CY2026 Fee Schedule Final Rule: Two Conversion Factors and One Efficiency Cut

CMS released the calendar year 2026 Medicare Physician Fee Schedule final rule on Friday, October 31, 2025, a month into the government shutdown and roughly on its usual schedule. The rule takes effect January 1, 2026. It is the first fee schedule in years with a conversion factor increase that clinicians will actually feel, and the first ever with two conversion factors. It also carries the efficiency adjustment that specialty societies fought all summer, and a payment change for skin substitutes that will reshape wound care billing.

A practice administrator for a four-physician orthopedic group asked us on Monday whether the 3.26 percent headline increase meant a 3.26 percent increase in her Medicare revenue. The honest answer is no, and the reason is the rest of this article.

Key takeaways

• The 2026 conversion factor is $33.40 for most clinicians and $33.57 for qualifying APM participants, up 3.26 and 3.77 percent from $32.35. Most of the increase is a one-year 2.5 percent bump from the July 2025 reconciliation law, so plan 2027 without it.
• A 2.5 percent efficiency adjustment cuts the work RVUs of non-time-based services. E/M visits, care management, behavioral health and telehealth-list services are exempt, so office-based cognitive practices keep most of the increase and procedural practices give a large share of it back.
• Skin substitutes in the office move from product-specific ASP pricing to a single national rate of about $127.28 per square centimeter, paid as an incident-to supply.
• Several telehealth changes are now permanent in regulation, but the originating site and geographic waivers that lapsed on October 1 are statutory and only Congress can restore them.

The two conversion factors

Starting in 2026, the statute provides different annual updates for clinicians who are qualifying participants in advanced alternative payment models (0.75 percent) and for everyone else (0.25 percent). Add the one-year 2.5 percent increase that Congress included in the July 2025 reconciliation law, plus a small positive budget-neutrality adjustment from the work RVU changes, and the final numbers are:

The 2.5 percent piece is a one-year increase. Unless Congress acts again, it falls out of the 2027 calculation, and the 0.49 percent budget-neutrality piece is recalculated every year and can go either way. We would plan 2026 budgets on the new numbers and 2027 budgets without the 2.5 percent. The qualifying participant status follows the individual clinician, is determined by CMS from the prior performance year, and has to be loaded into the billing system per provider, which most practice management systems have never had to do before.

The efficiency adjustment

CMS finalized a negative 2.5 percent efficiency adjustment for 2026, applied to the work RVUs and the intraservice physician time of services that are not time-based. The rationale is that procedures get faster as clinicians gain experience and technology improves, and the adjustment is derived from a five-year lookback at the productivity component of the Medicare Economic Index. CMS intends to update it every three years, so this is a permanent feature of the fee schedule, not a one-time cut.

The exclusions matter more than the rule for most office practices. The adjustment does not apply to time-based services, including evaluation and management visits, care management services, behavioral health services, services on the Medicare telehealth list, maternity codes with a global period of MMM, and codes that are new for 2026. A primary care practice billing 99213, 99214, 99495 and G2211 will see almost no efficiency cut. A dermatology, orthopedic, gastroenterology or surgical practice will see it on nearly every procedure code.

Here is the arithmetic, using illustrative RVUs and ignoring practice expense changes for the moment:

Because the conversion factor rises by 3.26 percent and the work RVU falls by 2.5 percent on procedural codes, the net effect on the work component of a procedure is roughly a 0.7 percent increase. On an E/M visit, the full 3.26 percent applies. That is why the orthopedic administrator's revenue will not rise 3.26 percent, and why her specialty impact figure in the rule's table is closer to flat.

Practice expense: office wins, facility loses

CMS also finalized a change in how indirect practice expense is allocated. The rule recognizes greater indirect costs for practitioners in office-based settings compared to facility settings, and reduces the indirect practice expense allocated to services furnished in facilities. CMS pointed to the steady decline in private practice and the rise of hospital employment as context. The effect is a relative shift of payment toward office-based practices and away from hospital-employed physicians billing in a facility setting. CMS additionally finalized the use of hospital outpatient data to set rates for radiation treatment and remote monitoring services, which lowers some of those rates.

