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June 11, 2026 – While we are still in the midst of a Medicaid regulatory feast, it’s getting hotter outside, which means only one thing in the health policy regulatory world: it’s almost time for Medicare payment reg season! Every summer, the Centers for Medicare & Medicaid Services (CMS) releases major proposed regulations that impact payments and policies for end-stage renal disease treatment, home health services, outpatient hospitals, and physicians and other clinicians. The policies proposed in the hot summer months are finalized when the temperature drops (by November 1) and go into effect on January 1 of the following calendar year (CY). While each of reg is significant, Regs & Eggs has focused a lot of its attention on the Physician Fee Schedule (PFS), the rule that impacts physicians and other clinicians. Previous blog posts have discussed major issues that CMS is grappling with as the agency continues to modernize policies and shift incentives to better reward primary and value-based care. As school lets out for summer, I provide some perspective on what we should all be watching for in the upcoming CY 2027 PFS rulemaking cycle.
The conversion factor (CF) is the standardized dollar amount used to convert relative value units (RVUs) – the building blocks of physician payment – into actual payment rates. The CF plays a central role in determining how physicians are reimbursed under Medicare, and it’s come under increased pressure in recent years. Despite rising practice costs and broader inflationary trends, the CF saw cuts for five years in a row because of various policy and budgetary factors. In the CY 2026 PFS final rule (last year’s reg), CMS finalized an increase to physician payments for the first time in six years! The CY 2026 PFS CF is $33.5675 for clinicians who meet certain participation thresholds in advanced alternative payment models (APMs) and $33.4009 for other clinicians. These amounts represented increases of 3.77% and 3.26%, respectively, from the CY 2025 CF of $32.3465.
The positive update experienced in CY 2026 may be short-lived, however. One of the key factors that drove the increase for CY 2026 compared to CY 2025 was a one-year 2.5% payment increase provided by Congress in the One Big Beautiful Bill Act. This bump was a temporary fix and is set to expire at the end of CY 2026. Without further congressional action, CMS is required by law to remove 2.5% from the CY 2027 CFs. While CMS will make other adjustments to the CF that will impact the final updates, it may be difficult to overcome a 2.5% cut, and physicians and other clinicians may enter CY 2027 in an all-too-familiar situation: a reduction to the CFs.
Stakeholders will likely continue to sound the alarm about the lack of a stable inflationary update under the PFS. In fact, the 2026 Medicare Trustees Report issued on June 9, 2026, states:
While the physician payment system put in place by MACRA [the Medicare Access and CHIP Reauthorization Act] voided the significant short-range physician payment issues resulting from the SGR system approach, it nevertheless raises important long-range concerns that will almost certainly need to be addressed by future legislation. The law specifies the physician payment updates for all years in the future, and these updates do not vary based on underlying economic conditions, nor are they expected to keep pace with the average rate of physician cost increases. The specified rate updates could be an issue in years when levels of inflation are high and would be problematic when the cumulative gap between the price updates and physician costs becomes large. Absent a change in the delivery system or level of update by subsequent legislation, the Trustees expect access to Medicare-participating physicians to become a significant issue in the long term.
Congress is evaluating potential options to provide a long-term inflationary update to PFS payments, but the clock is ticking and CMS’s hands are somewhat tied without congressional action.
Every year, beyond updating the CFs, CMS makes adjustments to RVUs for PFS codes. Historically, CMS has used a “scalpel” to carefully dissect the work, practice expense (PE), and malpractice RVUs for a select number of codes, and has made updates to those code values based on recommendations from the American Medical Association’s Relative Value Scale Update Committee (referred to as the RUC) and/or other interested parties through public comments and specific requests. However, in the CY 2026 PFS, CMS added a blunter instrument to its policymaking kit and finalized two general policies that impacted large batches of codes:
As described below, CMS could reexamine these policies in the CY 2027 rule.
