7 Things To Know About Travel Nursing Company Profit Margins

A review of travel nursing forums and social media groups indicates there are a lot of questions about travel nursing company profit margins. A deep understanding of  agency profit margins can help travel nurses negotiate better pay packages. Here are 7 things every travel nurse ought to know about travel nursing company profit margins.

1: The Difference Between Gross Profit Margin And Net Profit Margin

Of course, the first thing we need is a working definition of the term “profit margin”. There are two fundamental types of profit margins that travel nurses should know, gross profit margins and net profit margins.

Gross profit margin is defined as:

A financial metric used to assess a firm’s financial health by revealing the proportion of money left over from revenues after accounting for the cost of goods sold. Gross profit margin serves as the source for paying additional expenses and future savings.

Net profit margin is defined as:

The percentage of revenue remaining after all operating expenses, interest, taxes and preferred stock dividends (but not common stock dividends) have been deducted from a company’s total revenue.

Blah, blah, blah, financial mumbo jumbo. What’s the bottom line for travel nurses?! The first key point for travel nurses to know pertains to the Gross Profit Margin. Specifically, travel nurses should know that a Gross Profit Margin is the proportion of revenue that is left over after subtracting the cost of goods sold.

Now, I really hate saying this, but in the travel nursing industry, the goods being sold are travel nurses. Yuck, I know!! Saying this makes my skin crawl, but this is how the staffing industry works.

The second key point for travelers to know is that every last cost that can be attributed to the travel nurse is deducted before arriving at the agency’s Gross Profit Margin.

The third key point for travelers to know is that the Gross Profit Margin is what recruiters and agencies are referring to when they talk about profit margins publicly. So, if you have ever heard a recruiter say something like, “we take out our customary 20% profit margin” when referring to travel nursing pay packages, they’re talking about Gross Profit.

2: The Difference Between Gross Profit Margin And The Travel Nursing Pay Package

With that in mind, we turn to one of the most common misconceptions about travel nursing company profit margins. It is commonly assumed that a travel nurse’s pay package constitutes the entire set of cost variables that are associated with the traveler.

In other words, people assume that that the pay package IS the “cost of goods sold”. This leads people to think that the difference between the traveler’s pay and the bill rate is the company’s gross profit.

There Are Additional Costs That Aren’t Visible On The Pay Stub

Unfortunately, this is not correct. There are actually a host of additional costs that must be covered before the agency’s gross profit kicks in. Let’s take a look at a quote from a traveler posted in a social media group illustrating the confusion that this assumption can cause:

I had a recruiter tell me that they only keep 15-20% of the bill rate because they value their nurses and want to give them the best rates. I found out differently when I started my assignment. Travelers talk and I found out that I was the lowest paid nurse working in that department. I went to the Sourcing Dept at the hospital and asked what the bill rate was and found out that the recruiter lied to me. They weren’t keeping 15-20%. They were keeping 47%! And 66% of on call pay! I will NEVER work for this agency again.

To summarize, the recruiter told the traveler that the company keeps 15-20% of the bill rate. The traveler found out the bill rate and calculated that the agency was keeping 47% of the regular rate and 66% of the on-call rate.

Given the limited information available to the traveler, it would be very difficult, if not impossible, to accurately determine how much the agency was keeping. However, understanding all the variables involved can help travelers make informed guesses. So let’s take a look at what’s involved.

Account For The Entire Travel Nursing Pay Package

First, we have to account for the entire travel nursing pay package. Here is a list of items to consider when determining the value of the pay package:

1. Taxable Base Rate (blended for regular and overtime if you get paid overtime as part of your contracted hours)
2. Meals & Incidental Expenditure Stipend
3. Lodging or Lodging Stipend
4. Medical Benefits
5. Travel Stipend
6. License/Certification Reimbursements
7. Any other compensation variable received by the traveler.
8. Break everything down to an hourly value to arrive at the blended pay rate. Check out the video below to see how to calculate the blended rate.

Account For The “Other Costs” Attributable To The Traveler

If we stopped here and only accounted for the pay package, we’d still be way short of the total cost. For example, based on my experience, if the bill rate for an assignment in California was $65 per hour, then it would be reasonable to expect the total value of the traveler’s compensation package to be $43 per hour with a 20% gross profit margin, or $13 per hour, for the agency.

