Higher Nursing Staff Wages Are Associated With Lower Operating Margins in Nursing Homes: An Instrumental Variable Analysis

Nursing staff including registered nurses (RNs), licensed practical nurses (LPNs), and certified nursing assistants (CNAs) are critical to nursing home (NH) operations but account for approximately 27% of net revenues. Understanding how nursing staff wages affect financial performance is particularly important as policy efforts seek to expand NH minimum staffing hours. Drawing from efficiency wage theory, which posits that employers may pay above-market wages to enhance worker productivity and retention, this study examined the relationship between nursing staff wages and NH financial performance. We used secondary datasets, including Payroll-Based Journal data and Medicare cost reports (N = 37 933 facility-year observations, 2020-2022). The dependent variable was operating margin, while the independent variables were facility-level RN, LPN, and CNA wages. An instrumental variable (IV) approach was used to address potential endogeneity in RN wages, with county-level average wages (excluding the index facility) serving as the instrument. The first stage modeled RN wages as a function of the instrument, and the second stage estimated the effect of predicted wages on operating margin. Ordinary least squares models were used for LPN and CNA wages, for which endogeneity was not detected. A $1 increase in RN wages was associated with a 0.70 percentage-point decrease in operating margin (<i>P</i> = .01, 95% CI [-1.27, -0.14]). For LPNs, a $1 increase was associated with a 0.17-point decrease (<i>P</i> < .001, 95% CI [-0.20, -0.13]), and for CNAs, a 0.31-point decrease (<i>P</i> < .001, 95% CI [-0.37, -0.26]). These findings underscore the tension between workforce investment and financial sustainability in an industry that operates in a resource-constrained environment. Policy interventions such as wage subsidies or higher Medicaid reimbursements may be necessary to balance staffing investments with financial viability.