In the CY 2026 reg, CMS stated that its current process for reviewing and updating work RVUs may not fully account for efficiencies that can develop over time for services that are not reported based on time, such as procedures, radiology services, and diagnostic tests. CMS explained that the resources required to furnish these services may decrease as they become more common, clinicians gain experience, technology improves, and workflows become more efficient. CMS expressed concern that these efficiencies are not consistently reflected under the current valuation process. To account for this, CMS finalized a policy beginning in CY 2026 to apply a 2.5% reduction to both work RVUs and the physician intra-service time for services that are not time-based. CMS calculated the 2.5% reduction based on the cumulative Medicare Economic Index (MEI) productivity adjustment over the prior five years.
It is unclear whether CMS will make any adjustments to this policy in the CY 2027 rule. CMS stated in the CY 2026 rule that it plans to recalculate the efficiency adjustment every three years. Stakeholders have expressed concern that re-applying a cumulative MEI-based reduction every three years risks creating a compounding downward payment spiral for certain services without empirical evidence that additional efficiency gains are achievable. Even if CMS decides to adjust that aspect of the policy, the agency doesn’t necessarily have to make that decision in the CY 2027 reg, since the next adjustment isn’t scheduled to be implemented until CY 2029.
CMS also could further adjust its exemption policy. Based on comments on the CY 2026 PFS proposed rule, in the final rule CMS modified the list of codes to which the efficiency adjustment applies. CMS added more exemptions, most notably for new CY 2026 services and for other time-based services not captured in the proposed rule, such as time-based drug administration, physical medicine and rehabilitation and therapy services, and remote therapeutic monitoring services. With these changes, the final efficiency adjustment applies to around 7,700 codes, compared to nearly 9,000 codes as proposed. In the CY 2027 rule, CMS could continue to refine the list and add more exemptions.
One of the most significant policies in the CY 2026 rule was a change to the indirect PE allocation methodology. Under the PFS, many services are paid differently depending on where they are furnished. In a non-facility setting (e.g., a physician’s office), payment includes both the work RVU (reflecting the physician’s time and effort) and a PE RVU that captures the full cost of operating the practice. This includes direct costs (such as clinical labor, supplies, and equipment) and indirect costs (such as administrative overhead). In a facility setting (e.g., a hospital), payment still includes both work and PE RVUs, but the PE RVU is typically lower because direct costs are paid separately to the facility under a different payment system (e.g., the Outpatient Prospective Payment System). As a result, indirect PE in the facility setting is allocated based solely on the work RVU, since the physician does not incur those direct expenses.
The facility setting payment still includes some indirect PE to reflect assumptions built into the original PE methodology, which was developed at a time when most physicians maintained office-based practices even if they also furnished care in hospitals. Under that model, the PE methodology allocated the same amount of indirect cost per work RVU regardless of site of service. In the CY 2026 reg, CMS stated that these assumptions may no longer hold true, given substantial changes in healthcare delivery and practice patterns in recent decades, with fewer physicians now in private practice. CMS concluded that the indirect PEs allocated to clinicians who work in facilities were overstated, especially if these clinicians no longer maintain a separate office-based practice. To address this potential inaccuracy, CMS modified the indirect PE allocation methodology for services furnished in the facility setting beginning in CY 2026 by reducing the portion of indirect PE allocated per work RVU to 50% of the amount allocated for non-facility services.
PEs have a budget neutrality requirement, meaning that cuts to the PE RVUs for certain services are redistributed to the PE RVUs for other services. Since CMS’s policy change reduced PE RVUs for facility-based services, PE RVUs for non-facility-based services increased, which meant that overall PFS spending for many office-based specialties and clinicians furnishing highly technical services in non-facility settings increased. The policy therefore produced sharp differences in payment based on where certain providers provide services, even among providers in the same specialty. While we don’t know the actual impact yet (since we are only halfway through 2026), CMS estimated that RVUs for allergy/immunology providers will increase by 7% overall in the non-facility setting but decrease by 11% in the facility setting.
