Medicare's 2026 Rule Cuts Facility Pay by 50%. Here's Why

CMS cut the share of indirect practice-expense payment tied to work RVUs by 50% for services performed in a hospital or other facility setting, effective January 1, 2026, under the final Medicare Physician Fee Schedule rule (CMS-1832-F). The same rule raises hospital outpatient and ambulatory surgical center payment rates by 2.6%, so a practice now sees a different Medicare number depending on where a procedure happens, not just which code is billed.

What Changed in the Practice-Expense Formula

Medicare pays a portion of practice expense based on work RVUs, and until 2026 that portion was calculated the same way regardless of setting. CMS finalized a change that reduces the work-RVU-linked share of indirect practice expense to half of the non-facility amount for any service billed in a facility setting, according to the agency's fact sheet on the final rule. That change lands on top of two conversion factor updates: $33.40 for clinicians not in a qualifying Advanced Alternative Payment Model, a 3.26% increase over the 2025 rate of $32.35, and $33.57 for Qualifying APM Participants, a 3.77% increase, both per CMS. The Medical Group Management Association's October 31, 2025 statement on the rule noted that 2025's conversion factor had itself followed a 2.83% cut from 2024, so the facility-setting change arrives on top of a rate that was already recovering from a prior reduction.

The Efficiency Adjustment Stacks on Top

A separate 2.5% efficiency adjustment applies to roughly 7,700 non-time-based codes in 2026, based on a lookback at productivity growth under the Medicare Economic Index, according to Holland & Knight's analysis of the final rule. CMS exempts evaluation and management visits, care management codes, behavioral health services, codes on the telehealth list, and maternity codes billed under a global MMM period. Holland & Knight's analysis also notes that CMS used older Bureau of Labor Statistics data to set the 2.5% figure; had the agency used more current BLS data, the adjustment would have come out to 3.6% instead. For a facility-based physician, that 2.5% cut applies in addition to the 50% reduction in indirect practice-expense allocation, since the efficiency adjustment does not exempt facility-based services. Specialties that bill a large share of facility-based codes, such as cardiology, radiation oncology, and surgical subspecialties, carry more exposure to the combined cut than primary care and behavioral health, which bill mostly in the office setting or fall under the rule's exemption list.

Hospital Outpatient and ASC Payment Moved the Other Way

While facility-linked physician payment tightened, the hospital outpatient and ASC side of the same rule package moved up. CMS raised OPPS and ASC payment rates by 2.6% for 2026, built from a 3.3% hospital market basket increase reduced by a 0.7 percentage point productivity adjustment, per CMS's OPPS/ASC final rule fact sheet. In dollar terms, CMS projects total OPPS payments of about $101 billion for 2026, an increase of about $8.0 billion from 2025, and total ASC payments of about $9.2 billion, up about $450 million, according to Applied Policy's analysis of the rule. A group that owns or is affiliated with a hospital outpatient department or an ASC collects more on that side of its Medicare revenue in 2026 even as its facility-based physician payment tightens on the other side.

A $10 Billion Skin Substitute Reset

One provision inside the same physician fee schedule rule affects any practice billing for skin substitutes in wound care. CMS finalized a single payment rate of about $127.28 for these products starting January 1, 2026, across both office and outpatient settings, replacing a payment structure that let individual product prices vary widely from one manufacturer to the next. CMS cites Medicare spending on skin substitutes that grew from $252 million in 2019 to more than $10 billion in 2024 as the reason for standardizing the rate rather than continuing to pay separately negotiated amounts per product.

What This Means for Where a Practice Performs a Procedure

A practice weighing office, hospital outpatient, or ASC placement for a procedure now has to run two different 2026 numbers instead of one. Office-based work carries the full conversion factor gain, 3.26% or 3.77% depending on APM status, reduced only by the 2.5% efficiency adjustment on non-time-based codes. Facility-based physician work carries the same conversion factor gain but loses half its indirect practice-expense allocation on top of the same 2.5% cut. Facility ownership itself, through an OPPS department or an ASC, sees a cleaner 2.6% rate increase with no offsetting reduction. A multi-site group that bills professional fees in a hospital outpatient department but also owns the department itself is effectively on both sides of the rule at once, absorbing the physician-side cut while collecting the facility-side increase. Telehealth billing carries its own date to track separately: CMS extended audio-only telehealth access for rural health clinics and federally qualified health centers through December 31, 2026.

Source: CMS CY 2026 Medicare Physician Fee Schedule and OPPS/ASC final rules, via Applied Policy's analysis. 2025 totals are derived by subtracting the reported year-over-year dollar change from the 2026 totals.

Sources

• CMS, "Calendar Year (CY) 2026 Medicare Physician Fee Schedule Final Rule (CMS-1832-F)," fact sheet
• CMS, "Calendar Year 2026 Hospital Outpatient Prospective Payment System (OPPS) and Ambulatory Surgical Center Final Rule," fact sheet
• MGMA, "MGMA Statement on 2026 Medicare Physician Fee Schedule Final Rule," October 31, 2025
• Holland & Knight, "CMS Releases CY 2026 Medicare Physician Fee Schedule Final Rule," November 2025
• Applied Policy, "CMS Finalizes 2.6% OPPS/ASC Increase, Declines 340B Offset Acceleration, and Launches IPO Phase-Out," 2025