Nurses

1
Centre for Market and Public Organisation
Can pay regulation kill? Panel data evidence on
the effect of labor markets on hospital
performance Emma Hall, Carol Propper, John Van
Reenen CMPO conference June 2008
2
Motivation

• Unintended consequences of wage regulation
• Pay setting (e.g. public sector) often has
  geographical equity despite different local
  labor markets.
• Pay regulation sets a maximum pay level
• Implies problems of labor supply when outside
  labor mkts strong
• Implies poorer performance when outside labor
  markets are strong

3
Our Design

• Wages for nurses (and doctors) in UK National
  Health Service centrally set by National Pay
  Review Body. NPRB Mandates wage rates for
  doctors and nurses by grade. Uprated each year.
• Very little local variation in regulated pay
  despite substantial local variation in total
  private sector
• E.g. 65 private sector pay gap between
  North-East England and Inner London but only 11
  in NPRB regulated pay
• Use exogenous variation in outside wage and
  examine impact on hospital outcomes (quality,
  prody)
• Institutional setting one in which selection of
  patients to hospitals is limited

4
Our Results

• Hospitals in high outside wage areas have lower
  hospital quality (higher AMI death rates) and
  lower output per head.
• Not result of general UK labour market conditions
• Placebo experiments on similar sectors no
  evidence of negative effect of outside wages on
  productivity
• One mechanism greater reliance on lower quality
  temporary/agency staff.

5
Geographical variation in
In-hosp AMI deaths
Outside wages
Agency nurses
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OUTLINE

1. Models What is the effect of pay regulation?
2. Empirical models
3. Data
4. Results
5. Conclusions

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1. Effects of high outside wage relative to
regulated wage

• Employers
• try to circumvent by over-promoting (grade
  drift) and increasing non-wage benefits. Limited
  by regulation/union enforcement
• Substitution to other factors health care
  assistants, maybe capital. But limited due to
  nature of needed expertise.
• Substitute temporary agency staff. Lower
  job-specific human capital so less
  productive/lower quality (cf Autor Houseman,
  2006)
• Employees
• Lower participation, higher vacancies for
  permanent staff
• More likely to become agency staff.
• Permanent staff also less motivated, lower
  relative quality compared to low outside wage
  areas
• Implication Worse hospital performance in
  high outside wage areas

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Simple model

• 2 areas high outside wage South and low
  outside wage North
• Regulated wage the same in both areas
• Regulated wage lower than equilibrium wage

9
Wages
Labour Supply, South
Labour Supply, North
Labor Demand
Regulated Wage
N, employment
NSOUTH
NNORTH
10
Wages
Labour Supply, South
Labor Demand
Regulated Wage
N, employment
NSOUTH
11
Wages
Labour Supply, South
Labor Demand
Agency Wage
Regulated Wage
Agency staff
N, employment
NPERMANENT
NTOTAL
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Implications

• In high outside wage areas
• Problems of labor supply for permanent staff
• higher vacancies
• lower participation in nursing
• Greater reliance on agency nurses
• Worse health outcomes
• Lower quality (AMI death rate)
• Lower productivity
• See this in raw data at regional level

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Higher nurse vacancy rates1 in stronger labor
markets (fig 4)
1 Percentage of nurse posts that have been vacant
for 3 months or more
14
Higher use of agency nurses in stronger labor
markets (Fig 6)
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Higher death rate from AMI admissions in stronger
labor markets (fig 7)
16
Changes in AMI death rates and changes in outside
wages
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2. Empirical Models
1. Hospital quality equation
For hospital i in year t d 30 day death rate
from emergency AMI admission for 55 year
olds SPHYS share of clinical workforce who are
physicians SNURSES share of clinical workforce
who are nurses (and AHPs) (base group is health
care assistants) wO ln(outside wage) Z
controls for casemix, area mortality rates,
hospital size, teaching status w ln(inside
wage) ? hospital dummies t time dummies,
rregional dummies
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2. Hospital productivity equation
Ln(Y/L) ln(Finished Consultant Episodes per
clinical worker) SPHYS share of clinical
workforce who are physicians SNURSES share of
clinical workforce who are nurses (and
AHPs) (base group is health care assistants) wO
ln(outside wage) Z controls for casemix, area
mortality rates, hospital size, teaching status w
ln(inside wage) r regional dummies t time
dummies ? hospital dummies
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Issues

