The Effects of Managed Care and Prospective Payment on the Demand for Hospital Nurses: Evidence from California

Health Services Research, Dec, 1999 by Joanne Spetz

Objective. To examine the effects of managed care and the prospective payment system on the hospital employment of registered nurses (RNs), licensed practical nurses (LPNs), and aides.

Data Sources. Hospital-level data from California's Office of Statewide Health Planning and Development (OSHPD) Hospital Disclosure Reports from 1976/1977 through 1994/1995. Additional information is extracted from OSHPD Patient Discharge Data.

Study Design. Multivariate regression equations are used to estimate demand for nurses as a function of wages, hospital output, technology level, and ownership. Separate equations are estimated for RNs, LPNs, and aides for all daily services and for medical-surgical units. Instrumental variables are used to correct for the endogeneity of wages, and fixed effects are included to control for unobserved differences across hospitals.

Principal Findings. HMOs are associated with a lower use of LPNs and aides, and HMOs do not have a statistically significant effect on the demand for RNs. Managed care has a smaller effect on nurse staffing in medical-surgical units than in daily service units as a whole. The prospective payment system does not have a statistically significant effect on nurse staffing.

Conclusions. HMOs have affected nursing employment both because HMOs have reduced the number of discharges and because of a direct relationship between HMO penetration and the demand for LPNs and aides. Contrary to press reports, LPNs and aides have been affected more by HMOs than have registered nurses.

Key Words. Nurses, hospitals, managed care, prospective payment

The effect of health maintenance organizations (HMOs) and preferred provider organizations (PPOs) on the staffing of nursing personnel in hospitals is causing growing concern. Recent newspaper articles report that hospitals reduced their use of registered nurses (RNs) by replacing RNs with unlicensed assistive personnel in response to cost-cutting pressures caused by the growth of HMOs (Rosenthal 1996; Kunen 1996; Shuit 1996). Patient advocates, nursing unions, and other observers argue that these staffing changes are reducing the quality of care provided by hospitals (Rosenthal 1996).

In response to these claims of reduced nurse staffing and quality of care, state legislatures are attempting to regulate hospital employment of nursing personnel. Legislation has been introduced in several states, including Massachusetts, Nevada, California, and Florida, to establish minimum staffing levels for RNs and other staff. For example, California's Assembly Bill 394 in the current session would mandate staffing levels in most units of hospitals; similar legislation was vetoed by Governor Wilson after being passed by the state assembly and senate in 1998. This and similar legislation typically are supported by labor groups and unions and are opposed by hospitals and their associations.

Unions and hospitals have engaged in heated debates about whether nurse staffing levels have been reduced and whether such reductions affect quality of care. Contract disputes serve as a forum to draw public attention to the effect of nurse staffing changes on the quality of care at the hospitals (Herscher 1997). For example, during a contract dispute, the California Nurses Association (CNA) alleged that Kaiser Permanente hospitals reduced staffing to dangerous levels. The CNA received public support despite a lack of documentation of the staffing cuts that the CNA claimed had occurred (Hall 1998).

Little research has been published on whether significant changes have occurred in the staffing of RNs, licensed practical nurses (LPNs, called licensed vocational nurses in California), and aides (and other unlicensed assistive personnel), and the research that has been done has found contradictory results. Some researchers have found a decline in the fulltime equivalent employment of hospital nurses per patient day (Aiken, Sochalski, and Anderson 1996), while others have found an increase in hours worked (Anderson and Kohn 1996; Spetz 1998). [1] A cross-state comparison of RN employment and HMO penetration identified slower rates of RN employment growth in states with higher HMO penetration, but did not control for other factors that might affect hospital demand for nursing personnel (Buerhaus and Staiger 1996).

Because future regulations of hospitals are likely to be based on the perception that HMOs are causing reductions in nurse staffing, it is important to determine whether reductions actually are occurring and whether managed care is associated with any such changes. This article answers the question of whether reductions actually are occurring and measures the effect of managed care on such reductions by estimating labor demand equations for RNs, LPNs, and aides in California's short-term general hospitals from 1976 through 1994. The findings have implications for future hospital regulation and provide policymakers and healthcare professionals with much-needed information so that they can make informed statements about nurse staffing.