Why turnover is not just an HR problem: The Financial Impact of Turnover

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1 Why turnover is not just an HR problem: The Financial Impact of Turnover ABSTRACT Hospitals and healthcare institutions face high turnover among their employee populations. Moreover, the responsibility for a solution to this problem often rests with Human Resources while the impact of the problem is felt across the organization. As a result, HR leaders find themselves attempting to reduce turnover without the financial and organizational support needed to have meaningful impact. This paper articulates the financial impact to the organization of high turnover, making the argument that this issue is one that senior healthcare leaders should both understand and seek to address. We will explore the problem of high turnover in the healthcare industry, look at the direct financial costs associated with turnover, address how those costs are measured and consider possible solutions to the problem. THE PROBLEM High Healthcare Turnover Employees in the healthcare industry turn over at an astoundingly high rate each year. Of the ten industries with the highest turnover in the US, healthcare ranks sixth with an attrition rate of 15.6%. i For other industries, the reasons for high turnover are inherent. Retail, for instance, is often dependent on the seasons with an influx of students seeking jobs during the summer months only to leave soon after when school starts in the autumn. In addition, there are a high percentage of workers in the retail industry for whom that job is not their vocation. The same is true of the hospitality industry; and in this industry there is also a seasonal component to the business itself so that organizations in this industry need larger numbers of workers at certain times of the year. This is not the case in healthcare. Hospitals and health systems are not seeking seasonal employees, and the majority of open positions in a hospital require more extensive training. This finding points to the reality that most employees in a healthcare organization see their work as a vocation, not just a temporary job. If this is the case, why do healthcare workers experience such high turnover and what is that turnover costing the organizations that employ them? Healthcare Turnover by the Numbers: A Focus on RNs Healthcare industry turnover has historically been high, with little fluctuation attributed to the economy, or other outside factors. The majority of positions in hospitals are nursing positions. As such, for purposes of this analysis, we will focus on quantifying the financial impact of turnover among nurses. In recent years, the turnover rate for Registered Nurses (RNs) has averaged 14% across US hospitals ii. That means, with an example facility that employs 400 nurses, 56 of them will leave every year. This is a vast amount of training hours, experience, and knowledge lost and a lot of work, time, and cost to fill those many newly opened positions. 1

2 In addition, the first-year turnover rate (the number of employees who leave before being at the institution even just one year) is even higher: 28.3% on average iii. This means that in a sample institution that hires 100 nurses each year, 28 of those new hires will leave before they reach the first anniversary of their hire date. A certain amount of turnover can be a healthy part of any organization, but when an employee does not stay at the institution for even a year, this is usually categorized as a bad hire, or a candidate who was a poor fit for the position in the first place. This type of turnover has the most significant adverse impact on the organization, creating greater instability among teams and costing the organization significantly more because the employee has been fully productive for a very small percentage of their total tenure at the organization. Drilling down further, consider employees who turnover in 60, 90 or 180 days. In these cases, an institution is having to fill that position multiple times in a single year. Given the significant impact of turnover due to bad hiring decisions, this is an area where organizations should seek effective solutions. FIGURE 1 & 2: Annual RN Turnover and Healthcare Turnover highlighting employees who leave before completing one year at the hiring insititution Figure 1 Annual RN Turnover Figure 2 Healthcare Turnover 14% Returning nurses 28% New hires who leave within 1 year 86% Leaving nurses 72% New hires staying on through 360 days Cost of RN Turnover A Registered Nurse (RN) is a keystone of healthcare organizations. RNs provide and coordinate patient care, educate patients and the public about various health conditions, and provide advice and emotional support to patients and their family members. iv RNs deal with sensitive, delicate, life and death matters, and they interact very closely with patients - they are, for all intents and purposes, the face of each institution, making their role all the more vital. This also makes their value all the more difficult to put into hard numbers. In fact, the full cost and implications of replacing an existing nurse go well beyond the financial costs, though the financial costs themselves are staggering. When estimating these costs, most sources stick to direct costs monetary costs that are easy to track, such as the cost to advertise for an open position, orientation and preemployment costs, overtime costs of remaining employees to cover the extra work when a nurse leaves, salary and benefits paid during the training period when a nurse is not yet fully productive, etc. A conservative estimate of directs costs is 1.5 times the base salary of the exiting employee v. With an average RN salary of $67,525 vi, this will cost our example institution with 400 nurses over five million dollars each and every year. 2

