Mercer Capital's Value Focus: Healthcare Facilities | Year-End 2017
Economic Analysis of Nursing Shortage
1. Ricky Robbins
ECON 5980
Economic Effect of the Nursing Shortage
The US has been experiencing a steady decline in the ratio of nurses to
patients. “Estimates of average nurse vacancy rates at hospitals range from
10.2 percent to 13 percent, with one in seven hospitals reporting more than 20
percent (Spetz and Given).” This gap in healthcare provision will only be
magnified in the next 20 years as the entire “baby boomer” generation enters
retirement. People, as a general rule, need more medical care in later years of
life. Typically, employment in the nursing field has been cyclical, as with any
profession, going through periods of shortage and surplus. The vast majority of
registered nurses (RNs) are members of the baby boomer demographic. As
the US has a large influx of retiring nurses, there will be a massive shortage in
the healthcare field. With the current economic status and employment state,
there is not sufficient inflow of new Registered Nurses to replace all those who
will retire in the near future. Registered Nurses make up the largest segment of
the healthcare profession (Georgia Nurses Association). With all these nurses
going into retirement, we will have a strong need for new entrants into the
nursing profession. How can we fix this problem?
In the late 20th and early 21st century United States, there has been a
steady decline in the number of Registered Nurses in the medical field. This
paper will discuss the reasons for the shortage, from both an economic and
medical perspective, the effects of the shortage and also possible solutions for
the shortage. Several economists, as well as professionals looking at the
medical field, have analyzed this shortage. This paper will discuss some of the
research already performed by economists, describing an economic model as
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2. Ricky Robbins
ECON 5980
Economic Effect of the Nursing Shortage
well as report a case study from a best practice hospital in the Midwestern
United States.
This paper proceeds as follows. The following section describes the
aging nurse population and employment trends in the nursing profession over
the past ten years. Details are given on US salary data for registered nurses.
Common detractors for new potential new nurses will be discussed along with
some demographic trends in the labor supply. One important aspect of the
shortage, the lack of teaching faculty in schools of nursing, is detailed. After,
the report will explain what it means to have a shortage in an economy and
some overall reasons for this shortage in the United States. I further detail
some economic statistical evidence of how the US may be experiencing a
shortage of nursing professionals in the next few decades. The United States
healthcare field has been plagued by the effect of monopsony markets in
healthcare labor employment. This will be defined in the mid-section of the
paper. A best practice hospital’s strategy is explained as a possible “model” for
ways to overcome the looming shortage. The paper concludes with theoretical
information on the shortage and proposed solutions
The Nursing Profession and Employment Data
The median age of the nursing population in the United States is rising.
For instance “In March 2004, the average age of the RN population was
estimated to be 46.8 years of age, more than a year older than the average age
of 45.2 years estimated in 2000; and more than 4 years greater than in 1996
when the average age was 42.3 years (Rosseter, 2006, pg 3).” These nurses
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3. Ricky Robbins
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Economic Effect of the Nursing Shortage
will need to be replaced as the supply of Registered Nurses enters retirement.
The chart on the following page pictures the change in the age distribution of
RN’s from 1980 to 2004. The age gap can easily be viewed here. For
instance, “in 2000, an estimated 31.7 percent of all RNs were under the age of
40; in 2004 only 26.6 percent of all RNs were estimated to be under the age of
40 (American Nurses Association).” The problems are magnified because as
all these nurses are retiring and leaving the workforce, the “baby-boomer”
generation retiring increases the need for nursing services. The changes in the
age of the majority of nurses can be viewed over the last 20 years in the chart
pictured below.
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4. Ricky Robbins
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Economic Effect of the Nursing Shortage
Wages in different nursing settings are presented in the table below,
obtained from the Bureau of Labor Statistics.
Employment services (Nurse recruiters, etc.) $63,170
General medical and surgical hospitals 53,450
Home health care services 48,990
Offices of physicians 48,250
Nursing care facilities 48,220
Many employers offer flexible work schedules, childcare, educational
benefits, and bonuses. The table above reiterates that the demand on nurse’s time,
mental wellness, and stress levels drive the wage rate required to retain nurses higher.
