Why Physician Reimbursement Can Fall Even When Productivity Rises

Figures as of September 10, 2026. The CY2027 Physician Fee Schedule final rule is expected in early November 2026.

In 2026 Medicare paid physicians about 3.3% more per unit of work than in 2025. The proposed rate for 2027 is a cut of about 1.7%. Over the twenty-five years from 2001 to 2026 the number that converts physician work into dollars went from $38.26 to $33.40, before inflation. Hospitals received inflation updates every one of those years. Physician productivity, measured in work RVUs per physician, rose throughout.

None of this is a scandal. It is machinery, and it works the way it was built to work. A clinician who understands the gears can read a fee schedule rule the way they read a lab panel, and can see the productivity treadmill for what it is: a policy assumption, written into statute, that you will get faster and be paid less for it.

The conversion factor

Medicare pays for physician services by assigning every service a number of relative value units (RVUs) for the physician's work, the practice's expense, and malpractice, then multiplying the total by a single dollar figure called the conversion factor. The RVUs say how much a service is worth relative to other services. The conversion factor says what a unit is worth in dollars. Congress sets the rules for the conversion factor; CMS sets the RVUs.

• 2001. Conversion factor: $38.2581. What drove it: Baseline.
• 2025. Conversion factor: $32.3465. Change: −2.83% vs 2024. What drove it: Expiring congressional relief; budget neutrality.
• 2026 (final). Conversion factor: $33.4009 standard; $33.5675 for qualifying APM participants. Change: +3.26% / +3.77%. What drove it: +0.25% or +0.75% statutory update; +2.5% one-year increase enacted in July 2025; +0.49% budget-neutrality adjustment.
• 2027 (proposed, July 2026). Conversion factor: $32.84 standard; $33.17 for qualifying APM participants. Change: −1.68% / −1.19%. What drove it: +0.25% or +0.75% statutory update; +0.53% budget-neutrality adjustment; expiry of the 2.5% one-year increase.

Adjusted for inflation in practice costs, the AMA calculates that Medicare physician payment rates fell 33% between 2001 and 2026. The Medicare Economic Index, the government's own measure of what it costs to run a practice, has grown 2% to 4% a year over that period. The physician fee schedule has no automatic inflation update. Since 2026 it has a fixed statutory update of 0.25% a year for most physicians and 0.75% for those in qualifying alternative payment models, which means the two conversion factors diverge by half a percent a year from here on.

Budget neutrality: one specialty's raise is everyone's cut

Federal law requires that changes to RVUs not move total Medicare physician spending by more than $20 million in a year. If CMS raises the value of office visits, it must pay for the increase by cutting the conversion factor for every service. In 2021, when CMS raised the value of office visits, the required offset to the conversion factor was large enough that Congress stepped in with a temporary increase to soften it.

Reimbursement can fall for a specialty that did nothing wrong. A procedural specialist whose codes CMS left untouched in a given year still absorbs a conversion-factor cut when CMS revalues a different specialty's codes upward.

The efficiency adjustment: the treadmill in statute

For 2026 CMS did something new. It applied an "efficiency adjustment" of −2.5% to the work RVUs, and to the intraservice time, of every service that is not billed by time. Office visits, care management, behavioral health, telehealth, and maternity codes were exempt. Procedures, imaging, and tests were not.

The stated reasoning is that the physician time estimates behind procedural RVUs come from specialty-society surveys that CMS considers inflated, and that physicians get more efficient over time in ways those surveys don't capture. CMS derived the number from the productivity adjustment in the Medicare Economic Index over a five-year lookback, and it intends to apply the adjustment every three years. It also declined to use the AMA's own practice-cost survey, citing small samples and low response rates, which removed the profession's main counter-evidence from the rulemaking.

Medicare now assumes, as a matter of policy, that a proceduralist gets 2.5% faster every three years and reduces the payment per procedure accordingly. Whether the efficiency came from an AI tool, a better scope, or working through lunch is irrelevant. CMS prices the dividend from any productivity gain out of the professional fee on a schedule, before the gain arrives at your practice. The productivity is the reason for the cut.

