The 2027 Medicare Physician Fee Schedule: Why the Conversion Factor Isn't the Whole Story

When CMS released the proposed 2027 Medicare Physician Fee Schedule, one number was easy to focus on: the conversion factor.

For most physicians and practitioners who are not qualifying participants in an Advanced Alternative Payment Model, CMS is proposing a 2027 conversion factor of approximately $32.84, down from approximately $33.40 in 2026 — a 1.68% decrease. For qualifying APM participants, the proposed conversion factor is approximately $33.17, a 1.19% decrease from 2026.

Those numbers matter.

But they do not tell the full story.

For many specialties — and for many individual physician practices — the actual financial impact of the proposed 2027 fee schedule could be materially different from 1.68%.

Medicare reimbursement is more than a conversion factor

At a simplified level, Medicare Physician Fee Schedule reimbursement is built from several components:

Work RVU + Practice Expense RVU + Malpractice RVU

Those components are geographically adjusted and then multiplied by the applicable conversion factor.

That means Medicare can leave the conversion factor relatively stable while significantly changing reimbursement for an individual service by changing one or more of the underlying RVUs.

CMS is proposing changes in all three major RVU components for various services in 2027, while also proposing broader changes to the methodology used to calculate practice expense. CMS describes this as part of a multi-year effort to move away from older specialty-specific practice expense data and toward more routinely updated and auditable cost information.

For physician practices, that creates a much more complicated question than:

“What is the Medicare conversion factor next year?”

The better question is:

“What happens when the proposed 2027 RVUs and conversion factor are applied to the actual services our practice performs?”

Specialty averages reveal how different the impact can be

CMS's own specialty impact estimates demonstrate how uneven the proposed changes may be.

Some of the larger estimated reductions include approximately:

• Dermatology: -9%

• Otolaryngology: -9%

• Orthopedic Surgery: -7%

• Hand Surgery: -5%

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At the other end of the spectrum, CMS estimates increases for several behavioral-health and other practitioner categories, including clinical social workers and clinical psychologists. Importantly, CMS's specialty impact estimates reflect the effects of RVU and policy changes and do not incorporate the separate conversion-factor reduction.

Orthopedic Surgery provides a useful example.

CMS estimates an approximately 7% overall reduction attributable to the proposed RVU and policy changes, with an estimated 5% reduction in the non-facility setting and 8% in the facility setting. The proposed reduction in the conversion factor would be additional to those specialty-level estimates.

That is a very different financial story from simply saying:

“Medicare is cutting rates by 1.68%.”

Why Practice Expense deserves attention

One of the most consequential areas of the 2027 proposal may be Practice Expense, or PE.

Practice Expense represents the resources involved in furnishing a service beyond the physician's work itself — including clinical labor, supplies, equipment and indirect overhead.

CMS is proposing to reduce its reliance on older specialty-specific Practice Expense per Hour data and begin transitioning portions of the methodology to a different framework. CMS is also proposing a stabilizer intended to mitigate short-term volatility while the methodology transitions.

For some services, CMS is also using phase-in protections to limit how quickly PE RVUs decline.

That creates another important distinction for practices:

The 2027 proposed payment may not represent the full long-term impact of the new PE methodology.

A CPT could experience one level of reduction in 2027 because of phase-in protection and potentially face additional pressure if the methodology is fully implemented in later years.

This is especially important for specialties with significant direct and indirect practice costs.

Site of service matters

Two physicians performing clinically similar services may also experience different Medicare payment changes depending on where those services are furnished.

Medicare distinguishes between:

Non-facility services — generally services performed in a physician office where the practice incurs the related overhead.

and

Facility services — generally services performed in settings such as a hospital outpatient department or ambulatory surgery center, where Medicare separately pays the facility for much of the infrastructure.

Because the Practice Expense RVUs differ between those settings, a practice's actual site-of-service mix can materially change the financial result. CMS specifically recognizes this facility/non-facility distinction in the PFS methodology.

A national specialty average therefore provides useful context — but it still does not tell an individual practice exactly what will happen.

What physician practices should be analyzing now

Before the 2027 Physician Fee Schedule is finalized, physician leaders should understand at least four things:

1. Their highest-volume Medicare CPT codes

Which services actually drive Medicare revenue?

2. Their highest-value Medicare CPT codes

A relatively low-volume surgical procedure may create significantly more financial exposure than thousands of lower-value office visits.

3. Facility versus non-facility utilization

The same CPT may have different Practice Expense implications depending on the setting.

4. Medicare Advantage contract structure

Original Medicare is directly governed by the Medicare Physician Fee Schedule.

Medicare Advantage is different.

Many MA contracts reference Medicare — perhaps 100%, 105%, 110% or another percentage of the Medicare fee schedule — but the actual effect depends on the contract.

A CMS change can therefore flow through a much larger portion of practice revenue than Original Medicare alone if Medicare Advantage contracts are tied to Medicare rates.

Moving from headlines to actual financial impact

At Appalachian Physician Advisors, we have been working through the underlying CMS data behind the proposed 2027 Physician Fee Schedule.

Rather than stopping at the conversion factor, we developed several free tools to help physician practices evaluate the proposal at different levels.

The 2027 PFS Calculator allows users to compare an individual CPT or HCPCS code under 2026 Medicare rates versus the proposed 2027 methodology.

The Specialty Benchmark shows CMS's estimated impact across specialties, including separate Work RVU, Practice Expense and Malpractice components.

And the Practice Impact Analyzer allows a practice to apply the proposed 2027 rates to its own CPT and volume data.

Each answers a different question.

But they are built around one central idea:

A national Medicare percentage is not a practice-specific financial forecast.

The only way to understand the impact on an individual physician group is to apply the proposed reimbursement methodology to that group's actual services.

CMS published the proposed rule on July 16, 2026, and the public comment period remains open through September 14, 2026.

There is still uncertainty about what will ultimately be finalized.

But physician practices do not need to wait for the final rule to begin understanding their exposure.

In fact, the period before the final rule may be the most valuable time to do it.

Because once the financial impact is understood, leadership can begin evaluating the implications for:

• physician compensation models,

• Medicare Advantage contracts,

• site-of-service strategy,

• coding and documentation,

• service-line economics,

• operational workflows, and

• 2027 budgets.

The conversion factor is the headline.

Your CPT mix is the financial story.

Explore the APA 2027 Medicare PFS tools at APAHealthcare.com.

Source: CMS CY 2027 Medicare Physician Fee Schedule Proposed Rule, CMS-1848-P. All 2027 policies and rates discussed are proposed and subject to change in the final rule.