However, as you can see, there is a $22 per hour difference between the bill rate ($65 per hour) and the value of the compensation package ($43 per hour). And $22 is 33% of $65. So what gives?

There are a host of additional costs that we need to factor in before we get to the agency’s profit margin. These costs include:

1. Non-Billable orientation hours.
2. The employer’s portion of FICA taxes on the taxable wage.
3. The employer’s portion of State Worker’s Comp, Disability and Unemployment taxes on the taxable wage.
4. Liability insurance for the traveler.
5. Compliance and credentialing costs (background checks, drug screens, medical records, etc)
6. Vendor Management Service fees if applicable.

You can find descriptions of each of these costs here if you’re interested.

Using our example with a $65 per hour bill rate and $43 per hour pay package, these additional costs will easily add up to $9 per hour. That leaves the agency with $13 per hour which is 20% of the $65 per hour bill rate. To simplify the equation:

 

Bill Rate - Traveler Pay Package - Other Costs = Gross Profit

 

3: How Do Travel Nursing Agencies Calculate Gross Profit Margin?

As you can see, there are a lot of variables to factor in before arriving at the company’s gross profit margin. It’s also important to note that different agencies may calculate their gross profit margins in different ways. In particular, agencies may factor in different variables when accounting for “Other Costs”.

For example, if an agency offers a 401K match benefit, then they may or may not account for that cost as one of their “other costs” when determining travel nursing pay packages. If they do not account for it, then the cost of the benefit will come out of the agency’s gross profit margin.

Whether or not this has an impact on the agency’s pay rates depends on the gross profit margins they target. For example, one agency might not accept profit margins lower than 20%, but offer a 401k match, the cost of which is factored into the “other cost”. Another might not accept profit margins lower than 21%, but offer their 401k match without factoring it into the “other cost”. So either way, it’s a wash for the traveler.

This is why it’s so important for travel nurses to have a firm grasp on comparing pay packages. Even when agencies publicize bill rates and gross profit margins, it’s important for travelers to run comparisons. One travel nursing company’s gross profit calculation might be different than another company’s calculation.

4: Not All Gross Profit Margins Are Created Equal

In the case above, we see that different companies attribute different costs to their travel nurses. Therefore, there gross profit margin calculations can be different. However, we must consider 2 additional factors that make gross profit margins different.

Agencies Subject to Different Fees

The first factor is the Vendor Management Fee. For those that aren’t familiar, a Vendor Management Service is a service used by hospitals to help them manage all their communication and correspondence with travel nursing companies. Vendor Management Services typically charge agencies a fee as a percentage of the bill rate.

Unfortunately, these fees aren’t always the same for every agency. For example, in some cases, the Vendor Management Service is actually a healthcare staffing company. When this is the case, the Vendor Manager is referred to as a “Managed Service Provider” (MSP). Managed Service Providers charge fees to other agencies, but not to themselves. Therefore, the MSP ultimately has a higher bill than other agencies. As a result, they can maintain higher profit margins while still paying the nurse as much or more than their competitors.

Economies of Scale

The second factor that can cause differences in gross profit margins is “Economies of Scale”. “Economies of Scale” refers to the reduced cost per unit that arise from increased total output of product. I know, more economic mumbo jumbo! Simply put, contrary to conventional wisdom, large companies are able to realize lower costs than their smaller competitors.

How Costs Can Be Different For Different Companies

Let’s consider housing costs for example. AMN Healthcare has over 8,000 travel nurses working for them. And that’s just travel nurses. AMN also has robust Allied, Locums, and PRN businesses. It’s fair to say that AMN has thousands of healthcare professionals who utilize company provided corporate housing.

That gives AMN tons of negotiating power with large apartment complex operators and furniture rental companies. As a result, AMN is able negotiate price reductions on apartments and furniture rentals. Meanwhile, smaller travel nursing companies are forced to pay a premium for apartments and furniture rentals. This is because apartment operators do not like short term leases, unless you’re going to sign hundreds or thousands of them.

Economies of scale are realized by large companies on a host of production costs. These costs include medical benefits, workers compensation costs, disability coverage costs, liability insurance costs, medical exam costs, background check costs and many others. As a result, a large company’s 26% gross profit margin could easily be equal to a small company’s 20% gross profit margin all else being equal.

