Insights^

On July 14, 2025, the Centers for Medicare and Medicaid Services (CMS) released the Calendar Year (CY) 2026 Medicare Physician Fee Schedule (PFS) Proposed Rule. The CMS press release can be found here. A fact sheet from CMS can be found here. The 60-day comment period ends on September 12, 2025.

CONVERSION FACTOR

As part of the rule, CMS proposes implementing two separate conversion factors (CFs). For Alternative Payment Model (APM) participants, known as Qualifying Participants (QPs), the aggregate conversion factor is set at $33.59, a 3.83% increase ($1.24) from the CY25 CF of $32.35. For non-qualifying participants (non-QPs), the aggregate proposed CF is $33.42, reflecting a 3.62% increase ($1.17) from the previous year. A summary of the various components of those aggregate payment updates is below

• The primary reason for the bifurcation of the CFs is the Medicare Access and CHIP Reauthorization Act (MACRA) of 2015, which reformed Medicare physician payments by replacing the outdated Sustainable Growth Rate (SGR) formula with the Quality Payment Program (QPP). Under MACRA, starting in CY26, a statutory update of 0.75% is provided for QPs (that meet thresholds for significant participation in Advanced APMs that emphasize quality and cost accountability) and 0.25% for nonQPs. This differential aims to incentivize clinicians to shift toward value-based care delivery models.
• In addition to the MACRA updates, the proposed rule includes a one-year increase of 2.50% applicable to both QPs and non-QPs, as included in the recently enacted One Big Beautiful Bill Act (OBBBA). Enacted to address concerns over physician payment adequacy, the OBBBA’s 2.50% adjustment helps offset inflation and other economic factors while Congress considers longer-term/systemic reforms to the PFS (which were considered during the development of the OBBBA but were ultimately dropped from the bill due to a combination of cost concerns and a lack of broad Republican consensus).
• Finally, the CF updates account for shifts in relative value units (RVUs), which are used to determine payment rates based on the resources required for services. CMS proposes an estimated 0.55% adjustment to accommodate two broad-based changes in work and practice expense (PE) RVUs. As discussed below in greater detail, the RVU modifications proposed by CMS as part of the CY26 rule will (if finalized) have the practical effect of somewhat offsetting (in some instances, substantially) the positive CF update for certain specialties/services, particularly those delivered in the facility setting.

EFFICIENCY ADJUSTMENT

As noted above, CMS is proposing broad-based adjustments to RVUs as part of the CY26 rule. The first, described as an efficiency adjustment, would have the practical effect of reducing the work component of the aggregate RVU calculations. The work RVU quantifies the physician’s professional effort in providing a service, encompassing factors such as time, technical skill, physical effort, mental effort and judgment, and psychological stress due to potential risks to the patient. It constitutes approximately 51% of the total RVUs for a service, alongside practice expense (PE) and malpractice RVUs.

As part of the proposed rule, CMS notes that it has long depended on survey data from the American Medical Association’s Relative Value Scale Update Committee (AMA-RUC) to determine work RVUs. However, the agency raises concerns over the limited number of codes that undergo annual reevaluation and highlights third-party research suggesting time assumptions in many PFS valuations are significantly overstated.

The efficiency adjustment involves a broad-based -2.5% reduction applied to the intraservice physician time component of the work RVUs. The -2.5% is calculated as the sum of the Medicare Economic Index (MEI) productivity adjustments from the prior five years (CY21 through CY25). In the view of CMS, the use of MEI – which measures economy-wide productivity gains and is used here to proxy efficiency improvements in medical practices – for calculating broad-based work RVU adjustments provides a more accurate picture of shifts in efficiency as compared to “low-response rate” and “conflicted” industry surveys. Notably, the adjustment does not apply to time-based codes, such as evaluation and management (E/M) services, care management services, behavioral health services, services on the telehealth list, and specific maternity codes.

Specialties most directly impacted by this proposal include interventional radiology (-1% cut to work RVUs), neurosurgery (-1%), nuclear medicine (-1%), pathology (-1%), plastic surgery (-1%), radiation oncology (-1%), and thoracic surgery (-1%).

PRACTICE EXPENSE

As part of the CY26 proposed rule, CMS intends to pursue a second broad-based adjustment to the RVUs, this time targeting the PE RVU. The PE RVU quantifies the non-physician costs associated with providing a medical service, including clinical staff time, supplies, equipment, and indirect expenses like office rent and administrative overhead.

