The Centers for Medicare & Medicaid Services (CMS) is fundamentally changing how it classifies and pays for most skin substitutes.
On October 31, CMS announced policy changes for skin substitute Medicare payments, effective on or after January 1, 2026. Currently, most skin substitutes are paid as if they are biologicals under the average sales price (ASP)-based payment methodology described in section 1847A of the Social Security Act. Going forward, most skin substitutes will now be classified as "incident-to supplies" for purposes of Medicare reimbursement.
This represents one of the most significant Medicare payment policy changes in recent years, with CMS projecting substantial savings while attempting to preserve access to clinically appropriate care.
Medicare Part B Spending on Skin Substitutes Has Exploded Since 2019
The scale of Medicare's skin substitute spending crisis is staggering. Part B spending exploded from $252 million in 2019 to over $10 billion in 2024 – a nearly 40-fold increase while patient volume only doubled.
CMS attributed this primarily to pricing increases and highlighted multiple problematic industry practices in its final rule, including:
- Manufacturers launching products at inflated prices
- Inappropriate use on vulnerable populations
- Concentration of abuse among a small number of outlier providers
In 2025 alone, the CMS fraud operations stopped nearly $185 million in improper payments to suspect providers billing for skin substitutes.
The New Medicare Payment Framework for Skin Substitutes
Under the new policy, CMS is establishing three payment categories based on FDA regulatory pathways:
1. 361 HCT/Ps (Human Cells, Tissues, and Cellular/Tissue-Based Products):
361 HCT/Ps are a subset of HCT/Ps that are regulated solely under section 361 of the Public Health Service Act and the regulations in 21 CFR 1271. Manufacturers must register these products in the electronic Human Cell and Tissue Establishment Registration System (eHCTERS). However, this is a self-determination process. These products do not require clinical trials prior to marketing, nor do they receive FDA approval for a specific treatment, prevention, or cure of a disease.
Most importantly, 361 HCT/Ps may only be used in a manner that is consistent with the product’s homologous use. According to FDA guidance, for example, the homologous use of amniotic membrane provides a physical covering for the protection of the wound; the homologous use of amniotic membrane does not include wound healing.
Note: The ASP-based payment methodology will be reserved for HCT/Ps that have undergone the rigorous FDA Biologics License Application (BLA) process under section 351 of the PHS Act. Section 351 and Section 361 of the PHS Act are two distinct regulatory frameworks. Section 351 biological products must seek FDA pre-marketing approval (using clinical studies to show safety and efficacy for the intended use), and are approved for use in preventing, treating, or curing a specific disease or condition.
2. 510(k) Cleared Devices:
When intended only to cover and protect a wound, to absorb exudate, and to maintain appropriate moisture balance within the wound, the FDA's Center for Devices and Radiological Health (CDRH) regulates wound dressings composed of natural biomaterials as medical devices. A 510(k) is a premarket submission made to the FDA to demonstrate that the device is substantially equivalent to a legally marketed device. At this time, wound dressings have not been 510(k) cleared by the FDA for use as wound treatment, promotion or acceleration of wound healing, or serving as a skin substitute.
3. PMA Approved Devices:
Premarket approval (PMA) is the most rigorous type of review of a medical device and generally is required for class III medical devices. Similar to BLA-approved wound care products, PMA-approved devices require demonstration of safety and efficacy for the intended use, which generally requires the performance of clinical studies. Compared to 510(k) devices, PMA-approved devices are generally intended to go beyond a simple wound cover to provide some type of direct treatment effect.
Uniform Rate for All Skin Substitute Products in 2026
For 2026, all three categories will receive the same payment rate of approximately $127.28 per square centimeter (before geographic adjustments). This represents a massive reduction from current ASP+6% rates.
CMS estimates this change will reduce gross fee-for-service program spending for skin substitute services by $19.6 billion in 2026 alone – nearly a 90% reduction in spending relative to current spending levels “without compromising patient access or quality of care.”
