backCMS Issues CY 2026 Medicare Physician Fee Schedule Final Rule – On November 5, 2025, CMS issued a final rule implementing changes to the to the Medicare Physician Fee Schedule (PFS), Medicare Shared Savings Program Requirements, and Medicare Prescription Drug Inflation Rebate Program for Calendar Year (CY) 2026 (the Final Rule). Among other changes, the Final Rule updates the PFS rates and conversion factor, reduces payments by a newly created efficiency adjustment, makes permanent certain COVID-era flexibilities for telehealth, and provides additional guidance for drug manufacturers to calculate average sales price. The Final Rule takes effect January 1, 2026.
CY 2026 PFS Rate Setting and Conversion Factor
Beginning in CY 2026, there will be two conversion factors that convert relative value units (RVUs) (the resources typically used to furnish a service) to payment rates. One of the conversion factors will be used for qualifying alternative payment model (APM) participants (QPs) and will be updated by +0.75 percent, while the other one will be used for physicians and practitioners who are not QPs and will only be updated by +0.25 percent. Additionally, there will be a one-year increase of +2.50 percent for CY 2026 stipulated by statute and an estimated adjustment of +0.49 percent to account for changes in work RVUs for certain services.
Efficiency Adjustment
In the Final Rule, CMS finalized its proposal to apply an efficiency adjustment to the work RVUs and corresponding intraservice physician time for codes describing non-time-based services. According to CMS, non-time-based services, such as procedures, radiology services, and diagnostic tests, “should become more efficient as they become more common, professionals gain more experience, technology is improved, and other operational improvements.”
CMS has decided to use the Medicare Economic Index (MEI) to account for efficiency gains in the RVUs. The MEI, which is updated annually by the CMS Office of the Actuary, purports to measure the inflation faced by physicians with respect to their practice costs and wage levels, including inputs such as the physician’s own time, rent, equipment, etc. CMS currently uses the MEI to update the inpatient and outpatient prospective payment systems for productivity.
To implement the efficiency adjustment for 2026, CMS reduced the work RVUs and corresponding intraservice physician time for codes describing non-time-based services by -2.5 percent, which represents the sum of the MEI productivity adjustments over the past five years (2022 through the estimated adjustment for 2026). CMS decided to exempt new services from this adjustment “given that practitioners would not be able to accrue efficiencies for services that are new in the first year.”
CMS explained that its decision to use a five-year look-back period “is not intended to account for the full magnitude of previously unaccounted for efficiency gains,” and warned that “we may consider making refinements to the efficiency adjustments in future rulemaking to better account for these gains.”
Commenters to the rule questioned CMS’s authority to adjust PFS payments for efficiency. In response, CMS pointed to its statutory authority to “adjust the number of RVUs to take into account changes in medical practice.” The agency explained that it believed the efficiency gains in the services represented by RVUs “have been caused by changes in medical practice,” and thus fall within CMS’s authority to adjust the payment rates.
Practice Expense
Currently, the practice expense (PE) methodology primarily relies on AMA’s Physician Practice Information (PPI) survey data from 2008 concerning specialty-specific practice costs. In recent years, CMS has expressed interest in developing a roadmap for updating the PE methodology to account for the changed healthcare landscape and solicited comments regarding the same.
While the Final Rule refrained from making certain contemplated changes to this methodology, the Final Rule indicates that further changes to the PE methodology may occur in the future. For example, while the Final Rule does not incorporate the findings of the AMA’s PPI survey data from 2024 due to limitations with the data, the proposed rule solicited comments to consider in future rulemaking.
The Final Rule adjusts the portion of the facility indirect PE RVUs allocated based on work RVUs to only half the amount allocated to non-facility indirect PE RVUs. This adjustment is intended to account for the fact that many physician practices may no longer also maintain an office-based practice.
Telehealth Services
In the Final Rule, CMS finalized several changes to its policies concerning telehealth services. First, the agency finalized its proposal to simplify the review process for adding services to the Medicare Telehealth Services List. Specifically, the agency replaced its 5-step review process with a three-step process that will consider whether a service is (1) separately payable under the PFS, (2) inherently a face-to-face service, and (3) capable of being furnished via audio-video communications technology. Further, the review process will no longer include a distinction between provisional and permanent services.
Second, CMS finalized its proposal to permanently remove frequency limitations on furnishing telehealth services for subsequent inpatient visits (CPT 99231-99233), subsequent nursing facility visits (CPT 99307-99310), and critical care consultations (G0508-G0509).
Third, to further increase the availability of telehealth services, CMS finalized its proposal to adopt a definition of “direct supervision” that permits virtual presence through audio/video real time communications technology to meet the requirement for “incident-to” services.
Fourth, CMS finalized a policy permitting teaching physicians to have a virtual presence in all teaching settings in clinical instances when the service was furnished virtually.
Skin Substitutes
Skin substitutes are currently paid primarily using the average sales price-based payment methodology, which provides a unique billing code and payment limit for each skin substitute product. The Final Rule changes this payment methodology by categorizing skin substitute products as “incident-to supplies” in the physician office and hospital outpatient settings (“incident-to” is a term of art that means an integral, although incidental, part of the physician’s professional service). In both settings of care, the payment for skin substitutes will not be bundled into the procedure payment and will instead be a separate payment for the product in addition to the payment for the skin substitute application procedure.
CMS is also creating three payment categories of products as supplies, relying on FDA regulatory categories: (1) PMA (pre-market approvals), (2) 510(k) and (3) 361 HCT/P (human cells, tissues and cellular and tissue-based products). CMS is finalizing a single initial payment rate across all three categories for CY 2026 to avoid underestimating the resources in providing these products. CMS is using the highest of the three product category rates for hospital OPPS data, which is the rate for 361 products. Under the Final Rule this payment rate will be approximately $127.28 per square cm. This is a slight increase from the proposed payment rate of $125.38 per square cm. In future years, CMS intends to propose payment rates that will differentiate among the three FDA regulatory categories.