For an independent practice this is good news in direction, though the dollar effect depends on specialty and code mix. Look at the final rule's specialty impact table before assuming anything, and then look at your own top 50 codes, because a specialty average hides a lot.

Skin substitutes: a flat rate per square centimeter

Medicare spending on skin substitutes grew from about more than $250 million in 2019 to more than $10 billion in 2024, according to CMS. CMS decided that the product-by-product payment under average sales price was the cause. Starting January 1, 2026, most skin substitute products used in a covered application procedure in the non-facility setting are paid as incident-to supplies at a single national rate, finalized at about $127.28 per square centimeter, with geographic adjustment. The same approach applies in the hospital outpatient setting under the OPPS. CMS said it may differentiate rates by FDA regulatory category in later years.

Practices that apply skin substitutes need to relook at product selection, inventory contracts and the economics of each application before January. Products that were paid at thousands of dollars per square centimeter under ASP will be paid at the flat rate. Documentation of wound size, product size and wastage will be scrutinized. This is also one of the services covered by the WISeR prior authorization model in six states from January, which we will write about separately.

Telehealth policies

The rule makes several telehealth changes permanent regardless of what Congress does with the statutory waivers:

• The distinction between provisional and permanent services on the Medicare telehealth list is removed. Review now asks only whether a service can be furnished by interactive two-way audio-video.
• Frequency limits on subsequent inpatient visits, subsequent nursing facility visits and critical care consultations are removed permanently.
• Direct supervision may be furnished virtually, through real-time audio-video (not audio-only), for incident-to services, diagnostic tests, and pulmonary and cardiac rehabilitation, excluding procedures with a 010 or 090 global period.
• Teaching physicians may have a virtual presence in all teaching settings, but only when the service itself is furnished as telehealth.

None of this restores the originating site and geographic waivers that lapsed on October 1. Those are statutory, and only Congress can fix them. As of today the shutdown continues and Medicare video visits with non-behavioral patients at home remain unpayable.

Questions we hear

Does the efficiency adjustment apply to commercial payers?

Only if the contract ties rates to current-year Medicare RVUs, which many do. A contract at a percentage of the current Medicare fee schedule inherits the adjustment automatically. A contract with a fixed fee schedule does not. Read the rate exhibit, and if the contract says "current year RVUs" without naming a conversion factor, ask the payer in writing which conversion factor it will use.

Is the 3.26 percent increase permanent?

The 0.25 percent statutory update is permanent. The 2.5 percent is one year only. The 0.49 percent budget-neutrality adjustment changes each year. For a practice with $1.2 million in Medicare allowed charges, the 2.5 percent is about $30,000 that should be treated as a 2026 windfall rather than a new baseline.

What about the QPP changes in the same rule?

The MIPS and APM policies for the 2026 performance year are in the same document. We will cover them in a separate article later this month. Practices on our billing service will get the code-level 2026 comparison as part of the December fee schedule load, and our RCM audit includes a contract review for Medicare-linked commercial rates.

What to do this month

1. Download the final rule addenda and pull the 2026 RVUs for your top 50 codes by volume. Multiply by the applicable conversion factor and your GPCI. Compare to 2025 payments code by code.
2. Identify which of your top 50 codes are subject to the efficiency adjustment (procedural, non-time-based) and which are exempt (E/M, care management, behavioral, telehealth list). The split tells you your real 2026 change.
3. If you apply skin substitutes, model each product at the flat rate and talk to your suppliers before January.
4. Confirm whether any of your clinicians will be qualifying APM participants for 2026. The higher conversion factor follows the individual, and your billing system needs to know.
5. Check that your practice management vendor will load the 2026 Medicare fee schedule before the first January claim, and confirm the date.
6. Read the rate exhibits on your commercial contracts for Medicare-linked language and write down which ones will move in January.