Through the year 2014, employment of registered nurses is expected to
grow faster than the average occupation. Because the occupation is quite
large, many new jobs will result and this supply and demand effect will have the
nursing field creating the second largest number of new jobs among all
occupations (Bureau of Labor Statistics). Out of all healthcare jobs, nursing
takes the vast majority, with 2.4 million jobs. Registered Nurses from all types of
facilities: hospitals carrying the largest percentage going from 59.1% of the RN
population in 2000 to 56.2% in 2004, nursing homes and extended care
facilities employing above 6% of nurses, community and public health settings
decreased their nursing employment from 18.3% in 2000 to 14.6% in 2004,
nursing education rose to 2.6% and ambulatory care settings at 11.5% in 2004;
earned a median annual salary of $52, 330 with the lowest 10% earning less
than $37,300 and the highest 10% earned more than $74,760 in May of 2004
(US Bureau of Labor Statistics). For the future of nursing to look bright, wages
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5. Ricky Robbins
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Economic Effect of the Nursing Shortage
will have to rise to clear the market.
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6. Ricky Robbins
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Economic Effect of the Nursing Shortage
The Health Resources and Services Administration has looked at the
current number of nursing professionals and the aging US population and
estimated the increased need for nurses in the not so distant future. It is
concluded that the RN shortage will continue to grow, under the current trends,
due to “a growing and aging US population, high demand for highest quality of
care, an RN workforce at or approaching retirement age and difficulties
attracting new nurses and retaining the existing workforce (Health Resources
and Services Administration).” The growth in the need for nurses will have
quite a notable increase as expressed in the table on the following page, also
obtained from the HRSA:
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7. Ricky Robbins
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Economic Effect of the Nursing Shortage
Projected Number of and Demand for Licensed Registered Nurses,
2000-2020
Licensed RNs Licensed RNs FTE Licensed RN Projected Demand
Active in Nursing Workforce for FTE Licensed
RNs
2000 2,697,000 2,249,000 1,891,000 2,001,500
2020 2,705,000 2,163,000 1,808,000 2,824,900
Graphically:
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8. Ricky Robbins
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Economic Effect of the Nursing Shortage
The graph below provides another view of the need until 2020. This bar
graph below provides another way of looking at the shortage we will likely be
experiencing in the United States, as it depicts the number of projected open or
unfilled nursing positions by 2020. This information was taken from Johnson
and Johnson Services, Inc. Over the past five years, there were over 100,000
vacant positions in healthcare. Healthcare will be an ever growing job market,
with an unending need. Subsequently, the career outlook is excellent for the
nursing field. (Johnson and Johnson Services, Inc., 2002-2006).
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9. Ricky Robbins
ECON 5980
Economic Effect of the Nursing Shortage
The aging workforce in the United States contributes to the
aforementioned growth in the need for nurses. As we move into the 21st
century, the “baby-boomer” generation is coming into retirement. A “baby-
boomer” is defined as someone born between 1946 and 1964. This definition
implies that as of 2007, baby boomers will be between the ages of 43 and 61.
This large aging population’s health needs will increase dramatically, on
average, in retirement.
Another reason hospitals may not be able to attract nurses is built into
the economy. In a one-hospital locale, it may be easy for a hospital to drive
down the wages of its registered nurse staff. In a city or region with 2 or more
hospitals, the hospital with the lower wages will have a hard time attracting
nurses from the labor market. In this situation, hospital administrators may
work together, unlawfully, to set the wage rates for the entire market location.
This collusion is strictly outlawed and will have a detrimental effect on the labor
market for RNs. If wages can’t adjust to a shortage using the normal economic
laws of supply and demand, no new entrants will be drawn into the market and
all end up losing out.
Education
A serious factor that is further confounding the shortage in the supply of
Registered Nurses is the lack of nursing faculty in the schools and colleges of
nursing. The table below from nursingPhD.org further spells out the severity of
the educational faculty shortage:
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10. Ricky Robbins
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Economic Effect of the Nursing Shortage
Qualified Applicants Turned Away
Academic Year
by Nursing Schools in the US
2002-2003 5,283
2003-2004 18,105
64.8% (nearly two-thirds) of respondents to a survey conducted by the
American Association of Colleges of Nursing (AACN) around 2003 said the
main reason qualified they turned away qualified applicants from their
undergraduate nursing education programs was due to a shortage of faculty.
Some problems that schools and colleges of nursing have continuously run into
is a lack of qualified nursing educators at the Masters or Doctorate level to
teach college level courses. Some nurses fear this may cause administration to
lower the qualifications for new nursing faculty (American Association of
Colleges of Nursing).
