In annual rule, CMS finalizes new regulatory curbs on Medicare physician payments

Medicare has cued up its first physician payment increase in six years, but policy changes will bring new financial constraints for hospital-based physicians and many specialties.

A 2026 final rule ushers in limitations on payments for a wide array of physicians. After factoring in budget neutrality requirements, the policies appear to boost independent primary care clinics while pinching reimbursement for various other settings and services.

The final rule “protects hometown doctors,” HHS Secretary Robert F. Kennedy Jr. said in a news release.

“CMS is reinforcing primary care as the foundation of a better healthcare system while ensuring Medicare dollars support real value for patients, and not the kind of waste or abuse that erodes trust in the system,” added Chris Klomp, director of CMS’s Center for Medicare.

Physician payments will rise in 2026 after five consecutive years of decreases. The increase to the conversion factor will be 3.77% (to $33.57) for physicians who are qualified participants in an advanced alternative payment model and 3.26% (to $33.40) for nonparticipants, CMS wrote in a fact sheet.

Advocacy groups said they were pleased to see the increase but noted it was driven by a onetime 2.5% boost as legislated in the budget reconciliation bill known as the One Big Beautiful Bill Act. They continue to call for a fix that would link the annual payment update to medical cost inflation through a tracker such as the Medicare Economic Index (MEI).  

Beyond long-term concerns with the conversion factor, key policies are set to reduce payments for many physician categories in 2026 and future years.

A cut for various physician services

One of those policies is a 2.5% reduction that CMS describes as an efficiency adjustment. The goal of the policy is to reflect “services that have likely become able to be furnished more efficiently over time but still retain valuations based on outdated assumptions,” the agency wrote.

Examples given in the rule include surgical procedures, diagnostic imaging interpretation, outpatient interventions, interventional pain management and orthopedic services. The total number of affected codes is roughly 7,700.

“These tend to benefit from technological advancements or standardized workflows that reduce time and resource use, without corresponding payment adjustments,” CMS wrote.

The American Medical Association (AMA) projected that the impact would be widespread, saying the adjustment would reduce payment for 95% of all physician services.

“Physicians should take a close look at how this change affects their reimbursement and plan accordingly,” advised Katie Gilfillan, MSW, CHFP, director of healthcare policy and education with HFMA.

The 2.5% negative adjustment will be applied to work RVUs and corresponding intraservice time and is based on MEI productivity over a recent five-year period, with future calculations scheduled every three years.

Time-based codes will be exempt from the adjustment, including those for evaluation and management services, care management, behavioral health, telehealth, time-based drug administration services and some maternity healthcare codes (those with an MMM global period).

“The Medicare Payment Advisory Commission, the Government Accountability Office and researchers across the political spectrum have called out longstanding overvaluation of certain procedures and undervaluation of time-intensive services like primary care,” CMS wrote.

The agency noted that due to budget neutrality requirements, the negative efficiency adjustment contributed to the increase in the overall conversion factor.

A cut based on site of care

Another adjustment is intended to balance payment between hospital-based and clinic-based physicians. For hospital services and other services designated as facility-based, Medicare will reduce indirect practice-expense (PE) RVUs to equal half the rate that applies to non-facility services. Facility-based maternity care services coded with an MMM global period are exempt from the decrease.

The AMA projects that Medicare payment for facility-based services will decline by 7% as a result of the change, which the association said “does not accurately reflect physician resource costs incurred by practices in the facility setting.” CMS’s thinking is that physicians don’t face the same costs if their practice operates within a hospital.

Contracted physicians in hospital settings stand to be adversely affected by the change, stated the American College of Emergency Physicians (ACEP).

“Most emergency physicians are not hospital employees; they staff emergency departments through professional services contracts and must finance their own fixed costs — 24/7 physician coverage to meet EMTALA, on-call backup, clinical staffing, malpractice, billing/IT, and compliance,” ACEP wrote. “The finalized cut treats those costs as if the hospital absorbed them simply because care occurs in a facility, so physician payment is reduced while the physician’s costs do not change.”

When taken together with the efficiency adjustment, the facility-based decrease could have notable impacts on certain specialties. For example, more than a third of oncologists face payment reductions of between 10% and 20%, according to the AMA. Cuts of 5% or more are estimated to await 80% of infectious disease specialists and 56% of internists.

With budget neutrality requiring CMS to increase the PE RVU rate for office-based services in conjunction with the decrease to facility-based services, many specialties are projected to face a widening payment impact based on site of service (see the table beginning on page 1738 of the rule).

Tackling perceived spending waste

CMS also is seeking to attain financial efficiencies in the area of skin substitutes, noting that Medicare spending on wound care increased from $256 million in 2019 to more than $10 billion in 2024, per claims data.

“This dramatic spending increase is largely attributed to abusive pricing practices in the sector, including the use of products with limited evidence of clinical value,” CMS wrote, citing a cost of more than $2,000 per square centimeter.

The change effective in 2026 entails shifting from reimbursing skin substitutes as biologicals based on average sales price (ASP) to reimbursing them as incident-to supplies in physician offices and hospital outpatient departments. The rate for the upcoming year is $127.28 per square centimeter.

As a result, projected Medicare spending would fall by nearly 90%, or $19.6 billion, and CMS says there would be no drop-off in access or quality. The estimated dollar figure is based on 2025 utilization to date, “which is significantly higher than [previously] estimated,” CMS wrote.

However, the estimated savings cannot be applied to an increase in overall payments as a budget neutrality adjustment, CMS said, because of the methodological change of going from ASP to work RVUs.