The practice-expense reallocation

In the same 2026 rule CMS changed how it allocates indirect practice expense between physicians who work in facilities and physicians who work in offices, on the reasoning that the growing share of hospital-employed physicians don't carry office overhead. The AMA's analysis of the rule estimated the effect at about −7% for facility-based practice expense and +4% for office-based. If you are a hospital-employed physician, this is a cut aimed at your setting. CMS's proposed rule for 2027 goes further, asking whether the difference in payment between facility and office settings is still appropriate at all.

Physicians versus hospitals

Hospitals receive an annual market-basket update tied to input costs, reduced by a productivity adjustment. Physicians receive a fixed statutory update with no inflation link.

• 2025. Inpatient hospital (IPPS) update: +2.9%. Outpatient hospital (OPPS) update: +2.9%. Physician fee schedule conversion factor: −2.83%.
• 2026. Inpatient hospital (IPPS) update: +2.6%. Outpatient hospital (OPPS) update: +2.6%. Physician fee schedule conversion factor: +3.26% (of which 2.5% expires after one year).
• 2027. Inpatient hospital (IPPS) update: +2.3% (final). Outpatient hospital (OPPS) update: +2.4% (proposed). Physician fee schedule conversion factor: −1.68% (proposed).

MedPAC, the commission that advises Congress on Medicare payment, recommended in March 2026 that physicians receive 0.5 percentage points more than current law for 2027, having noted that current law delivers a cut. A year earlier it had recommended tying the physician update to the Medicare Economic Index minus one point. Neither recommendation is law. The two conversion factors, the efficiency adjustment, and the absent inflation update are.

This asymmetry is why the facility fee and the professional fee for the same procedure have moved apart for two decades: adjusted for practice-cost inflation, the professional side fell 33% between 2001 and 2026 while the facility side received a market-basket update every year. Whoever owns the facility side of the ledger has a rising price; that was true before AI and will be amplified by it.

The employer layer

Medicare sets a per-unit price; the employer sets what reaches the physician. The data on what happens between the two are mixed by setting.

Among hospital-employed physicians tracked by Kaufman Hall and Vizient, work RVUs per full-time physician rose 9% between 2023 and the end of 2025 while compensation rose 6% and net revenue per RVU fell 1%. Among large medical groups surveyed by AMGA, compensation growth outpaced RVU growth in 2024 and 2025 overall, but hospitalists produced 5.8% more while being paid 2.5% more, and surgical compensation per RVU barely moved. Across both, revenue per unit of work is flat to falling and the productivity required to hold compensation steady is rising. Employers pass through a per-unit price that falls in real terms every year, and the pass-through arrives as more required work rather than a smaller paycheck, which is why it feels like a treadmill rather than a pay cut.

The payer layer

Realized revenue is lower than the billed unit, and the gap is where algorithmic utilization management lives: commercial prior-authorization and claim-review systems, and since January 2026 the CMS WISeR model bringing AI-assisted prior authorization to traditional Medicare in six states for a defined list of procedures. The billed RVU is unchanged; the collected dollar and the cost of collecting it are not. That channel is covered with the other four here.

What to watch, with dates

The CY2027 final rule, expected in early November 2026, will confirm or revise the proposed −1.68% and settle the practice-expense questions. The next efficiency adjustment falls due for 2029 under the three-year cadence. The 2.5% one-year increase enacted in July 2025 expires at the end of 2026 unless Congress acts. The two conversion factors continue to diverge by 0.5% a year. This page is updated at each of those points.

Where the book picks up

The Income Variable puts this machinery inside a larger picture in a chapter titled "Death by a Thousand Cuts": the external drag from payers and CMS, the internal gravity of the employer's productivity target, and the conflicted compensation benchmarks that price your work. It also tells you how to read the difference between a transient denial problem and structural compression, and what to bring into the room when the contract comes up.

Related: who keeps the hours an AI scribe saves, and what a decade of falling unit prices did to radiology. Join the launch list for the book and the free companion tools.

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