CMS released the calendar year 2026 Physician Fee Schedule proposed rule on Monday, July 14, 2025, and it appeared in the Federal Register on July 16. Comments are due September 12. On the surface it is good news: the conversion factor goes up for the first time in years. Underneath, it is the most structurally unusual fee schedule proposal we have read in a decade, and the headline increase hides a redistribution that will hit some specialties hard.
We have been fielding calls from practice managers all week asking whether they should be pleased or worried. The honest answer is that it depends on your code mix, and you can find out with a spreadsheet and an afternoon. This article walks through the five proposals that move money and how to model each against your own claims.
Key takeaways
- Two conversion factors for the first time: $33.59 for qualifying APM participants and $33.42 for everyone else, both carrying a one-year 2.5 percent statutory increase that disappears in 2027.
- The 2.5 percent efficiency adjustment cuts the work RVUs of nearly every non-time-based service, so the headline increase is largely offset for procedural specialties and fully kept by office-based cognitive ones.
- Indirect practice expense for services performed in a facility setting is cut by half, a second redistribution from hospital-based to office-based practices.
- Skin substitutes move from average sales price to a flat per-square-centimeter supply payment; any wound care line needs to be remodeled now.
- The telehealth proposals are useful but do not touch the statutory flexibilities that expire on September 30, 2025. Comments are due September 12.
Two conversion factors
For the first time, Medicare would pay from two conversion factors. Clinicians who are qualifying participants in an advanced alternative payment model would use $33.59, a 3.8 percent increase over the 2025 factor of $32.35. Everyone else would use $33.42, a 3.3 percent increase. Both include the one-year 2.5 percent statutory bump that Congress included in the July 4 reconciliation law, plus a small budget-neutrality adjustment for the work RVU changes described below.
The 2.5 percent is for 2026 only. Unless Congress acts again, the 2027 factor starts from a lower base, and the two-track structure remains. If your practice is in an ACO in the Shared Savings Program, find out now whether your track qualifies you as a QP, because the difference is worth about half a percent across every Medicare claim.
Two redistributions
The efficiency adjustment
This is the piece to read twice. CMS proposes to cut the work RVUs and the intraservice time of nearly every non-time-based service by 2.5 percent, on the theory that procedures get faster as clinicians gain experience and technology improves, and that the survey data used to value them has not kept up. Excluded are evaluation and management visits, care management services, behavioral health services, maternity global codes and other time-based services.
The practical effect is a shift from procedural specialties toward primary care and cognitive specialties. A family medicine practice whose Medicare revenue is 85 percent office visits barely notices. A dermatology, orthopedic or gastroenterology practice sees the 2.5 percent conversion factor increase largely offset by a 2.5 percent cut to the work component of most of what it bills. CMS plans to repeat the adjustment every three years, so this is not a one-time event.
Practice expense in the facility setting
The second redistribution is quieter. CMS proposes to cut the indirect practice expense RVUs allocated to services performed in a facility setting by half, reasoning that clinicians who operate mainly in hospitals do not carry the same overhead as office-based practices. The agency cites the fall in physician practice ownership as its justification. For hospital-based and surgical specialists this compounds the efficiency adjustment. For office-based practices, budget neutrality means the money flows the other way.
Skin substitutes
Medicare spending on skin substitutes rose from about more than $250 million in 2019 to more than $10 billion in 2024, and CMS is done with the current system. The proposal reclassifies these products from biologicals paid at average sales price to incident-to supplies paid at a single flat rate per square centimeter, regardless of product, in both the office and the hospital outpatient department. CMS projects a spending reduction of around 90 percent. Practices with a wound care line should model 2026 revenue on the flat rate now, because the product-level margins that made this line attractive are gone in the proposal.
Telehealth
Four telehealth proposals matter for daily operations. CMS would simplify the process for adding services to the Medicare telehealth list by dropping the provisional and permanent categories. It would permanently remove frequency limits on subsequent inpatient visits, subsequent nursing facility visits and critical care consultations. It would permanently allow direct supervision through real-time audio and video for most incident-to services. And it would roll back the virtual presence allowance for teaching physicians outside rural settings.