• Unobserved heterogeneity OLS, long differences
  and System GMM
• Endogeneity of wages and shares
• Outside wage hospitals are a small of local
  labor market
• Skill shares GMM-SYS (Blundell-Bond,2000 Bond
  and Soderbom, 2006)
• Standard errors allow for heteroscedacity,
  autocorrelation and clustering by region

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Issues

• Endogeneity of patient quality
• Selection of hospitals
• Hospital selection limited by inst. structure
• AMI patients sent to nearest hosp.
• Hospitals not monitored on quality in theory
  financial incentives exist but no systems to
  implement

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3. Data

• Hospital level panel data
• 3 groups of clinical workers Physicians, nurses
  (AHPs) and Health Care Assistants. Total
  employment. From Medical Workforce Statistics
• Agency staff hospital financial returns
• Hospital quality 30 day in-hospital death rates
  for Emergency admissions for Acute Myocardial
  Infarction (AMI) for over 55 year olds. From HES
  (Hospital Episode Statistics).
• Productivity Finished Consultant Episodes (HES)
  per worker

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Wage Data

• Outside wage
• New Earnings Survey (NES) 1 sample of all
  workers
• Use travel to work area (78 in England)
• Map to hospital specific TWA
• Female non-manual wage
• Inside Wage
• Average wage in hospital (but can just reflect
  grades)
• Predicted wage based on NPRB regulation including
  regional allowances (Gosling-Van Reenen, 2006)

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Final Dataset

• 211 hospitals between 1996-2001
• 907 observations

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Large spread in death rates from AMI between
hospitals
Worst 10
Best 10

• Improvements over time (cf. TECH Investigators)
• 1996 10 percentage point (60) difference
  between top and bottom (90th 27,10th 17)

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Big spread in productivity between hospitals
(Fig 3)
Note productivity measured by finished
consultant episodes per worker
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OUTLINE

1. Models What is the effect of pay regulation?
2. Empirical models
3. Data
4. Results
5. Conclusions

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Table 2 Death Rates from AMI
28
Magnitudes (col 3)

• From 90th to 10th percentile of area outside wage
  difference is a fall of 33, associated with
• a 14 fall in death rates (a quarter of the 62
  90-10 spread)

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Table 3 Productivity (FCEs per employee)
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Magnitudes

• From 90th to 10th of area outside wage difference
  is a fall of 33, associated with
• a 16 increase in productivity (a quarter of the
  90-10 productivity difference)

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Placebo tests

• Nursing homes
• Provide medical care and other care services to
  elderly
• Wages not regulated
• 649 randomly selected homes data for 1998 and
  1999
• Our estimates show no association between outside
  wages and productivity for nursing homes

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Other placebo tests

• 42 service industries
• Dependent variable ln(revenues/worker)
• Only in 7/126 regression was outside wage neg.
  and significant
• Inside wage significant in almost all
• Suggests our finding of neg. effect of outside
  wages is a result of regulated pay maximums

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A possible mechanism Agency nurses
34
A possible mechanism Agency nurses

• Higher outside wages associated with
  significantly greater use of agency staff
• Doubling of agency staff increases AMI death
  rates by 5 no effect of outside wages
• Agency nurses disproportionately in A and E wards
• Less effect on outside wages in productivity
  equation, but agency use still significant
• For 2001-2002 find use of agency staff related to
  MRSA rates

