The 2.5% Cut Nobody's Talking About, and What It Actually Means for Your Practice
Here’s a scenario playing out in orthopedic practices right now. A surgeon reviews Q1 numbers and notices something the practice manager already flagged: a drop in reimbursements on several of the most‑performed procedures.
“It’s that CMS efficiency adjustment. About 2.5% across the board on the non‑time‑based codes.”
And the natural next thought?
“I guess I’ll just have to add a few more cases to the schedule to make up the difference.”
This is the instinctive response when reimbursement drops. Revenue goes down, so volume goes up. It feels logical. And in many cases, it’s one of the most expensive ways to address the problem.
For context, in the 2026 Medicare Physician Fee Schedule, CMS introduced a 2.5% “efficiency adjustment” to work RVUs for many non‑time‑based services, which effectively reduces reimbursement on those services; time‑based services are treated differently, and commercial payer impact will vary by contract.
The Imaging Result
Let me frame this the way you would in a clinical setting. Think of the CMS reimbursement cut as an imaging result. The image itself (a roughly 2.5% reduction in per‑procedure revenue on many non‑time‑based orthopedic codes under Medicare) is the finding. But the finding isn’t the diagnosis.
Many surgeons will look at this result and treat the most obvious symptom: less revenue. The reflexive prescription? More procedures. More volume. More time in the OR.
But any experienced surgeon knows that treating a symptom without understanding the underlying condition leads to poor outcomes. The same is true financially when the only response to a reimbursement cut is “I’ll just do more.”
The Math That Makes “More Volume” Expensive
Let’s get specific with a simple hypothetical.
Suppose a surgeon is performing 400 procedures a year at an average reimbursement of $3,200. A 2.5% CMS efficiency adjustment would reduce per‑procedure revenue by $80.
Across 400 procedures, that would be a $32,000 reduction in annual revenue.
The instinct is to add cases. To replace $32,000 in lost revenue in this example, you’d need to add approximately 10 procedures at $3,200 each.
On the surface, that sounds straightforward. But here is where the math turns.
Those 10 additional procedures are not free. Each one carries marginal costs: OR time, anesthesia, surgical supplies, implant fees, staff hours, facility charges. In many high‑overhead surgical settings where fixed costs are already covered by existing caseload, these marginal costs can reasonably consume around 60% of the additional revenue.
Using that assumption, the 10 additional procedures generate $32,000 in gross revenue, but $19,200 goes right back out the door in marginal costs.
Net recovery in this example: $12,800.
You just worked perhaps 30 to 40 additional hours in the OR to recover roughly 40 cents on every dollar of revenue you lost.
And there is a cost that doesn’t show up in your accounting system: the time itself. Those are hours you could have spent with family, on continuing education, on practice development, or simply recovering from the physical toll of surgery. At surgeon income levels, your time is one of the most expensive inputs you have. Spending more of it to chase a diminishing return is the definition of working harder, not necessarily smarter.
The Response Nobody Considers First
Now compare that to a different approach.
Many orthopedic and surgical practices run overhead in the roughly 50%–60% of collections range, depending on practice model, payer mix, and ownership structure. For a practice collecting $1.6 million annually (our 400‑procedure hypothetical surgeon at $3,200 average), that’s somewhere in the neighborhood of $800K to $960K flowing out of the practice in overhead before the surgeon keeps a dollar.
In this example, a 2% reduction in overhead, applied across a $1.6M practice, would save $32,000.
That matches the size of the reimbursement loss. And importantly, it does so without any additional procedures, OR time, staff costs, or physical wear.
A 2% improvement may sound modest, but in practice structures like these, there are often opportunities in three broad categories that go unexamined:
Supply and vendor contracts
When was the last time your practice benchmarked its supply costs against peer practices? Implant pricing, surgical supplies, and office materials are often negotiable, and many practices have not revisited contracts in years. A modest percentage reduction in supply costs alone can, in some cases, recover tens of thousands of dollars annually for a typical orthopedic practice, depending on volume and case mix.
Staffing efficiency
This is not about cutting staff. Most practices that have grown over time carry staffing structures built for an earlier era of the practice. Aligning staffing ratios with current patient volume, reviewing scheduling workflows, and clarifying role allocation can sometimes reduce staffing overhead by a few percentage points without reducing quality of care.
