in the core technology of hospitals and deliver patient care
(Bloom, Alexander, & Nuchols, 1997).
The effect of nurse staffing on quality outcomes is well established in the literature. For example,
higher nurse staffing levels have been consistently linked to lower mortality rates (Aiken, Clarke,
Sloane, Sochalski, & Silber, 2002; Elting et al., 2005; Mark, Harless, McCue, & Xu, 2004) and lower
readmissions (McHugh & Ma, 2013; Weiss, Yakusheva, & Bobay, 2011) in hospitals. However, little
is known about the relationship between nurse staffing and profitability in hospitals. Few studies
have examined the influence of nurse staffing patterns on profitability in hospitals: a non- significant relationship (McCue, Mark, & Harless, 2003); and a positive relationship in competitive
markets (Everhart, Neff, Al-Amin, Nogle, & Weech-Maldonado, 2013).
Using the resource based view of the firm perspective, this study attempted to examine the
association between nurse staffing, the quality, and financial performance in hospitals. Specifically,
how nurse staffing is associated with hospital profitability through its impact on quality was
investigated by testing a mediating effect. To our knowledge, there have been no prior studies
examining the mediating effect of quality on the relationship between nurse staffing and hospital
profitability. The findings of this study are expected to help hospital managers and administrators
better understand the gains and losses of changing nurse staffing in terms of quality and
profitability. This could assist them in making better staffing decisions.
LITERATURE REVIEW
To investigate how nurse staffing influences hospital performance, the current study draws on the
resource based view of the firm that is rooted in organizational economics and strategic
management. This perspective conceptualizes that performance differences across firms are
attributable to the variance in the firm's resources and capabilities (Hitt, Bierman, Shimizu, &
Kochhar, 2001). It suggests that organizations make strategic choices on securing and using their
internal resources and that their strategic decisions enable them to generate sustained competitive
advantage (Barney, 1991; Short, Palmer, & Ketchen, 2002).
According to Barney (1991), these internal resources may comprise human capital resources,
including their experience, judgment, and intelligence. Under the resource based view of the firm,
valuable resources are the source of a competitive advantage for firms. Barney describes that
competitive advantage is obtained by implementing a value-creating strategy that cannot be easily
copied and sustained by competitors. Barney further describes "sustained competitive advantage"
as occurring only when other firms are incapable of duplicating the benefits of a competitive
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advantage (Barney, 1991, p. 102). To have the potential of sustained competitive advantages,
resources of a firm should have four attributes (Barney, 1991): 1) the resource must add positive
value to the firm; 2) the resource must be unique or rare among its current and potential
competitors; 3) the source must be imperfectly imitable; and 4) the resource cannot be substituted
with another resource by competitors.
This study posits that managing effective nurse staffing is a value-creating strategy that satisfies
the four attributes of sustained competitive advantage. First, the nursing workforce is a valuable
resource in a hospital. Research supports the favorable performance implications of nurse staffing
patterns in hospitals, with respect to better quality of care and higher efficiency of care (Cho,
Ketefian, Barkauskas, & Smith, 2003; Mark et al., 2004; McHugh & Ma, 2013). When a resource
enables a firm to execute strategies that increase its efficiency and effectiveness, the resource is
regarded as valuable (Barney, 1991). Therefore, nurses are valuable and crucial elements to make
hospital patient services efficient and effective (McCue et al., 2003).
In addition, nurses, especially RNs, can be considered a relatively rare resource. Previous studies
characterized the market environment of acute care hospitals as hospitals competing for crucial
resources (e.g., human capital), while seeking cost containment and maintaining quality (Morrisey,
2001; Thomson, 1994). Given that the shortage of RNs is expected in the next decade (Buerhaus,
Auerbach, & Staiger, 2009) and improving nurse retention has been a subject of substantial
research (Gardner, 2010), securing a proper level of nurses is an important managerial and
operational issue for hospitals.
Barney (1991) suggests that socially complex resources are hard to imitate because they are
embedded in complicated social systems. Nurse staffing can be seen as part of a socially complex
system because nurses interact with various types of hospital personnel in patient care and have
tacit knowledge of their relations with those personnel and organizational routines (Coff, 1997).
Tacit knowledge is generally embedded in organizational routines and interpersonal relationships
in organizational work environments. Because such knowledge is not easily articulable, and
transferring it is slow and complex (Lei, Hitt, & Bettis, 1996; Teece, 1998; Weech-Maldonado,
Meret-Hanke, Neff, & Mor, 2004), it is less likely to be perfectly imitable. Therefore, this study
suggests that the tacit knowledge of nurses is imperfectly imitable.
Finally, compared with licensed practical nurses (LPNs), RNs receive more training and are
regarded as having higher skill levels (Spetz, Dyer, Chapman, & Seago, 2006). Certain duties can be
performed only by RNs. In general, LPNs are restricted from medication administration,
administering blood products, and providing other types of care that are critical in hospitals, and
they are less likely to function as charge nurses or team leaders in hospitals (Spetz et al., 2006).
Although replacing an RN with a new RN from the outside is possible, the tacit knowledge of RNs,
such as the knowledge gained from their roles as supervisors in interpersonal relationships for
patient care and organizational routines, is not perfectly substitutable with the knowledge of new
RNs.
Based on the discussion above, this study posits that nurses, especially the knowledge and
experience of skilled nurses as RNs, are a source of a competitive advantage in hospitals, and the