This is another reason why it is so important for travel nurses to always compare pay packages. It’s great when companies reveal their bill rates and display their gross profit margins. However, it’s not a guarantee that they’re paying higher.

5: The Gross Profit Margins of Publicly Traded Travel Nursing Companies Account for More Than Their Travel Nursing Business

Next, it’s important to understand that the publicly available gross profit margins of publicly traded healthcare staffing companies include much more than just their travel nursing business. For example, here is a chart with AMN’s gross profit margins. You’ll see that they typically report gross profits between 25-32%. Here a is chart with Cross Country’s gross profit margins. You’ll see that they typically report gross profits between 23-28%.

These gross profit margins are for their entire business. Each company has many different business segments, each with its own gross profit margins. So, what’s their gross profit margin on their nursing business?

Every once in a while, they’ll discuss this metric during one of their investor conference calls. For example, Brian Scott, AMN’s Chief Financial Officer, reported that the gross margin for AMN’s Nursing and Allied division was 26.1% in the second quarter of 2018. As you can see, that’s much less than the 32% gross margin they reported for their entire business.

6: What does the gross profit margin cover?

At this point, you’re probably wondering what the gross profit covers. Is it pure profit?!

As mentioned above, the “Net Profit” is what is left over after the company deducts all operating expenses, interest, taxes and preferred stock dividends. So essentially, the gross profit covers all of the expenses that are not directly attributed to the travel nurse. These expenses include:

1. Payroll for the agency’s entire internal staff.
2. Office space.
3. Office supplies.
4. Cost of capital (agencies borrow money to meet their financial obligations for example).
5. Technical resources like phones and internet services.
6. Marketing expenses.
7. Taxes.
8. And others.

After all of the costs have been deducted, the agency is left with their net profit.

7: Do Travel Nursing Agencies Make Huge Profits Margins or Net Profits?

I’ll leave the answer to this question up to you. Here is some data to consider:

As mentioned above, many travel nursing companies publicly state that they aim for profit margins of 20-25% on their travel nursing contracts. My experience indicates that this is about right for companies focused on travel nursing. We also have some public financial reports to consider because some of the largest players in the business are publicly traded on the stock exchanges.

Here is a chart with AMN’s net profit margins. You’ll see that they typically report between 2-6%. Here is a chart with Cross Country’s net profit margins. You’ll see that they typically report between 2-4%. However, they have recently reported losses which are possibly the result of recently buying other companies like MSN.

Now, these are the largest companies in the business. Many experienced travelers are adamant that these companies pay less than their smaller to mid-sized competitors. And judging by these numbers, this may be true. However, it’s also possible that these companies pay as much or more because of lower fees and economies of scale.

Meanwhile, Staffing Industry Analysts surveyed 21 travel nursing companies in 2016. The 21 companies accounted for 68% of the US travel nursing market. The average gross profit margin reported was 25.8%

With all that in mind, how do these gross and net profit margins stack up to those exhibited in other industries. When running comparisons like this, it’s best to compare companies in the same industry, but it’s also worthwhile to compare with different industries.

Comparing Travel Nursing Profit Margins to Other Industries

Looking at some different industries, Facebook operates with gross profit margins between 73-85% and net profit margins between 20-25%. A company like Fastenal which sells construction supplies and equipment operates with gross profit margins between 48-53% and net margins between 9-13%.

No matter how you square it up, travel nursing is an industry with low profit margins relative to other industries. They’re in a league with grocery stores, convenience stores, and other retail outlets. In fact, even compared to staffing companies in other segments, travel nursing companies operate with relatively low profit margins. For example, Robert Half is one of the largest general staffing companies and it operates with gross profit margins between 36-42% and net profit margins between 3-7%.

That said, Cross Country’s CEO made $600,000 in 2015 and American Mobile’s CEO made $1.49 million in 2015. While that might seem high, it’s on the moderate to low end for CEOs of similar sized companies.

In any case, we hope this information helps travelers negotiate better contracts. You can get our free ebook on negotiating travel nursing pay packages by simply joining BluePipes! Remember, a 2% difference matters! On a 468 hour contract with a $65 bill rate, it’s $1.30 per hour which is $608. Over the course of a year, that can easily add up to $2,000. Moreover, we hope this information helps travelers identify whether or not they’re getting a bad deal when they’re able to find out the bill rate.

As always, we’d love to hear about your experiences with this issue or any ideas you have that could help us improve this article.