Before Q1 Closes: The One Number That Matters More Than Collections

Let’s build a hypothetical profile for a surgeon we’ll call Dr. A. He’s pulling together his year‑to‑date practice numbers. Collections are tracking strong—up 4% over the same period last year. He’s genuinely pleased, and he should be; running a busy orthopedic practice and growing collections in an environment of tightening reimbursements is no small thing.

But there’s a question he hasn’t considered:

“What’s your effective hourly rate?”

He knows his collections. He knows his overhead percentage (roughly). He has a general sense of his tax burden. But he’s never pulled those numbers together into a single figure that captures what he actually keeps for every hour of clinical work.

In the hypothetical example below, when you run the calculation, the result is sobering.

His collections say 2.4 million dollars. His effective hourly rate says 185 dollars.

Why Collections Can Be Misleading

Collections are the number everyone celebrates. They’re the headline in every practice meeting, the figure on the dashboard, the benchmark you compare against your partners. It makes sense: collections represent the top‑line revenue your skills and effort produce.

But collections measure how much the practice earned; they do not measure how much the surgeon kept.

Think of it the way you’d think about a clinical outcome. A surgery can be technically successful and still produce a poor functional result. The procedure was performed well, but the outcome—the thing that actually matters to the patient’s life—fell short.

Collections are the surgical technique. Your effective hourly rate is the functional outcome.

The Five Components of Your Effective Hourly Rate

Your effective hourly rate is what remains after five forces act on your collections. Every one of these is measurable, and most of them are at least partially within your control. The numbers below are simplified and hypothetical, designed to illustrate the concept—not to model any specific surgeon’s situation.

1. Gross collections

This is the starting point. For our example, we’ll use 2.4 million dollars annually, which sits within a reasonable range for many mid‑career orthopedic practice owners.

2. Practice overhead

Rent, staff, supplies, implant costs, malpractice insurance, billing, IT—everything it takes to run the practice. For a typical orthopedic practice, total overhead often falls somewhere around 50% to 60% of collections, though actual numbers vary by market and practice model. At 55%, that’s 1.32 million dollars, leaving 1.08 million flowing to the surgeon.

3. Taxes

Federal income tax, state income tax, and payroll or self‑employment taxes on income that is treated as wages or self‑employment earnings all come into play. At 1.08 million in surgeon income, a blended effective rate around 40% is a reasonable planning assumption for many high‑income physicians once federal, state, and payroll/self‑employment taxes are included, though your actual rate will depend on your specific situation and filing status. That 40% assumption produces a tax figure of 432,000 dollars in this example.

4. Mandatory retirement contributions

If you are funding a 401(k) up to the 2026 limit and you’re age 50 or older, the maximum employee deferral is 24,500 dollars, plus an 8,000‑dollar catch‑up contribution, for a total of 32,500 dollars. In a well‑designed plan with an employer profit‑sharing layer, the total annual additions (employee plus employer) can reach 72,000 dollars in 2026. This money is working for your future, and it’s important—but it’s not spendable today.

5. Debt service

Practice acquisition loans, equipment financing, build‑out costs, and similar obligations. For an established practice owner still carrying some debt, a figure around 96,000 dollars per year is a plausible, if simplified, assumption.

Now, the math:

2.4 million in collections

minus 1.32 million in overhead

minus 432,000 in taxes

minus 72,000 in retirement contributions

minus 96,000 in debt service

What’s left: 480,000 dollars.

Divide that by 2,600 clinical hours (a rough assumption for a surgeon who operates four days a week plus clinic time, call coverage, and the occasional weekend case), and you arrive at an effective hourly rate of about 185 dollars.

Let that sit for a moment. A practice collecting 2.4 million per year. A surgeon working 2,600 clinical hours. And the actual keep rate, per hour, is about 185 dollars.

That number is not a failure; plenty of professionals would be delighted with it. But it’s a long way from the roughly 923 dollars per hour you’d calculate if you just divided 2.4 million by 2,600 hours. And the gap between those two numbers is where your financial structure lives.

