The Centers for Medicare and Medicaid Services (CMS) introduced many important changes to the Medicare program in 2025. These policies included shifts toward site-neutral payment, reforms to 340B drug payment, and efforts to address inappropriate skin substitute spending.
In 2026, CMS can take further steps to build a more patient-driven, market-based Medicare program without legislative action or new Innovation Center models. These could include enhancing and strengthening site-neutral payment reforms, repealing counterproductive Medicare Advantage regulations and guidance, making more use of market data, and expanding enrollees’ options for Part D drug plans. This policy brief reviews certain policy actions taken by CMS in 2025 and suggests additional options CMS should consider to further empower patients, remove distortions, and better manage taxpayer resources.
Site-Neutral Reforms
Medicare typically pays higher rates for procedures performed in hospital outpatient settings than in ambulatory surgical centers (ASCs) or physicians’ offices. As Paragon has written previously, site-of-service differential payments cost taxpayers and Medicare enrollees tens of billions of dollars annually and create government incentives for health system consolidation, which also unnecessarily raises prices for Americans who are not enrolled in Medicare. Last year, CMS introduced multiple site-neutral payment reforms in its rulemakings for 2026 payments:
- In the 2026 Outpatient Prospective Payment System (OPPS) final rule, CMS began phasing out the inpatient-only list, which specifies procedures that Medicare will pay for only when performed in inpatient settings. The list is inconsistent with the principle that patients and physicians are best positioned to determine the most appropriate care setting, especially given advances in medicine that have improved the safety of procedures performed in outpatient settings.
- CMS significantly expanded the list of procedures that Medicare will pay for if performed in ASCs in the OPPS rule. Payments to non-hospital-affiliated ASCs are typically about 60 percent of the amount paid to hospital outpatient departments for the same service.
- In the 2026 Physician Fee Schedule (PFS) final rule, CMS adjusted calculations for physician payment to account for the fact that doctors employed by hospitals have significantly lower administrative, office, and other non-clinical expenses than office-based physicians. The rule essentially corrects a longstanding government-created distortion initiated at a time when there were far fewer doctors fully employed by hospitals, which, through inertia, led to unintended impacts, including government incentives for consolidation.
Market-Based Reforms
CMS made several market-based reforms to Medicare in its 2025 rulemaking:
- In the 2026 OPPS rule, CMS finalized a policy to collect data on what hospitals charge Medicare Advantage (MA) insurers to help determine relative inpatient payment rates in traditional fee-for-service (FFS) Medicare. By using negotiations between MA plans and hospitals to set relative payment rates, this policy creates an opportunity to gradually reduce cost-based government price setting in the program.
- CMS also expanded existing price transparency requirements for hospitals in the 2026 OPPS rule by requiring that hospitals provide narrower price ranges for services and improve the comparability of their standard charges.
- In the 2026 PFS rule, CMS reduced payments for services where time with the patient was not a core component of the service. This addresses a payment distortion that has steered resources toward specialists at the expense of general practitioners, leading to fewer primary care providers. While this change is a step in the right direction, the goal of minimizing distortions can be further advanced by using market sources for these and similar calculations, including examining prices charged outside of Medicare.
- CMS proposed to update the MA and Part D Star Ratings system to focus less on bureaucratic and administrative measures. The proposed changes help address some of the critiques of quality bonus payments (QBPs) that Paragon has raised, though Paragon has proposed ending QBPs altogether as part of a unified package of MA reforms.
Drug Pricing Changes
- In the 2026 OPPS rule, CMS gave notice that it will be conducting a survey of hospital drug acquisition costs for drugs acquired at a discount through the 340B Drug Pricing Program. Since its inception in the early 1990s as a small program for the neediest safety-net hospitals, the 340B Program has exploded—with purchases at the discount price growing to over $81 billion in 2024. The government program incentivizes distortionary consolidation because eligible hospitals have unique access to government-imposed discounts that act as an indirect subsidy and can be used to acquire physician practices. Hospitals can then use those newly acquired practices to bill more discounted 340B drugs at high rates, generating additional revenue. This not only results in ever more consolidated entities that command a higher price in the private market, but it also reduces the incentive for hospitals to use cheaper drugs because more expensive drugs have bigger discounts and hospitals can command higher billing rates for them. This is all because of misguided government action. The survey is the first step toward a rule to reduce the artificial advantage 340B hospitals have over other providers and to reduce government incentives for further industry consolidation.
