Medicare skin substitute reimbursement changes have raised provider risks

A formerly high-revenue healthcare service has been diminished on several fronts in 2026.

Medicare Part B spending on skin substitutes increased by 640% between 2022 and 2024, reaching nearly $3 billion per quarter, according to a government report. Steps taken by CMS and policymakers to counter that trend include an overhauled payment system and an increased focus on finding fraud, waste and abuse.

The crackdown on perceived excess spending on skin substitutes manifested last month in the latest “healthcare fraud takedown.” As part of the sprawling enforcement action, the Trump administration charged 11 wound care clinicians across six districts.

Fraud in wound-care products often stems from kickback schemes involving medically unnecessary care, according to the administration.

“The Health Care Fraud Unit’s Data Analytics Team detected a spike in payment for allografts, leading to prosecutions,” states the administration’s report on the takedown.

Increasingly sophisticated enforcement tools promote scrutiny.

“[AI] tools are just more refined and can help identify potential outliers and issues,” said Denise Barnes, formerly a trial attorney with the U.S. Department of Justice and currently a member at the law firm of Bass, Berry & Sims.

“Anecdotally, I’ve heard that CMS has been more aggressive in payment suspensions, using them more affirmatively. I think we can expect the use of data analytics and AI to identify what CMS views as potential practitioners, providers and hospital systems that are likely engaging in fraud.”

CMS changes how Medicare pays for skin substitutes

Concerns about payment inflation with respect to skin substitutes also spurred CMS to overhaul Medicare reimbursement for the products going into 2026.

In prior years, Medicare generally reimbursed skin substitutes furnished in physician offices as biological products at average sales price plus 6%. In hospital outpatient departments (HOPDs), the products were packaged into payment for the associated procedures, which CMS divided into high-cost and low-cost ambulatory payment classifications (APCs).

Beginning in 2026, CMS pays for skin substitutes as incident-to supplies and has created three separately payable APCs for HOPDs. Across settings, the 2026 rates are roughly $127 per square centimeter. The agency estimated a $19.6 billion reduction in gross Medicare fee-for-service spending on skin substitute services this year and has proposed maintaining the rate for 2027.

“What’s happening here also is that the agency is getting in front of what they think might be a source of fraud,” Barnes said. “A driver of that might be incentivized by the way in which things are reimbursed. That’s what it looks like they’re assuming.”

Manufacturers brought litigation challenging the reimbursement changes, but the case was dismissed when the judge ruled that the plaintiffs first needed to exhaust their options under administrative review. The case since has been refiled.

There’s been some whiplash in payment policy around skin substitutes. Among other developments, local coverage determinations (LCDs) were slated to be implemented by Jan. 1, 2026, before the administration withdrew them in late December.

The coordinated set of LCDs would have established more uniform criteria. The withdrawal left in place a patchwork of policies under which coverage criteria are assessed on a claim-by-claim basis.

“Providers have a lot of angst about how this has been handled,” Barnes said.

Medicare audits expose providers to substantial recoupments

Reimbursement issues around skin substitutes do not all rise to the level of fraud. In the last 18 to 24 months, Medicare began contacting physicians about previously paid claims to investigate whether those had been paid correctly.

Recovery audit contractors and unified program integrity contractors have been reviewing claims for issues such as medical necessity, treatment frequency, wound-care documentation, product acquisition records and billing accuracy.

Some of the reviews reach back several years, and recoupment actions have resulted, according to attorneys representing wound care practices.

“With the providers we have who are facing millions to tens of millions of dollars in recoupment efforts from Medicare, that’s a primary focus,” said Kristin Bohl, formerly a technical advisor at CMS and currently a member at Bass, Berry & Sims.

“At the same time they’re working to change their current and future practice to be compliant and figure out what products are still available and that they can use for patients, to continue to provide the kind of care that they were seeking to provide with these products. Is it necessarily with the skin substitutes still, or alternative wound dressings and treatments?”

The trade association for wound care practices issued a bulletin earlier this year in which it wrote that “extrapolation methodologies have multiplied alleged overpayments far beyond the original audit sample.”

“In at least one reported instance, a provider’s Medicare billing privileges were revoked on the basis of three claims, all of which were under timely appeal,” states the bulletin by the American Professional Wound Care Association, adding that practices have had to cease operating because of the revenue loss.

What healthcare finance leaders should know

The increasing constraints on skin substitutes can be viewed as part of a broader Medicare trend. In 2026 and 2027, CMS also is taking steps such as slashing reimbursement for 340B drugs and expanding site-neutral payment.

“This is a piece of a larger puzzle in the government’s attempt to, in my view, limit Medicare Part B spending, especially in areas that it has increased substantially,” Barnes said.

In an environment where payment for skin substitutes is at risk, providers should ensure they have the wherewithal to act quickly if they are exposed to fraud allegations or recoupment.

“You have such a short period of time to respond, and you don’t have a million bites at the apple,” Barnes said. “It’s really important to provide a very comprehensive response in the first instance, rather than to have to back into a more comprehensive response later. That might be intuitive, but you might be surprised how often that does not happen.

“It’s really important to understand that a payment suspension can have a huge impact, especially given the fact that CMS is using this more frequently, in a more affirmative way and aggressive way.”