This year America’s doctors can forget raising a glass of celebratory champagne. Despite the congressional enactment of a 2.5% across the board Medicare payment increase, courtesy of President Trump’s “One Big Beautiful Bill” their pay increase is being undercut.
The Center for Medicare and Medicaid Services (CMS), the agency that runs the giant Medicare program, issued its massive 2026 Medicare Physician Fee Schedule that contains other provisions weakening doctors’ higher Medicare reimbursement. Specifically, CMS’s fine print also provides for so-called "efficiency adjustments" that will reduce payments for 95% of physician services by 2.5%, changes in practice expense adjustments that disadvantage independent physicians, and “methodology” shifts in administrative payment that will hit oncologists particularly hard—with 37% of these cancer specialists facing 10-20% payment reductions.
More troubling, at a time when independent physician practices are at a critical turning point, the latest CMS rule does nothing to reverse the trend of doctors being pushed into hospital employment and thus furthering the anti-competitive consolidation of America’s health care delivery. Instead of simplifying Medicare’s administrative payment formulas, CMS is making it more even complex, replacing a single “conversion factor” -- the dollar amount assigned to the “value” of a medical service into payment for that service -- with two “conversion factors.”
This year, CMS will pay slightly higher amounts for physicians participating in Medicare’s "qualified" alternative payment models, which the agency is encouraging, and slightly lower amounts for everyone else. While the dollar difference is marginal, little changes. The system continues to reward doctors for navigating Medicare’s bureaucratic requirements, leaving independent physicians to seek hospital employment as a more attractive option for dealing with the already-burdensome task of running a private practice.
Beyond 2026, more physicians will be concerned about their long-term participation in the Medicare program. That’s why the American Medical Association, among others, warn that while Congress’s modicum of short-term relief is welcome, this broken system still fails to keep pace with rising practice costs. Since 2001, Medicare physician reimbursements have plummeted 33% when adjusted for inflation. Meanwhile, practice costs have climbed relentlessly higher. The result is a widening chasm between what it costs to run a medical practice and what Medicare pays.
CMS's new "efficiency adjustment" perfectly exemplifies Washington’s reluctance to dig out the roots of its long-term policy failures. Rather than asking Congress to fix the broken resource-based relative value scale (RBRVS) -- the bizarre formula sold as a “scientific” solution for physician reimbursement 37 years ago -- the agency is applying a blanket 2.5% cut to most services and justifying the cut based on “productivity” gains that may or may not exist. This is bureaucratic “cost control” : assume unlikely “efficiency” improvements, cut payments accordingly, and repeat annually.
Medicare’s administrative payment system is a mess. The multiple problems of the system are not going to be resolved with bureaucratic tweaks. Congress needs to overhaul the program and meanwhile adopt new interim policies. To start:
- End routine pay cuts and ensure stability and predictability in Medicare’s payment updates. There are various indices that track inflation. While the Medicare Economic Index, reflecting practice costs, might be ideal, it accommodates rather than controls costs. The Chained-Consumer Price Index (C-CPI), reflecting the dynamics of supply and demand in the economy, is the best measure of inflation. While adopting the C-CPI index is an imperfect compromise, it is a far better option than year-by-year, ad hoc, Congressional interventions. And it has the virtue of being an automatic inflation-based update that best reflects the dynamic price changes in the economy.
- Drop the "efficiency adjustment" that punishes independent practices based on bureaucratic assumptions. CMS's new 2.5% productivity cut assumes the government can accurately measure efficiency gains across thousands of complex medical services. Medical specialty societies have roundly criticized this adjustment, and for good reason: independent practices, predominantly specialists, already operate on thin margins and face this automatic reduction whether they've actually achieved “efficiency” gains or not. The exemptions tell the story: time-based codes escape the cut, meaning hospital-employed physicians providing evaluation and management services are shielded while independent specialists performing procedures bear the full burden. This is not evidence-based reform. It is just another chapter in Washington’s outdated administrative price-setting that makes independent specialty practice economically unsustainable, accelerating the consolidation that drives up healthcare costs.
- Stop punishing doctors for treating Medicare patients outside traditional Medicare. Under intense pressure from the Clinton administration, in 1997 Congress adopted a law that still prohibits straight private contracting between physicians and Medicare patients unless the physician agrees to a two-year exclusion from all other Medicare reimbursement. Not surprisingly, Democrats have proposed similar punitive restrictions in the House and Senate versions of their “Medicare for All” legislation to impose total government control over American health care. To the contrary, no American should be faced with such statutory or regulatory obstacles to enter into private agreements between themselves and their doctors, especially where no taxpayer monies are involved. Medicare patients should have the right to go outside of the Medicare program and spend their own money on services from a physician of their personal choice for any reason that seems good to them. It’s called freedom.
- Adopt site-neutral Medicare payments. Medicare currently pays different amounts for identical services based solely on location, and hospitals, of course, get higher Medicare reimbursements. This administrative favoritism rewards continuing hospital market consolidation. Hospitals benefit from inflated facility fees, while independent medical practices are undercut by bureaucratic rules and compliance costs. Site-neutrality in Medicare payment not only corrects a current inequity, but it also levels the future playing field and harnesses competitive forces of the market, while generating savings in the process.
Today’s Medicare physician payment system is the result of a series of counterproductive legislative patches rather than comprehensive market-based reforms. For decades, Congress layered patch over patch, often fixing the unintended consequences of its previous interventions. Now, CMS is adding another layer of “efficiency adjustments" and dual “conversion factors” for physician payment to the already mind-numbingly complex Medicare payment system. This is not progress.
Medicare payment has lots of moving parts, and there is no quick “fix.” Overhauling such a large bureaucratic system, built up over almost 40 years, will take hard legislative work, including extensive hearings plus detailed analyses on the part of professional economists and the Congressional Budget Office. Meanwhile, Congress should recognize that the perpetuation of perverse economic incentives and the continuing demoralization of American physicians is not a tolerable option.
Congress has a choice: Either undertake a serious structural reform of the payment system, based on free-market principles, or continue the wasteful status quo of annual crisis management.
Caleb Keng is a former Graduate Fellow in Health Policy and Robert E. Moffit, PhD, is a Senior Research Fellow in the Richard and Helen DeVos Center for Human Flourishing at the Heritage Foundation.