- CMS equalized payments for drug administration services performed at hospital outpatient departments and physician offices in the 2026 OPPS rule. CMS expects that in 2026, this change will save taxpayers $210 million in reduced spending and will save enrollees $70 million in reduced out-of-pocket payments.
Waste, Fraud, and Abuse
- In the 2026 OPPS rule, CMS addressed skin substitute payments that cost taxpayers $10 billion in 2024. The process for how these products are priced in Medicare allowed skin substitute manufacturers to effectively set their own Medicare payment rates. This led to an increase in Medicare spending on skin substitutes by over 4,000 percent since 2018. CMS changed the payment methodology to a flat rate to prevent further unnecessary spending growth—both from sometimes outrageously high price points and from excessive utilization driven by high prices. CMS expects this reform to reduce spending on skin substitutes by 90 percent and to reduce annual per Medicare-enrollee Part B premiums by over $130.
- The Innovation Center introduced the Wasteful and Inappropriate Service Reduction model, which will test how AI technology combined with human oversight can reduce unnecessary spending on select services in FFS Medicare that are prone to fraud and abuse.
- Equalizing rates for high-overlap services. CMS should consider equalizing Medicare payment rates for imaging and other services commonly provided in multiple care settings, meaning where a large share of a service is performed in both (1) the hospital outpatient setting and (2) either an ASC or physician office setting. This approach could draw on the legal authority of the clinic visit policy and recently finalized changes for drug administration in which CMS established a PFS-equivalent rate for services in off-campus provider-based departments to prevent unnecessary increases in the volume of covered services. This approach could also be codified as a standing rule in future years that would be applicable to any services meeting the relevant criteria.Paying higher rates for the same services in hospital settings creates a powerful, government-induced incentive for hospitals to acquire independent practices to trigger facility-fee billing. Correcting this distortion ensures that the site of care is determined by informed consent and clinical judgment rather than government payment rules. When there is a high frequency of overlap in the sites where services are performed, CMS should apply the lower rate (in this case, the PFS or the ASC rate, depending on where the overlap is) to protect taxpayers and prevent unnecessary utilization.
- Additional site-neutral reforms. CMS should also consider broader steps to reinforce site-neutral payment and limit incentives that favor higher-cost care settings. These include preventing facilities that are exempt from congressionally-mandated site-neutral pricing (because of statutory grandfathering provisions) from expanding their scope of services or capacity in ways that increase the volume of higher-paid services, ensuring that payment policies—including inflation and other adjustments—do not categorically disadvantage lower-cost (and typically higher performing) ASCs relative to hospital outpatient departments, revisiting overly expansive basic definitions that allow certain facilities to bill hospital outpatient rates for services functionally indistinguishable from those provided in physician offices; and providing greater regulatory flexibility for ASCs to appropriately serve more FFS enrollees. Taken together, these reforms would support FFS enrollees’ access to high-quality care while encouraging the delivery of services in more efficient, lower-cost settings.
Medicare Advantage and Enrollee Choice
- Residence-based benchmarking for MA. Relying on statutory references to costs for “individuals” and “per capita,” CMS should study whether it makes sense to base MA benchmarks on FFS spending in an enrollee’s county of residence rather than where the care is delivered. A residence-based approach could align payments with the actual risk and costs of the patient served—regardless of where that patient is traveling for care.