According to CMS, the PE RVU adjustment is necessary to address distortions in payment allocation resulting from evolving site-of-service trends and to promote payment stability amid healthcare consolidation. As noted by CMS, in recent years, there has been a significant shift in physician practices from independent, non-facility settings to hospital-based or facility settings, with private practice ownership decreasing from 72% to 35.4% over the past three decades. This consolidation into larger health systems means that many physicians no longer bear the full indirect costs in facility settings, where hospitals often cover these expenses, distorting payment incentives and contributing to higher Medicare expenditures without reflecting actual resource use.

The mechanics of the PE RVU shift involve adjusting the indirect PE allocation methodology by reducing the facility indirect PE to half of the non-facility indirect PE for applicable services, calculated using a revised formula that scales down the indirect PE allocator for facility settings based on work RVUs or clinical labor inputs. This adjustment applies broadly to PFS services, excluding those without dual settings and those with specific exemptions, such as certain radiation oncology codes (which instead use Outpatient Prospective Payment System (OPPS) relative weights for PE valuation).

Specialties most directly impacted by this proposal include cardiac surgery (-3% cut to aggregate PE RVUs), colon/rectal surgery (-2%), critical care (-5%), emergency medicine (-3%), gastroenterology (-3%), infectious disease (-7%), neurosurgery (-4%), plastic surgery (-3%), and thoracic surgery (-3%). Facility-based PE RVU cuts are, in some instances, much more dramatic (i.e., -10% or higher for many specialties).

SKIN SUBSTITUTES

Skin substitutes are currently reimbursed under the Medicare PFS in non-facility settings as separately payable items using the Average Sales Price (ASP) plus 6% methodology, with each product assigned a unique HCPCS Level II code and manufacturers required to report ASP data quarterly. Synthetic skin substitutes have been paid separately in physician offices since CY 2022, distinct from the application procedure codes (i.e., CPT 15271-15278). In contrast, under the Outpatient Prospective Payment System (OPPS), skin substitutes have been packaged into the payment for application procedures since CY 2014. CMS has significant concerns with the PFS approach, noting the dramatic increase in Medicare Part B spending on skin substitutes from $250 million in CY19 to $10 billion in CY24, while the number of beneficiaries treated has only doubled.

To address concerns about the potential overuse of skin substitute products, CMS proposes reclassifying skin substitutes as “incident-to” supplies rather than treating them as separately payable under the ASP + 6% methodology. In practice, “incident-to” classification means skin substitutes are considered integral but incidental components of the physician’s professional service during wound care. In place of the separate payment, the cost of such products would be “packaged” into the physicians’ PE RVU. Under this new construct, the PE RVU for such procedures would be adjusted to reflect a uniform OPPS-based rate of $125.38 per cm² for skin substitute products for CY26, representing up to a -90% reduction in aggregate per-service costs, yielding a projected $9.4 billion in savings for CY26. In the out-years, CMS intends to trifurcate the payment rates for skin substitute products in a manner consistent with their FDA regulatory status (i.e., resulting in distinct rates for products depending on whether they are approved under the Human Cells, Tissues, and Cellular and Tissue-Based Products (HCT/P), Pre-Market Approvals (PMAs), or 510(k) pathways).

Notably, for CY26, CMS is asserting that this change, which, in practice, shifts what was ordinarily a separately payable supply into the PE RVU of the underlying procedure, will not carry broader budget neutrality implications for RVUs or the CF. However, the agency notes that once this change is reflected in the CY26 claims data, there may be potential budget neutrality impacts in CY27 and beyond (i.e., future downward pressure on RVUs and/or the CF more broadly to account for the increase in PE RVUs for skin substitutes).

CHRONIC ILLNESS AND BEHAVIORAL HEALTH G-CODES

As part of the CY25 PFS final rule, CMS finalized three new G-codes for Advanced Primary Care Management (APCM) services. These codes – G0556 for non-complex APCM (requiring at least one serious condition and clinical staff time thresholds), G0557 for complex APCM (involving multiple conditions with significant staff involvement), and G0558 for APCM with direct physician or non-physician practitioner time thresholds – bundle elements from existing Chronic Care Management (CCM), Principal Care Management (PCM), and Communication Technology-Based Services (CTBS) into a single monthly payment structure. The intent was to reduce administrative burdens associated with fragmented billing requirements and increase access to coordinated care for beneficiaries with chronic or high-risk conditions.

