Paying Physicians

Since 1992 Medicare has paid physicians through a resource-based fee schedule. The design is simple to state and consequential in ways that reach far beyond Medicare, because commercial payers widely use the same relative values as the basis for their own rates.

How a payment is built

CMS describes the mechanic directly: “Payments are based on the relative resources typically used to furnish the service. Relative value units (RVUs) are applied to each service for work, practice expense, and malpractice expense. These RVUs become payment rates through the application of a conversion factor. Geographic adjusters (geographic practice cost indices) are also applied to the total RVUs to account for variation in costs by geographic area.”

So a payment is the sum of three geographically adjusted RVU components multiplied by a single dollar figure. Three consequences follow:

• Relative values are a zero-sum judgment. Raising the RVUs for one service lowers everyone else’s payment through budget neutrality, which makes RVU decisions genuinely contested.
• The conversion factor is a policy lever. One number moves every physician payment in the country.
• Setting is separate from service. Rates “in facility settings, such as a hospital outpatient department (HOPD) or an ASC, reflect only the portion of the resources typically incurred by the practitioner,” because the facility bills separately.

Two conversion factors

CY 2026 introduced a structural change that matters for value-based care. “As required by statute, beginning in CY 2026, there will be two separate conversion factors: one for qualifying alternative payment model (APM) participants (QPs) and one for physicians and practitioners who are not QPs.”

The updates differ permanently: “+0.75 percent” for qualifying APM participants and “+0.25 percent” for everyone else. Layered on a one-year statutory increase of 2.5 percent and a budget neutrality adjustment, “the final CY 2026 qualifying APM conversion factor of $33.57 represents a projected increase of $1.22 (+3.77%)” while “the final CY 2026 nonqualifying APM conversion factor of $33.40 represents a projected increase of $1.05 (+3.26%).”

The dollar gap in 2026 is small. The design intent is not: the two update rates compound annually, so the gap widens every year, and taking on accountable-care risk becomes progressively more valuable relative to staying in pure fee-for-service.

How relative values are set, and the objection

CMS states plainly that it “historically has relied on survey data primarily provided by the AMA Relative Value Scale Update Committee (AMA RUC) to estimate practitioner time, work intensity, and aspects of practice expense,” and describes the weaknesses of that process without hedging: “this process relies primarily on subjective information from surveys that have low response rates, with respondents who may have inherent conflicts of interest (since their responses are used in setting their payment rates).” CMS concluded that “the time assumptions built into the valuation of many PFS services are, as a result, very likely overinflated,” and finalized an efficiency adjustment in response.

Worth remembering: the fee schedule is often described as if it were an objective measurement of resource use. It is better understood as an administered price built from survey estimates, adjudicated through a process CMS itself now describes as conflicted, and then normalized to a fixed budget. Understanding that it is a negotiated construct rather than a measurement explains why so much of value-based care is an attempt to stop paying this way.

Key takeaways

• Physician payment equals geographically adjusted work, practice expense, and malpractice RVUs multiplied by a conversion factor.
• From CY 2026 there are two conversion factors, $33.57 for qualifying APM participants and $33.40 for everyone else.
• The statutory updates of +0.75 and +0.25 percent compound, widening the advantage of APM participation over time.
• Relative values rest on RUC survey data that CMS has publicly described as low-response and conflicted.

Sources

• CMS, Calendar Year 2026 Medicare Physician Fee Schedule Final Rule (CMS-1832-F) (opens in a new tab)