3 SAMPLE COST OF TURNOVER IN A 400 NURSE FACILITY Total nurses at facility 400 Total yearly turnover at 14% 56 Total yearly cost of turnover $5,672,100 Consider that if our example institution could lower their turnover by just one percent (for an overall turnover of 13%) the institution would save $405,150 a year by retaining just four more nurses. SAVINGS FROM 1% REDUCTION IN TURNOVER IN A 400 NURSE FACILITY Total nurses at facility 400 Total yearly turnover at 13% 52 Total yearly cost of turnover $5,266,950 Total savings from decreasing turnover to 13% $405,150 THE SOLUTION How Predictive Analytics Can Be Used to Reduce Turnover How can an institution lower turnover? There are two things at play here: hiring the right employee for the job, and working to retain employees by keeping them happy with their job, situation, and team. Looking at these two components of turnover, we can address both issues by hiring candidates who are most likely to stay with the organization. Yes, an organization still needs to invest in employee engagement, but if we can predict up front which candidates are best suited for a particular position at a given institution, then engaging those employees will be a much more successful endeavor. 3

4 The challenge lies in the difficulty of sizing up a candidate based on an application, resume, interview, and references. We have all made decisions about other people, only to be vastly surprised later and proved wrong. So what happens? It is difficult to assess a person in such a short amount of time, especially when prospective employees and interviewers are both on their best behavior. However, with the mainstreaming of Predictive Analytics and Big Data, we now have the ability to determine accurately whether an individual will be a good fit in a specific open position. Predictive Analytics is a technique that uses mathematical models to organize data, analyze it with current and historical trends and facts, to form accurate, unbiased predictions about the future. The key to getting the right team (and keeping it together) is to recognize that there are cultural dynamics and aspects of individual personalities that are not readily identifiable. There are tacit, underlying elements involved in human relationships and cultural fit that we can t always put our finger on. The advantage of Big Data is the benefit of objectively evaluating millions of data points and thousands of facts about thousands of people capturing what is really going on rather than what we perceive emotionally, subjectively, and subconsciously. We all make the best decisions when we are impartial. How Pegged Software Works to Reduce Turnover The Pegged Software solution employs a strictly scientific approach. Pegged collects, analyzes, and incorporates robust observational data, matching culture and personality based on what has already been proven. Pegged can measure these attributes independently of judgment and hypothesis, in order to apply and develop models that align most closely with the everyday realities on which a prosperous and pleasant work culture depends. Big Data is a term used to describe both data sets that are so massively large that traditional processing methods and systems cannot process them, and the new technology that can. Pegged Software has long been applying Predictive Analytics and Big Data to find the right fit the right candidate for the right job, at the right institution. Since we have been collecting so much data (Big Data) we have mathematical models that have been proven to work time and time again. In our example institution mentioned above, we saw the impact of lowering overall turnover by just one percent. Pegged Software is proven to lower turnover by as much as 45% - 75%. Let s focus on just the first year, just the employees who leave within one year: if Pegged Software is deployed at our example institution, in just the first 360 days our number of nurses who leave within one year will decrease by almost half. This means our example institution will save a minimum of $1.25 million in the first 360 days alone. 4

5 NURSE TURNOVER - with PEGGED SOFTWARE in First Year Total nurses hired at facility 100 Original total of who leave before 1 year 28 Number of nurses saved with Pegged Software 13 Savings with Pegged Software in first 360 days $1,276,233 CONCLUSION Hospitals and healthcare institutions face high turnover, particularly when compared to other industries. The financial impact of this turnover is substantial, and is just the tip of the iceberg in terms of its impact on patient satisfaction and the quality of care an institution is able to provide. Looking at nursing positions alone, a small to mid-sized hospital spends millions each year as a result of turnover among RNs. The good news is that the advent of Big Data and Predictive Analytics has afforded this industry the proper tools to successfully reduce this turnover and curb these costs. So when it is possible to lower turnover thereby saving money, building a better team, and providing better care the answer is simple: Big Data and Predictive Analytics with the Pegged Software service. ibares, Ann. CompensationForce.com Turnover Rates by Industry. March 22, ii Raphael, Todd. Ere.net. Nurse Tunover in Hospitals. June 8, iii Patel, Shebani; et al. PricewaterhouseCoopers. PwC Saratoga 2012/2013 US human capital effectiveness report Executive summary for the hospital sector iv Bureau of Labor Statistics, U.S. Department of Labor. Occupational Outlook Handbook, Edition, Registered Nurses. March 29, 2012 v Patel, Shebani; et al. PricewaterhouseCoopers. PwC Saratoga 2012/2013 US human capital effectiveness report Executive summary for the hospital sector vi Salary.com. Staff Nurse RN, 2013 *This number represents base salary only and does not include any signing bonus,or annual bonus with these numbers included, the average total can be as high as $94,957. 5