2 Methods Travel Nursing Companies Use to Calculate Pay

In our previous article, we reviewed various considerations that shape how travel nursing companies view and approach the pay packages they offer. In this article, we’ll take a look at two methods travel nursing companies use to actually calculate their pay packages.

Travel Nursing Agencies are Businesses

First, let’s run through a simplified recap on how the healthcare staffing business works. Essentially, healthcare providers outsource their supplemental staffing needs to travel nursing agencies who can provide the staffing services at a lower cost than single hospitals or hospital systems are able to on their own.

Now, healthcare providers do not make separate payments for the staffing agency’s services and the supplemental clinician’s pay. Instead, healthcare providers pay an all-inclusive “bill rate” to the agency for each hour the supplemental clinician works. This hospital intends for this bill rate to cover everything, including the agencies expenses and the travelers pay.

So, the question for the agency becomes, how do agencies determine how much of that all-inclusive bill rate they can pay to their supplemental clinicians while still leaving them enough money to execute the mission while achieving the financial metrics they need to keep their business healthy and growing.

Option 1 – Gross Margin per Contract

The most common approach travel nursing agencies use to determine travel nursing pay is what we call “Gross Margin per Contract”. In this case, the Gross Margin is the percentage of the bill rate that the agency keeps to cover its operating expenses.

For example, if the agency keeps $20 of a $100 bill rate, then the Gross Margin is 20% ($20/$100). For a standard 13-week contract for 36 hours per week, that would be $9,360 in gross profit for the entire contract if the traveler worked every hour and the hospital paid for every hour.

That gross profit would need to cover the advertising and marketing expenses, salaries for staff members including recruiters, payroll, finance, and administration, all the various office expenses and any research and development the agency might want or need to do. Everything else, $80 per hour in this case, would go to covering every expense associated with delivering the traveler to the hospital, including the clinician’s pay, payroll taxes, benefits, onboarding, credentialing and more.

Some agencies require that the Gross Margin always be the same no matter what. For example, they might say the Gross Margin must be 20% for all contacts. Other agencies might allow a range of Gross Margins. For example, they might say gross margins need to fall between 17% and 25%. Other agencies may be even more flexible than that.

Agencies who opt for flexibility do so for a number of reasons. First, they may want to allow themselves some leeway to keep their payrates on par with their competitors. Second, they may understand that the difficulty level for placing candidates varies from job to job or from modality to modality. Third, they may understand that some hospitals are more difficult to work with than others which leads to variations in contract cancellations, backouts, collection expenses and other costs.

Option 2 – Fixed Dollar per Hour

An exceedingly smaller number of agencies use an approach we call “Fixed Dolar per Hour”. In this case, the fixed dollar per hour is an actual dollar value instead of a percentage. For example, the agency might set $15 per hour as the dollar value that it uses to cover its operating expenses.

This approach creates a different dynamic with respect to the pay packages the agency offers. For example, the agency might offer a really low pay rate compare to other agencies when the bill rate for the job is lower, but a really high pay rate relative to other agencies when the bill rate is higher.

Let’s take a look at some examples for clarity. Let’s say a job has a $60 bill rate. The agency using a 20% margin, or $12 per hour, will have $48 per hour left to allocate to the expenses related to the traveler. Meanwhile, the agency using a fixed-dollar-per-hour of $15 would have only $45 per hour left to allocate to the expenses related to the traveler. The payrate from fixed-dollar-per-hour is lower in this case.

However, the pendulum swings with higher bill rates. For example, let’s say a job has a $100 bill rate. The company with the 20% margin will have $80 left to allocate to the expenses related to the traveler. The company using the fixed-dollar-per-hour will have $85.

Now, it’s important to note that an agency could have a range of dollar-values. For example, they might put that range at $12 to $20 per hour. For each contract, they might select a dollar value from the range based on some of the same principles we described above, like pay competitiveness, supply and demand dynamics, or facility quality.

Why Agencies Choose one Approach over the Other

As I mentioned above, the Fixed Dollar per Hour approach has become exceedingly rare over the last decade. However, I’m aware of at least 2 agencies that still use it. So, why would an agency choose one over the other?

I’ve had some who use the Fixed Dollar approach tell me that they used it because it simplified their financial planning. Essentially, they use metrics to help them determine their cost per contractor and, from there, their cost per hour worked. To do so, they track things like the number of internal staff they need to support a certain number of contactors, the advertising cost per placement, overhead expenses required to support internal staff, and so on. Altogether, they use these metrics to calculate what they need to cover per hour worked.

These folks express concern that it’s more difficult to plan when they use the gross margin approach. For example, two ICU jobs in the same city might have dramatically different bill rates. It’s going to cost the same to fill them. However, if you have your team members or automated pay calculation software apply the same gross margin to them both, then you get much less for the job with the lower bill rate.

All that said, the gross margin approach is by far the more popular of the two. Proponents tell they prefer it for two reasons. First, using gross margin easily aligns with accounting metrics. Moreover, they find it more flexible, which allows them to manage concerns raised by those who prefer the Fixed Dollar approach.