Medicare Payment Rules Advance Key Reforms

In today’s newsletter, I start with a policy brief from Jackson Hammond on two new Medicare payment rules that contain a host of important reforms. Today’s newsletter also includes a new Paragon Pic showing how state Medicaid spending from actual state revenue sources has not risen for more than three decades, while both federal Medicaid expenditures and state spending funded with money-laundered funds have soared.

In the newsletter, I also highlight three new factsheets in Paragon’s efforts to set the record straight on the One Big Beautiful Bill (OBBB). Speaking of the OBBB, we’re hosting a virtual discussion of the OBBB at 11 a.m. EDT on Thursday, August 7, with Ryan Long, Elle Minarik, and me. We will cover OBBB’s important reforms, implementation challenges for the federal government and states, and how Congress and the Trump administration should think about future reforms. At the end of the presentation, we’ll answer as many questions from the audience as possible. Register for that event here.

I will also discuss the Centers for Medicare and Medicaid Services (CMS) announcement of its Part D bid information for contract year 2025—and why the weighted average of the bids has soared in recent years.

Finally, this newsletter comes out on the 60th anniversary of Medicaid. Over the past 15 years, Medicaid has strayed far from its intended mission to serve the truly vulnerable—low-income children, pregnant women, the elderly, and individuals with disabilities—as more resources have been directed in favor of able-bodied, working-age adults. Fortunately, the OBBB takes an initial step to rebalance the program by targeting wasteful spending and corporate welfare and preserving resources for those most in need.

CMS Rules Expand Medicare Site-Neutral Payments and Reduce Distortions

In mid-July, the CMS released its annual rules for 2026—the Physician Fee Schedule (PFS) and the Outpatient Prospective Payment System (OPPS), which also includes updates to Ambulatory Surgical Centers (ASCs). These proposals advance key reforms that reduce harmful distortions in Medicare payment policy and move toward a more efficient, patient-driven health sector.

The centerpiece of these rules is site-neutral payment reform. Medicare typically pays much higher rates for services delivered in a hospital outpatient department compared to the rates for identical services delivered in a physician’s office or an ASC. Site neutrality would align Medicare payments with the service delivered—not the setting. The OPPS rule proposes repealing the Inpatient Only List and expanding the ASC Covered Procedures List. These changes would allow more services to be delivered in lower-cost outpatient settings, reduce unnecessary inpatient care, lower costs for patients and taxpayers, and reduce incentives for health sector consolidation.

The rules also extend a reform from the first Trump administration to establish payment parity for drug administration across settings—once again eliminating inflated hospital payments for identical services. CMS estimates this change will save Medicare $210 million and beneficiaries $70 million next year.

Another major reform is an overhaul of Medicare’s skin substitute payment policy. These payments have increased nearly 4,000 percent over five years and often involve products with limited clinical benefit. CMS proposes changing how these products are reimbursed by treating them as part of the overall procedure rather than billing them separately. This will reduce spending by 90 percent and shift incentives toward products supported by stronger evidence.

The PFS rule also proposes higher payments to independent-physician practices, which typically face higher operational costs than hospital-employed groups. This change would help level the playing field and enhance competition and patient choice.

CMS further proposes an efficiency adjustment to the PFS payment rates, recognizing that many procedures now take less time than when those rates were originally set. This change would better align Medicare payments with current clinical practice and help reduce waste.

In addition, the OPPS rule would begin tying some hospital payments to prices negotiated by Medicare Advantage plans. Although this may modestly increase the use of market benchmarks in traditional Medicare, the impact may be limited because most commercial rates (including those in MA) are already based on Medicare pricing formulas.

CMS also proposes stronger price-transparency requirements, mandating that hospitals publish more standardized and accessible pricing data.

Together, these reforms are important steps toward a more patient-driven, fiscally responsible, and market-aligned Medicare program.

Setting the Record Straight on the One Big Beautiful Bill

Paragon has launched a dedicated webpage for the OBBB. The page includes our full summary of all the health policy provisions with the legislation, complete with the final estimates from the Congressional Budget Office. We now have seven one-pager factsheets that tackle myths of the OBBB.

• Myth: The OBBB Medicaid reforms are unpopular.
• Myth: The OBBB cuts Medicaid.
• Myth: The OBBB will result in large coverage losses.
• Myth: The OBBB’s Medicaid provisions will force nursing homes to close.
• Myth: States will not be able to cope with the limits on Medicaid money-laundering mechanisms.
• Myth: Rural hospitals will close because of the OBBB.
• Myth: The OBBB largely repeals the Affordable Care Act.

We also have a longer factsheet that sets the record straight on the Medicaid community engagement requirements in the OBBB.

As Medicaid Money Laundering Peaks, Reform Is on the Way

States are now more dependent than ever on federal funds to finance Medicaid—an alarming shift from the program’s original design as a shared federal-state responsibility. Today, the federal government covers nearly 75 percent of all Medicaid spending, up from 60 percent in the early 1990s. Federal and gimmick-based spending is way up, while the state share funded with actual state revenue has remained flat.

This week’s Paragon Pic breaks down Medicaid spending by source—federal dollars, laundered state contributions through provider taxes and intergovernmental transfers, and actual state dollars. Half of all states now finance more than 30 percent of their Medicaid share using provider taxes alone. Fortunately, the One Big Beautiful Bill includes major reforms to limit these financing gimmicks—restoring integrity to the program, rebuilding cooperative federalism, and protecting federal taxpayers. The Congressional Budget Office estimates the reforms will save $366 billion over the next decade.

CMS Releases Part D Bids and Takes Modest Step to Address Biden’s Insurer Bailout

On Monday night, CMS announced its Part D bid information for contract year 2025. This bid information consists of two main parts: the National Average Monthly Bid Amount (NAMBA) and the Base Beneficiary Premium (BBP). The NAMBA is essentially a weighted average of all the bids—the premium plans projected will cover beneficiary costs—drawn from what Part D plans submitted. The BBP is used by plans to calculate the individual premiums for their enrollees. The federal government covers the difference between the two. This year, the NAMBA will be $239.27 (up dramatically from $34.71 in 2023), while the BBP is $38.99 (compared to $32.74 in 2023. The reason the NAMBA has exploded is largely attributable to the Inflation Reduction Act and the negative effects of its  Part D redesign, which Paragon has covered extensively.

The IRA’s redesign required a cap on total out-of-pocket costs of $2,000, while increasing insurers’ liabilities. As a result, insurers passed on those costs through higher premiums—which the government heavily subsidizes. The last three years have seen premiums jump dramatically as a result, increasing the burden on taxpayers.

In an election year ploy and in order to further mitigate the increase in costs to seniors, the Biden administration created a Part D “demonstration” program that bailed out insurers with at least $5 billion for the first year of a three-year program. To prevent a cliff when this pseudo-demonstration expires, CMS has decided to reduce the amount of taxpayer money insurers are getting by about 42 percent. Ideally, CMS would end the demonstration entirely, but this represents a modest step toward phasing out this demonstration and protecting taxpayers. The large premium increases over the past two years demonstrate the urgent need to address the fundamental flaws of the IRA and its destabilizing effects on the Part D program.