On January 1, 2026, Medicare changed how it pays for most skin substitutes. Under the CY 2026 Physician Fee Schedule final rule, announced October 31, 2025, CMS stopped paying most of these products as biologicals based on average sales price and began paying them as incident-to supplies, at an initial rate of about $127 per square centimeter, in both physician offices and hospital outpatient departments.
For anyone evaluating a wound care company, the change resets the revenue math for a whole product category, and it shows how quickly a payment rule can overtake a company's plan.
What CMS Changed
Before 2026, most skin substitutes applied in physician offices were paid under the average sales price (ASP) methodology, and CMS noted that prices could reach more than $2,000 per square centimeter. The CY 2026 final rule:
- Reclassified most skin substitutes as incident-to supplies, paid with the application, in the non-facility and hospital outpatient settings
- Set a single initial payment rate of about $127 per square centimeter for 2026
- Grouped products by FDA regulatory pathway: Section 361 HCT/Ps, 510(k)-cleared devices and PMA-approved devices
- Left products licensed as biologics under Section 351 of the Public Health Service Act on ASP-based payment
The Rationale
CMS pointed to spending growth: Medicare spending on skin substitutes rose from $256 million in 2019 to more than $10 billion in 2024. CMS estimated the change would reduce fee-for-service spending on skin substitute services by $19.6 billion in 2026.
The Coverage Side
Separately, Medicare Administrative Contractors had finalized local coverage determinations (LCDs) for skin substitutes used on diabetic foot ulcers and venous leg ulcers, set to take effect January 1, 2026. On December 24, 2025, CMS announced that the contractors were withdrawing those LCDs. The payment change went ahead; the coverage limits did not.
What CMS Has Proposed for 2027
CMS's CY 2027 hospital outpatient (OPPS) proposed rule, released July 2, 2026, would keep paying $127.14 per square centimeter for skin substitutes that are not biologics licensed under Section 351, without geographic adjustment in the outpatient setting. The CY 2027 Physician Fee Schedule proposed rule followed on July 14, 2026. Comments closed August 31 and September 14, respectively; final rules are expected later in the year.
Clinical Note
A flat per-square-centimeter rate doesn't distinguish products with strong healing evidence from products without it, or appropriate use from inappropriate use. How patients with hard-to-heal wounds fare under the new payment will depend on which products clinicians and facilities keep using.
What It Means for a Diligence Read
The effect on a given company depends on facts in its own record:
- Product pathway: whether its products are 361 HCT/Ps, 510(k) devices, PMA devices or 351-licensed biologics, since that determines which payment rules apply
- Payer and setting mix: how much revenue came from Medicare in physician offices and hospital outpatient departments, compared with commercial payers and other settings
- Pricing history: how far its pre-2026 price sat above the new rate
- Evidence: what comparative clinical data it has, which matters for commercial payer coverage and any future product-specific policy
- Balance sheet: whether its financing and debt were sized to pre-2026 cash flows
A Due Diligence Question
For any wound care company, ask: "What share of revenue came from Medicare skin substitute applications before 2026, by setting, and how has that share changed since January?"
What to Watch
- The CY 2027 Physician Fee Schedule final rule, and any change to the rate or the product categories
- Whether local coverage policies for skin substitutes return in another form
- Company disclosures (earnings calls, 10-Q filings) on 2026 wound care revenue
- Clinical evidence generated for commercial payers
The lesson reaches beyond wound care: a product category whose Medicare spending grows quickly while comparative evidence stays thin can draw a payment change that resets its economics in a single rule cycle.
Questions Investors Should Ask
When evaluating a wound care company in this environment:
- What is the Medicare revenue exposure by setting (physician office and hospital outpatient), and how has it changed since January 2026?
- What clinical evidence exists differentiating this product from lower-cost alternatives?
- What is the company's site-of-service and payer diversification?
- How dependent is the business model on ASP-based reimbursement vs. contracted rates?
- What is each product's FDA regulatory pathway, and which 2026 payment category does it fall into?
- What does the balance sheet look like under the new payment rate?
References
- CMS. "CMS Modernizes Payment Accuracy and Significantly Cuts Spending Waste." Press release, October 31, 2025. cms.gov
- CMS. Fact sheet on the withdrawal of final Local Coverage Determinations for certain skin substitutes. December 24, 2025. cms.gov
- CMS. "Calendar Year (CY) 2027 Medicare Physician Fee Schedule Proposed Rule." Fact sheet, July 14, 2026. cms.gov
- HMP Global Learning Network (Wounds). "How the OPPS and ASC Proposed Rule Would Change Payment Rates for Wound Care." July 10, 2026. hmpgloballearningnetwork.com
- Reed Smith. "CMS reclassifies certain skin substitutes and dramatically cuts payment under Medicare Part B." November 20, 2025. reedsmith.com
- HCH Lawyers. "CMS Fundamentally Restructures Skin Substitute Payment: Key Takeaways for Dermatologists, Wound Care Specialists." December 9, 2025. hchlawyers.com
- Applied Policy. "Skin Substitutes in Medicare: Trends, Challenges, and CMS's Policy Response." December 29, 2025. appliedpolicy.com
- Wound Care Advantage. "Medicare's 2026 Rule Shakes Up Wound Care Payments — What You Need to Know." December 1, 2025, updated December 24, 2025. thewca.com
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