Work Load/Detractors
Some detractors from the nursing field for new entrants is it is a very high
stress work-load, a strict set of qualifications for licensing and long wait periods
for admittance into training programs and schools. quot;Everyday the nurse
confronts stark suffering, grief and death as few other people do. Many nursing
tasks are mundane and unrewarding. Many are, by normal standards,
distasteful and disgusting. Others are often degrading; some are simply
frightening (P. Hingley, Nursing mirror, No. 159, 1984).quot; Much of the work
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Economic Effect of the Nursing Shortage
related stress in nursing comes from the conflict of different roles and a work
overload. One of the main tasks of the RN is to “get the patient better.” This
often times conflicts emotional support. Several reports have been done on the
consequences of these nursing shortages. “Patient outcomes and medical
errors have received the most attention, and several major studies have
demonstrated that reduced nurse staffing is associated with increased inpatient
mortality, post surgical complications, hospital-acquired infections, and other
negative outcomes (Spetz and Given).”
Lack of Diversity
One area that has been severely lacking in the nursing employment field
is diversity. Nursing in the United States has traditionally been seen as a
profession for white females. As we move on into the future, males and
members of diverse ethnic groups have been entering the nursing profession in
greater numbers than ever. This gender/racial stereotype makes itself quite
evident in the healthcare profession today, pictured in the pie chart below,
which represents out of all males in the nursing profession, what small
percentage are of a race other than non-Hispanic white.
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12. Ricky Robbins
ECON 5980
Economic Effect of the Nursing Shortage
Only about 6% of all US nurses in 2001 were male. Of this 6%, only
14% were members of diverse ethnic groups. This imbalance of representation
in the nursing field is quite dismal considering the recent growth in the minority
population. Data from the US Census Bureau’s American Community survey
showed a growing population of immigrants. In 46 of the US states, and the
District of Columbia, the percentage of immigrants increased from 11.1 percent
in 2000 to 12.4 percent in 2005 (Report: Diversity Growing in Nearly Every
State). Though discrimination in the nursing field has eased in recent years, it
still exists. Many men will not enter the nursing profession because of the
assumption that males in nursing are feminine or those assumptions point to a
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13. Ricky Robbins
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Economic Effect of the Nursing Shortage
profession with a sexual preference. While many men do experience the
disparate treatment as registered nurses, others have broken through the
stigma of discrimination and become very successful. “Mark Buike, RN, feels at
ease and confident as a male nurse. Buike, a Nurse II in the pediatrics ICU at
Jackson Memorial Hospital in Miami, said that any door he has wanted to walk
through has been open to him (Hilton).”
Monopsony
The definition of a shortage in the economy is “quantity demanded is
greater than quantity supplied at the market price (Lane and Gohmann, 1995,
pg. 644).” One can see the possibility of a shortage presenting itself in the
United States when examining data from the US Bureau of Labor Statistics.
One economic explanation for this shortage comes from the fact that the
demand for nurses is rising faster than the employment rate of new RNs.
“Paying a wage equal to the competitive equilibrium wage at the intersection of
supply and demand (Lane and Gohmann, 1995, pg. 645),” could help to solve
this problem. Other explanations for non-market-clearing wages can be
explained by the high demand on a nurse’s time, labor unions and the effect of
a monopsony in the labor market for nurses. With a monopsony in the labor
market, you have one demander of labor. In the case of nursing, hospitals and
hospital-like organizations have traditionally been the sole demanders of
nursing labor in a community. As the only employer of nurses in geographic
location, hospitals can pay lower wages to the RN labor force. Pictured on the
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14. Ricky Robbins
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Economic Effect of the Nursing Shortage
following page is a graphic explanation of Monopsony in the Labor Market
(Riley,tutor2u, 2006).
The monopsony employer has “significant buying power” in the labor
market. Hospitals can use this power to drive down wage rates. In the
occurrence of a monopsony employer, the company will face an upward sloping
supply curve. Students will be less willing to enter the nursing industry.