In the CY26 PFS proposed rule, CMS is building on that framework by introducing three new add-on G-codes – GPCM1 (initial psychiatric Collaborative Care Model or CoCM, mirroring CPT 99492 for the first month of outreach, assessment, and treatment planning), GPCM2 (subsequent CoCM months, mirroring CPT 99493 for ongoing monitoring and adjustments), and GPCM3 (general Behavioral Health Integration or BHI services, mirroring CPT 99484 for at least 20 minutes of monthly care coordination) – which (if finalized) will be billed monthly alongside the base APCM codes. The intent is to further alleviate documentation burdens by eliminating time-tracking requirements, improve access to behavioral health in primary care environments (especially for underserved populations), and encourage holistic care management without duplicative billing.

While this policy change (if finalized) provides incremental reimbursement for primary care management, in CY27 and beyond, higher-than-anticipated utilization of these add-ons – reflected in CY 2026 claims data – could create downward pressure on PE RVUs for other PFS services or lead to reductions in the CF (as CMS redistributes resources to offset any net spending increases while maintaining aggregate PFS.

TELEHEALTH

CMS is proposing several updates to its PFS telehealth policies for CY26, including:

• CMS plans to streamline additions to the telehealth services list by eliminating the “provisional” versus “permanent” categories and concentrating evaluations only on whether the service can be adequately provided through interactive two-way audio-video technology.
• The agency intends to permanently lift limitations on the frequency of telehealth use for follow-up inpatient visits, subsequent nursing facility encounters, and critical care consultations.
• For procedures needing direct oversight, CMS proposes allowing permanent virtual supervision via real-time interactive audio-video communications (excluding audio-only). This would cover “incidentto” billing, diagnostic testing, pulmonary rehab, and cardiac or intensive cardiac rehab services.
• CMS does not plan to extend the pandemic-era flexibility permitting teaching physicians to supervise residents virtually for billing purposes. Instead, it proposes returning to the original mandate for physical presence during key parts of resident-delivered services in urban Metropolitan Statistical Areas (MSAs), while preserving the exemption for rural areas.

AMBULATORY SPECIALTY MODEL

CMS proposes launching the Ambulatory Specialty Model (ASM) as a mandatory alternative payment model through the Innovation Center (CMMI), targeting beneficiaries with heart failure and low back pain. Starting January 1, 2027 (performance period through 2031, with payments tied from 2029 to 2023), the model holds specialists individually accountable through a two-sided risk payment adjustment on Medicare Part B fees, ranging roughly between –9% and +9% in the first payment year. Performance is evaluated across four domains: quality (e.g., BP control, functional improvement), cost reduction, careimprovement activities (like patient engagement and social needs screening), and interoperability via certified EHRs. Specialists must treat at least 20 Medicare patients per condition annually and operate within selected Core-Based Statistical Areas (CBSA).

QUALITY PAYMENT PROGRAM

CMS proposes several refinements to the Quality Payment Program (QPP), including maintaining the Merit-based Incentive Payment System (MIPS) performance threshold at 75 points for the 2028-2030 payment years, adding five new quality measures (i.e., transplant waitlist ratios) while removing 10 others (i.e., social drivers of health), and introducing six new Value Pathways (MVPs) for specialties like diagnostic radiology and podiatry.

MEDICARE SHARED SAVINGS PROGRAM (MSSP)

The CY26 PFS proposed rule includes several updates to the MSSP, including:

• Limiting participation in the BASIC track’s one-sided risk level to a maximum of five performance years (down from seven), requiring ACOs to transition more quickly to two-sided risk models
• Renaming the health equity adjustment to “population adjustment” and removing it from scoring.
• Updating the APM Performance Pathway Plus measure set, including removing the social determinants of health screening measure and expanding CAHPS survey modes to web-mail-phone in 2027.
• Extending Extreme and Uncontrollable Circumstances (EUC) protections to include cybersecurity events for quality and financial evaluations from performance year 2025 onward.

REQUESTS FOR INFORMATION

As part of the proposed rule, CMS issued several Requests for Information (RFIs), seeking stakeholder feedback on issues including:

• Ways to streamline Medicare regulations to reduce provider burdens and align those regulations with Executive Order 14192 (“Unleashing Prosperity Through Deregulation”)
• How to enhance payment accuracy for global surgical packages
• How to handle cost-sharing for APCM services, and whether waiving or adjusting cost-sharing requirements for APCM services could enhance access and utilization
• Whether and how to standardize “core elements” within the MVP reporting requirements
• How to integrate Prescription Drug Monitoring Program (PDMP) data into Medicare workflows to enhance opioid prescribing safety and reduce misuse
• Input on transitioning to digital quality measurement within the QPP and MSSP
• The timeline for implementing Fast Healthcare Interoperability Resources (FHIR)
• Whether and how CMS can enhance its support for prevention and management of chronic disease through new “well-being” and “nutrition” service lines or quality metrics