Recent federal cuts to how Medicare pays physicians are likely to deliver significant negative consequences to independent medical practices.
The Centers for Medicare and Medicaid Services’ (CMS) final rule for the 2026 Medicare Physician Fee Schedule imposes a dramatic reduction in payment rates for medical services performed in hospital settings by independent clinicians.
The payment reduction fails to account for the true resource costs incurred by independent physician practices, creating an unfair two-tiered system that will endanger patient access, undermine competition, and accelerate health system consolidation.
For independent medical practices, these cuts may result in staff and salary reductions, greater burnout, and practice closures. For patients, the effect may be reduced access to care, compromised quality and safety, and higher medical expenses.
Although CMS’ intent behind the payment reductions was to avoid overpaying for practice overhead for hospital-employed clinicians and discourage the inflationary effects of hospitals acquiring independent practices, the cuts may paradoxically have the opposite effect and accelerate consolidation.
The context: Practice expense funding
Hospitals across the nation rely on independent physicians and advanced practice clinicians to provide hospital medicine, critical care, emergency medicine, anesthesiology, and other essential services.
Further, contracting with independent physicians enables hospitals, especially in under-resourced communities, to achieve operational efficiency and preserve patient access to care.
Independent of the recent CMS cuts, private practices were already under strain. In 2024, 42 percent of physicians were in private practice, in other words, a practice that was wholly-owned by physicians, according to the American Medical Association (AMA). This figure represents a drop of 18 percentage points since 2012, the earliest year for which comparable data are available.
Factors driving the decline in independent practices include inadequate payment rates, costly resources, and burdensome regulatory and administrative requirements, according to the AMA.
Now, with reductions to practice expense payments, these problems are likely to become exacerbated.
As of January 1, 2026, CMS reduced the practice expense inputs used to calculate Medicare payments for hospital and facility-based care. As a result, physician payments for services performed in a facility will decrease overall by 7 percent, according to the AMA.
These practice expense payments are intended to cover all of the overhead costs associated with delivering medical care, such as staff, equipment, software, supplies, and utilities.
The problem with the reduction to practice expenses is that CMS’ plan does not accurately reflect costs associated with physician resources that are incurred by practices in the facility setting. The effect will be “dramatic, unsustainable impacts” to physicians, practices, and other health care professionals, the AMA said.
Consequences for providers and patients
Independent physician groups generally operate on thin margins. The financial and operational strain caused by practice expense payment cuts will exact a heavy toll on these practices, which, unlike large health systems, do not have the benefit of cross-subsidizing inpatient care with revenue from more profitable lines of business.
The result will be difficult decisions and trade-offs that affect independent practices’ workforce and long-term sustainability. In some cases, providers will lower staffing and require clinicians to conduct more patient visits per hour, which may compromise care quality and drive burnout.
Other practices may reduce compensation to providers, making recruitment and retention of physicians more difficult, which may drive practice closures and leave physicians little choice but to seek employment with hospital-affiliated physician groups.
As independent practices shutter and dwindle, local health care markets will consolidate, giving large established providers immense pricing power and control over their markets.
None of this is good for patients, who will undoubtedly be forced to contend with the downstream effects of practice expense payment reductions. Access to care will decline as physicians depart for better compensation and working conditions. Rural and underserved communities will be particularly affected. Quality and safety will suffer, as physicians’ time is stretched more thinly across larger patient populations. Health care costs, already rising at an unsustainable rate for many Americans, will rise as hospital consolidation grows and market competition declines.
What Congress and CMS should do
To prevent the unintended consequences of reduced patient access and provider consolidation, Congress and CMS must act. A good starting point would be legislation to suspend the cuts until we have a clearer idea of their effects on independent practices, hospitals, clinicians, and their communities.
Then, CMS could refine its payment methodology to better distinguish between overhead costs that hospitals support for their employed physicians and the real practice expenses that independent groups must cover in facility settings.
Another option for policymakers is to pursue narrow, targeted payment reductions, as opposed to broad, unfocused reductions. This might include a reduction in practice expense payments for hospital-based clinicians who already receive institutional support for overhead, while exempting independent physicians who do not have access to similar resources.
Additionally, policymakers could establish carve-outs for specific inpatient services, such as emergency medicine and hospital medicine, that rely more heavily on independent groups for care delivery. These steps could preserve practice capacity, prevent further consolidation, and protect patient access and care quality.
Finally, it’s an open question as to whether CMS even has the authority to reduce practice expense payments. The Medicare statute requires CMS to value physicians’ services based on physician resources, not hospital outpatient department costs. The statute does not authorize CMS to substitute hospital outpatient costs, hospital cost structures, or other payment proxies for the physician work and practice expense inputs of a freestanding physician service.
Conclusion
Practice expense cuts pose a danger to patients because they’re likely to destabilize independent physician practices, drive consolidation that leads to higher prices, and reduce patients’ access to timely, high-quality care. We urge Congress and CMS to take decisive action to prevent these problems by stopping the reductions and supporting a more sustainable, competitive, and patient-centered inpatient care system.
John Birkmeyer leads the Sound medical group and is responsible for clinical affairs and performance across all specialties at Sound Physicians. A graduate of Harvard Medical School, a member of the National Academy of Medicine, and formerly executive vice president and chief academic officer for Dartmouth Health, Dr. Birkmeyer brings deep experience in clinical leadership, academic medicine, and health system performance.
He is nationally recognized as a health services researcher with expertise in understanding variation in hospital and provider performance, developing scalable strategies for quality improvement, and advancing value-based reimbursement. His work has focused on improving care delivery through data-driven insight, operational excellence, and systemwide accountability.
More information about his leadership and publications is available through his Sound Physicians profile and on LinkedIn.