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Robustness checks

• Upswings lead to poorer health in local labour
  market (e.g. Ruhm)
• Case-mix and local wages
• AMI severity (HRG category) not related to
  outside wages
• controls for HRG not significant for AMI deaths
  total case-mix not significant for prody
• Are outside wages associated with higher
  community death rates?
• Our model implies weakly so
• Ruhm type argument strong positive relationship
• We find weak n.s. positive relationship
• Also find no relationship between two key drivers
  of poor health-upswing relationship (pollution,
  smoking)

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Robustness checks

• Outside labor market affecting ambulance care
• More economic activity slower road speeds
  (floor to door)
• Control for ambulance speeds
• Poorer quality of ambulance crew (door to needle
  time)
• Ambulance crew have no autonomy over which
  hospital to go to administration of reperfusion
  (to stop clotting) by crews under 0.6.
• Other tests
• Financial pressure
• Dynamics

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Cost effective?

• Effect on AMI death rates of outside wage similar
  magnitude to drug based medical interventions
  (aspirin, beta blockers)
• 10 increase in outside wages leads to 1 pp
  increase in AMI fatality Heidenrich and
  McClellan (2001) increase use of aspirins by 70
  resulted in 3.3 p.p fall in AMI mortality
• Cost of a life year saved by an 1 increase in
  (inside) nurse wages and an 1 p.p. increase in
  physician and nurses skill shares
• Increasing inside wages 100,000
• physician share 60,000
• nurse share 36,000
• Value of QALY c 60,000
• Cheaper than the current cost of AMI treatment in
  the US (Skinner et al 2006)

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Conclusions

• Regulated pay costs lives (and productivity) in
  high outside wage areas
• Higher death rates (and lower productivity) in
  areas where labor markets are tight
• Some of this affect seems to operate through
  greater reliance on temporary agency staff
• Not a feature of other UK service industries
  where (maximum) pay regulation does not operate
• Labor markets important for health on supply side
  of medical care as well as demand side
• Policy solution allow wages to reflect local
  labor market conditions?

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Back Up Slides
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Next Steps

• Other explanations e.g. technology adoption
  (Acemoglu and Finkelstein, 2006)?

41
Underlying structural model

• Hospitals choose mix of factors depending on
  environment and adjustment costs
• Factor with high adjustment costs changed more
  slowly
• Implies that lagged values predict future values
• Empirical identification requires that adjustment
  costs be sufficiently different across the
  factors to avoid weak instruments problems

42
System GMM
Equation of interest
1) Difference equation eliminates firm fixed
effects
Moment conditions allow use of suitably lagged
levels of the variables as instruments for the
first differences (assuming levels error term
serially uncorrelated, see Arellano and Bond,
1991)
for s gt 1 when uit MA(0), and for s gt 2 when
uit MA(1), etc.
Test assumptions using autocorrelation test and
Sargan
Problem of weak instruments with persistence
series..
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System GMM

• 2) Use lagged differences as instruments in the
  levels equation
• additional moment conditions (Arellano and Bover,
  1998 Blundell and Bond, 2000)

for s 1 when uit MA(0), and for s 2 when
uit MA(1)

• Requires first moments of x to be time-invariant,
  conditional on common year dummies
• Can test the validity of the additional moment
  conditions
• We combine both sets of moments for difference
  and levels equations to construct System GMM
  estimator
• We assume all firm level variables are
  endogenous, while industry level variables are
  exogenous in main specifications (relax in some
  specifications)

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Alternative to regulation

• Avoiding permanent pay increases (Houseman et al,
  2003)
• Pay more observable than in US
• Differences in pay and quality across regions are
  persistent

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Sample characteristics
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Sample characteristics cont
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3. Placebo productivity equation
Ln(R/L) ln(revenues/worker) SQUAL share of
workforce who are qualified (nursing homes with
nursing quals ln (cap/labor) ratio other
industries) wO ln(outside wage) Z total
staffing ( gender mix, age of staff for nursing
homes) w ln(inside wage) r regional effects t
time dummies ? firm fixed effect Run for 42
industries nursing homes
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Robustness checks coefficient on outside wage
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Table 6 Placebo experiments nursing homes