Jackson Hammond is a Senior Policy Analyst at Paragon Health Institute. He has been active in the federal and state health policy space since 2017.
Prior to joining Paragon, Jackson was a health care policy analyst for American Action Forum (AAF). While at AAF, his work focused on payer issues including private insurance, Medicare, and Medicare Advantage. Furthermore, Jackson wrote extensively about the 340B Program and contributed to AAF’s research on a variety of drug pricing issues.
The Centers for Medicare and Medicaid Services (CMS) released two new proposed payment rules to take effect in 2026: the hospital Outpatient Prospective Payment System (OPPS) and Ambulatory Surgical Center payment rule and the Physician Fee Schedule (PFS) rule. These rules include policy proposals for site neutrality reforms, the 340B Drug Pricing Program, primary care payments, and provisions to reduce waste. These two proposed annual rules, if finalized, mark important progress toward a more patient-driven health system and are a win for reform advocates, though there are some provisions that raise concerns.
Below is an analysis of the most important proposed policies based on the guiding principles of Paragon’s Medicare Reform Initiative.1 These principles include the following:
This analysis also discusses the impact of the proposed policies on enrollees, taxpayers, and providers. While most of these proposed provisions do not have specific estimates of savings or costs for the federal government or beneficiaries, this is more due to the difficulty of modeling behavior changes in patients and providers for each provision than a lack of real-world savings, particularly with respect to the site neutral provisions. The brief provides the estimates of savings or costs if the relevant proposed provision contains them.
The hospital OPPS rule pertains to payments for outpatient services at facilities including hospitals, ambulatory surgery centers (ASCs), and community mental health centers. CMS estimates that changes specific to this proposed rule account for a $1.6 billion increase in federal government expenditures from 2025 to 2026. When CMS includes changes in enrollment, utilization, and case mix along with this rule, it estimates an increase of $8.1 billion in OPPS expenditures from 2025 totaling $100.0 billion in OPPS expenditures.2 CMS estimates that total payments to ASCs will reach $9.2 billion in 2026, an increase of $480 million from 2025.
Site Neutral Reforms
Medicare typically pays much more for most services performed in hospital outpatient settings than in physicians’ offices, even for identical services and even when the two settings are indistinguishable except for their ownership structure. This distortion raises costs for both taxpayers and patients and incentivizes unnecessary utilization. Moving Medicare to a site neutral payment system would lower costs, reduce incentives for consolidation (hospitals taking over physician offices and then billing at higher rates), and ensure that the site of care is based on physician and patient considerations of what is best for the patient, not distortionary payment rates. Given that Medicare beneficiaries pay 20 percent of the cost of services in cost sharing, these actions can significantly reduce costs for patients. The following provisions in the rule advance Medicare site neutral payments.
Repealing the Inpatient Only List
The Inpatient Only (IPO) list designates which procedures must be performed in inpatient settings to be covered by Medicare. The new rule proposes to repeal this list gradually over three years.
The IPO list is a top-down regulation that limits the ability of providers and patients to decide the best setting for procedures and raises costs by forcing more procedures to be done in high-cost inpatient settings. It was an attempt by CMS to regulate patient safety through payment rates. However, numerous professional societies, provider and facility licensure requirements, tort law, and state regulations exist to specifically address safety without directly altering payment rates in a distortionary way.
ASC Covered Procedures List Expansion
ASCs are non-hospital facilities that perform a wide variety of outpatient surgeries. Due to site-specific Medicare reimbursement rules, procedures done in ASCs have lower Medicare payments (ASC payments average 60 percent of those to hospital outpatient departments) than the same procedures done in hospital outpatient settings.3 Medicare’s ASC Covered Procedures List (CPL) specifies the services that ASCs can provide and receive Medicare payment for. The OPPS rule proposes to modify the CPL’s criteria that would, in practice, add procedures and services to the CPL that are not currently required to be performed in hospital inpatient settings because they are on the 2025 IPO list.
By adding so many more procedures to the ASC CPL, this proposed rule would take a big step toward Medicare site neutrality, ensuring that Medicare can pay for more procedures in lower-cost settings. As with the elimination of the IPO, this proposed change would remove another distortionary CMS payment policy and let the market work by allowing patients and providers to choose the settings most valuable to their needs. Expanding the ASC CPL would also reduce out-of-pocket costs for beneficiaries and Medicare expenditures, though CMS did not quantify the amount of savings it expects. CMS buttresses this proposed change with a one-year extension of a temporary change in the inflation update for ASCs to match the more generous one paid to hospital outpatient departments. This gives the agency a greater opportunity to understand, in the years since COVID, whether the long-standing difference in inflation updates results in lower-cost ASCs inevitably being unable to compete for market share with higher-cost hospital outpatient departments. Medicare’s distortionary payment and benefit structures limit the value of shopping for services and thereby reduces the ability of lower-cost facilities like ASCs to leverage their competitive advantage on cost in the same way a traditional market actor would in a normal market. As such, higher-cost facilities are paid more and have more capital to expand in the market, including buying out competitors.
