On July 14, 2025, CMS issued a proposed rule that identifies and seeks public comment on a variety of proposed changes 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 Proposed Rule). The proposed updates would, among other things, update payment models to attempt to award efficiency, make permanent many COVID-era flexibilities for telehealth, and provide guidance regarding fair market valuations in connection with bona fide service fees used to calculate drug manufacturer’s Average Sales Price. If finalized, the proposed changes would take effect January 1, 2026. Comments are due by 5:00 p.m., September 12, 2025.
CY 2026 PFS Rate Setting and Conversion Factor
Under the Proposed Rule, beginning in CY 2026 there will be two conversion factors which 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 participants (QPs), and updated by +0.75 percent, while the other one will be used for physicians and practitioners who are not QPs and only updated by +0.25 percent. The larger update for the QP conversion factor appears intended to reward providers participating in alternative payment models which have features to ensure accountability for quality and cost of care. Additionally, there will be a one-year increase of +2.50 percent for CY 2026 stipulated by statute, and an estimated adjustment of +0.55 percent to account for proposed changes in work RVUs for certain services.
Efficiency Adjustment
Over the past several years, CMS has expressed concern and solicited comments regarding the PFS overvaluing non-time-based services due to efficiency gains over time. Literature and comments offered in response to past proposed rules on the PFS have suggested that such services become overvalued due to the combination of medical practice efficiencies over time and delays in code re-valuation, which some estimates suggest occur only every 17-25 years. To address the likelihood of overvaluation of non-time-based services, the Proposed Rules makes an efficiency adjustment to the work RVU and corresponding intraservice portion of physician time for non-time-based services in CY 2026, and then periodically every three years thereafter. The Proposed Rule uses a sum of the past five years of the Medicare Economic Index productivity adjustment (which is calculated by the CMS Office of the Actuary) to calculate the efficiency adjustment, which would result in a -2.5% efficiency adjustment for CY 2026.
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.
The most significant change in the Proposed Rule regarding the PE methodology is a proposed reduction in 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 physicians practicing in facilities being less likely to also maintain an office-based practice.
The Proposed Rule indicates that further changes to the PE methodology are likely to occur over time. For example, while the Proposed Rule does incorporate the findings of the AMA’s PPI survey data from 2024 due to concerns with the data, the Proposed Rule solicits comments on CMS’s proposed updates to the PE methodology because CMS intends to further refine that methodology.
Telehealth Services
CMS has several proposals under the PFS for CY 2026 related to telehealth payments.
First, CMS proposes simplifying the review process for adding services to the Medicare Telehealth Services list in several aspects. Rather than a five-step process that requires consideration of whether a service is comparable to already approved telehealth services or clinically equivalent to the in-person service, the proposed three-step process will consider only 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 proposes permanently removing frequency limitations on furnishing services via telehealth for subsequent inpatient visits (CPT 99231-99233), subsequent nursing facility visits (CPT 99307-99310), and critical care consultations (G0508-G0509).
Third, CMS proposes permanently adopting a definition of “direct supervision” that allows virtual presence through “immediate availability” via audio/video real-time communications technology to meet this requirement for all services described under § 410.26, i.e. “incident to” services,” except for higher-risk surgeries that have a global surgery indicator of 010 or 090.
Fourth, CMS proposes transitioning back to its pre-PHE policy requirement for teaching physicians to be physically present to bill services provided that involve residents, with virtual present remaining permissible pursuant to a rural exception.
Policies to Improve Care for Chronic Illness and Behavioral Health Needs
Consistent with the Administration’s Executive Order, “Establishing the President’s Make America Healthy Again Commission,” the Proposed Rule is focused on improving care for chronic disease in several aspects.
First, the Proposed Rule establishes three new G-Codes to be billed when complementary behavioral health integration (BHI) or psychiatric Collaborative Care Model (CoCM) services are provided in conjunction with Advanced Primary Care Management (APCM) services. This is intended to facilitate integration of behavioral health with primary care, thus addressing chronic behavioral health conditions.
Second, the Proposed Rule broadly solicits comments and feedback as to how CMS could improve its support management of the prevention and management of chronic disease, including the identification of services that would address the root cause of disease, chronic disease management, and related prevention.
Skin Substitutes
Currently, most skin substitutes are paid using the average sales price-based payment methodology, which provides a unique billing code and payment limit for each skin substitute product. The Proposed Rule changes this payment methodology by proposing that skin substitute products are paid 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 instead will be a separate payment for the product in addition to the payment for the skin substitute application procedure payment.
CMS proposes to create three categories of products for payment as supplies, relying on FDA regulatory pathway: (1) PMA (pre-market approvals), (2) 510(k) and (3) 361 HCT/P (human cells, tissues and cellular and tissue-based products). For any biological products that are listed under section 351 of the PHS Act, the current ASP methodology would continue to apply. The proposed payment policy for skin substitutes in hospital outpatient settings is provided in the CY 2026 Outpatient Prospective Payment System/ Ambulatory Surgical Center proposed rule here.
