By Jan R. Radke, MD
A big part of the financial pressure at Natividad Medical Center involved nursing shortages, high turnover rates, and high registry costs. Quality nurses were leaving, and the hospital was forced to hire expensive contract nurses. A major change in human resources policies and compensation strategies was long overdue.
Natividad Medical Center, a 172-bed safety-net hospital of Monterey County, Calif., had rarely achieved a positive cash flow in its 121-year history. In FY06, financial losses mounted to $25 million, with a forecast of continued losses of $24 million into FY09. If Natividad Medical Center continued on its expected path, it faced closing its doors to the community.
Natividad served 92 percent of Monterey County’s poor, indigent, and uninsured, increasing the importance of staying afloat. Closing the medical center would add significant operating pressure and overcrowding to the other two hospitals in the county, and a material reduction in the financial performance of those two hospitals.
As a result, the county joined with the other two main hospitals in the area to create a new seven-person hospital board of trustees for Natividad, which included four members from the other two hospitals. These other two hospitals, Salinas Valley Memorial Hospital and Community Hospital of Monterey Peninsula, funded the turnaround efforts of Natividad.
The board supported numerous performance improvement initiatives in an effort to put Natividad on a different--and successful--path. One important one was adjusting pay scales so the hospital could retain and recruit qualified nurses and ancillary employees.
Compensation Needed Adjusting
Compensation rates at Natividad were much lower than the base salaries of its competitors. In fact, they were below market by 8 percent to 12 percent, which was below the 50th percentile. Improving nursing compensation was a top priority because employing and retaining effective nurses was critical to creating a patient-centered culture and improving operations, consistency, patient safety, physician satisfaction, and patient satisfaction. It was important to close the gap, stop people from leaving, and get those skilled nurses who had left, to return to Natividad.
Additionally, because of the high turnover, Natividad’s vacancy rates and registry costs were high as well. Natividad was buying people on the “spot market” for 1.5 to 2 times employee pay rates. The learning curve was steeper for these employees, and patients were not comfortable with those unfamiliar with the hospital procedures. The overall result was low patient satisfaction and suboptimal team performance.
Localize HR Control
The first step to adjusting nursing compensation required the delegation of authority to Natividad to enact market competitive pay scales. Overall, the human resources department at Natividad operated as a “satellite” of the county, rather than as an independent department of Natividad Medical Center. Natividad had to defer to the county human resource policies.
It was recommended, and approved by the board of trustees, to allow Natividad to operate within its own policies and procedures by a process of delegation of authority from the board of supervisors. The relationship between the county and the hospital was redefined to improve timing and speed of decision making, and allow the hospital to make its own specific recruitment and compensation decisions.
By localizing human resource controls, Natividad could establish and maintain its own pay practices and incorporate pay-grade level benchmarking from non-county facilities. Management developed a compensation philosophy and strategy that allowed for direct competition in the local market, rather than with other county hospitals.
While the hospital was not competing for patients in its primary market, Natividad was competing for its workforce with the other three hospitals in the county: Salinas Valley Medical Center, Mee Memorial, and Community Hospital of Monterey Peninsula. Prior to the delegations, the county set pay levels based on benchmarking pay grades against other county systems. Very few of the selected counties used for benchmarking purposes had hospitals, and the ones that did, were not a close comparison to Natividad.
Compensation Up; Vacancies Down
In January of 2008, the compensation changes went into effect, adjusting nursing salaries to the 85th percentile of benchmark. Since then, the nursing vacancy rates have dropped from 14.4 percent to 3.6 percent, and remain below 4 percent in 2009.
Further, nurse registry hours decreased by 66.8 percent from FY06-07 to FY08-09. Registry costs decreased from $4.5 million in FY07 to $3 million in FY08. The cost of implementing the salary increases was offset by the savings on registry costs.
Natividad also adjusted salaries for ancillary staff, bringing wages to the 85th percentile for cardiopulmonary, laboratory, diagnostic imaging, and rehab services. The goal with ancillary market adjustments involved retention strategies versus a reduction in registry costs. Ancillary support was in short supply and demanded a premium in the market. To date, the retention strategy has been successful.
Lessons Learned
The delegation of human resources functions to Natividad from the county, and the subsequent improved nursing compensation strategies, created lasting benefits. More important, the hospital was able to keep its doors open and continue to employ and serve people in the community. The organization is financially viable, and the environment is safer. Patient safety, patient satisfaction, and employee satisfaction have improved dramatically.
Keeping the pay competitive was essential to shifting the culture of the organization. Today, employees feel valued for their contributions. Their compensation is aligned with the market, and they are continually reminded that they are an important asset to the success of the organization. Leadership has remained committed to continuous improvement and maintaining a culture of accountability and quality patient care.
Jan R. Radke, MD, is managing director, Huron Consulting Group.