Drug Administration Payment
This provision expands on a 2019 rule and proposes to equalize payments for drug administration services between off-campus hospital outpatient departments and physician offices. Despite some site neutral reforms passed in the Bipartisan Budget Act of 2015, most hospital outpatient departments remain eligible to bill Medicare and enrollees at much higher rates than physician offices.
This provision further extends site neutral policies and ensures that the government and patients are not paying more for the same drug administration services simply because of the location at which they were rendered. CMS estimates that in 2026, this provision would save Medicare $210 million in reduced OPPS spending and would also save Medicare enrollees $70 million in reduced coinsurance. In future years, CMS could expand this policy even further—for example, by expanding it to imaging services or any service often or usually performed in physician offices.
340B Drug Pricing Program Acquisition Cost Survey and Payment Adjustments
A Trump administration rule in 2018 reduced payments to 340B hospitals for drugs acquired through the 340B Program by 22.5 percent to match the actual cost the 340B hospitals paid for those drugs. The 22.5 percent reduction comes from conservative estimates by the Medicare Payment Advisory Commission of the value of 340B discounts to participating hospitals.4 The Supreme Court struck down this rule because the Department of Health and Human Services did not conduct a drug acquisition cost survey first. To satisfy the Court’s decision and enact reforms to determine how to appropriately reduce Medicare’s overpayments to 340B hospitals for outpatient drugs, CMS is required to conduct a survey of hospitals’ drug acquisition costs. This provision notifies hospitals that CMS will be conducting this acquisition cost survey for specified drugs in 2026 and that CMS intends to adjust payments based on that survey beginning in 2027.
If CMS follows through and uses this survey to enact the payment changes for drugs purchased through the 340B Program, those savings would be redistributed in the form of higher payments for non-drug items and services due to statutory budget neutrality rules. Payments for those items and services would be higher for all hospitals receiving OPPS payments—whether or not they participate in 340B—which is what happened as a result of the 2018 340B payment changes.
If CMS ultimately decides to base their Part B reimbursement for 340B drugs on actual acquisition costs, it would reduce government spending and patient copays. The 340B Program has a host of negative impacts on the health care system, drives up federal spending, and increases the utilization of drugs—and more expensive drugs—regardless of any benefit to the patient.5
When the Supreme Court struck the 2018 340B payment change rule down in 2022, it required that CMS pay back affected hospitals. For the purposes of budget neutrality constraints, CMS opted to do this with a lump-sum repayment that was offset over a 16-year period with minor payment rate reductions in non-drug services. This rule would shorten the offset period by 10 years, with the planned $7.8 billion offset achieved by 2031.
As Paragon wrote in a comment letter to CMS in 2023, reducing the timeline of repayment would ensure greater certainty in the amount of repayments.6 Additionally, it provides less strain on the federal budget, as the time-value of money means that offsets recouped sooner would more accurately reflect the inflation-adjusted value of the lump-sum repayment.
Market-Based Reforms
Market-Based MS-DRG Payment Data Collection
The rule proposes to have CMS collect data from hospitals on what they charge Medicare Advantage plans and then use the collected data to help determine relative payment rates for inpatient hospital services in traditional Medicare. In theory, if Medicare Advantage plans charged double for Service A what they charged for Service B, traditional Medicare’s payment rate for Service A would then be double that of Service B.
This provision advances a more market-based approach to Medicare payments by attempting to base Medicare inpatient payments in part on the prices that insurers and hospitals agree to in negotiation. In other words, the goal is to have the government bureaucracy learn from the private sector and move away from Medicare’s current system in which payment rates are influenced by costs, which provides incentive for providers to increase costs in order to increase payment rates. While this attempt would likely produce only small benefits in the near term, as insurers often base their rates as a percentage of traditional Medicare, this proposal would help move Medicare rates away from being as heavily influenced by provider costs and more toward the relative value those services provided in a market setting.
Hospital Price Transparency
This provision expands existing hospital price transparency requirements to require more specific ranges of prices in accessible forms to be more meaningful and relevant to patients. This includes requiring hospitals to post the 10th, median, and 90th percentiles of the range of prices hospitals have received for services. It also requires improving the comparability of standard charges among hospitals.
Increased price transparency requirements allow for a better market, providing consumers and employers with information to better plan and compare prices from providers. Price transparency holds the promise to make health care more shoppable, affordable, and ultimately more patient-focused.
The PFS rule provides the annual change in Medicare payments rates to update physician payment rates.
