The headline from the CY 2027 Physician Fee Schedule proposed rule is a pay cut. The mechanics underneath tell a more useful story, and the number worth watching is not the one being reported.
The cut that isn't a policy decision
CMS proposed reducing the conversion factor from $33.5675 to $33.1693 for qualifying alternative payment model participants, and from $33.4009 to $32.8409 for non-qualifying participants, reductions of 1.19% and 1.68%.
Now look at what CMS actually proposed as updates. The statutory update for the qualifying APM conversion factor is +0.75%, and +0.25% for the non-qualifying factor, plus an estimated +0.53% adjustment to account for proposed changes in work relative value units.
Every component CMS controls points up. So where does the cut come from? Public Law 119-21 provided a one-year conversion factor increase of 2.5% for CY 2026, which will no longer be in effect for CY 2027.
That is the whole story. Physicians are not being cut by a regulatory decision. They are returning to baseline after a temporary congressional increase lapsed, and the baseline is lower than the patched rate they got used to.
This has become the defining rhythm of Medicare physician payment. The underlying formula produces inadequate updates, Congress passes a one-year fix, the fix expires, and the following year's rule shows a "cut" that is really the absence of the previous year's rescue. Practices budget around a number that exists only because a temporary law made it exist, then face a shortfall when it does not renew. The instability is the policy, in effect if not intent.
The fork that compounds
The more consequential change gets less attention because it does not move much in any single year.
Beginning in CY 2026, statute requires two separate conversion factors: one for qualifying APM participants and one for physicians who are not. For 2027 the updates are +0.75% and +0.25%.
A half-point gap in one year is noise. But this is a permanent statutory structure, not a temporary differential, and it compounds. Two physicians doing identical work, one participating in an advanced alternative payment model and one not, will see their base payment rates diverge a little further every single year, indefinitely.
That is the actual mechanism by which Medicare is pushing physicians into value-based arrangements. Not a mandate, not a penalty, but a permanently widening fork in the road where standing still costs progressively more. Independent practices without the infrastructure to join an advanced APM, which requires downside risk, data capability, and administrative capacity, are on the slower-growing track by default, and the gap will be meaningful within a decade.
For a small practice, the question is no longer whether value-based participation is philosophically appealing. It is whether being on the lower conversion factor permanently is survivable.
The data problem CMS is finally addressing
The most substantive reform in the rule concerns practice expense, the portion of payment covering rent, staff, equipment, and supplies, and it targets a genuinely embarrassing situation.
CMS proposes reducing reliance on specialty-specific practice expense per-hour data drawn from physician surveys conducted by the American Medical Association. The agency's reasoning is that these surveys have historically had low response rates and discrepancies with actual data, particularly problematic for specialty providers.
More striking is what is being phased out: the methodology that ensures the overall number of practice expense RVUs by specialty is consistent with data from 2007 or earlier, to be replaced over several years by a practice expense stabilizer that mitigates short-term volatility without anchoring overall values to a specific point in time.
Sit with that. A meaningful share of how Medicare allocates practice expense across specialties has been anchored to cost relationships from 2007 or before. Since then, imaging moved to digital, electronic health records became mandatory, drug and device costs shifted enormously, and entire specialties changed their cost structures. The allocation has been frozen against a world that no longer exists.
Fixing it is correct and will be contentious, because practice expense reallocation is zero-sum. The RVU pool is budget-neutral, so any specialty whose practice expense allocation rises does so at another specialty's expense. Specialties currently advantaged by 2007-era assumptions have every reason to defend them, and the comment period will reflect that.
The provision proceduralists will fight hardest
One proposal will hit specific practices directly. CMS proposes to reduce payment when a separately identifiable office or outpatient evaluation and management visit is furnished by the same physician, or a physician in the same practice, on the same day as a global procedure. Under the policy, the most expensive service is paid at 100% and all other surgical procedures or E/M visits furnished the same day are paid at 50%.
CMS's rationale is duplicate resource costs: when a visit and a procedure happen in one encounter, some overhead is counted twice. That is a reasonable theory.
The counterargument is equally real. A patient who arrives for a scheduled procedure and raises a separate clinical problem during the same visit generates genuine additional physician work. Paying half for that work creates an incentive to schedule the second issue for another day, which is worse for patients and generates an additional visit Medicare then pays for anyway.
Notably, CMS acknowledges this proposal is similar to one in the CY 2019 proposed rule. That earlier version generated intense opposition and did not survive. Its return signals CMS considers the underlying issue unresolved rather than settled.
A related change: G2211, the complexity add-on code, would become a modifier reimbursed as a percentage of the primary code rather than a flat rate. That converts a fixed payment into a proportional one, which raises payment where the base service is expensive and lowers it where the base service is cheap, a quiet redistribution toward higher-value encounters.
What else is moving
Several structural changes deserve tracking. CMS proposes to sunset traditional MIPS reporting in 2029 and transition strictly to MIPS Value Pathways, specialty-specific measure sets, while maintaining the performance threshold at 75 points. The Medicare Shared Savings Program would see changes designed to generate additional savings in two-sided risk arrangements, with a guardrail limiting the Accountable Care Prospective Trend to no more than 1 percentage point below or 1.5 points above national growth rates. And 340B hospitals would face mandatory Part D claims repository reporting starting in 2027, converting last year's voluntary system into a requirement.
CMS also included a request for information on the American Medical Association's Current Procedural Terminology system, alongside RFIs on redesigning primary care and specialty care in shared savings. The CPT question is the notable one: the agency is asking whether the privately controlled code set it uses to pay for everything imposes licensing costs and innovation barriers, which is an unusual thing for a payer to ask publicly about its own vocabulary.
What to actually take from it
Comments are due September 14, 2026, and proposed rules change.
The framing worth carrying is this. The annual conversion factor drama is largely theater at this point: a temporary fix expires, a cut appears, Congress may or may not patch it again, and everyone repeats the cycle next year. It is genuinely damaging to practices trying to plan, and it is not where the durable change is happening. The durable changes are the permanent two-track conversion factor that widens every year, and the multi-year practice expense overhaul that will redistribute money among specialties based on cost data from this century rather than the last one.