Drugs and Biological Products Paid Under Medicare Part B
Payment for drugs under Part B is derived from the average sales price (ASP) of the drug based on ASP data reported by manufacturers. In the Final Rule, CMS finalized rules clarifying how manufacturers should account for price concessions and bona fide service fees (BFSFs) in reporting ASP to CMS.
First, CMS updated its regulations to specify how manufacturers should incorporate bundled arrangements into ASP calculations. The rules now define “bundled arrangement” to include any discount conditioned on the purchase of the same drug or other drugs. Manufacturers are directed to allocate discounts under bundled arrangements to the drugs purchased under those arrangements.
Second, CMS updated the documentation that manufacturers must submit with their quarterly ASP submissions. The new rules require manufacturers to obtain letters from entities receiving BFSFs certifying that the fee will not be passed on to an affiliate, client or customer of any entity, and submit those letters to CMS. Manufacturers are also required to disclose the reasonable assumptions they make in calculating ASP for their drugs.
Rural Health Clinics (RHCs) and Federally Qualified Health Centers (FQHCs)
The Final Rule implements changes to align payment to RHCs and FQHCs largely consistent with the proposals with regards to telehealth services, chronic illness, and behavioral needs. First, for RHC and FQHC services requiring “direct supervision,” CMS is finalizing a rule that will allow permanent adoption of a definition that allows virtual presence through “immediate availability” via audio/video real-time communications technology, consistent with CMS’s expansion of the “direct supervision” definition in other aspects. Second, CMS adopted the same additional codes for the three new G-Codes (which are billed when Behavioral Health Integration or Collaborative Care Model services are provided in conjunction with Advance Primary Care Management services) for RHC and FQHC services as well.
Medicare Prescription Drug Inflation Rebate Program
The Inflation Reduction Act of 2022 established the Medicare Prescription Drug Inflation Rebate Program, which requires drug manufacturers to pay rebates to the Medicare program if they raise their prices for certain drugs payable under Part B or covered under Part D faster than the rate of inflation. In the Final Rule, CMS finalized changes to the Part B and Part D components of the rebate program.
With respect to Part B, CMS finalized policies for (1) identifying the payment amount benchmark quarter if data needed to calculate the payment amount are not available, (2) calculating the payment amount if a published payment limit is not available, and (3) calculating the payment amount if there is no published payment limit and neither positive ASP nor positive wholesale acquisition cost data are available in the ASP Data Collection System.
Regarding Part D, CMS finalized its proposal to use a claims-based methodology to ensure that the units used to calculate the total rebate amount for a Part D rebatable drug will exclude drugs for which the manufacturer provided a discount under the 340B program. CMS also established a 340B repository for covered entities to voluntarily submit certain data elements from Part D claims for Part D rebatable drugs for which a manufacturer has provided a discount under the 340B program.
The final rule is available here, and the fact sheet is available here.
Reporters, Alek Pivec, Washington, D.C., +1 202 626 2914, apivec@kslaw.com; William Mavity, Los Angeles, +1 213 218 4043, wmavity@kslaw.com
Also in the News
An Update on the Government Shutdown—The federal government shutdown is entering day 41, but the end is in sight. On Sunday, November 9, the Senate voted 60 to 40 on a procedural measure to advance a continuing resolution (CR) to reopen the government. The following Democratic or Independent Senators voted in favor of proceeding to a vote on the CR, joining all Senate Republicans except Senator Rand Paul (R-KY):
- Catherine Cortez Masto (NV)
- Dick Durbin (IL)
- John Fetterman (PA)
- Maggie Hassan (NH)
- Tim Kaine (VA)
- Angus King (ME)
- Jacky Rosen (NV)
- Jeanne Shaheen (NH)
The Senate CR would amend H.R. 5371, the House-passed CR and:
- Funds most federal agencies through January 30, 2026.
- Contains a three-bill “minibus” to fund agencies and programs through the rest of fiscal year 2026. This includes: Agriculture, Rural Development, Food and Drug Administration, and Related Agencies Appropriations Act (summary available here); Legislative Branch Appropriations Act (summary available here); and Military Construction, Veterans Affairs, and Related Agencies Appropriations Act (summary available here).
- Extends several health policies through January 30, including telehealth flexibilities (telehealth claims that have been on hold would be paid retroactive to October 1); community health center funds; and expanded payment adjustments for low-volume hospitals. The CR includes $14 million for HHS to implement no surprise billing programs. The CR also delays the $8 billion in scheduled Medicaid payment cuts to disproportionate share hospitals as well as delays Medicare laboratory cuts scheduled under the Protecting Access to Medicare Act.
- Authorizes funds to be used to provide back pay for federal employees, including furloughed employees and prevent federal agencies from enacting any Reductions in Force (RIFs) for full-time federal employees during the duration of the CR.
Majority Leader Thune (R-SD) promised the chamber’s Democrats a vote by early December on separate legislation to extend enhanced Affordable Care Act premium tax credits that expire December 31. House Speaker Johnson did not make the same promise and is not bound by the Senate commitment. The Senate is back in session November 10 and working toward a vote on the CR. Speaker Johnson has committed to giving 36 hours notice for when the House—which has not been in session for the past 50 days—needs to be back in DC to vote. While the margins are very tight, with House Republicans only being able to lose 2 votes, it is expected that the House will pass the Senate amendment, earliest this Wednesday (November 12) and likely by the end of this week.
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