Compensation Packages in Healthcare Organizations

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Table of Contents

Introduction
Cottage Health Hospital System
Ways of Improving Hospital Cost-Efficiency
The Role of HRM in Forming Compensation Packages
Existing Situation and Potential for Improvement
Existing Employee Benefits Package Analysis
Possible Changes and Improvements to Employee Benefits Package
Conclusions
References

Introduction

US healthcare is very expensive. On average, a family of four spends from 10% to 20% of its yearly income on paying for healthcare insurance and covering various out-of-pocket fees that are not mentioned in the insurance plan. Despite the fact that the American government spends over 3.3 trillion dollars on healthcare, which is approximately 10,000 dollars per person per year, the country’s hospital system remains extremely inefficient in terms of costs and quality of care (Duffield et al., 2014). The cost-efficiency of US hospitals is suboptimal. One of the most overlooked ways of cost-benefit optimization is the employee retention strategy.

The Healthcare industry is known for its high staff turnover rates. The average turnover rate for US hospitals varies between 10% and 35%, which is incredibly high when compared to other industries (Thompson, n.d.). The situation is made worse by the fact that demand for qualified nursing specialists is high and is expected to grow, whereas working conditions for nurses are likely to remain the same. Turnover rates are associated with high healthcare costs, increased chances for error, and decreased the quality of care in general. Hospitals lose much from employee turnover and are forced to compensate for these financial losses by bumping up prices, which affects the healthcare system as a whole.

Thus, employee retention is of paramount importance to any hospital. One of the primary tools for attracting and retaining qualified healthcare specialists is the employee benefits package. Having a competitive benefits package can ensure loyalty and a long-term commitment among doctors and nursing staff, thus saving money in the long run. The key to designing an effective benefits package lies in cost-benefit analysis. The purpose of this paper is to analyze the employee benefits program of a hospital and provide a series of recommendations based on a cost-benefit analysis.

Cottage Health Hospital System

Cottage Health is a non-profit hospital association that is comprised of several facilities, which include Santa Barbara Cottage Hospital, Cottage Children’s Medical Center, Cottage Rehabilitation Hospital, Santa Ynez Valley Cottage Hospital, and Goleta Valley Cottage Hospital. These hospitals provide healthcare coverage to citizens of Goleta Valley, Santa Ynez Valley, and Santa Barbara (“About Cottage Health,” n.d.). The hospital has an employee turnover rate of 15.6% (Duffield et al., 2014). With the total number of staff exceeding 600 , it means that Cottage Health needs to replace roughly 60-70 employees on a yearly basis (“About Cottage Health,” n.d.). The hospital claims to have one of the best employee benefits packages in the USA. According to the hospital’s official page, their benefits package includes these basic features (“Cottage Health’s total compensation package,” n.d.):

Medical Plan.
Dental Plan.
Life Insurance.
Disability Coverage.

In addition, all employees are welcome to enjoy the benefits of a college savings plan, retirement plan, hospital-sponsored events, employee recognition program, discount tickets, free onsite yoga, and sitting massages, as well as housing benefits and tax-sheltered annuities. There are some other minor benefits offered by the hospital, but their effects are considered negligible or marginal to be included in this analysis.

Ways of Improving Hospital Cost-Efficiency

There are several ways of improving hospital cost-efficiency (Thompson, n.d.):

Increase operational effectiveness of medical processes.
The use of cost-efficient technologies and medicines to achieve better outcomes while simultaneously reducing costs.
Reduce staff turnover rates.

Each of these ways requires a different approach. In order to increase the operational effectiveness of the existing processes, a large-scale review and analysis of procedures must occur, which is expensive and time-consuming. Typically, unless the organization suffers from serious problems in operational management, improvements help reduce operational costs by 5-10%.

The use of cost-efficient medicines and technologies is typically tied to various endeavors in medical and pharmaceutical research. Once there is sufficient evidence of a drug or practice to be superior, they are adopted by hospitals at large. However, it takes time for new and cost-efficient ways of treatment to be developed and implemented.

Reducing turnover rates is one of the primary methods of improving hospital cost-efficiency, as expenses for hiring and training new employees are very high and leave a significant imprint on the hospital budget. Reducing turnover rates helps save money, therefore increasing the hospital’s cost-efficiency (Thompson, n.d.).

Why is Retaining Employees Important?

Many people associate finding new employees by simply putting an ad in a local newspaper or placing one on a job search site. However, this is an extremely narrow view. Hiring new employees is expensive. The majority of these expenses, however, are the so-called ‘unseen expenses.’ They are not obvious to an average employee or even to a manager, but a company director or a CEO is typically well aware of how much does it cost. In order to manage high levels of employee turnover, a hospital has to have a dedicated HR department and work with recruitment companies. Otherwise, there is a danger of leaving important positions understaffed. The hospital is required to cover the expenses for numerous job ads placed on dozens of sites, as well as HR manager payments, interview expenses, material expenses, and other costs (Kantor, 2016).

In addition, the company will lose in quality and profit from having fewer employees on duty, meaning that fewer patients would be attended to. Lastly, new employees would need training and time to adjust to their new positions within the hospital hierarchy. Training is expensive, and adjustment is a lengthy process. Different researches estimate that it takes roughly 1 to 2 years before a new employee is fully ready to compensate for the previous one, which has fully adapted the position (Kantor, 2016). Should the hospital lose a highly qualified employee, their skills and knowledge would be used by a competing organization. This could indirectly affect the hospital’s income and market share in a negative way. According to various researches in hospital economics, it takes from six to nine monthly employee salaries to replace an employee, which means that the hospital loses from 70,000 to 100,000 dollars on average per employee lost due to turnover (Kantor, 2016).