What You Can Actually Influence

Here’s where it gets interesting. Of those five components, you have meaningful influence over at least three of them.

Overhead is partially within your control. You can’t eliminate rent or malpractice insurance. But you can audit vendor contracts, renegotiate supply costs, evaluate staffing efficiency, and review billing performance. Even a three‑percentage‑point reduction in overhead (from 55% to 52%) puts roughly 72,000 dollars back into the equation on 2.4 million of collections.

Taxes are where structure often makes a big difference. This is the focus of much of the planning work for high‑income professionals. For eligible practices, an S‑corporation salary that is calibrated thoughtfully—rather than set arbitrarily—may reduce overall self‑employment and payroll tax exposure compared to other structures, as long as you pay yourself reasonable compensation in line with IRS guidance. A cash balance plan layered on top of your 401(k) can often allow an additional low‑ to mid‑six‑figure contribution each year for a high‑income surgeon, depending on age, income, and plan design. Thoughtful entity and compensation structure can help you better capture available deductions and tax‑favored savings opportunities, subject to IRS rules and documentation requirements. For many surgeons at this income level, the difference between a basic, minimally planned return and a thoughtfully structured approach can easily reach tens of thousands of dollars per year in tax savings, depending on the situation.

Retirement contributions are interesting because they’re a double‑edged variable. You want to maximize them—they’re building your future—but the vehicle and design matter enormously. A standard 401(k) has employee contribution limits (24,500 dollars plus applicable catch‑up in 2026), while a cash balance plan can significantly increase total tax‑favored contributions for the right profile. The structure determines whether retirement savings are a trickle or a river.

Debt service is mostly fixed in the short term, but refinancing, accelerated payoff strategies, and the timing of new equipment purchases all play a role over a multi‑year horizon.

Collections (the one everybody focuses on) are often the hardest to move. Reimbursement rates are set by payers. Case volume is constrained by OR availability and your own physical capacity. Yes, you can optimize your payer mix and coding practices. But for many surgeons, the ceiling on collections is lower and harder to push than they assume.

The counterintuitive insight: the surgeon who improves structure by a few percentage points often gains more after‑tax, after‑debt dollars than the surgeon who grows collections by the same percentage.

The Same Practice, Restructured

Let’s take Dr. A’s 2.4‑million‑dollar practice and apply some potential structural improvements. Again, these numbers are hypothetical and simplified.

Overhead drops from 55% to 52% through vendor contract renegotiation and a billing audit that recovers underpayments. That’s 1.248 million in overhead instead of 1.32 million. The surgeon’s pre‑tax share rises to 1.152 million.

S‑corp salary is recalibrated from an arbitrary number to a more carefully supported one, which, in this example, reduces exposure to self‑employment and payroll taxes by about 18,000 dollars while still meeting reasonable‑compensation standards. A cash balance plan is established, allowing an additional 180,000 dollars to be contributed on a tax‑favored basis and increasing total retirement plan contributions from 72,000 to 104,000 dollars (the additional 32,000 dollars of contributions is partially offset by the tax savings the plan generates). After accounting for these changes in compensation structure, deductions, and retirement contributions, the blended effective tax burden in this example drops from 432,000 to 396,000 dollars.

Debt service remains the same at 96,000 dollars. The practice doesn’t take on new debt or pay off old debt early in this scenario.

The result in this hypothetical: the surgeon keeps 560,000 dollars instead of 480,000 dollars.

Divide by the same 2,600 clinical hours, and the effective hourly rate rises from roughly 185 dollars to about 215 dollars.

That’s a 30‑dollar‑per‑hour difference. Over 2,600 hours, that’s 80,000 dollars per year. Over ten years, assuming even modest investment returns on the difference, the long‑term impact can easily reach seven figures.

And here’s what matters most: in this example, Dr. A doesn’t work a single additional hour to capture that 80,000 dollars. He doesn’t add cases. He doesn’t take on more call. He doesn’t negotiate higher reimbursements (though he may want to explore that, too). The improvement comes entirely from how the money flows after he earns it.

