Medicare Reimbursement Is Not One Story
ANALYSIS & OBSERVATIONS | MEDICARE REIMBURSEMENT
What the Data Reveal Across Care Settings, Orthopedics, and Total Knee Replacement
Healthcare Finance & Strategy | August 2026 | Approximately 11-minute read
Medicare payment pressure looks different when viewed across care settings, within a specialty, and at the individual-procedure level. Our analysis of national CMS data shows why conversion factors, service mix, site of care, and facility alignment must be evaluated together.
Discussions about Medicare reimbursement often begin and end with the Physician Fee Schedule conversion factor. That measure is important, but it does not tell the full story.
Medicare pays for care through multiple systems. Hospitals, ambulatory surgery centers, skilled nursing facilities, home health agencies, dialysis facilities, physician practices, and other providers each operate under different payment methodologies and policy adjustments. Within the Physician Fee Schedule, individual specialties are affected differently because their service mixes, relative value units, and sites of service are different. At the procedure level, reimbursement can also migrate between inpatient hospitals, hospital outpatient departments, and ambulatory surgery centers even when the physician's professional payment changes very little.
To examine these dynamics, Appalachian Physician Advisors developed three complementary analytical views:
A cross-setting Medicare payment adequacy model comparing payment updates with inflation.
A fixed-basket orthopedic model measuring professional reimbursement for a consistent service mix from 2004 through 2026.
A total knee replacement case study following utilization and reimbursement across inpatient, hospital outpatient, and ambulatory surgery center settings.
Together, the models point to a central conclusion: reimbursement strategy must evaluate not only how much Medicare pays, but also which services are performed, where they are performed, and who participates in the facility economics.
EXECUTIVE OBSERVATION Physician payment erosion, changes in service mix, and migration across care settings are related but distinct economic forces. Looking at only one of them can produce an incomplete - and sometimes misleading - view of financial performance. |
How the Analysis Was Constructed
The models were designed to separate reimbursement policy from changes in utilization wherever possible.
The broad care-setting model compounds published Medicare baseline updates and compares the resulting payment index with CPI-U inflation. The orthopedic model holds the 2024 Original Medicare orthopedic CPT and professional site-of-service mix constant, reprices that basket under each year's Physician Fee Schedule RVUs and conversion factor, and then adjusts the result for inflation. The TKA model trends setting-specific CMS public benchmarks independently and compares 2024 facility and surgeon payment mechanics.
This structure answers three different questions:
Analytical level | Primary question | What the model isolates |
Medicare system | Are payment updates keeping pace with inflation across care settings? | Baseline payment policy versus CPI-U |
Orthopedic specialty | How has a consistent orthopedic service mix performed under the PFS? | CPT mix, RVU changes, site-of-service differentials, and conversion-factor movement |
TKA procedure | What happens when a major procedure migrates between care settings? | Utilization movement, facility payment differences, and professional reimbursement |
The analysis uses national Original Medicare fee-for-service data and is intended as a strategic screening framework. It is not a forecast of realized revenue for a specific organization.
View One: Payment Pressure Extends Beyond Physician Offices
From 2020 through the provisional first half of 2026, CPI-U increased approximately 27.8%. Across the 12 Medicare care areas in the model, the median inflation-adjusted payment change was approximately -7.7%.
The Physician Fee Schedule experienced the largest modeled decline. The non-qualifying APM conversion factor fell approximately 7.5% nominally between 2020 and 2026, producing an estimated 27.6% loss of purchasing power relative to CPI-U. At an unchanged service mix, approximately 38.1% more volume would be required to restore the 2020 inflation-adjusted revenue position.
Other settings generally performed better than the PFS, but most still did not fully keep pace with inflation.
Selected care area | 2020-2026 nominal change | 2020-2026 real change | Volume needed to restore 2020 real level |
PFS - non-QP conversion factor | -7.5% | -27.6% | 38.1% |
IPPS | +18.0% | -7.7% | 8.3% |
OPPS | +18.0% | -7.7% | 8.3% |
ASC | +18.0% | -7.7% | 8.3% |
Skilled nursing facility | +24.4% | -2.7% | 2.7% |
Home health | +17.9% | -7.7% | 8.4% |
ESRD | +13.6% | -11.1% | 12.5% |
Figure 1. Medicare payment adequacy across care settings, 2020-2026.
Three observations emerge from this broader view.
1. Inflation pressure is systemic, but it is not uniform
Most Medicare payment systems lost purchasing power during the period, but the magnitude varied. A single narrative about "Medicare reimbursement" therefore obscures meaningful differences among physician, institutional, and post-acute payment systems.