The initial CY 2026 payment rates for each of the three categories of products were initially calculated using the volume-weighted average Q4 2024 ASP for products in the category. If ASP was not available, CMS used the hospital MUC (geometric mean unit cost). CMS noted, however, that when taking into account product utilization across both physician office and hospital outpatient settings, this created a “rank order anomaly” such that PMA products had the lowest rate and 361 products had the highest rate. In response, CMS is proposing to use a single initial payment rate across all three categories for CY 2026 to avoid an underestimation with the resources required. CMS is using the highest of the three product category rates for hospital OPPS data, which is the rate for 361 products. Thus, the initial CY 2026 payment rates for all three categories is $125.38 per sq cm.
The payment rates would then be updated on an annual basis through rulemaking using the most recently available calendar quarter of ASP data (or potentially multiple quarters of ASP data), if available. If ASP data is not available, the hospital MUC will be used. If MUC is not available, the product’s WAC will be used. If WAC is not available, the payment rate will be based on 89.6% of AWP. This data will be used to determine a weighted average per-unit cost by group based on all products in the category in both physician office and hospital settings of care.
CMS will continue to assign specific HCPCS codes to skin substitutes, but certain products (361, 510(k), de novo, PMA products) will now be considered through the bi-annual coding process that includes a public meeting.
Drugs and Biological Products Paid Under Medicare Part B
Currently, the manufacturer’s average sales price (ASP) is used to determine Part B drug payment limits. CMS is proposing new guidance regarding pricing concessions and bona fide service fees (BFSFs). With regards to pricing concessions and bundled discounts, CMS is adopting a definition of bundled arrangements which will result in pricing discounts being allocated proportionally.
With regards to BSFSs, in the proposed rule, CMS appears to be proposing a new level of oversight of manufacturers with respect to fair market value (“FMV”) determinations of BSFS, with such changes likely aimed at eliminating potential conflicts of interest and ensuring that FMV determinations are unbiased and accurate. Specifically, under the proposed rule, CMS has proposed the following:
- For fees paid by a manufacturer to an entity that do not vary directly with the amount of drug sold or price of a manufacturer’s drug, FMV determinations must be based on comparable market transactions that generally reflect the current market conditions or the cost of service plus a reasonable markup to the total cost.
- For fees paid by a manufacturer to an entity that do vary directly with the amount of drug sold or price of a manufacturer’s drug, CMS would require:
- The FMV must be determined by using the cost of the service and adding a reasonable markup to the total cost (or if any material portion of cost data is unavailable, by using a market-based approach based on verifiable market data until sufficient cost data are available), and
- The FMV assessment must be conducted by an independent third-party valuator and documented with a description of the methodology used.
- All FMV assessments must be conducted by an independent third-party valuator – one who does not have any financial relationship (other than the arrangement to conduct the FMV analyses) with the with either party to the arrangement and no stake in the outcome of the valuation.
Manufacturers must conduct periodic updates of any FMV analyses for service arrangements that are ongoing, at a frequency no less than the renewal frequency of the arrangement.
Rural Health Clinics (RHCs) and Federally Qualified Health Centers (FQHCs)
The Proposed Rule proposes 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 proposing the 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 is proposing that the additional codes proposed for APCM that the three new G-Codes to be billed when BHI or CoCM services are provided in conjunction with APCM services be adopted for RHC and FQHC services as well.
Medicare Prescription Drug Inflation Rebate Program
Pursuant to the Inflation Reduction Act of 2022 (IRA), and its requirements under which inflation rebates are owed by drug manufacturers if they raise their prices for certain drugs payable under Part B and/or Part D faster than inflation, the Proposed Rule includes new policies for the related Inflation Rebate Programs.
For the Medicare Part B Drug Inflation Rebate Program, the Proposed Rule proposes news policies to be used when standard information is not available. Specifically, CMS proposes to (1) identify the payment amount benchmark quarter if data needed to calculate the payment amount are not available, (2) describes CMS’s method for calculating the payment amount in the payment amount benchmark quarter if a published payment limit is not available, and (3) describes CMS’s method for calculating the payment amount in the payment amount benchmark quarter if there is no published payment limit and neither positive ASP nor positive WAC data are available in the ASP Data Collection System.
For the Medicare Part D Drug Inflation Rebate Program, the Proposed Rule proposes to use a claims-based methodology to implement the IRA’s requirement that CMS exclude drugs provided pursuant to the 340B program from the number of units used to calculate the total rebate amount for Part D. Consistent with this, CMS proposes establishing a 340B repository to receive submissions of certain data elements from Part D 340B claims.
The proposed rule is available here, and the fact sheet is available here.
