A Pharmacy Director’s Guide to Employment Costs: Focusing on Benefits
Have you ever been working on a project and you need to model labor costs? Then, your boss says that you need to factor in benefit costs? Typically, you get told to call someone in HR and ask what to use and they say, “use 20%” or some similar number. Here’s why you should never use such a generic number.
Benefits, and other employment expenses, are often somewhat mysterious for many pharmacy directors and even some executives in the organization. It is no wonder such a situation exists. Not only are the calculations complicated, but obtaining the correct exact data for analysis can be daunting to even the most well-connected manager.
In this article, we will focus on benefits such as medical, dental, optical, prescription, life, retirement, and paid time off. There are other non-labor employment costs that can be addressed in a different article.
Medical Benefits
Medical benefits comprise the largest portion of insurance benefits costs to organizations. The medical benefits cost about 8% of the average company’s total budget. Some of the factors that must be considered for understanding medical benefits costs are:
Some benefits apply to only some employees. For example, perhaps only full-time workers get health insurance. Or, part-time workers are offered a plan at a different employee contribution.
There are other variables to consider here as well. For example, the cost of insuring an individual is different than insuring a couple, which may be different than a family.
Age stratifications can occur: health insurers can charge different fees based on the age of the employee, and the ages of the others in the family.
Employee contributions have to be deducted from the data on insurance costs, or the data has to be obtained as the net cost to the institution.
Some plans have an employee and/or employer contribution to health spending or similar accounts.
Some benefits are not paid for by the employer at all, rather, the employee contribution is the cost of the full premium (common with certain vision plans, disability plans, etc.)
There are often costs charged directly to the company that are not associated with a particular employee. Those types of cost should be allocated to the staff in order to get a true picture of benefits costs.
Without having good data, one estimate from 2018 data:
Single policy average (employer contribution of 82%): $5,655/year
Family Policy average (employer contribution of 71%): $13,927/year
Paid Time Off (PTO)
Another common benefit is paid time off (PTO): Which can include sick, vacation, personal, and holiday time. When completing a financial analysis, the first step is determining if time off is relevant for your calculation. The rule of thumb is this: if the hours worked in the financial model are likely to create more PTO for the employee, the PTO should be included. We recommend just adding the accrual rate. A PTO accrual rate is the number hours earned as PTO per hour worked. In an example where a person gets 160 hours per year, the accrual rate would be 160 divided by (2080-160), or 0.08 hours/worked hour, or 8.3%.
Even this seemingly simple calculation comes with variables. First, not all employees earn the same amount of time off. This could be a function of employment status (such as part time, full time, etc.) and/or based on a sliding tenure rule. This could range from 0% for a contingent or temporary employee, to 13.8% for a full time employee with 3 weeks vacation, 5 sick days, and 8 paid holidays. Remember in this calculation that full time workers are paid for (8 hours a day x 5 days a week x 52 weeks a year) = 2080 total hours each year. When they take time off, and replace it with PTO they work (2080 - 256 PTO hours) = 1824 worked hours.
Retirement
Another benefit cost for many companies is retirement plan contributions. Companies offer a range of plans for employees. Retirement plans are attractive to employees and can be set up as pensions, 401k, 403b, IRAs and may include employee contributions. For the purposes of understanding employment benefits costs, the following elements must be considered:
Eligibility: most companies make eligibility determinations on factors such as length of employment and FTE status (full time vs. part time vs. contingent vs. temporary)
Company Contribution: Finding out what the company contributes is usually one of the easiest data elements to obtain. Some companies do not contribute to the plan directly, and others will contribute a percentage of income, or a percentage of income with a match.
Benefit Plan Costs: Technically, when a company has to pay a fee for maintaining a plan for its employees, the costs should be allocated to the workers. That is, if there were no workers, there would be no expenses. We, like most other managers, recommend ignoring this cost unless it is very expensive and there are few employees.
Other Insurances
There are other less common insurance benefits costs. Life insurance, dental insurance, and various disability insurances are a few examples. Some companies also provide long term care insurance plans. For most of these plans, the employer contribution is available on the invoice. That is, for many businesses, we can track these costs to a specific worker. Life insurance premiums are typically for term life policies and likely have age factors. Dental plans are more likely to be subcategorized between individual and spouse and/or family plans. Life and dental insurance plans could be estimated to be about $100-$250 every month per each employee.
For the purpose of this article, other costs of employment are not considered. These may include workers compensation, unemployment insurance, and required tax contributions like for social security and medicare.
Full Cost per Worked Hour
In most financial models, the Full Cost per Worked Hour is the most useful output. To determine the Full Cost per Worked Hour, all of the costs of employment of the worker are summed and divided by the number of worked hours (not paid hours). Typically this calculation is performed using costs for a year and hours actually worked in a year. This allows for the variation in worked hours due to vacations and holidays.
Impact Examples
In our calculations, we see that employee insurance expenses often cost $600 to $1100 per month per enrolled employee. This translates to about $3.50 per hour to $7.00 per hour per worker. Using two extreme cases, let’s compare the percent contributed for insurance for lower paid workers with family coverage and higher paid workers getting individual coverage
Proper Application of Information
The key to a useful financial model is to apply the estimates properly. That is, if your model is being used to justify a new program, it is important to know if full time, part time, or contingent staff are likely to be hired. If your analysis is determining if you should outsource a service, again, it needs to be determined if the in-sourced staff would consist of full time staff.
Applying this additional benefits cost is also tricky when considering if a worker is to be replaced or not replaced during time off. To clarify this decision, let’s compare two position scenarios where a one worker works in a position that requires replacement.
Worker “A” works in the pharmacy that is open every day, including holidays. She earns 7 paid holidays per year and 2 weeks of vacation. This worker’s pay turns out to be $28 per hour after all variable expenses, and the company pays $9,600 for insurances of all types.
The cost of this worker is:
Paid Wages and variable expenses: 2080 hours x $28 per hour = $58,240
Insurance Costs are $9,600
Total Annual Cost is $67,840
Worked Hours: 1944 hours (2080 - 17 days of paid time)
To analyze the worker, we think about paying 2080 hours. But, to analyze the position, we have to pay for 2080 hours and replace the worker for the time off. The amount of replacement is an additional 136 hours per year. Or $3,808 in salary costs of an identical worker, plus a prorated cost of that worker’s insurance cost (unless they have none). This means that there is about a 5-6% additional replacement expense for the position.
Conclusion
Non-salary costs for employees are highly variable. They depend on many factors determined by the company, the insurance product, and even the employee themselves. For a financial model to be reasonably accurate, and to help managers make effective financial decisions, a significant effort needs to be made to sort out the important factors, and apply them where relevant to the model.