Hospitals must then pay a higher wage rate to attract RNs to their facility and to
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15. Ricky Robbins
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Economic Effect of the Nursing Shortage
attract new entrants into the nursing profession. The diagram above
demonstrates that “the profit maximizing level of employment is where the
Marginal Cost of Labor (MCL) equates with the marginal revenue product of
employing extra workers (MRPL) (Riley, 2006, Trade Unions and Monopsony
Employers).” ACL and MCL represent the labor supplies at the wage that the
monopsonist offers (ACL and at the level worth the nurses skill-set (MCL). In
this model, Eq employees are employed at the firm; the monopsonist chooses
to pay wage level of Wq. In this case, the employer will only receive the
number of employees equal to the intersection with the line ACL, which
represents the lower number of employees willing to work at this level. This
represents one theory of what is occurring in the nursing labor market. To help
and end the nursing shortage in hospitals, administrators must decide to pay
the wage rate at the profit maximizing level so nurses will enter the labor market
at those hospitals. In the next section I will discuss some social reasons
contributing to the economic shortage in nurses.
At the turn of the century, studies have shown nurses moving away from
working only in the hospital environment. Now many nurses have moved to
working in physician-owned specialty facilities. These jobs are much less
stressful than working in a hospital that runs 24/7 to facilitate all people within a
community during all times. Typically in the physician owned practices run
during the day (1st shift) and only open Monday through Friday. Based on this
movement in the nursing labor, hospitals have lost their monopsonistic power.
When the hospitals are not the only companies hiring nurses in a community, it
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16. Ricky Robbins
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Economic Effect of the Nursing Shortage
can allow for the reinstatement of market competition of wages in the
healthcare field. The common theme among all explanations is wages fail to
adjust instantaneously, creating the likelihood of involuntary unemployment. If
the monopsonistic power of the hospitals is destroyed, hospitals will be forced
to offer a more competitive wage to compete with the private practices.
Case Study
A case study was performed by interviewing Karen V. RN, nurse
recruiter from a top 100 hospital in the Midwestern United States. The interview
is summarized as follows:
• Q: How have you seen the effects of the nursing shortage at your
hospital?
• A: The shortage hasn’t really been seen at all here. It is projected that in
the shortage will hit our organization in 2012.
• Q: Why hasn’t your hospital been affected by the shortage?
• A: A hospital in today’s market has to be good at retaining a skilled
nursing workforce. Our reputation, benefits and overall company culture
provide a pleasant working environment.
• Q: What would be some good plans to implement for when the shortage
does hit your organization?
• A: You need to keep the stream of new college graduates entering the
nursing workforce at your hospital by offering internships, fellowships,
tuition reimbursement and so on. You also need to keep older nurses
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Economic Effect of the Nursing Shortage
working longer. The aging RN workforce has invaluable experience to
pass on to the new graduates. Adjust work schedules away from the 12-
hour workdays of the traditional nurse workday.
• Q: What is a main barrier for young people wishing to enter a nursing
education program?
• A: Most nursing schools have long wait periods. Some community
colleges have a 2-year waiting period after application to actually start in
the program. Major universities have waiting periods based on
qualifications. They take the best people first from year to year, based
on grade point average. Long waiting periods are due to a lack of
experienced nursing faculty to teach. Low faculty numbers provides a
high burn out rate for instructors
• Proposed Shortage Solutions:
o Implement retention/reward programs
o Maintain a happy and satisfied workforce to help embody a good
reputation.
o Government assistance (subsidies for students and teachers in
nursing)
o Hospitals participate in tuition reimbursement
o Provide incentives for retired nurses to teach
o Constantly analyze the return on Investment of the training
programs and adjust accordingly.
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18. Ricky Robbins
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Economic Effect of the Nursing Shortage
The results from the interview in the case study show several strategies
that hospitals could implement to help reduce the shortage. The policy cannot
just be put in place at one hospital for it to be effective. These strategies should
be placed similarly in hospitals throughout the United States to bring about
reform in the nursing labor market.
The Future
Policy makers in the government and other administrative roles are
implementing strategies to help regulate the shortage in nurses. In 2004,
California implemented laws that require hospitals to maintain a minimum
nurse-to-patient ratio. Organizations such as the Joint Commission on
Accreditation of Healthcare Organizations (JCAHO) monitor hospitals and
supply financial incentives for hospitals to maintain minimum staffing levels of
Registered Nurses. Another possible source of new nurses to the US labor
market is by recruiting from other countries. Migration of a foreign nursing force
will only mitigate the US nursing labor crisis in the short term and is unlikely to
provide a long-term solution. International nursing laborers may be reluctant to
enter the labor market in the United States because the majority of nurses in
the World Health Organization also report shortages in their own country’s
nursing workforce (Spetz and Given). The number of new Registered Nurses
will be a function of the amount of people wishing to pursue nursing education
and the capacity of institutions that teach nursing.
