Conversion Factor

Conversion Factor in the Medicare Fee Schedule

A fee schedule built on relative values separates two questions, namely how much one service is worth compared with another, and how much money one unit of that worth should buy. In the US Medicare Physician Fee Schedule the conversion factor answers the second question, so one figure sets the money level of thousands of prices while the relative value units fix their ratios. The payment formula includes a geographic adjustment, the two 2026 conversion factors can be rebuilt from the CMS final rule, and an illustrative example shows why the factor moves when relative values are revised under budget neutrality. Fee schedule amounts also serve as unit costs in economic evaluation, other countries use point values, and the term has a looser use for converting costs between price years and currencies.

Relative values set the ratios, the conversion factor sets the level

Medicare has paid for physicians' services under the fee schedule since 1992. Each service carries relative value units for physician work, practice expense and malpractice expense, built under the resource-based relative value approach, and these units only express how resource-intensive one service is compared with another. The conversion factor is a fixed dollar amount per unit that turns the relative scale into prices.

The split matters economically because the two parts do different jobs. Relative values shape the incentives between services under fee-for-service payment, since they decide whether an hour spent on a procedure pays more than an hour spent on a consultation. The conversion factor shapes total spending, because it scales every price in the same proportion and leaves the ratios between services unchanged. Federal regulation records that the first factor, for 1992, was set so that the schedule would have paid the same aggregate amount as estimated 1991 payments, adjusted by the 1992 update.

The fee schedule formula and geographic adjustment

The regulation computes a fee schedule amount as the product of the service's relative value units, a geographic adjustment factor for the payment area and the conversion factor. Each of the three components has its own geographic practice cost index. The calculation is therefore clearest when written component by component, as follows.

$$P_{s,l} = \left( W_s G^{W}_{l} + E_s G^{E}_{l} + M_s G^{M}_{l} \right) \times CF$$

where $P_{s,l}$ is the fee schedule amount for service $s$ in payment locality $l$; $W_s$, $E_s$ and $M_s$ are the work, practice expense and malpractice relative value units of the service; $G^{W}_{l}$, $G^{E}_{l}$ and $G^{M}_{l}$ are the geographic practice cost indices for those components in locality $l$; and $CF$ is the conversion factor in dollars per adjusted unit. The regulation expresses the same result through a single geographic adjustment factor, which weights each index by the share of the service's total relative value that comes from that component, so the two forms give identical amounts.

The geographic indices compare local costs with the national average. The work index reflects only one quarter of the difference between local and national physician work effort, while the practice expense and malpractice indices reflect relative cost differences, subject to statutory floors such as the practice expense floor for qualifying frontier states. The fee schedule amount for a non-participating supplier, one without an agreement with CMS to participate in Medicare Part B, is 95% of the amount calculated for a participating supplier, and anaesthesia services are priced with separate conversion factors of their own.

How CMS built the 2026 conversion factors

The conversion factor is recalculated every year through rulemaking by multiplying the previous year's factor by a chain of adjustments. Some adjustments are set by statute and one keeps spending neutral when relative values change. From calendar year 2026 the statute requires two factors, one for services furnished by qualifying participants in advanced alternative payment models, and one for all other services.

In the final rule for calendar year 2026, CMS started from the single 2025 factor of USD 32.3465, applied a budget neutrality adjustment of 0.49% (a multiplier of 1.0049), the statutory update for each group (0.75% for qualifying participants and 0.25% for everyone else) and a one-year statutory increase of 2.50% for 2026 in the following product.

$$32.3465 \times 1.0049 \times 1.0075 \times 1.0250 = 33.5675$$

where 33.5675 is the 2026 conversion factor for qualifying participants, in dollars per adjusted relative value unit. Replacing the 0.75% update with 0.25% gives the factor for all other physicians and practitioners, as follows.

$$32.3465 \times 1.0049 \times 1.0025 \times 1.0250 = 33.4009$$

where 33.4009 is that factor in the same units. The rule notes that many practitioners do not qualify, so CMS generally treats this second factor as the default. The anaesthesia factors for 2026 (20.5998 and 20.4976) carry an extra anaesthesia-specific adjustment.

The 2.50% increase applied to 2026 only, so the proposed rule for calendar year 2027, published in July 2026, proposes lower factors of about USD 33.17 for qualifying participants and USD 32.84 for others; the final 2027 values will appear in the final rule.

Budget neutrality and why the factor moves when relative values change

Changes to relative values are not allowed to raise or lower Medicare Part B spending by more than USD 20 million in a year compared with what would have been spent without them. When revaluations exceed that limit, CMS restores neutrality through an adjustment to the conversion factor. As a result, a cut to the relative values of some services raises the factor, and with it the payment for every service whose relative values were not cut.

A simplified version of the adjustment compares the total relative value units that a fixed volume of services would generate before and after the change, as follows.

$$BN = \frac{\sum_s q_s R^{\text{old}}_s}{\sum_s q_s R^{\text{new}}_s}$$

where $BN$ is the budget neutrality multiplier applied to the conversion factor, $q_s$ is the projected volume of service $s$, and $R^{\text{old}}_s$ and $R^{\text{new}}_s$ are its geographically adjusted relative value units before and after the revaluation. CMS's own estimate works from prior-year utilisation and handles several adjustments in sequence, so this expression shows the logic rather than reproducing the agency's calculation.