- Promoting informed active choice. The agency should start to transition away from the current default of passive enrollment in FFS and MA toward a system of informed active choice. CMS should redesign or create enrollment materials and timing to prompt enrollees to decide between MA and FFS before their FFS Medicare cards arrive, as the arrival of the card can create long-lasting inertia in FFS for many enrollees. CMS could explore ways to provide notification of upcoming Medicare eligibility and a summary of choices regarding MA and FFS even earlier through focused outreach to near retirees directly from CMS (through modern marketing lists) or through employers’ human resources departments.
- Restoring seamless enrollment for continuity. Given the current framework of default enrollment in FFS for Medicare enrollees, CMS should consider taking steps to modestly balance that by restoring and streamlining the seamless conversion process for the MA program, similar to the changes made by the Biden administration for federal employees upon retirement with respect to their Part D benefits. This would allow insurers to transition new-to-Medicare enrollees from commercial or individual market plans into corresponding MA plans upon eligibility to reduce benefit gaps. CMS could require multiple notifications and exceptions for certain types of enrollees.
- Reducing administrative micromanagement in MA. The agency should consider a renewed effort to reduce regulatory burden across the MA program by reviewing and publicly analyzing the justification for all current regulatory burdens not required by statute, particularly with respect to marketing and related administrative requirements adopted by the Biden administration. The pending proposal to eliminate the 48-hour Scope of Appointment waiting period—whereby the Biden administration generally required potential MA enrollees to wait 48 hours before discussing Medicare options (and then another 48 hours for each option for which the corresponding box on the form was not originally checked)—is a good start, but there is much more that could be done, including reconsidering the recent proposal to unnecessarily expand the already-broad definition of marketing to include materials that do not contain information on benefits, cost-sharing, or premiums. In addition, numerical network adequacy requirements could be overhauled to reflect geographic market realities or, at least for rural areas, revisited altogether to provide enrollees with innovative plan choices.
- Calculating FFS and MA comparative costs. The agency should consider issuing its own comparisons of MA’s comparative costs to FFS, accounting for factors such as the amount benchmarks would be if calculated based on the FFS population with both Part A and Part B, FFS administrative costs in both programs, and the “spillover effects” of MA that reduce provider costs in the rest of the Medicare program (and which CMS takes into account in estimating the costs of the Medicare Shared Savings Program but not MA). This would build on the new CMS analysis on coding patterns showing that accounting for lags in data and adopting the latest risk adjustment model changes (v28) takes the coding differential in MA relative to FFS from estimates of around 10 percent to 1.5 percent.
- Rural telehealth network adequacy. CMS should consider allowing telehealth to count toward network adequacy requirements in rural areas to an even greater extent than it currently does. Outdated physical distance standards can prevent innovative plans from entering rural markets and allowing telehealth to satisfy these standards would increase competition, while the ability to have networks, utilization management, and flexible benefit design ensures that telehealth in MA does not create the same concerns present in FFS.
- Transparency in ACOs. CMS should consider re-establishing the “beneficiary information notification” template for the shared savings program. This template clearly explained to Medicare FFS enrollees that a provider is part of a Medicare Shared Savings Program ACO and what an ACO is. ACOs often operate like managed care or MA, but without affirmative enrollment by the FFS enrollee. This means an ACO can effectively be managed care that operates completely behind the scenes without the knowledge of the Medicare FFS enrollee and without the competition or choice that protects enrollees in the MA market. Enrollees in FFS deserve to at least know when and how their care is being managed.
Market Forces
- Modernizing rate setting via MA data. CMS should consider using MA price transparency data, which is now required to be publicly disclosed, as a proxy for cost and resource use when setting rates or the relativity of rates within the PFS and hospital outpatient payment systems. This would tie government payments to markets to some extent rather than solely to complex government formulas that can have little bearing on the real world and are derived from a “cost-plus” system and obscure Department of Defense accounting principles.