Site Neutral Reforms
Practice Expense Update
This year’s proposed rule for Medicare physician payment rates moves policy toward site neutrality by recognizing that independent physician practice expenses—including supplies, office space, and non-physician labor costs—are typically higher than for physicians employed by hospitals, where most if not all the practice expense is covered by the hospital. Medicare payment policy currently treats these as equal. This status quo illustrates one of the fundamental problems with central planning: Markets should reveal prices based on competition and choice rather than have prices set for them by government. Government-determined pricing, often a rough attempt to identify and pay for costs, is particularly prone to these kinds of problems based on the inertia of decisions made when the health system looked very different. This proposed improvement is a good example of the work still to be done to reform Medicare physician payment.7
Other Physician Payment Changes
Efficiency Adjustment
CMS has historically used physician surveys and advisory inputs from the American Medical Association (AMA) to help calculate payment rates. This practice results in distortions based on the AMA’s internal biases and methodology, e.g., it has typically resulted in higher payments for specialists over general practitioners (GPs). This, in turn, has contributed to the growth in the number of specialists, while the proportion of general practitioners (and by extension, primary care providers) has shrunk.8 This provision proposes adding a CMS adjustment to the traditional survey and AMA advisory inputs when CMS calculates the work involved in physician services. Specifically, CMS is proposing to decrease some payments in services where time spent with the patient is not a core component of the service. This provision is intended to reflect changes in medical practice that result in greater efficiency but have not generally been accounted for by the AMA’s recommendations and CMS’s incorporation of them. This would be accomplished by using standard measures of productivity calculated by CMS’s Office of the Actuary. CMS is additionally proposing to more heavily weight empirical studies of physician time as it moves away from survey-based assumptions.
This proposal signals CMS’s interest in moving Medicare payments away from low-sample-size surveys that create payment distortions. This move would also direct payments away from highly paid specialists and toward typically lower-paid primary care providers. This could be a helpful step toward adjusting incentives to encourage greater primary care access. The open question is whether CMS’s conception and calculation of a new adjustment factor is more or less distortionary than the current survey process. CMS implicitly acknowledges this in their discussion and solicitation of comments on how to base physician payment more on data. The answer is that CMS should look to market-based approaches for such data.
Telehealth
In the rule, CMS proposes to streamline its telehealth service approval process and remove the “provisional” versus permanent distinction of services. This removes the current step requiring clear evidence of clinical benefit before certain telehealth services are given permanent coverage status. CMS also proposes to end the frequency limitations on how often physicians may bill for a specific telehealth service and to allow all physicians (except teaching physicians in non-rural settings) to provide virtual supervision for certain services.
While CMS’s desire to increase access to care is understandable, these rules remove useful cautionary measures that prevent waste, fraud, and abuse in telehealth. The removal of frequency limitations in particular deserves further study and consideration before finalizing this year. While utilization may have been low for much of the pandemic and after, that could change over time and be in good part due to the frequency limitations.
Paragon research has found that the evidence in support of Medicare fee-for-service payment for telehealth is mixed.9 There is evidence that telehealth did not decrease costs but increased overall utilization of health care and was additive, rather than substitutive, to health care services. In the meantime, Medicare beneficiaries have broad access to telehealth through Medicare Advantage, where the benefit is provided within the guardrails of a capitated payment. As such, CMS should be cautious when expanding telehealth services and do so only where there is clear evidence of patient benefit.
Chronic Illness and Behavioral Health Needs
CMS is proposing to create modest add-on payments for behavioral health services in primary care and expand current policies for separate payment to physicians for certain digital mental health devices to include the treatment of Attention Deficit Hyperactivity Disorder.
This proposal is aimed at increasing incentives for providers to coordinate behavioral health care for patients and provide more non-pharmaceutical treatment options for patients. CMS should remain cautious when covering new devices to ensure that only evidence-based methods are included and that Medicare does not end up paying for the phones needed to use these devices.
Skin Substitutes
In the proposed rule, CMS aims to rein in exploding costs for new and emerging live biological products, specifically skin substitutes. Medicare spending on skin substitutes, a class of biologic products often used to treat chronic wounds, has surged over the past five years due to perverse financial incentives. Annual Part B spending on these products increased from $256 million in 2019 to more than $10 billion in 2024—a nearly 4,000 percent increase in five years.10
Currently, when a new product enters the market, it receives a temporary reimbursement for six months based on the manufacturer’s list price before CMS calculates a payment rate that is generally lower than the list price. For example, after six months, skin substitute manufacturers can make superficial modifications—such as altering unit sizes or making minor formulation adjustments—and reset the pricing window, inflating costs for patients and taxpayers. Manufacturers couple strategies such as this with discounts from the higher prices that incentivize physicians to utilize these products.
To address these incentives for waste, CMS proposes a major overhaul expected to reduce spending on these products by nearly 90 percent. Beginning in 2026, CMS would pay for skin substitutes at a flat rate. After 2026, payment would vary by regulatory classification. These proposed changes also apply to OPPS payments as well.
This proposed reform appropriately targets systemic waste, addresses payment distortions, and restores fiscal discipline. Importantly, the flat-rate approach curbs price gaming and encourages use of products based on competition rather than central planning pricing decisions.
The proposed OPPS and PFS payment rules overall represent a very positive step toward improving Medicare payment policy, advancing a more patient-centered health care system, and reducing bad incentives in government programs that limit choice and competition. The proposed implementation of site neutral payment policies, anti-waste measures, and reforms to 340B and physician payment systems would ensure that patients and the federal government are spending less over the long run, discouraging further consolidation, and promoting higher quality care. Policymakers should exercise caution with regard to the telehealth provisions, but overall, this rule represents a positive start for the administration and its goal of advancing market-oriented Medicare reforms.
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