2. The Physician Fee Schedule is structurally different
Hospital and post-acute updates are generally tied to market-basket methodologies, often reduced by productivity adjustments. The PFS conversion factor is shaped by statutory updates, budget neutrality, RVU changes, and temporary congressional relief. The finalized 2026 non-QP conversion factor increased 3.26%, but that increase included a temporary 2.5% statutory adjustment. CMS also finalized a separate efficiency adjustment affecting many non-time-based services. A positive one-year update should not be mistaken for a full reversal of the longer-term trend.
3. A headline update is not the same as realized revenue
Case mix, wage indices, quality penalties, sequestration, outliers, utilization, coding, and policy offsets can materially change actual payment. Home health illustrates the distinction: the 2026 routine update was positive, while CMS estimated an aggregate payment decline after other adjustments. Baseline updates are useful indicators, but they are not substitutes for organization-specific modeling.
View Two: Orthopedics Reveals the Importance of Service Mix
The broad PFS conversion factor is a useful policy signal, but it does not measure how a specialty's actual CPT basket has changed.
To address that limitation, the orthopedic model repriced a fixed 2024 service basket under every annual PFS from 2004 through 2026. The stable basket included 516 CPT codes, 653 CPT and site-of-service combinations, and approximately 16.7 million public-use services, representing 84.1% of 2024 nondrug orthopedic volume captured in the dataset.
The modeled average professional payment per service increased from approximately $125.74 in 2004 to $136.66 in 2026, a nominal gain of only 8.7%. CPI-U increased approximately 75.1% over the same period. After inflation, the weighted orthopedic basket retained only 62.1% of its 2004 purchasing power, a real decline of approximately 37.9%.
At an unchanged service mix and payment rate, an orthopedic practice would need approximately 61.1% more Medicare service volume to reproduce the inflation-adjusted revenue generated by the same basket in 2004.
The erosion is concentrated in procedure-heavy service lines
Orthopedic service family | Real change, 2004-2026 | Real change, 2020-2026 | Additional volume required versus 2004 |
E/M visits | -11.4% | -8.3% | 12.9% |
Imaging | -50.7% | -19.8% | 103.0% |
Injections and minor procedures | -43.2% | -16.7% | 75.9% |
Major surgery and fracture care | -51.4% | -34.0% | 105.6% |
Figure 2. Fixed-basket orthopedic Medicare reimbursement analysis, 2004-2026.
This difference matters. E/M valuation changes partially offset conversion-factor erosion, particularly after the 2021 office-visit changes. Imaging, injections, and major surgical services did not receive the same degree of protection.
Consequently, two orthopedic groups with identical Medicare revenue in one year may face very different future exposure. A clinic weighted toward office E/M services will behave differently from a surgeon-heavy group with a large proportion of imaging, injections, fracture care, and major procedures.
The weighted specialty average can therefore conceal the service lines experiencing the greatest pressure.
TKA professional reimbursement illustrates the procedural trend
For CPT 27447, the modeled national professional payment decreased from approximately $1,475.95 in 2004 to $1,159.35 in 2026. That represents a nominal decline of approximately 21.5% and an inflation-adjusted decline of approximately 55.1%.
That result is important, but it still reflects only the surgeon's professional claim. It does not capture the larger change occurring in the site of care.
View Three: TKA Shows Where the Economics Moved
Total knee arthroplasty provides a useful case study because Medicare policy expanded the settings in which the procedure could be paid. CMS removed TKA from the inpatient-only list beginning in 2018, making appropriate cases eligible for hospital outpatient payment. TKA was subsequently added to the ASC covered-procedure environment in 2020.
The public data show a pronounced migration signal.
The utilization signal spans all three settings
Setting-specific utilization indicator | Starting volume | 2024 volume | Change |
Inpatient DRG 470 | 443,252 in 2018 | 59,121 | -86.7% |
HOPD APC 5115 | 113,996 in 2018 | 362,845 | +218.3% |
Observed ASC TKA - CPT 27447 | 9,469 in 2020 | 47,727 | +404.0% |
MedPAC's claims-based count similarly increased from approximately 10,800 ASC TKAs in 2020 to 49,258 in 2024, supporting the direction and scale of the observed ASC trend.
These series should not be added together as national market shares. DRG 470 includes major hip and knee replacement or reattachment without major complication or comorbidity, while APC 5115 includes a broader group of Level 5 musculoskeletal procedures. The ASC series is specific to CPT 27447, and provider-level public data suppress some low-volume records. The appropriate interpretation is a strong directional migration signal rather than a precise one-for-one transfer of cases.
The 2024 payment mechanics clarify the strategic issue
2024 national benchmark | Facility payment or allowed amount | Surgeon professional allowed | Combined benchmark |
Inpatient DRG 470 | $17,318 | $1,284 | $18,602 |
Hospital outpatient APC 5115 | $12,402 | $1,284 | $13,686 |
ASC TKA | $8,586 | $1,284 | $9,870 |
Figure 3. TKA site-of-care migration and 2024 reimbursement mechanics.
