This is the second in a series of blog posts designed to provide a deeper dive into the provisions of the 2025 Reconciliation Law (Informally called the One Big Beautiful Bill Act). An earlier installment discussed the impact of the law on reproductive rights and gender affirming care. This installment discusses the impact on the Medicare program.

Of the two primary Federal health care programs, Medicaid experienced the most significant changes in the final version of H.R. 1, the 2025 Reconciliation Law. But Medicare did not go unscathed. In fact, the impact to Medicare will be substantial—both in terms of the law’s express provisions and the broader implications regarding future Medicare payment levels.

What was carved out of the law during the Senate amendment process may be just as important as what was left in, as that Senate carve-out process reflects legislative changes to the Medicare program that were a high enough priority to make it into a House bill that passed by only a single vote, but were omitted from the Senate version for procedural reasons. The Reconciliation Law’s changes are designed to offset increased government costs associated with the Administration’s tax agenda. As a result, the cuts associated with those changes will result in reduced access to certain Medicare services.

In this post, the second in our series that dives deeply into the terms and impact of the Reconciliation Law, we will discuss both the textual and contextual impacts of the law on Medicare, starting with the provisions that actually made it into the law.

What is in the law?

Eligibility Restrictions for Certain Classes of Non-Citizens

The law changes eligibility for Medicare to exclude all but specifically enumerated classes of immigrants. Currently, any immigrant with legal status may purchase Medicare coverage if they otherwise qualify for participation in the program. Under the new law, Medicare enrollment eligibility narrows to only the following four categories:

• U.S. Citizens
• Lawful Permanent Residents (i.e., green card holders)
• Cuban or Haitian Entrants who qualify under Section 501(e) of the Refugee Education Assistance Act of 1980
• COFA migrants (citizens of Micronesia, the Marshall Islands and Palau who are permitted to live, work, and study in the United States without a green card or visa because of the Compacts of Free Association).

This change specifically excludes any immigrants who are in the country: (i) as a result of temporary protected status, (ii) seeking asylum, or (iii) as a result of other refugee status. For anyone who falls into these categories and is currently receiving Medicare coverage, their coverage will be terminated by January 4, 2027—18 months after the law was enacted.

Medicare Savings Program Rule Moratorium

The law places a decade-long moratorium on implementation of the Medicare Savings Program Eligibility Determination and Enrollment rule from September 2023 (88 Fed. Reg. 65230). State Medicaid agencies implement the Medicare Savings Program (MSP) to cover premiums and cost-sharing requirements for Medicare enrollees below certain income level thresholds that qualify for Medicaid coverage for their Medicare cost-sharing amounts.

The Centers for Medicare and Medicaid Services (CMS) designed this rule to streamline MSP eligibility requirements, to increase the availability of the programs, and to encourage low-income seniors to remain enrolled in Medicare and improve their access to care. Provisions of the rule took effect last fall, with the remainder of the rule scheduled to take effect in 2026. However, under the new Reconciliation Law, implementation is pushed back almost a decade until 2034.

This is a cost-saving measure.  Because many low-income Medicare beneficiaries who might otherwise access premium or cost-sharing assistance may not be able to do so under the freeze, those beneficiaries are less likely to seek services payable by the Medicare program, as they cannot make their cost-sharing and premium payments to access those services. This will also result in a corresponding reduction in Medicaid costs when less cost-sharing and premium assistance payments are needed.

Adjustments to the Medicare Physician Fee Schedule

The new law adds 2.5% to the conversion factor applicable in the 2026 Physician Fee Schedule. The conversion factor debate, including how much it should increase, is an ongoing problem for Medicare payment. For years, Congress has increased the conversion factor to make up for Medicare payment reductions caused by budget sequestration or to address inflation. Historically, Congress added these increases last minute or in descending scales by must-pass budget legislation.

This provision is no different. The 2.5% barely covers the required 2% reduction in Medicare payments caused by the mandatory Budget Control Act (BCA) sequestration that is applied annually to Medicare through 2032. As with past increases to the Medicare payment rate, this one will endure for only one year (i.e., calendar year 2026). CMS has already released its 2026 proposed rule for the Physician Fee Schedule and has included within it the new 2.5% increase for the conversion factor.

The conversion factor increase also reflects a change from the original House version of the bill, which presented a longer-term solution to the annual problem of Medicare payment reductions. Specifically, the conversion factor for 2026 would have increased by 75% of the projected increase in the Medicare Economic Index (MEI), which measures inflationary increases in medical practice costs and is set by the Department of Health and Human Services (HHS) annually. In addition to the 2026 increase, the House version would have increased the conversion factor by 10% of the MEI increase every year thereafter, removing the need to negotiate increases annually as part of Congress’ budgeting process.

The House version also would have eliminated the two-tier conversion factor system that is scheduled to take effect in 2026 and provide higher reimbursement for qualifying advanced alternative payment model (APM) participants. But that language did not survive during the Senate process and the APM conversion factor will be implemented in 2026 as planned. This is made clear by the inclusion of the APM conversion factor in the 2026 proposed rule for the Physician Fee Schedule.