Your Q1 Checkpoint

Q1 closes at the end of March. In early April, you’ll have three months of real numbers to work with. Here’s a framework you can use to get a first pass at your own effective hourly rate as soon as that data is available.

Step 1: Pull your Q1 collections.

Your billing department or practice management software will have this number as soon as the quarter closes. Write it down.

Step 2: Estimate your annualized overhead rate.

Take your Q1 operating expenses, multiply by four, and divide by your annualized collections. If you’re above roughly 55%, there may be opportunities to tighten overhead, depending on your specialty, market, and practice structure.

Step 3: Estimate your effective tax rate.

Look at your most recent return (for example, your 2025 filing) or your Q1 estimated payments for 2026 and calculate what percentage of your surgeon income went to federal and state income taxes (and, where applicable, self‑employment or payroll taxes). If you’re north of the high‑30s and you don’t have structures like a cash balance plan or optimized entity and compensation design in place, there may be planning opportunities to bring that number down, depending on your age, income, and overall situation.

Step 4: Add up your committed outflows.

Retirement plan contributions plus debt service. These are the non‑negotiable draws on your take‑home in the near term, even though retirement contributions are building your future balance sheet.

Step 5: Do the division.

Take what’s left after overhead, taxes, retirement contributions, and debt service. Estimate the clinical hours you worked in Q1, annualize them (multiply by four), and divide your projected annual “keep” number by those annualized hours. That’s your effective hourly rate.

Now compare it to last year. Is it higher or lower? If it’s lower and your collections held steady or grew, then the issue likely isn’t revenue. The issue is somewhere in the structure. For many surgeons, entity structure, S‑corp salary calibration, retirement plan design (including cash balance plans), and reimbursement dynamics are the most common places where value leaks out.

The Number That Changes the Conversation

As a CFP who focuses on complex planning for high‑income professionals, one thing stands out about the effective hourly rate: it changes the conversation.

Before running this calculation, the questions tend to be about the top line. “How do I collect more?” “Should I add another surgery day?” “Can I renegotiate my payer contracts?” Those are good questions.

But after seeing the effective hourly rate, the questions usually shift. “Where is the money going between collections and my bank account?” “Which of those buckets can I actually shrink?” “Am I structured the way I should be?”

The second set of questions is where the real leverage often lives.

You spent years training to perform complex procedures with precision. You understand, better than almost anyone, that outcomes depend on getting the small things right. A two‑millimeter difference in implant placement changes the functional result. A single overlooked variable in the pre‑op plan creates complications downstream.

Your financial structure works the same way. A small reduction in overhead, a properly calibrated S‑corp salary, a retirement plan design—including a possible cash balance plan—that matches your age and income profile: these are the small, precise adjustments that can compound into significant differences over a career.

Collections tell you how much your practice earned. Your effective hourly rate tells you how much of that earning actually became your wealth. And the gap between those two numbers is the space where a thoughtful financial structure does its work.

Calculate your number. Compare it to last year. If the gap is wider than you expected, that’s not a reason to panic—it’s a reason to look under the hood.

Capably yours,

Jared

Important disclosures

This material is for educational and informational purposes only and is not intended as tax, legal, or investment advice. Tax laws, IRS limits (including 401(k) and cash balance plan limits), and federal and state tax brackets discussed here are based on current guidance for 2026 and are subject to change. The hypothetical examples in this article are for illustration only; they do not represent any specific client or recommendation, and they do not guarantee any particular outcome. Your actual results will depend on your individual circumstances, including your income, filing status, state of residence, practice structure, and plan design.

Before implementing any strategy described here—including entity selection, S‑corporation compensation planning, or retirement plan design—consult with a qualified tax professional or attorney and review current IRS guidance. As an investment adviser registered with the State of New York, I provide financial planning and investment advisory services only where properly registered or exempt from registration, and I do not provide legal or tax advice.