Without a doubt the most comprehensive and daunting annual regulatory event facing physician practices is the release of the final Medicare Physician Fee Schedule (PFS) rule, which updates payment amounts and policies for the following year. This year is no different. The Centers for Medicare & Medicaid Services (CMS) finalized its 2026 Medicare PFS in late October, introducing numerous changes to the Medicare program as well as a shift in how the CMS utilizes physician survey data to measure physician work and practice costs.
Included in the 2000-plus-page final PFS are three significant new payment policies that will have disparate impacts on medical groups depending on specialty, site of service and participation in value-based care models. As medical groups look ahead to 2026, it is important to understand how these changes may impact your practice and plan accordingly. Despite important increases to (now dual) Medicare conversion factors for 2026, updates to practice expense and work relative value units (RVUs) may prove more impactful to certain physicians.
2 conversion factors
The CMS sets payment rates for thousands of services under the Medicare PFS each year using the resource-based relative value scale. RVUs for work, practice expense and malpractice are adjusted by geography and multiplied by a monetary conversion factor to convert into payment rates.
The CMS finalized two conversion factors for 2026 as required by statute: one for qualifying Alternative Payment Model (APM) participants (QPs), including a +0.75% adjustment; and one for non-QPs, consisting of a +0.25% adjustment. The CMS finalized a conversion factor of $33.57 for QPs and $33.40 for non-QPs, an increase of 3.77% and 3.26%, respectively, over the 2025 conversion factor. These amounts include a 2.5% increase for 2026, as mandated by the One Big Beautiful Bill Act, and a positive 0.49% budget neutrality adjustment.
QPs, which will receive an additional +0.5% increase compared to non-QPs, are eligible clinicians who meet certain thresholds of treating Medicare patients through participation in an Advanced APM entity (such as certain tracks of the Medicare Shared Savings Program or CMS Innovation Models). This policy reflects the desire of Congress and the CMS to transition away from fee-for-service to value-based care arrangements, which was an underlying impetus for many policies in the legislation establishing the two conversion factors.
It is important to contextualize this increase within the greater trajectory of declining Medicare physician payment. The conversion factor was reduced by 2.83% for 2025, and the Medicare payment system does not include an annual inflationary update, unlike other reimbursement systems under the CMS’ purview, so reimbursement fails to keep pace with the cost of providing care. Adding further strain are budget neutrality requirements that often lead to cuts to the conversion factor, along with certain specialty reimbursements being reduced while other specialties receive an increase. The two policy changes discussed below are illustrative of this redistributive system.
Efficiency adjustment
Separate from positive updates to the Medicare conversion factors, the CMS finalized a -2.5% efficiency adjustment that will apply to work RVUs and the intraservice portion of physician time of non-timed-based services for 2026 and every three years thereafter. The CMS used the sum of the past five years’ Medicare Economic Index (MEI) productivity adjustments to calculate the efficiency adjustment. The agency believes the time-based assumptions in these services have likely been overvalued due to efficiencies, such as technological advances and clinicians gaining familiarity with these procedures, accruing over time.
The efficiency adjustment will apply to over 7,000 non-time-based services such as radiology services, procedures, diagnostic tests, etc. Time-based codes such as evaluation and management services, services on the telehealth services list, care management services, behavioral health services and maternity care codes with a global period of MMM will be exempt. The CMS will also not apply the efficiency adjustment to new codes introduced during 2026. Overall, there are 1,059 codes on the exclusion list. Review the CMS’ Codes Subject to Efficiency Adjustment public use file to see the complete list of codes subject to the new policy and exempted for 2026.
According to the CMS’ estimates, many specialties will experience up to a 1% cut, while specialties that bill time-based codes, such as family medicine, will be exempt from this decrease. With work RVUs playing a central role in many physician compensation contracts and measuring productivity, it is important to note these changes and understand their contractual implications. Physicians and administrative leaders may benefit from reviewing productivity-based contracts, modeling the impact of the efficiency adjustment and considering contractual amendments as necessary in response to this new policy.
Changes to practice expense methodology—site of service payment differential
The CMS changed its practice expense (PE) methodology for 2026, citing a decline in the number of private practices and an increase in the number of physicians employed by hospitals and operating in facility settings. The CMS intends to recognize greater indirect costs for physician services provided in office-based settings compared to facility settings than it already does, as it believes physicians in facilities receive duplicative payments under the PFS in addition to benefiting indirectly from facility fees under the Outpatient Prospective Payment System. This new policy may have a significant effect by reducing payments to independent practices whose physicians provide care in hospitals yet have no way of benefiting from Medicare facility fees paid directly to hospitals and not to physicians.
To reflect its belief, the CMS finalized a reduction to the proportion of facility PE RVUs allocated based on work RVUs to half the amount allocated to non-facility PE RVUs for 2026. This technical change to indirect PE RVUs will have a substantial impact to overall physician payment rates based on site of service. According to CMS projections, physicians providing care in facilities will see a reduction to PE RVUs and an overall reduction in reimbursement of 7%, while office-based physicians will receive an increase of 4%. Depending on where care is delivered, some physicians may see significant shifts within their own specialty; for example, an independent medical group of gastroenterologists providing care in a hospital setting could receive a Medicare payment cut of 10%, while office-based gastroenterologists see an increase of 6%. The CMS’ specialty impact table reviews the effect of RVU changes on payment to specialties differentiated by site of service.
Taken together, these latter two changes may undermine the positive adjustment to the conversion factors for certain specialty practices. It is important for medical groups to understand how the nuances of these policies impact operations and reimbursement moving into 2026.
Anders Gilberg is senior vice president of government affairs at MGMA.
Editor’s note: MGMA advocates for Medicare payment reform that includes an annual inflationary update, budget neutrality reform and other policies in support of medical groups’ financial viability—see its public comments on the 2026 proposed Medicare PFS here.