Do not assume it is. Medicare fee schedule updates have lagged practice cost inflation over time, and CMS's July 2026 proposal would lower the 2027 conversion factor by 1.19% to 1.68%, depending on qualifying APM status. Check your own practice with three comparisons: cost per visit against collections per visit, allowed amounts against payer contracts, and revenue tied to current-year Medicare rates.
This is one of the questions physician owners have been bringing me. I spent a good part of my career on the buy side of healthcare M&A, where reading a practice's numbers was a big part of the job. Here is how I would work through this one: what is driving the gap, the checks I would run, and when I would bring someone in.
Why the gap keeps opening
Start with labor. MGMA's June 2026 medical-group poll and AHA's March 2026 hospital cost report both identify pay pressure as a contributor to operating costs. They cover different types of organizations. Use them as context, then check what wages, benefits, and contract labor are doing in your own practice.
Medicare's 2026 raise came with conditions. The 2026 conversion factor rose 3.77% for qualifying participants in advanced alternative payment models (APMs) and 3.26% for everyone else (CMS, October 2025; AMA, December 2025). Most of that was a one-year 2.5% increase from Congress. The same rule applied a 2.5% reduction to work RVUs for affected non-time-based services. Exemptions include E/M visits, care management, behavioral health, telehealth-list services, certain maternity codes, and new services introduced for 2026 (Holland & Knight, November 2025). Within the physician fee schedule, CMS also shifted practice expense payment toward office-based services relative to facility-based services. For procedural practices, these changes can absorb much of the conversion factor increase (ACC, November 2025).
2027 looks worse on paper. CMS's July 2026 proposed rule would drop the conversion factor to $32.84 for physicians outside qualifying APMs, a 1.68% cut, because the one-year increase expires. Qualifying APM participants would see a 1.19% cut (AHA, July 2026). The efficiency adjustment finalized for 2026 continues, and CMS plans to recalculate it every three years. Specialty swings are larger than the headline. CMS estimates its proposed RVU changes would cut aggregate Medicare allowed charges about 9% for dermatology and otolaryngology before the conversion factor change, while clinical social workers and psychologists gain the most (HFMA, July 2026; HMA, July 2026). These are proposals, and the final rule can change them.
The gap has a long history. Medicare fee schedule updates have lagged practice cost inflation over time, as described by MedPAC in March 2026 and the AMA in April 2025. The June 2026 Medicare Trustees report warns that scheduled physician payment updates are not expected to keep pace with physician cost increases.
Revenue growth can hide the problem. More visits do not tell you whether reimbursement is keeping up. Separate changes in volume, payment rates, and service mix before you read revenue growth as better economics.
Volume has limits: providers, rooms, and hours. Contract rates and costs are the levers left.
How to check your own numbers
Here are the checks I would run. The first three are the ones from the top of this piece. Four and five go one level deeper. Your bookkeeper can pull these from the general ledger, the practice management system, and payer remittances. Compare the same months each year so seasonality does not mislead you.
Cost per visit against collections per visit. For each quarter of 2024, 2025, and 2026, divide operating cost by visits, and collections by visits. Include compensation for clinical work, including owner clinical compensation, on a consistent basis each year. Keep profit distributions out. Match collections to the same dates of service and allow time for payment. If you use quarterly cash receipts, review payment timing before treating two quarters of a widening gap as structural. Procedural groups can use wRVUs instead of visits. Recalculate every year's activity using one fixed RVU schedule so changes in code values do not look like changes in work. The 2026 efficiency adjustment reduced work RVUs for affected codes.
Paid against contracted, payer by payer. For your top five payers and your top 20 codes by revenue, compare the allowed amount on remittances to the contracted fee schedule. Then compute the net collection rate by payer. For the same dates of service, divide payer and patient collections, net of refunds, by contractually collectible amounts. Allow time for payment before comparing rates. Any payer paying below contract, and any contract without a rate increase in two years, goes on a list.
Medicare exposure. Add traditional Medicare collections to any Medicare Advantage or commercial contracts priced off the Medicare fee schedule. For each contract, check whether it references current-year Medicare rates or a fixed base year, and read its update provisions. Multiply the revenue tied to current-year rates by the rate change. This estimates the conversion factor effect with volume and service mix held constant. Review code values and contract terms separately. Illustrative example, round numbers: a practice collecting $10 million, with $3 million tied to current-year Medicare rates, would lose about $50,000 from a 1.7% conversion factor cut alone. If the same practice has $7 million in operating costs rising 5%, that is $350,000. In this example, cost growth is about seven times the rate cut.
Your code mix. Compare payments for your top 20 Medicare codes under the current and proposed fee schedules, holding volume constant. Use the applicable conversion factor, site of service, geographic adjustments, and work, practice expense, and malpractice RVUs. Keep this estimate separate from the conversion factor example above. National specialty estimates are context for that calculation.
Labor cost per visit. Split staff wages, benefits, and contract labor from the rest of overhead and track each per visit. MGMA's June 2026 poll and AHA's March 2026 cost report both identify labor pressure, making this a useful place to start your budget review.
When to bring in help
These are the situations where I would bring someone in. Your own thresholds may differ:
Cost per visit has outrun collections per visit for two quarters and you cannot say why.
You cannot produce paid against contracted by payer, or your largest commercial contract has not moved in two years.
You are setting 2027 physician compensation, adding a provider or location, or heading into a payer negotiation.
You run more than one site and do not have a profit and loss statement for each.
FAQ
Is Medicare cutting physician pay in 2027?
As proposed, yes. The conversion factor would fall 1.68% for physicians outside qualifying APMs and 1.19% for qualifying APM participants, because the one-year 2.5% increase for 2026 expires. The final rule or Congress can still change that.
What is the efficiency adjustment?
It is a 2.5% reduction to work RVUs for affected non-time-based services, starting in 2026. E/M visits, care management, behavioral health, telehealth-list services, certain maternity codes, and new services introduced for 2026 are exempt. CMS plans to recalculate it every three years.
How fast are our costs rising?
Use your own expense trend. Compare the same periods, separate price changes from spending on new providers or services, and track labor separately. A national index does not replace your budget.
Will the Medicare cut hit our commercial contracts?
It can affect contracts tied to current-year Medicare rates. Pull each reimbursement exhibit and check its base year, update provisions, and other rate-change terms.
How often should we run these checks?
Quarterly, and before every budget and payer negotiation.
If you want a second set of eyes on these numbers before you set your 2027 budget, book a 25-minute call.
-Shawn
Healthcare M&AI is a fractional CFO and transaction advisory practice for physician-owned practices, led by Shawn Rothlis, a former in-house healthcare M&A and strategic finance professional.
This newsletter is for informational purposes only and does not constitute investment, legal, or financial advice.