The 2026 rule gives a clear case. CMS applied an efficiency adjustment of minus 2.5% to the work relative values of services that are not valued on time, using the productivity adjustment in the Medicare Economic Index over a five-year look-back. Time-based services such as evaluation and management visits were exempt. The work units removed by this adjustment contributed to the positive 0.49% budget neutrality adjustment, which CMS describes as accounting for finalised changes in work relative values for some services, and that higher factor raises payment for the exempt services without changing the spending total.

Worked example of budget neutrality in a two-service schedule

The figures in this example are illustrative; the relative value units, indices and volumes do not describe any real code or locality. A short pricing step comes first, using the 2026 default factor; the budget neutrality steps then use a round illustrative factor of USD 33.00.

1. Price one service with and without geographic adjustment. Service A has 1.00 work, 1.20 practice expense and 0.10 malpractice units, 2.30 in total, so with all indices at 1.00 it pays USD 76.82 (2.30 × 33.4009). With indices of 1.02, 1.15 and 0.80 the adjusted total is 1.00 × 1.02 + 1.20 × 1.15 + 0.10 × 0.80 = 2.48, and the fee is USD 82.83 (2.48 × 33.4009), about 7.8% higher. Applying a simple unweighted average of the three indices (0.99) to 2.30 would not give this figure; the regulation's weighted geographic adjustment factor (2.48 / 2.30 = 1.0783) does.

2. Cut the work units of a procedure. In a national schedule with two services, Service A (2.00 units, 600 claims) is time-based and exempt, while Service B (4.00 units, of which 2.00 are work, 400 claims) has its work units cut by 2.5%, from 2.00 to 1.95, so its total falls to 3.95. Total units fall from 600 × 2.00 + 400 × 4.00 = 2,800 to 600 × 2.00 + 400 × 3.95 = 2,780.

3. Restore neutrality through the factor. Spending was USD 92,400 (2,800 × 33.00). Keeping it unchanged requires a new factor, calculated as follows.

$$CF_{\text{new}} = 33.00 \times \frac{2800}{2780} = 33.2374$$

where $CF_{\text{new}}$ is the adjusted conversion factor. Spending is now 2,780 × 33.2374, which is USD 92,400 after rounding. Service A's fee rises from USD 66.00 to USD 66.47 (2.00 × 33.2374), and Service B's fee falls from USD 132.00 to USD 131.29 (3.95 × 33.2374). The cut to one service has raised the price of the other without any change in its own relative value, which is the redistribution that budget neutrality produces.

Fee schedule amounts as unit costs in economic evaluation

Because the fee schedule publishes a national price for most covered codes, it offers a ready source of unit costs for physician services in US cost-effectiveness and budget impact analyses. The Health Economics Resource Center of the US Department of Veterans Affairs recommends Medicare reimbursement rates for costing outpatient services. It also advises analysts to price a procedure and the visits before and after it separately where possible, instead of using global fees that bundle them, and to apply facility practice expense values for care in VA medical centres. For unlisted procedure codes, which have no Medicare relative value, it suggests the weighted mean value of procedures of the same type.

The same centre builds its outpatient average cost data with a conversion factor of its own. Its method assumes that VA outpatient resource use is proportional to Medicare relative values, and for each category of care it finds a factor that converts relative values into VA cost estimates, adjusted so that they add up to actual national VA spending. In a simplified stylisation, since the centre in practice scales a hypothetical Medicare reimbursement for each visit, the factor is as follows.

$$CF_c = \frac{X_c}{\sum_{i \in c} R_i}$$

where $CF_c$ is the cost per relative value unit for care category $c$, $X_c$ is the system's actual spending on that category, and $R_i$ is the relative value of encounter $i$ in the category. This approach keeps Medicare's relativities but replaces Medicare's price level with the health system's own costs, which suits an analysis taken from that system's perspective.

A fee schedule amount is a price set by an administrative formula, not a measured opportunity cost. Cost valuation should state whose costs are being counted, the fee schedule year and conversion factor used, the locality or national basis, and whether facility payments made under separate systems are included. Where precision matters more than comparability, micro-costing may give estimates closer to resource use.

Point values in other fee schedules

Other health systems combine relative values with a money multiplier in a similar way. In Germany the uniform value scale for statutory health insurance, the EBM, prices each service in points that express how much one service is worth compared with another, and the euro value of a point is the orientation value. The valuation committee, made up of three representatives each from the national association of statutory health insurance physicians (KBV) and the national association of statutory health insurance funds, raised the orientation value by 2.8% to 12.7404 cents for 2026. Regional point values are set from this starting value, and the KBV notes that the effect of a higher point value on doctors' service-related income also depends on the total remuneration available.

