Background

Each year, CMS releases the Calendar Year Medicare Physician Fee Schedule (MPFS) rule that establishes payment rates for health care practitioners serving the Medicare population. Medicare's budget-neutrality adjustment, a mechanism that requires cuts to physician payment rates when certain Medicare spending increases, drove five consecutive years of cuts to the MPFS conversion factor (CF) from 2021 through 2025, culminating in a 2.83% cut in 2025. The One Big Beautiful Bill Act (H.R. 1), signed into law in July 2025, provided a temporary, one-year 2.5% increase for 2026. However, CMS also finalized a -2.5% efficiency adjustment to work RVUs for many services, offsetting much of the increase for procedural and diagnostic specialties. The 2.5% increase expires in 2027, and Congress has not enacted a long-term fix.

The Inflation Gap

The MPFS remains the only Medicare payment system without an annual inflationary update. In 2025, practice cost inflation measured 3.6% as reflected in the Medicare Economic Index (MEI). Adjusted for inflation, Medicare physician pay has declined 33% since 2001, even as practice costs rose 59% over the same period. This widening gap threatens practice viability and patient access to care.

Budget-Neutrality Threshold

The budget-neutrality threshold that triggers across-the-board CF cuts has been set at $20 million since 1992 and has never been updated. This outdated threshold causes even routine service revaluations to trigger significant payment reductions. CMS also frequently overestimates utilization in its budget-neutrality calculations, and once reductions are made, they are not reversed when actual utilization proves lower, resulting in permanent, unjustified cuts. Congress should raise the threshold from $20 million to $53 million and set the threshold to the MEI every five years.

ASE Recommendations

ASE urges Congress to take immediate, meaningful action to stabilize the Medicare physician payment system by enacting legislation that:

• Eliminates the annual conversion factor cuts that have eroded physician payment for five consecutive years
• Establishes a permanent inflation adjustment to the CF tied to the full MEI, ensuring practices can keep pace with rising costs
• Raises the budget-neutrality threshold from $20 million to $53 million and indexes it to the MEI