In Part 1 of this series we discussed the three basic variables that travel nursing companies pay attention to when determining the travel nursing pay rates for their jobs. To keep it simple, we defined these variables in very simple terms (Revenue, Cost, and Other Costs) rather than using the technical terms typically used in the business. Now let’s turn to discussing how agencies use them to determine their pay packages.
Agencies are businesses
Let’s not forget that agencies are businesses. At a bare minimum, businesses need to break even in order to continue doing business. It’s true that businesses can take losses, and some businesses can take losses for years on end. However, agencies aren’t in the category of businesses that can take losses for years on end, they need to be break-even or profitable.
Break-even means that they don’t need to borrow additional money to meet their financial obligations. Profitable means they have some money left over after meeting their financial obligations. Profits can be paid out to shareholders as dividends, or to employees as bonuses, or they can be reinvested into the business, for example to purchase additional office equipment. No matter the case, every agency must employ some strategy for forecasting their future profitability to ensure that they don’t go bankrupt. How they accomplish this could potentially have an effect on the rates they offer and/or the overall make-up of their pay packages.
Agencies and the “fixed gross profit” method
I am aware of two forecasting strategies used by agencies. I’m not aware that there are any defined names used in the industry to differentiate these two methods, so we’ll call the first method the “Fixed Gross Profit Method.” In this scenario, the agency determines a fixed gross profit figure to target for each contract. No matter what the bill rate is, or the contracted hours, or anything else, in this scenario the agency must always achieve a predetermined gross profit figure.
This gross profit figure is typically defined by the agency’s “Other Costs.” The agency will determine their “Other Costs” down to the penny and set that figure as a gross profit goal. They then know how many contracts they need in order to meet their goal. To achieve even greater detail, the agency may focus on the number of “full time equivalents” they need to meet their profit goal. A “full time equivalent” is basically a full time worker. This could be defined as 36 or 40 hours per week.
For example, let’s say an agency determines that its Other Costs will be $200,000 for the fiscal quarter (a 3 month period). Now let’s say that the agency decides on a fixed gross profit of $5,000 per 13 week, 36 hour contract. This means that the agency needs 40 13 week, 36 hour contracts during the quarter just to break even. Because we don’t live in a perfect world, the agency is going to break this figure down to the hour. In this case, the agency needs to make sure that their nurses work a total of 18,720 hours (40 workers working 36 hours per week, for 13 weeks = 18,720). The agency is also going to know that their gross profit per hour is going to be $10.69 (13 weeks at 36 hours per week is 468 hours. $5,000 divided by 468 hours is $10.69 per hour). For an agency using this method, it doesn’t matter if it’s a single PRN shift, a 13 week contract with a $53 bill rate, or a 13 week contract with a $73 bill rate. They are going to target $10.69 per hour no matter what.
The Fixed Gross Profit Method is simple and efficient for the travel nursing agency to use. The agency knows exactly how many hours they need their nurses to work. In addition, the agency ensures that all of the nurses who work for them make the same amount of money at a given facility which minimizes complaints complaints from nurses who find out they’re getting paid less than others. Moreover, the agency’s recruiters are quick and efficient with pay quotes when they are requested. And the negotiation process is virtually eliminated as it becomes a take-it-or-leave-it proposition.
Despite the efficiency and uniformity of the Fixed Gross Profit Method, I believe that it’s used by few agencies. I have spoken to recruiters from agencies that use it, and the agencies have all had one thing in common, besides the use of the model. They all had relatively few contracts with facilities. They all derived a major percentage of their revenue from one or two facilities. For example, one agency derived over 80% of its revenue from the California Department of Corrections.
I believe they’re able to employ this method because they have relatively few bill rates to contend with. You see if a agency has a broad spectrum of facilities and bill rates, then this model becomes less attractive because it lacks flexibility. For example, let’s say that the agency was set on achieving $10.69 gross profit per hour, and they had bill rates that were as low as $48, and as high as $82. The agency would have a very difficult time filling the $48 bill rates. The gross profit wouldn’t leave enough money to make the package competitive with other agencies that were willing to take less than $10.69 per hour. Meanwhile, they’d have a very attractive pay package for the $82 bill rates. However, they’d also be leaving money on the table. They may be able to find travel nurses who would gladly work for a compensation package that would leave the agency $16 to $20 per hour.
Agencies and the “gross margin per contract” method
For this reason, most agencies utilize the second method that we’ll call the “Gross Margin per Contract” method. I believe it’s fair to say that the standard gross margin in the industry is between 15% and 25%. Any lower, and an agency may go out of business because they won’t be able to cover their Other Costs. Any higher, and they may get a very bad reputation for paying low rates.
Keep in mind, this margin range is a goal. Remember, this means that when Cost is subtracted from Revenue, the remainder will be 15% to 25% of Revenue. For example, let’s say the bill rate on a contract is $60. This means that the agency’s gross profit margin will be $9 (15% of $60) per hour to $15 (25% of $60) per hour. While the majority of their contracts will be negotiated somewhere in this range, there will certainly be some contracts that have both higher and lower margins.
The Gross Margin per Contract method provides the agency’s recruiters with some flexibility. Recruiters can make determinations based on experience, and how well a candidate fits the job description, and pay more or less accordingly. If the travel nurse recruiter is bidding against another agency, they will be better able to negotiate. Moreover, travel nurse recruiters will be able to reward veteran staff with potential pay increases for extending their contracts. They can also engage in retention strategies. For example, they may pay a current travel nurse staff member a good pay rate for a hospital with a low bill rate just keep that travel nurse from going to another agency, hoping that they’ll be able to get a better bill rate on the next contract.
The Gross Margin per Contract and the Fixed Gross Profit methods are employed to ensure that agencies are able to forecast, meet their debt obligations, and stay in business. Which method they choose will have an impact on the pay package they offer. However, it will be virtually impossible for travel nurses to tell the difference. Instead, you should focus on comparing travel nursing pay packages between agencies. In order to successfully do this, you’ll need to understand how pay packages work, and be armed with effective questions.