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The cost of employee turnover, that hidden operating expense that rarely finds its way into financial statements, is in the healthcare industry spotlight as hospital and physician group practice executives grapple with ways to reduce their costs in anticipation of significant cuts in Medicare payments that are in the pipeline.

Since more than 78 million Americans will be entering the Medicare system over the next 20 years, and with the Medicare Board of Trustees projecting that the Hospital Insurance Trust Fund will be bankrupt in eight years, the outlook for more severe cuts in payments to doctors and hospitals is a foregone conclusion. While the argument is true that simply cutting Medicare payments to healthcare providers is not healthcare reform, it is an economic reality.

There are more than 5,100 hospitals in the U.S. today. Those that cannot transform their operations and dramatically reduce costs may find themselves in bankruptcy or out of business.
That is why something as mundane as reducing employee turnover is so important.

There are hundreds of studies that have analyzed the economic impact of turnover, and executive mis-hires. For nurses, the projected replacement cost ranges from $3,000 in one “conservative estimate” to more than $60,000 for a specialized ICU or perioperative clinician. The consensus estimate is between $25,000 and $45,000 per nurse.

In hospitals that recruit and train 80 RNs a year, the estimated turnover cost is between $2 and $4 million a year. When you include dietary workers, nurse aides, lab and imaging technicians in the those costs quickly move north of $5 million a year. For some hospitals, the cost of turnover is equal to their operating margin for an entire year. At one large east coast hospital, executives estimate their turnover costs are more than $12 million a year, at a minimum.

The cost of leadership turnover ranges between two to three times their annual base salary, according to conservative projections. The average CEO tenure in 2006 was only 43 months, according to a study from the American College of Healthcare Executives. At some investor-owned corporations, that average tenure is considerably lower. With an average base salary of $175,000, the cost of CEO turnover for one investor-owned corporation is more than $8.7 million. Today, that may be viewed as a cost of doing business, but in a new healthcare economy where you must reduce costs to a level approaching Medicare Minus in order to make a margin on the flood of new seniors into the program, these turnover costs will be harder for investors to swallow.

Hospitals and physician group practices are in for a bumpy ride as they work to transform themselves – with or without Congressional “healthcare reform.”

At JohnMarch Partners we have transformed our business model to provide clients with flexible portfolio of recruitment solutions that will enable them to choose all or part of our executive search process – whatever suits their needs.