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19. Ricky Robbins
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Economic Effect of the Nursing Shortage
Proposed Wage Adjustment
Regression equations can be used to estimate the effect that wage
increases will have on the future growth of graduates from nursing programs.
In these regression equations, we will use the growth in the number of
graduates from RN programs as the dependent variable and past real wage
growth as the explanatory variable. Four equations are estimated to predict this
future growth phenomenon. The first two equations, one with a four-year lag
and the other with a three-year lag, are estimated to help determine the effect
on RN graduation rates. Two additional equations are presented with past
changes in the national unemployment rate as an explanatory variable, helping
to realize the performance of the economy in general has affected the supply of
nurses as well as the decision to pursue post-secondary education. In all these
regression equations, the coefficient of lagged wage changes is 2.25-2.51
statistically significant at 10 percent. The change in the intercept is -0.022 to
-0.026 and statistically insignificant. The coefficient that goes with the change
in unemployment ranges from -0.097 to 0.053 is also not statistically different
from 0. The R-squared statistic ranges from 0.34 to 0.60. These results
demonstrate how changes in past wages are a key determinant in the number
of RN graduations (Spetz and Given).
Using the aforementioned coefficients in the regression calculations, it is
calculated that the wage growth need for supply and demand will equate in
2020. This model is far from foolproof, given the variability of economic
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Economic Effect of the Nursing Shortage
conditions. Several assumptions underlie these calculations. It is assumed that
demand for Registered Nurses and exits from this labor market will not differ
from the forecasts by the Bureau of Health Professionals. It is also assumed
that there is no cap on the level of wage increase in nursing to encourage the
necessary number of people to enter nursing education programs. Thirdly, it is
assumed wages will not increase above the equilibrium level to reach full
employment in the nursing field in 2020. Fourth, it is assumed that nursing
schools have enough capacity to allow enough new entrants to reduce the
shortage. The fifth and final assumption in this model assumes unemployment
rates will not effect graduations from nursing programs. As mentioned in the
model, the coefficient of change in unemployment is not distinguishable from
zero in both equations (Spetz and Given). The diagram below details the
forecasted wage growth needed for RN Supply and Demand to reach
equilibrium by the year 2020. The wage growth needed for RNs in this model
would cumulatively increase by 55-69 percent, more than doubling the spending
on the nursing workforce by 2016.
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Economic Effect of the Nursing Shortage
Forecasted Wage Growth Needed For Registered Nurse (RN) Supply And Demand To Reach
Equilibrium By 2020
Regression model used for forecast
Three- Three-year lag with Four-year Four-year lag with
year lag unemployment lag unemployment
Required yearly real 3.2% 3.5% 3.7% 3.8%
wage growth, 2005–
2016
Cumulative real 55.4% 61.9% 66.3% 68.6%
wage growth, 2002–
2016
Real hourly wage in $37.12 $38.77 $39.92 $40.50
2016
SOURCE: Authors’ projections based on regression equations using data from the
Current Population Survey (U.S. Bureau of the Census), National League for Nursing,
Bureau of Labor Statistics, and Bureau of Health Professions.
NOTE: Wages are measured in 2003 dollars.
The shortage in nursing professionals is hitting hospitals all over the
United States. In October of 2007, the first member of the baby boomer
generation began to collect her Social Security benefits. This aging population
will continue to cascade into the hospital rooms and demand more nursing
services. If large numbers of new nursing staff are not recruited in the near
future, high stress levels due to overworking will be commonplace among all
healthcare professionals. Hospitals may find recruitment much easier if wage
levels will rise to meet the demand for labor. These changes will likely require a
total reform of the nursing profession and how it is viewed by society.
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Guide to Nursing Education and Careers.2007. December 3, 2007
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22. Ricky Robbins
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Economic Effect of the Nursing Shortage
American Nurses Association. “Background.” NursingWorld. 2007. November
28, 2007
<http://nursingworld.org/MainMenuCategories/CertificationandAccreditati
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<http://www.ilo.org/public/english/protection/safework/stress/nursing.htm
>
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Economic Effect of the Nursing Shortage
Riley, Geoff. “Trade Unions and Monopsony Employers.” A2 Markets & Market
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<http://www.tutor2u.net/Economics/revision-notes/a2-micro-trade-unions-
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V., Karen nurse recruiter. Professional interview. Kalamazoo, MI. November 19,
2007
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