Facility utilization
If you own your space or have a long‑term lease, are you using it efficiently? Unused operatory time, underutilized square footage, and energy costs all add up. For practices that own their building, a cost segregation study (which I discussed previously) may also, in some situations, accelerate depreciation deductions, creating potential tax benefits on top of the overhead reduction. Whether that makes sense depends on your tax status, ownership structure, and time horizon.
The concept is simple: in this hypothetical, a 2% overhead reduction is financially similar to adding roughly 25 procedures to your caseload, but without the marginal costs and time commitments that accompany additional cases.
The Highest‑Leverage Move: Income Flow Restructuring
Overhead optimization helps you get back to even. But there is a third response that many surgeons never consider, because it typically doesn’t come from the practice manager. It comes from a coordinated conversation with your financial and tax advisors.
When revenue per procedure drops, every dollar your practice earns becomes more valuable. That means the way those dollars flow from the practice entity to your personal balance sheet matters even more.
This is where the structural concepts from earlier discussions come into focus. If you are losing $32,000 in top‑line revenue in a year like this but your S‑Corp salary has not been reviewed for reasonable compensation and retirement‑plan design, your retirement plan is underfunded, or your entity structure is not being used in a tax‑efficient way, you can unintentionally compound the loss.
The reimbursement cut takes dollars off the top. A leaky structure can let additional dollars drain out the bottom through unnecessary tax, under‑utilized retirement plans, or inefficient entity design.
Conversely, if you use a moment like this to tighten the structure—recalibrating salary within IRS reasonable‑compensation standards, reviewing retirement plan and cash balance plan capacity, and making sure your entity and compensation mix are better positioned to keep more of every remaining dollar—you may be able to more than offset the revenue loss through improved structural efficiency, depending on your circumstances.
The reimbursement cut is real. How much of it you ultimately feel depends heavily on how well income flows from the practice to your personal balance sheet.
What the Cut Actually Reveals
Here is what I keep coming back to. The 2.5% efficiency adjustment is frustrating. Nobody wants to earn less per procedure. But the cut itself, while meaningful, is small enough that, for many well‑structured practices, it can often be absorbed without any change in surgical volume.
The surgeons who feel it most are usually the ones whose practices were already running close to the margin, with overhead unchecked, structures under‑optimized, and most of each revenue dollar committed before it ever reaches the surgeon’s pocket.
In that sense, a reimbursement cut can function like a diagnostic tool in its own right. It doesn’t just change how much you earn; it reveals how much of what you earn is being consumed by an inefficient structure.
And that revelation, while uncomfortable, is potentially valuable. Structural inefficiency is something you and your advisory team can work on. A CMS reimbursement policy is not.
The Prescription
You wouldn’t treat every fracture with the same approach. Complex pathology calls for a tailored treatment plan. The same principle applies here.
If a CMS cut is showing up in your numbers and your first thought is “I need to do more cases,” I’d encourage you to slow down and consider three responses, roughly in order of efficiency:
1 - Overhead optimization
Benchmark your practice’s overhead against peer data and your own history. Review supply contracts, staffing ratios, and facility costs. In the simple example above, a 2% reduction in overhead would recover the full $32K without any additional procedures. The actual opportunity in your practice may be higher or lower, but it is often more efficient to pull this lever first.
2 - Income flow restructuring
Review how practice income flows to your personal wealth. Is your S‑Corp salary being periodically reviewed for reasonable‑compensation standards and coordinated with retirement‑plan design? Are your retirement plans appropriately structured and funded? Is your entity and compensation mix structured as efficiently as possible for your situation, given current tax law and your time horizon?
3 - Volume adjustment
If the first two responses still leave a meaningful gap, then—and only then—consider adding cases. But do it with eyes open to the marginal economics: if an additional procedure carries high marginal costs and demands significant surgeon time, each incremental case may recover much less than its face‑value reimbursement.
The strongest response to external pressure is internal precision. You already practice that principle in the OR. It applies to your financial structure just as directly.
If nobody has looked at your practice overhead and income flow in coordination—not just one or the other, but both as a system—this may be the quarter to have that conversation with your advisory team. The reimbursement environment is unlikely to become more generous on its own. But your structure can almost always be examined and, where appropriate, improved.
Capably Yours,
Jared
Disclaimer
This article is for informational and educational purposes only and does not constitute investment, tax, or legal advice. It does not take into account the specific objectives, financial situation, or needs of any particular person. You should consult your own tax, legal, and investment professionals before acting on any information contained herein. Capable Wealth, a New York registered investment adviser, provides advisory services only where properly licensed or exempt from licensing.