How Much Does a Healthcare Employee Cost?

Healthcare employees are the heart and soul of the healthcare industry. Without them, basic care would be nearly impossible. And while your employees are a vital part of your healthcare organization, it’s still important to make sure you stay on top of all the costs you take on as a business.

Unfortunately, the costs of operating a healthcare business and paying employees have continued to increase drastically over the years.  ^[1]Glied, Sherry. (2016). Where the Money Goes: The Evolving Expenses of the US Healthcare System. Health Affairs, 35(7). https://doi.org/10.1377/hlthaff.2015.1356 Calculating the cost of your healthcare employees can help shed light on your business’s overall costs and let you create a plan to keep your business growing.

Why Is It Important to Calculate the True Cost of a Healthcare Employee?

Employers ultimately end up paying their employees in more ways than their salaries or hourly wages. With additional costs from uniforms to supplies, having a large number of employees can sometimes negatively affect your healthcare business’s profit. This is why it’s important to be on top of the numbers your healthcare business takes in, as well as the money that it’s putting out.

While labor costs vary depending on the job of a healthcare worker, their skills, and their hours, the total cost of each employee can add up quickly. Knowing how much you spend on each employee and why you spend that amount can help you better keep track of the money in your business and allow you to strategize methods of growing.

Calculate the Cost of a Healthcare Employee

Multiple different aspects go into paying your employees and determining their total costs. From calculating health insurance costs to taxes, there is much more to consider than just their salary or hourly wage. Some of the details that go into your employee’s overall cost include:

Health Insurance/Benefits

Benefits for every employee may vary slightly depending on their positions, but overall, healthcare employees should be receiving basic benefits. Things such as health insurance, dental coverage, life insurance, and disability insurance are all aspects employers need to keep in mind when creating salaries and calculating the costs of their employees. When creating salaries, it’s smart to start from a base salary and then add all of the different benefits, taxes, and extra details of the hiring process. This will help you get a better idea of the actual cost of that employee.

Worker’s Compensation Insurance

Employers also need to pay for unemployment and worker’s compensation insurance for their employees. The rates for each vary with the job of the worker, but you’ll notice that jobs that have a higher potential of safety issues or employees getting hurt will usually have higher worker’s compensation payment rates. ^[2]Ilsoon Shin, Jun-Byoung Oh, Kwan Hyung Yi. (2011). Workers’ Compensation Insurance and Occupational Injuries. Safety and Health at Work, 2 (2) 148-157.https://doi.org/10.5491/SHAW.2011.2.2.148. Because your employers are working in the healthcare industry, worker’s compensation rates shouldn’t be as drastic as other jobs, such as road construction, for example.

Social Security/Medicare

Social Security and Medicare are also two important aspects to keep in mind when calculating salaries and total costs of employees. Social Security and Medicare payments both take a certain percentage from each salary payment an employee gets. This percentage will vary depending on the state you’re in as well as the employee. Both payments are taken in addition to the benefits the employee receives.

Supplies Needed/Hiring Costs

When it comes to determining how to calculate the cost of hiring an employee for your healthcare facility, there are many factors to consider. Hiring costs can include a multitude of things, depending on the business you own, the services performed, and what an employee needs to operate properly.

Things like background checks and new employee screenings all add up quickly in addition to the costs of actually hiring someone. It’s also important to consider the supplies that may be needed when more employees are added to the equation, as they can be expensive in the healthcare industry. ^[3]Abdulsalam, Y., & Schneller, E. (2019). Hospital Supply Expenses: An Important Ingredient in Health Services Research. Medical Care Research and Review, 76 (2), 240–252. … Continue reading Uniforms, gloves, keys, name badges, and more are all small things that need to be remembered when hiring a new employee.