- Rationalizing Medicare reimbursement for 340B drugs. CMS should finalize the mandatory acquisition cost survey established in the OPPS Final Rule to understand hospitals’ true acquisition costs for 340B drugs and satisfy the statutory requirements of the Supreme Court’s AHA v. Becerra decision. To further safeguard this reform against potential judicial setbacks, the Secretary of Health and Human Services (HHS) should consider simultaneously directing the HHS Inspector General to conduct a Widely Available Market Price (WAMP) survey. This dual-track approach leverages the “Price Substitution” authority under the Social Security Act, which empowers the Secretary to replace the otherwise applicable rate in certain circumstances. Ultimately, it would help ensure reduced spending on drugs in Medicare and help mitigate the government-created consolidation incentives created by the 340B program.
- Advancing indication-based pricing and efficiency through cost-sharing. CMS should consider moving toward indication-based pricing (allowing prices to vary for drugs used for multiple indications) by modernizing its formulary review processes and prescription drug event data systems. This, along with accompanying clarifications, would ensure that Medicare processes can better accommodate plans with varying tiering and cost-sharing by diagnosis. CMS should consider similar operational and process changes—in concert with accompanying new regulation and guidance—to allow for different levels of cost sharing within a specific drug formulary tier based on factors such as patient adherence. These plan design innovations are all inhibited by current government requirements, opacity, and operational capabilities.
- Strengthening market discipline and affordability for prescription drugs. CMS should consider reforms to strengthen market discipline in the Medicare Parts B and D programs and reduce upward pressure on enrollees’ premiums. These reforms could include:
- Moving away from the cost-based Part B drug “buy-and-bill” model toward purchasing and distribution arrangements that incorporate negotiation and formularies by vendors of some sort to create market prices (while avoiding the financial risk for physicians that has plagued prior attempts);
- Taking steps to limit Part D premium growth by ensuring that only statutorily required enrollee cost sharing counts toward out-of-pocket thresholds, thereby preserving clearer price signals for enrollees and plans;
- Restoring, as has been previously proposed, greater formulary flexibility by allowing Part D plans to exclude drugs from protected classes in limited circumstances, such as when prices increase excessively or when products represent new formulations of existing therapies; and
- Evaluating the trade-offs of permitting more targeted formulary designs to put downward pressure on prices and premiums—including narrowing the number of drugs required within a therapeutic class in limited circumstances where market evidence suggests that existing requirements function as a de facto government-imposed monopoly.
- Improving efficiency adjustments. CMS should consider improving the adjustment for productivity and efficiency in the PFS based on market data, such as amounts paid by those with health savings accounts or prices paid by payors other than Medicare FFS.
- Adopting a market-based coverage standard. CMS should consider codifying a definition of “reasonable and necessary” (the statutory standard for Medicare coverage) that is market-based. This was proposed in a different form by CMS in 2020. A better version would decide whether to cover services on the basis of whether they are covered for a majority of lives in commercial health insurance plans in the country or the relevant local coverage determination (LCD) region. Currently, many commercial insurers generally follow Medicare coverage determinations when making their own coverage decisions. This potential reform would ensure that Medicare coverage tracks market-tested clinical standards rather than rest on the assumption that Washington has all the answers. It would also require innovators to convince the market of what is reasonable and necessary rather than navigate an impenetrable government process with standards so unclear they undermine investment in innovation. The policy could allow for the current legacy process to continue where there is a finding that the Medicare population has unique needs or issues that are not comparable to the generally younger and healthier population with private coverage.
- Incentivizing competition to serve the vulnerable. CMS should consider reinstating an exemption to the broad limits on physician-owned hospital (POH) expansion that was finalized in 2021 but reversed by the Biden administration—as well as removing burdensome public notice and comment opportunities uniquely imposed by CMS on POHs. Specifically, reinstating the 2021 policy would allow POHs that serve a higher share of Medicaid recipients than other hospitals in the same county (deemed “high Medicaid facilities”) to request permission from CMS to expand more frequently than the current once-every-two-years period. This would also remove caps on beds, procedure rooms, and operating rooms that can be approved in an expansion and allow high Medicaid POHs to expand beyond their main campuses. Finally, CMS could reinstitute a policy reversed by the Biden administration that defers to state laws about how to count the number of licensed beds a POH has. These actions would remove burdensome regulations that prevent hospitals from competing in the market and improving their facilities simply because they are physician-owned. In addition, CMS should consider permanently undoing the unnecessarily burdensome paperwork requirements put in place by the Biden administration for POHs requesting exemptions.