None of this touches the statutory flexibilities (geographic restrictions, home as an originating site, audio-only) that expire on September 30, 2025 unless Congress extends them. The proposed rule cannot fix that, and a practice that reads the telehealth section as reassurance about October is reading it wrong.
Other proposals worth a line
- A mandatory Ambulatory Specialty Model beginning January 2027 for heart failure and low back pain, with a five-year performance period.
- Ten quality measures removed and five added, with an emphasis on chronic disease prevention.
- An expanded Medicare Diabetes Prevention Program and broader coverage for digital mental health treatment devices.
- Continued use of the current claims-based cost measures in MIPS, with the usual annual changes to measure specifications.
How to model it in an afternoon
- Export the last twelve months of Medicare Part B claims by CPT code with allowed amounts and units.
- Flag each code as time-based (E/M, care management, behavioral health) or non-time-based. Flag the place of service as office or facility.
- Apply the 3.3 percent conversion factor increase to everything. Apply a 2.5 percent cut to the work portion of non-time-based codes (the work share by code is in the RVU file; 40 to 50 percent is a fair average for procedures).
- For facility-place-of-service codes, cut the indirect PE portion by half. This is rougher; use the PE RVU split in the public file.
- Sum, compare to the current year, and look at the result by provider. That is your exposure, within a couple of percent.
A worked example
Take a two-physician dermatology practice with $900,000 in Medicare allowed charges: $300,000 in office visits and $600,000 in procedures (destructions, biopsies, excisions, repairs). Assume the work component averages 45 percent of the procedure allowed amounts and the practice is not in an advanced APM, so it uses the $33.42 factor. The arithmetic looks like this.
| Line | 2025 allowed | Conversion factor, up 3.3 percent | Efficiency adjustment, 2.5 percent of the work share | 2026 estimate |
|---|---|---|---|---|
| Office visits (time-based, exempt) | $300,000 | +$9,900 | None | $309,900 |
| Procedures (non-time-based) | $600,000 | +$19,800 | 2.5 percent of $270,000, about $6,750 less | $613,050 |
| Total | $900,000 | +$29,700 | About $6,750 less | $922,950, up about 2.5 percent |
This office-based practice comes out ahead, and the model understates it slightly because the indirect practice expense taken from facility-based services flows back toward office-based codes through budget neutrality. Now run the same table for a hospital-based orthopedic group: the procedure share is higher, the work share of procedures is closer to 50 percent, and the facility practice expense cut takes another slice on top of the efficiency adjustment. That group can finish 2026 flat or down despite the larger conversion factor. Same rule, opposite result, which is why the specialty impact table in the proposed rule is the most-read page in it.
If the number is negative, that is the figure to put in your comment letter. CMS reads specific dollar impacts from real practices more carefully than form letters, and the deadline is September 12. If you would like a second set of eyes on the model, our RCM audit team runs fee schedule impact analyses as part of the payer contract review.
Questions we hear
Is the efficiency adjustment likely to survive to the final rule?
We do not know, and neither does anyone else. Specialty societies are organizing against it. Our view is that practices should model it as proposed and treat any softening in the November final rule as upside.
Does the 2.5 percent statutory increase carry into 2027?
No. It applies to 2026 only. The underlying update for 2027 reverts to the statutory schedule (0.25 percent for non-QPs and 0.75 percent for QPs) unless Congress changes it.
We do not use skin substitutes. Can we skip that section?
Yes, with one caveat: the same reclassification appears in the OPPS proposed rule released July 15, and the WISeR prior authorization model starting in January 2026 lists skin substitutes as a target. If you refer to wound care centers, expect access and authorization changes for your patients.
What to do this month
- Run the afternoon model above on twelve months of Medicare claims and record the result by provider and by specialty.
- If you participate in a Shared Savings Program ACO or another APM, ask the ACO in writing whether your clinicians are expected to reach qualifying participant status for 2026, since it decides which conversion factor you are paid from.
- Wound care lines: rebuild the 2026 revenue forecast on a flat per-square-centimeter payment and decide whether the service line still makes sense at that rate.
- Draft the comment letter with your dollar impact and the codes that drive it, and submit before September 12. Specialty society templates are a starting point; your own numbers are what get read.
- Separately, put the September 30 telehealth expiration on the operations calendar. The proposed rule does not solve it, and October visits need a plan of their own.