For a clinically eligible TKA, the observed ASC facility allowed benchmark was approximately $3,816 lower per case than the HOPD benchmark, a reduction of 30.8%. Across 100 cases, the difference equals approximately $381,600 in gross allowed amount.
The surgeon's professional schedule amount, however, remains approximately $1,284 in both HOPD and ASC facility settings. Moving the case does not automatically increase the professional claim.
This changes the strategic question. The relevant issue is not simply whether cases move to a lower-cost setting. It is also whether the physician enterprise owns, partners with, or otherwise participates in the destination facility.
For 100 eligible cases, the 2024 model produces the following screening economics:
Approximately $1.24 million of HOPD facility allowed amount is exposed if the cases leave the hospital outpatient department.
Approximately $858,600 of gross facility allowed amount is paid to the ASC.
Approximately $128,400 of surgeon professional allowed amount remains essentially unchanged.
Approximately $381,600 of total gross allowed amount is removed from the episode comparison.
These figures are not estimates of profit, EBITDA, distributable cash flow, or enterprise value. Implant costs, staffing, ownership terms, case duration, anesthesia, quality, complications, local wage adjustments, patient selection, and post-acute utilization all affect the actual economics. Nevertheless, the payment mechanics demonstrate why site-of-care strategy and facility alignment have become central to orthopedic financial planning.
The Themes That Connect the Three Views
1. Volume growth can coexist with reimbursement erosion
An orthopedic group may perform more services and generate more nominal revenue while earning less on an inflation-adjusted basis. Rising volume can mask declining unit economics, particularly when staffing, supply, occupancy, and technology costs are also increasing.
2. Specialty averages can conceal procedural pressure
E/M improvements supported the weighted orthopedic basket, but imaging, injections, and major surgery experienced substantially deeper real declines. The service mix determines how strongly an individual practice feels the policy trend.
3. Site-of-care migration redistributes revenue
The TKA example shows that reimbursement can move from an inpatient hospital to an HOPD and then to an ASC without creating a corresponding increase in the surgeon's professional payment. The clinical migration and the economic participation are not the same event.
4. Ownership and alignment increasingly determine enterprise exposure
A physician practice without ASC participation may facilitate lower-cost care while capturing only the professional fee. A practice with an appropriately structured ownership or alignment model may participate in facility economics, but the value depends on operating performance, governance, compliance, and the terms of the arrangement.
5. Reimbursement analysis should be layered
A useful strategic assessment should connect three levels:
Payment policy: How are Medicare updates performing relative to inflation across settings?
Practice exposure: Which CPT categories, sites of service, and payer contracts drive the organization's actual economics?
Care migration: Which procedures are moving, where are they moving, and who captures the associated facility revenue?
What Physician Leaders Should Evaluate Next
The national models establish a benchmark. The next step is to replace national weights with practice-specific data.
Leadership teams should consider five questions:
Which CPT codes and service families account for the largest share of Medicare professional revenue?
How have allowed amounts and realized collections changed by payer, code, provider, and site of service.
Which procedures are clinically and operationally capable of moving to a different setting?
Does the physician enterprise participate in the destination facility's economics, and under what ownership or alignment terms?
How much additional volume, productivity, ancillary contribution, or contract improvement is required to offset real reimbursement erosion?
Answering these questions requires claims-level service counts, payer allowables, site-of-service indicators, provider attribution, facility relationships, and an accurate understanding of operating costs. Once those inputs are connected, the national framework can become a practice-specific strategic model.
Conclusion
The most important observation from this analysis is that Medicare reimbursement pressure is not a single trend.
Across care settings, payment updates have generally struggled to keep pace with inflation. Within orthopedics, procedure-heavy service lines have experienced greater erosion than E/M services. At the TKA level, care has migrated toward lower-cost outpatient settings, but the surgeon's professional reimbursement does not automatically increase when the site changes.
The result is a more demanding strategic environment. Physician organizations must understand not only their fee schedules, but also their service mix, site-of-care exposure, facility relationships, and ability to participate in the value created by care migration.
The better question is no longer only, "What is Medicare paying?"
It is also, "Where is the payment landing, which parts of the enterprise are exposed, and who is positioned to capture the value?"
Methodology and Limitations
This analysis uses national Original Medicare fee-for-service data. The broad model evaluates baseline payment updates and CPI-U, not realized organization-specific revenue. The orthopedic model assumes a national GPCI of 1.0 and excludes Medicare Advantage, commercial contracts, sequestration, MIPS/APM adjustments, modifiers, multiple-procedure reductions, drugs, DME, therapy, and facility revenue. The TKA setting benchmarks are national observed averages and should not be interpreted as local fee quotes or clinical recommendations.
Primary Sources
About Appalachian Physician Advisors
Appalachian Physician Advisors helps physician organizations translate reimbursement, service-line, and operating data into practical strategic decisions. To discuss a practice-specific reimbursement or site-of-care analysis, visit apahealthcare.com.
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