The Role of HRM in Forming Compensation Packages

Many hospitals make one crucial mistake when designing their compensation packages -they make assumptions when offering various programs and benefits to potential employees, without actually contacting their existing ones and asking for their opinions in regards to the existing package. The role of the HRM department is to form a connection with potential and existing employees in order to understand which benefits are important to them and which ones can be safely discarded (Kantor, 2016). That way, it is possible to improve the program’s cost-efficiency while including programs and benefits sought after by the employees at the same time. Another important role of the HRM is to know the main reasons for turnover rates in their particular hospital. Employee benefits packages should be aimed at reducing these negative effects, thus decreasing turnover rates and increasing morale, productivity, and job satisfaction.

Existing Situation and Potential for Improvement

As it stands, the current benefits package does not do enough to decrease employee turnover rate, which is at 60-70 employees per year on average. In order to calculate potential losses from employee turnover at the current rate, we need to multiply 70 employees by roughly 85,000 dollars/employee. Thus, total yearly losses from turnover alone equate to 5,950,000 dollars a year. To calculate the costs and benefits of potential solutions based on the employee benefits package alone, it is required to project a future employee turnover rate after changes have been implemented (Nas, 2016). If we project the reduction of employee turnover rate by 10%, from 15.6% to 5.6%, total losses from employee turnover would be reduced from 5,950,000 to roughly 2,136,000 dollars. Thus, the total benefit from the implementation of such changes would be 3,814,000 dollars. In order for potential changes to the employee benefits package to be cost-effective, the costs of their implementation would need to be lower than 3,814,000 dollars per year. These calculations do not include changes to the quality of care, as those are hard to measure in a financial equivalent. However, a reduction in turnover rate is associated with a general increase in quality of care, which means fewer accidents and mistakes, more satisfied customers, and a general increase in quality of life.

Existing Employee Benefits Package Analysis

As it was already mentioned, Cottage Health Hospital provides many benefits to its employees in an effort to retain them. These bonuses are:

Medical Plan.
Dental Plan.
Life Insurance.
Disability Coverage.

These bonuses are standard for the majority of the hospitals and do not enhance the competitive ability of the package. They are the essentials, without which employee turnover rate will skyrocket. Therefore, the only ones that affect the competitiveness of the hospital’s employee package are the additional benefits offered to all employees. To reiterate, these are college savings plans, retirement plans, hospital-sponsored events, employee recognition programs, discount tickets, free onsite yoga, and sitting massages, as well as housing benefits and tax-sheltered annuities.

As it is possible to see, the hospital does not mention or provide the employees with paid holidays, paid sick leaves, or paid vacations. While these measures are standard in the majority of companies, some hospitals feel they cannot afford to lose a member due to being understaffed. However, the negative result of such a policy is that many workers are discouraged from taking days off even when they need them. This results in employees being overworked and suffer from burnout, which is considered the primary reason for turnover among hospital staff, especially nurses. The majority of nurses work 12-hour shifts, which are very strenuous on both mind and body, and having no paid breaks greatly reduces morale and desire for work, especially among the newer employees who are not used to such schedules. Statistics show that the majority of turnovers in hospitals happen within the first three years of service (Thompson, n.d).

Possible Changes and Improvements to Employee Benefits Package

In lieu of the provided cost-benefit analysis, Cottage Health Hospital has approximately 3.8 million dollars a year to spend on improving employee benefits package in order to reduce turnover rates by 10%. This sum could be further increased by discarding some of the unneeded benefits in the existing program. As it stands, free onsite yoga and sitting massages are pointless because of how overworked most nurses are. The majority of them simply do not have any free time in order to use these benefits.

However, what this hospital desperately needs to reduce turnover rates is a solid paid leave program, which would include sick leaves, holidays, and vacations. While this is a very expensive benefit, the hospital has money to afford it. The reduction in turnover rates would allow the hospital to continue functioning even while some employees enjoy their paid days off, and the total number of active employees is bound to increase. In addition, the hospital would enjoy a higher quality of care and employee motivation, which should bring additional financial benefits to the organization. Lastly, improving employee retention would help decrease costs associated with active search and recruitment of new employees. Having a solid basis for commitment and long-term relationships with the hospital would encourage new employees to develop a career within the organization. Thus, overall benefits would outweigh the costs, resulting in a positive CBA ratio (Nas, 2016).

Conclusions

Cottage Health Hospital System is suffering from high turnover rates associated with burnout, tiredness of the nursing staff, and unsatisfactory employee benefits package. The cost-benefit analysis showed that there is a potential of decreasing turnover rate from 15.6% to 5.6% by providing employees with paid holidays, paid sick leaves, and paid vacations as part of the overall cost-efficiency improvement strategy. By retaining employees, the hospital would be able to improve its costs and quality of care while at the same time saving money otherwise spent on dealing with high turnover rates.

References

About Cottage Health. (n.d.). Web.

Cottage Health’s total compensation package. (n.d.). Web.

Duffield, C. M., Roche, M. A., Homer, C., Buchan, J., & Dimitrelis, S. (2014). A comparative review of nurse turnover rates and costs across countries. JAN, 60(12), 2703-2712.

Kantor, J. (2016). Staff turnover costs more than you think. Huffington Post. Web.

Nas, T. F. (2016). Cost-benefit analysis: Theory and application (2nd ed.). New York, NY: Lexington Books.

Thompson, J. (n.d.). Staff turnover in hospitals.Web.

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