While stakeholders have expressed support for CMS’s goal of improving payment accuracy and better aligning indirect PE payment with the entity that actually incurs the overhead costs, some argue that the policy is overly broad because it applies the same reduction across all facility-based services without adequately accounting for variation in physician practice structures. They state that practice arrangements can vary significantly, with some physicians employed directly by facilities while others employed by independent practices that contract with the facility to provide services and cover overhead. Thus, some clinicians furnishing services in facility settings continue to incur substantial indirect costs. A more refined approach, according to these stakeholders, would fulfill CMS’s broader objectives while protecting independent clinicians and physician groups that continue to bear meaningful professional practice overhead in the facility setting.
In the CY 2026 PFS final rule, CMS asked for ideas to modify the policy, including by potentially implementing a facility-based physician modifier. Such a modifier could apply to facility-based services furnished by independent clinicians or physician groups that remain financially responsible for significant professional practice overhead. The modifier could effectively exempt qualifying claims from the CY 2026 reduction or otherwise increase payments for those services. CMS could introduce such a modifier or make some other modification that would narrow the scope of the policy for CY 2027.
A top priority for CMS has been rooting out fraud, waste, and abuse in federal spending and developing more “accurate” payment approaches. In the CY 2026 PFS rule, CMS focused on skin substitutes, finalizing policies aimed at addressing what the agency described as “unprecedented growth” in skin substitute spending under the PFS. CMS is consistently analyzing PFS spending trends and may identify other services in the CY 2027 PFS where the agency could introduce significant adjustments to payments.
Under the Quality Payment Program established by MACRA, most Medicare-participating clinicians can be subject to payment adjustments under a quality and cost performance program called the Merit-based Incentive Payment System (MIPS), or they can participate in the advanced APM track. Most clinicians are subject to MIPS. Eligible clinicians in MIPS have payments increased, maintained, or decreased based on relative performance in four categories: quality, cost, promoting interoperability, and improvement activities. Based on how their score compares to a pre-established performance threshold, clinicians receive a payment adjustment two years after the performance period. For example, performance in 2026 will impact Medicare payments in 2028.
In the CY 2026 final rule, CMS tried to promote stability in MIPS, including by maintaining the performance threshold of 75 points through performance year 2028/payment year 2030. Since stability seems to be the name of the game for MIPS, it is unclear whether CMS will propose any major changes to MIPS in the CY 2027 rule.
However, CMS may decide to make updates to MIPS Value Pathways (MVPs). MVPs are a participation option that focuses on an aligned set of measures around a specific specialty, condition, or episode of care. CMS believes that MVPs will make MIPS reporting more meaningful to patient care and more relevant to a clinician’s scope of practice. CMS adds more MVPs to the inventory every year (there are currently 27 MVPs) and has repeatedly stated that it will eventually make MVPs mandatory, sunsetting traditional MIPS. While CMS has not specified a date for when MVPs will become mandatory, during the March 2026 CMS Quality Conference, the agency recommended that clinicians try out MVPs for the “next several years” while they remain optional. CMS also stated that it is considering making certain measures within MVPs mandatory. Thus, while clinicians can choose to report some measures within an MVP measure list, a couple of measures could become required.
Based CMS’s statements during the conference, we could wind up seeing MVP proposals in the CY 2027 rule, including proposals to add more MVPs to the list and potentially to make a few measures within each MVP required. CMS could also propose an actual date for sunsetting traditional MIPS and fully transitioning to MVPs.
There are many other policies that CMS could include in the PFS, but these are some of the major ones we are tracking.
We will just have to wait to find out what policies ultimately make it into the rule! And we likely won’t need to wait long– the rule could come out at the end of June or in the first few weeks of July. So, stay tuned!
Until next week, this is Jeffrey saying, enjoy reading regs with your eggs.
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