Employee’s Job and Performance

As you most likely already know, the employee’s job is what plays the biggest factor in their overall cost. In the healthcare industry, your business requires multiple different kinds of professionals as well as entry-level employees to carry out different duties. If you own something along the lines of an urgent care facility, your business is going to have many employees at different levels, such as receptionists and doctors, both of which receive much different pay rates. You’ll also want to keep in mind the performance of an employee as well and think about performance-based incentives to keep your employees working efficiently. ^[4]Tracy Kuo Lin, Kalin Werner, Sophie Witter, Mohammed Alluhidan, Taghred Alghaith, Mariam M. Hamza, Christopher H. Herbst, Nahar Alazemi. (2022). Individual performance-based incentives for health … Continue reading

Calculate the Hourly Cost of a Healthcare Employee

Calculating the hourly costs of each of your employees can help you get a much better understanding of how you’re using money for payroll.

Labor Costs

Labor costs of an employee include a wide range of aspects. When determining the overall labor costs of an employee or a group of employees, things such as PTO, taxes, training costs, supplies and equipment, and overtime all play a role in the total cost.

To calculate the labor cost of an employee, simply add together their annual gross income, their benefits, cost of equipment, and taxes, divided by the hours worked in a year. This will give you the total yearly labor cost of each employee. With this number, you can develop better cost management strategies for the future.

Overhead

Overhead costs include the necessities needed for your employees to perform their jobs properly. Your basic overhead costs include things along the lines of property rent, office equipment and supplies, utilities like electricity, and other operating costs. When determining your annual overhead, don’t forget to keep in mind any employees who work remotely or any outsourcing you might be using.

Taxes

After determining the annual labor costs and overhead per employee, you then need to take a look at the total taxes you need to pay as well. When calculating tax per employee, it involves Social Security, Medicare, and state and federal unemployment rates.

Hours Worked Per Year

Once you’ve calculated the annual labor costs, overhead, and taxes of an employee, you can then use these amounts along with the hours worked per year to find the total cost of an employee per hour. Just simply add labor + overhead + taxes and then divide that by the number of hours your employee worked this last year. The number you get is the total cost per hour.

How to Calculate the Cost of Replacing an Employee

Many businesses try their best to avoid getting stuck in the cycle of constantly hiring and then having to replace employees. This is because it’s expensive and can also have a massive impact on productivity. ^[5]O’Connell, Matthew & Kung, Mavis (Mei-Chuan). (2007). The Cost of Employee Turnover. Industrial Management. 49. 14-19. Retrieved May 31, 2022 from … Continue reading When replacing an employee, you not only have to go through the entire hiring process again and spend money on those resources, but you’ll also have to spend more on equipment, supplies, benefits, and other essentials. Turnover cost can be calculated by simply determining the cost that someone vacating that position made and adding it to the cost that filling that spot will take.

Comparing Hourly Pay vs. Salaries

Paying your employees hourly versus with a salary can have more of an impact on your business’s overall costs than you might think, but it largely depends on the type of work your business does and how much your employees work. There are pros and cons for both salaries and hourly pay.

Salary

Employees who are paid salaries often have higher skill sets and more experience than entry-level employees in healthcare. For example, it would make sense for your business to be paying your doctor a yearly salary versus an administrative assistant who works a few days a week.

The pros and cons of paying an employee a salary include:

Pros:

• Employees can be paid a flat rate despite how much they work, even if there’s overtime.
• It simplifies payroll.
• There is little to no fluctuation in pay, so it helps keep costs manageable.

Cons:

• Employees are paid the same whether they work under their set time or over it.
• The salary changes with experience level and job.

Hourly

Hourly payments make sense for businesses that have a lot of entry-level workers. An hourly employee is paid a set rate for each hour, and then taxes and other details are taken out.

The pros and cons of hourly employees include:

Pros:

• Hourly workers don’t need to be full-time employees.
• You’re paying them a set rate per hour.
• Hourly employees don’t always get the same benefits as salaried employees.

Cons:

• If an hourly worker goes over 40 hours, overtime payments are required.
• Payroll changes weekly.
• Your business needs to keep track of the employee’s hours.

Calculating Costs and Building Your Best Business

Ultimately, no matter what kind of business you may own, crunching the numbers of your different expenses plays a vital role in your success. One of the biggest expenses of any business, especially a healthcare one, is its employees. By calculating the overall costs of your employees, you can build a better strategy that helps your business grow.

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