Hospital payment uses the same structure under a different name. A case weight plays the role of the relative value, and a base rate in money per unit of weight plays the role of the conversion factor.

A second meaning in converting costs across price years and currencies

The term is also used more loosely for the multipliers that restate a cost estimate in another price year or currency, for example when a review or a model draws costs from studies done in different countries and years. The CCEMG and EPPI-Centre cost converter does this in two stages, and its results panel labels the currency ratio an implied conversion factor and the price-year ratio an implied inflation factor. It first moves the estimate to the target price year with the original country's gross domestic product deflator, then converts it to the target currency with purchasing power parities for GDP, as follows.

$$C^{*} = C \times \frac{D_{T}}{D_{t}} \times \frac{PPP_{\text{target},T}}{PPP_{\text{source},T}}$$

where $C^{*}$ is the adjusted cost, $C$ is the original cost in the source currency and price year $t$, $D_{T}$ and $D_{t}$ are the source country's GDP deflator index values in the target year $T$ and the original year $t$, and $PPP_{\text{target},T}$ and $PPP_{\text{source},T}$ are the purchasing power parities (local currency units per international dollar) of the target and source countries in year $T$.

The tool's documentation explains that purchasing power parities remove differences in price levels between countries, which market exchange rates do not, and that parities from the IMF and the OECD give different results. The deflator measures general inflation across the economy, so a report should name the index and dataset used, and make clear which kind of conversion factor it means.

Where conversion factor reasoning goes wrong

Most errors come from treating the conversion factor as more than a policy parameter. It is a price level chosen to meet spending rules, so a rise does not show that the resources used per service cost more, and a fall does not show that care has become more efficient. Year-to-year comparisons of Medicare fees mix changes in relative values, geographic indices and the factor itself.

Other common slips are mechanical. Pairing one year's relative value units with another year's conversion factor breaks the budget neutrality link between them, and applying the qualifying participant factor to all services overstates payment for most practitioners. Analyses that use Medicare fees as costs for other payers assume that Medicare relativities and price levels hold there too, an assumption that should be stated and tested in sensitivity analysis.

Sources

• Centers for Medicare & Medicaid Services. Medicare and Medicaid Programs; CY 2026 Payment Policies Under the Physician Fee Schedule and Other Changes to Part B Payment and Coverage Policies; Medicare Shared Savings Program Requirements; and Medicare Prescription Drug Inflation Rebate Program. Final rule (CMS-1832-F). Federal Register 90 FR 49266; 5 November 2025. https://www.federalregister.gov/documents/2025/11/05/2025-19787/medicare-and-medicaid-programs-cy-2026-payment-policies-under-the-physician-fee-schedule-and-other
• Centers for Medicare & Medicaid Services. Calendar Year (CY) 2026 Medicare Physician Fee Schedule Final Rule (CMS-1832-F). Fact sheet. 2025. https://www.cms.gov/newsroom/fact-sheets/calendar-year-cy-2026-medicare-physician-fee-schedule-final-rule-cms-1832-f
• Centers for Medicare & Medicaid Services. Calendar Year (CY) 2027 Medicare Physician Fee Schedule Proposed Rule. Fact sheet. 2026. https://www.cms.gov/newsroom/fact-sheets/calendar-year-cy-2027-medicare-physician-fee-schedule-proposed-rule
• Centers for Medicare & Medicaid Services. Physician Fee Schedule. CMS Guide for Medical Technology Companies and Other Interested Parties. Page last modified 2026. https://www.cms.gov/cms-guide-medical-technology-companies-and-other-interested-parties/payment/physician-fee-schedule
• Code of Federal Regulations. Title 42, sections 400.202 (Definitions), 414.20 (Formula for computing fee schedule amounts), 414.26 (Determining the GAF) and 414.28 (Conversion factors). eCFR, current as of September 2026. https://www.ecfr.gov/current/title-42/chapter-IV/subchapter-B/part-414
• Health Economics Resource Center, US Department of Veterans Affairs. Estimating Medicare Payments; and HERC Outpatient Average Cost Data. Accessed 2026. https://www.herc.research.va.gov/include/page.asp?id=estimate-medicare-payments and https://www.herc.research.va.gov/include/page.asp?id=outpatient
• Kassenärztliche Bundesvereinigung. Anstieg der Honorare in der ambulanten Versorgung: für 2026 auf ein Plus von 2,8 Prozent geeinigt. Press release, 2025. https://www.kbv.de/presse/pressemitteilungen/2025/anstieg-der-honorare-in-der-ambulanten-versorgung-fuer-2026-auf-ein-plus-von-2-8-prozent-geeinigt
• Kassenärztliche Bundesvereinigung. Einheitlicher Bewertungsmaßstab (EBM): overview page. 2026. https://www.kbv.de/praxis/abrechnung/ebm
• Shemilt I, Thomas J, Morciano M. A web-based tool for adjusting costs to a specific target currency and price year. Evidence and Policy 2010;6(1):51-59; and CCEMG-EPPI-Centre Cost Converter, version 1.7, 2024. https://eppi.ioe.ac.uk/costconversion/default.aspx