Payment Rates for 2027 and Beyond
CMS will set separate payment rates for the three FDA categories for 2027 and beyond. CMS chose to start with a single rate in 2026 to allow the market to stabilize under the new grouped payment system before setting differentiated rates.
All rates will be updated annually through rulemaking using ASP data when available, supplemented by Hospital Outpatient Prospective Payment System (OPPS) mean unit cost (MUC)when ASP is unavailable.
Site-Neutral and Unbundled Payments for Medicare Skin Substitute Reimbursement
While supplies are generally bundled into the payment of the service in both the physician office and hospital outpatient departments, for many years skin substitute products have been paid separately in the physician office setting. According to CMS, the vast majority of skin substitute use occurs in the physician office setting. CMS further states that ASP data for physician-office use has been inflated by the profiteering practices of certain skin substitute product manufacturers.
CMS’s new payment policy applies consistently across both physician office (non-facility) and hospital outpatient settings, ending the previous disparity between bundled hospital payments and separate physician office payments. Per CMS, this “empowers providers to choose the most clinically appropriate setting based on patient needs rather than financial incentives.”
For facilities, this means that CMS will discontinue the bundling of skin substitute payments will pay for skin substitutes separately from the application procedure.
Exception: Products Licensed Under Section 351 of the Public Health Service Act
Products licensed under section 351 of the Public Health Service Act will continue to be paid as biologicals under the ASP+6% methodology. It should be noted, however, that section 351 products are relatively rare in the wound care space due to the substantial regulatory burden.
Products with this licensure must undergo full clinical trials demonstrating safety and efficacy, comply with rigorous manufacturing controls, and meet post-market surveillance requirements.
Most skin substitute manufacturers have chosen less rigorous regulatory pathways that allow faster market entry with lower development costs.
The Bottom Line for Physicians and Wound Care Clinics
CMS is betting that market competition under a single price point for reimbursement will drive down prices for most skin substitute products while preserving access to clinically appropriate treatments.
Wound care practices will need to quickly adapt their clinical and business models to remain viable under this new payment structure.
Financial Assessment
Many physician groups have argued that the rates are too low to sustain services, especially for smaller practices and mobile units without hospital purchasing power. You may want to conduct an analysis of your practice's current skin substitute utilization and profitability and determine if you can continue offering these services under the new payment structure.
Note: The revised payment methodology does not change the conditions of reimbursement for skin substitutes. In response to complaints about price, CMS indicated that many practices are engaged in problematic practices and overutilization. Your obligation to comply with all conditions for reimbursement continues under the revised payment policy.
Prepare for Increased Oversight
CMS – and its contract auditors Qlarant and Novitas – are closely watching utilization patterns for signs of overuse, and practices should be prepared for potential audits.
Strengthen documentation of medical necessity:
- Ensure appropriate wound size documentation matches billed units;
- Avoid outlier utilization patterns that might trigger audits;
- Maintain thorough clinical justification for all applications; and
- Comply with Medicare billing requirements, including any applicable National Coverage Determinations (NCD) and Local Coverage Determinations (LCD).
Monitor Regulatory Developments
Stay current on regulatory updates, including final Local Coverage Determination (LCD) implementations that will become effective January 1, 2026. These LCDs will establish coverage criteria that must be met for reimbursement, making ongoing monitoring of policy changes critical for compliance.
Anticipate Rate Volatility
CMS has indicated that separate rates for the three FDA regulatory categories are expected by 2027, which could significantly impact product selection and reimbursement.
Practices should monitor proposed changes in future rulemaking cycles to stay ahead of potential adjustments.
Ready To Assess How These Changes May Affect Your Practice?
Contact Hendershot Cowart P.C. at (713) 528-8793 to schedule a consultation. We can discuss strategies for adapting to the new skin substitute payment structure while maintaining compliance and protecting your practice.