Program Integrity
- Prior authorization expansion and deadlines. CMS should consider expanding prior authorization for high-utilization services or high-fraud areas, including certain chiropractic services, home health, and outpatient imaging. At the same time, CMS should also consider making new prior authorization requirements on payors from prior rulemaking contingent on and effective to the extent that plans are receiving electronic requests from the relevant providers, maintaining fidelity to the justification that these new requirements are intended to encourage adoption of modern technology.
Empowering Individuals and Reducing Regulatory Inconsistency and Duplication
- Refocusing disproportionate share hospital payments on traditional populations. CMS should consider reversing the 2024 policy that adjusted the calculation for disproportionate share hospital payments to include Medicare enrollees in states that have expanded Medicaid through 1115 waivers. This would ensure that resources reach traditional Medicaid recipients—the elderly, disabled, and low-income mothers—in order to reward states with fewer uninsured rather than reward them for putting more people on Medicaid.
- Addressing wage index disparities. In response to the Bridgeport Hospital v. Becerra case striking down CMS’s attempt to balance hospital payments in states with high wages with those with lower wages, CMS should consider policy options like revising how the rural floor is calculated, adjusting how local labor markets are measured, capping year-to-year wage index decreases through smoothing, technical changes to labor market definitions or data sources, and redistributing payments by occupational mix within hospitals.
- Eliminating dual regulation via state deference. CMS could consider replacing redundant federal “Conditions of Participation” with deference to (or incorporation by reference of) relevant state laws, allowing states to innovate. The agency should move toward not having two layers of regulation where state laws already provide oversight appropriate to the state. CMS could also consider overhauling Medicare Conditions of Participation toward different compliance requirements for different sub-types, sizes, or locations of a type of provider or supplier (e.g., ones in rural areas), rather than the mostly one-size-fits-all approach that exists today.
- Disclaiming Part A benefits. CMS should consider establishing a formal pathway for Medicare FFS enrollees to systematically not use Part A benefits even if they are entitled to them. This could allow certain individuals to maintain eligibility for private health savings accounts or keep other insurance.
- Identifying opportunities for Medicare payments made directly to FFS enrollees. Under traditional Medicare, patients rarely see or control the payments made on their behalf, which weakens price awareness and reduces pressure on providers to keep costs reasonable. CMS could consider circumstances where it would make sense to limit “assignment”—the process by which an FFS enrollee designates a provider to receive Medicare payments directly. New Medicare patients often assign benefits only once, but it could be required more often in some particular circumstances, as is currently the case for emergency ambulance transport. Alternatively, assignment language could be required to include a description of the option for enrollees to receive payment directly and then pay the provider. This might facilitate a somewhat greater share of Medicare payments going directly to individual FFS enrollees and encourage providers to be more attuned to what they can collect.
- Simplifying private contracting. CMS should consider simplifying the process for physicians and patients to privately contract (i.e., for direct primary care arrangements or simplified cash pay models) by allowing the contracts to automatically renew. This ensures that Medicare enrollees can more easily maintain their desired relationships with their chosen providers without unnecessary paperwork hurdles.
- Codifying competition and choice. The agency should formally codify in regulation guidance that promotes competition and explicitly prohibits, in regulation, central planning ideas that could currently be advanced through informal guidance. This makes good policy likely to last longer or remain forever, and makes harmful policy take longer to be adopted.
Medicare, as it exists today, is a massive force in the nation’s health care system. Unfortunately, it is plagued by distortions that undermine enrollees’ ability to access high quality and efficient care and that lead to large wasteful expenditures throughout the health care sector. The above options for a 2026 Medicare roadmap collectively offer, without requiring congressional action, an opportunity to improve enrollees’ lives while realizing savings for current and future taxpayers by making the program much more sustainable, patient-driven, and market-based.