Although the new law offers some payment stability in 2026, the long-term outlook for continued increases to the Physician Fee Schedule remains uncertain.

Potential Interaction With Statutory Pay-As-You-Go (PAYGO) Provisions

The above Physician Fee Schedule conversion factor analysis does not consider the Reconciliation Law’s impact on the deficit and what that means for further Medicare cuts in upcoming legislation. The BCA sequestration is not the only payment reduction Medicare providers face. The Statutory Pay-As-You-Go Act of 2010 (Statutory PAYGO Act) requires mandatory payment reductions of up to 4% across the board for all Medicare providers if a law that impacts Medicare increases the deficit over a certain threshold.

Medicare payment reductions were slated to be under 4% as a result of President Biden’s American Rescue Plan Act of 2021, which was also a Reconciliation law. However, in last year’s continuing resolution, Congress wiped the Statutory PAYGO scorecards clean, effectively eliminating the payment reduction limits created by the American Rescue Plan. Just like the American Rescue Plan, the Senate amendment to the 2025 Reconciliation Law  passed under special reconciliation procedures which remove the ability to waive the Statutory PAYGO requirements.

As a result, because the 2025 Reconciliation Law increases the deficit by trillions of dollars, it will trigger hundreds of billions of dollars in Statutory PAYGO sequestration over its 10-year life span. Any reduction to Medicare payments caused by this sequestration will be limited to 4%. So, starting in 2026, unless Congress acts to address the Statutory PAYGO issue, Medicare providers under the Physician Fee Schedule will see a total payment reduction of at least 3.5%, which reflects the combined sequestration reductions totaling 6% offset by the 2.5% increase in the conversion factor. Providers who are not paid under the Physician Fee Schedule could see the full 6% reduction starting in 2026 and the Physician Fee Schedule providers will join them in that reduction in 2027.

Orphan Drug Eligibility

The Reconciliation Law also addresses the Inflation Reduction Act’s Medicare Drug Negotiation Program (MDNP). The provision in the final law, which remained consistent in the House and Senate versions, expanded the definition of drugs excluded from the MDNP under the orphan drug designation. Instead of drugs that are only approved for one rare disease or condition, the exclusion will now be available to drugs that are approved for one or more rare disease or conditions.

Additionally, the law clarifies that the time a drug spends on the market as an orphan drug does not count toward the 7- or 11-year period required before a drug can be considered for the negotiation program.

This provision will allow a larger group of drugs to escape the negotiation program, and to do so for longer periods of time, so long as the drugs are available to treat rare diseases.

What is not in the law?

Pharmacy Benefit Manager Restrictions

It seems like every major “must-pass” piece of legislation that has come through Congress in the past five years has, at one point in its development, included restrictions or proposed regulation on the activities of Pharmacy Benefit Managers (PBMs). This law is no different. It emerged from the House with limits on PBM compensation and extensive reporting requirements proposed for PBM activities.

However, as with every other bill to date, these provisions were stripped out in the Senate. In this case, they were stripped out because they didn’t follow the Senate’s specific reconciliation rules. We could see the provisions resurrected in later appropriations bills.

Rural Emergency Hospital Expansion

Another provision included in the House version of the bill but stripped out of the Senate version would have allowed recently closed rural emergency hospitals to reopen and qualify for an increase in Medicare payments. Although the Senate removed this specific provision, it included a $50 billion rural health fund to support all rural health providers, including, but not limited to, rural emergency hospitals. However, this fund was designed largely to offset Medicaid cuts to rural communities, with half of the fund being paid out evenly to all states who apply with a “rural health transformation plan” and the rest of the fund’s allocation subject to HHS approval.

Because the Congressional debate around the Reconciliation Law’s Medicare provisions focused heavily on the law’s impact on rural health care providers, we could see additional provisions on rural emergency hospitals in later legislation, and HHS may focus its attention on opening additional rural emergency hospitals when considering how to award the rural health fund. As of the date of this post, the Senate continues to debate a proposal to double the rural health fund, allowing it to pay out until 2034.

What is Next?

As mentioned, there are currently legislative provisions in the works that might change some of the provisions in this Reconciliation Law. These attempts will have to clear a 60-vote threshold to pass the Senate however. So it is unclear whether there will be any additional changes to the law. They could be added to the 2026 appropriations bills that are currently making their way through Congress, but we won’t have clarity on that until later this fall.

Additionally, HHS now has to make sense of these laws in its annual rulemakings. That process has already begun with the release of a number of the proposed prospective payment rules and the 2026 Physician Fee Schedule.

Reed Smith will continue to follow the impacts of the Reconciliation Law on Medicare, as well as any future legislation or rulemaking as it impacts the Federal health care programs. If you have any questions about this, please do not hesitate to contact the authors of the post or your health care lawyers at Reed Smith.