CMS Finalizes 2027 Outpatient and Physician Payment Rules

On November 4, 2026, the Centers for Medicare and Medicaid Services (CMS) finalized its 2027 hospital outpatient prospective payment system (OPPS) and physician fee schedule (PFS) rules. The OPPS rule aligns Medicare payment for 340B drugs with hospitals’ acquisition costs, expands site-neutral payment, and adds prior authorization for botulinum toxin injections. The PFS rule moves practice expense payments away from a 2007 physician survey and tightens program integrity standards for remote monitoring.

Paragon supported these reforms in our comment letters on both rules. Together, they address longstanding payment distortions that have driven unnecessary spending and provider consolidation, and they rest on clear statutory authority and, for 340B, newly collected acquisition cost data.

340B Drug Payment Reform

The 340B Program requires manufacturers to sell outpatient drugs to certain hospitals at discounts that typically range from 22.5 to 50 percent off the average sales price (ASP), yet Medicare Part B generally pays those hospitals ASP plus 6 percent. Nothing requires hospitals to pass the discount on to patients or payers. This arbitrage helped the program grow from 39 hospitals in 1992 to over 2,700 today.

In 2022, the Supreme Court invalidated CMS’s earlier 340B payment reduction because the agency had not surveyed hospitals’ acquisition costs. Paragon recommended that CMS conduct the survey and use its findings to establish an acquisition-based rate. The survey found that hospitals acquire 340B drugs at an average of 33.4 percent below ASP and that, in some cases, an enrollee’s 20 percent coinsurance exceeded the hospital’s entire acquisition cost. Paragon supported setting payment at ASP minus 33.4 percent. The final rule instead adopts ASP minus 28 percent, based on HRSA’s 340B ceiling prices. Although this represents a significant improvement, ceiling prices reflect the minimum required 340B discount rather than hospitals’ average acquisition costs. As a result, Medicare will still pay hospitals approximately five percentage points of ASP more than their average acquisition cost. CMS would have been justified in adopting the deeper reduction supported by its own survey.

CMS estimates the new policy will reduce Medicare spending on 340B drugs by $4.35 billion and enrollee cost sharing by $1.1 billion in its first year, although the Medicare savings will be redistributed to non-drug services at all OPPS hospitals under budget neutrality. More important, the policy removes the Medicare fee-for-service portion of the margin that has encouraged hospitals to acquire physician practices and favor higher-priced drugs. The policy applies to hospital outpatient departments, not physician offices (where 340B discounts do not typically apply) or self-administered drugs obtained at pharmacies.

The 340B discount applies regardless of payer, and so the larger commercial 340B spread remains and will continue to drive consolidation until the program’s subsidy is separated from the drug price arbitrage. That change can only come from Congress.

CMS also raised the annual offset recouping $7.8 billion in inflated non-drug payments from 0.5 percent to 2 percent, finishing around 2031 rather than over roughly 16 years. Paragon urged a shorter timeline in 2023. Although CMS did not adopt our recommended timeline, the accelerated schedule will recover the funds sooner and preserve more of their value for taxpayers.

Site-Neutral Payment

Medicare often pays more for the same service in a hospital outpatient department than in a physician’s office. These payment disparities increase costs for taxpayers and patients and encourage hospitals to acquire independent practices simply to obtain higher Medicare reimbursement for the same services. Building on the 2019 clinic visit policy and last year’s extension to drug administration, the final rule pays physician-office rates for imaging without contrast, such as standard X-rays, ultrasounds, and many MRI and CT scans, at excepted off-campus departments. CMS projected first-year savings of $190 million in Part B spending and $70 million in enrollee premiums. This rule only applies to off-campus outpatient departments; applying site-neutral payments to on-campus sites will require congressional action. CMS should examine other services that can be made site neutral, including diagnostic testing, minor procedures like skin biopsies and lesion removal, and outpatient behavioral health visits.

The rule also removes 637 procedures from the inpatient-only (IPO) list in the second year of its three-year phase-out and adds 618 procedures to the ambulatory surgical center covered procedures list. These lists substitute regulatory judgment for physicians’ clinical judgment and patients’ preferences, shield higher-cost settings from competition, and burden rural patients. CMS should complete the IPO list’s elimination in 2028 and extend site-neutral rates to imaging with contrast and other services commonly furnished in physician offices.

Program Integrity

The OPPS rule adds eight botulinum toxin injection codes, representing about $102 million in annual Medicare spending, to the list of services requiring prior authorization. CMS identified a 42.8 percent increase in their volume between 2017 and 2024 that clinical need does not appear to explain. CMS should apply the same data-driven approach to other services with unwarranted utilization growth.

The PFS rule closes gaps in remote monitoring. When the remote therapeutic monitoring (RTM) codes were created for 2022, they lacked the established-patient and initiating-visit requirements that apply to remote physiologic monitoring (RPM). The final rule requires an initiating visit, in person or by telehealth, before either service begins, extends the established-patient requirement to RTM, and limits payment to monitoring by clinical staff employed directly by the billing practice (the direct-employment rule does not take effect until 2029). These changes respond to a 2024 Inspector General report finding that 43 percent of RPM enrollees did not receive all three components of the service and that some vendors recruited beneficiaries through cold calls.

Paragon supports these reforms but cautioned that a permanent ban on contracted clinical staff could reduce access to legitimate monitoring for smaller and rural practices. The delay on the direct-employment rule will give CMS time to consider supervision and documentation requirements, verification of medical necessity, and enforcement against abusive marketing as alternatives.

Practice Expense

The PFS sets practice expense payments, which cover rent, staff, supplies, and equipment, using specialty cost weights from a 2007 American Medical Association survey. These outdated data, which are nearly two decades old, allow physicians to influence the rates they receive, creating a clear conflict of interest. The final rule reduces reliance on the survey, phases out the indirect practice cost index tied to that survey by 2028, and begins a multi-year transition to CMS’ goal of “objective, routinely updated and auditable cost data.” CMS should anchor the new method in external sources, such as Bureau of Labor Statistics wage data, market prices for rent and supplies, and the prices charged by clinicians who do not accept Medicare.

Conclusion

These rules move Medicare toward paying the same amount for the same service and toward prices grounded in actual costs. Because commercial payers often follow Medicare’s lead, the effects should reach privately insured patients through weaker consolidation incentives and lower costs. CMS should build on this progress by eliminating additional payment distortions that reward consolidation and inefficiency, restrict competition, and increase health care costs.