On January 16, 2025, the Medicare Payment Advisory Commission (MedPAC), which advises Congress on Medicare policy and payment issues, voted on its payment update recommendations for a range of Medicare provider types for 2026. These recommendations will be published in the March 2025 Report to Congress. As in recent years, MedPAC approved recommendations to increase payments for acute prospective payment system (PPS) hospitals and physicians while voting to decrease payments for post-acute care (PAC) providers.
While Congress values MedPAC’s perspective when considering issues related to Medicare payments and provider financial sustainability, it infrequently acts on the commission’s recommendations. Likewise, CMS cannot directly act on MedPAC’s recommendations absent authorizing legislation. Nevertheless, the commission’s recommendations and discussion of financial sustainability offer valuable insights for Medicare providers.
Below, we explore the 2026 payment recommendations and key points from MedPAC’s discussion for acute PPS hospitals, physicians, and PAC providers. We also discuss how provider organizations can prepare for potential payment changes based on how Congress typically responds to these recommendations.
Acute PPS Hospitals
MedPAC recommends Congress increase payments to acute PPS hospitals by the amount under current law (calculated based on the market basket update minus the productivity adjustment) plus 1%. During the December meeting, MedPAC staff noted the 2026 PPS hospital update would be 4.6% if this recommendation were adopted. In addition, MedPAC carries forward its recommendation that Congress implement the Medicare Safety-Net Index that redistributes existing Medicare Disproportionate Share Hospital (DSH) payments and uncompensated care DSH payments and increases funding to Medicare safety-net hospitals by $4 billion. These recommendations are in line with the commission’s recommendations from the prior three years.
MedPAC justifies the recommended increases based on the fact that the median Medicare margin for a group of relatively efficient hospitals was -2% in 2023. This group of hospitals, which MedPAC does not make public, represents approximately 6% of PPS hospitals that consistently achieve high-quality outcomes at a lower cost than the average PPS hospital. The median Medicare margin for all PPS hospitals in 2023 was -13%. MedPAC projects these unsustainably low margins will continue in 2025.
MedPAC’s recommendation would increase hospital spending by up to $10 billion in the first year and up to $50 billion over five years, running counter to the expected intention of the new Congress and administration to reduce federal spending. For this reason, the recommendation is unlikely to receive consideration, and hospitals will likely continue to face wage, drug, and supply cost growth that outstrips Medicare payment updates.
In this environment, hospitals need to develop financial discipline to generate the margins necessary to thrive and fund investments in infrastructure, services, and talent that allow them to efficiently deliver high-quality outcomes. While hospitals should evaluate all cost areas, non-labor costs can be a source of savings achieved with minimal organizational disruption.
Physician Fee Schedule
MedPAC recommends Congress increase Medicare provider payments in 2026 by the Medicare Economic Index (projected to be 2.3%) minus 1%, resulting in a positive update to the conversion factor of 1.3%. The commission also renews its 2023 recommendation that Congress create a safety-net payment for physicians based on the number of beneficiaries they care for who are eligible for the Part D low-income subsidy. If implemented, the safety-net adjustment would increase Medicare payments to physicians by an estimated 1.7%. The combined effect of these policies would increase Medicare fee-for-service physician fee schedule payments by 3% (5.7% for primary care providers, 2.5% for all other clinicians).
MedPAC estimates these recommendations would increase Medicare spending by $2 to $5 billion in the first year and $10 to $25 billion over five years. Some members of Congress have shown interest in correcting inadequate Medicare physician payments; however, sweeping changes are unlikely to gain traction this year due to competing priorities and lack of agreement on necessary reforms. Congress might instead offset part of the reduction in the calendar year 2025 Medicare conversion factor in the legislation it passes to fund the federal government beyond March 14. Such a provision was included in an early draft of the continuing resolution legislation Congress passed in late 2024, but it was not included in the final version, resulting in further reductions to Medicare physician payments for services provided on or after January 1, 2025.
With uncertainty surrounding Medicare physician payments, healthcare organizations need to maintain strategic agility and execute innovative, adaptable plans. As part of this process, organizations should consider key questions to evaluate the performance of their physician enterprises.
Post-Acute Care Providers
MedPAC recommends reducing Medicare payments to skilled nursing facilities (SNFs) by 3%, inpatient rehabilitation facilities (IRFs) by 7%, and home health agencies (HHAs) by 7%. Congress would save up to $75 billion ($25 billion each for SNFs, IRFs, and HHAs) over five years by implementing this recommendation. However, it is important to note that Congress historically has not incorporated these recommendations in legislation for consideration.
The margin pressures experienced by many PAC providers, coupled with anticipated changes in legislation and regulation from the new Congress and administration, make it more important than ever that their reimbursement functions achieve regulatory excellence. Developing a deep understanding of the rapidly evolving regulatory environment will enable the organization to take advantage of strategic opportunities created by these changes and help successful organizations thrive financially.
How Forvis Mazars Can Help
Our healthcare professionals at Forvis Mazars are committed to helping healthcare organizations develop regulatory excellence, financial discipline, strategic agility, and other core capabilities that support their pursuit of achieving health for those they serve. If you have questions about upcoming Medicare payment policy changes and how they may affect your organization, please reach out to a professional on our team.