On December 24, 2025, the Centers for Medicare & Medicaid Services announced that its Medicare Administrative Contractors would withdraw finalized Local Coverage Determinations (LCDs) for skin substitute grafts/cellular and tissue-based products for the treatment of diabetic foot ulcers and venous leg ulcers. The LCDs had been scheduled to take effect January 1, 2026. CMS has not withdrawn the skin substitute payment policy finalized in the CY 2026 Medicare Physician Fee Schedule.
This story has been updated to reflect this change.
The Calendar Year (CY) 2026 Medicare Physician Fee Schedule Final Rule includes a restructured payment approach for skin substitutes in the non-facility setting. The agency cited steep growth in Medicare spending for these products as the impetus for this reform. This analysis explores both the underlying spending trends and the changes CMS has finalized.
Background
Skin substitutes, the class of wound care products used when the body’s natural healing processes fail, include allografts (from human donors), xenografts (from species such as pigs or fish), synthetic materials, and tissue-engineered constructs embedded with living cells. They are used in burn treatment and certain reconstructive and dermatologic procedures. Skin substitutes are also used in the management of chronic wounds, including diabetic foot ulcers (DFUs) and venous leg ulcers (VLUs), when standard interventions have not produced sufficient improvement.
There are currently more than 75 skin substitute products on the market. Although many offer limited or variable evidence of clinical efficacy, their use accounted for more than 15 percent of total Medicare Part B drug spending in 2024. Between 2019 and 2024, annual Medicare Part B expenditures on these products grew from $256 million to more than $10 billion—a nearly forty-fold increase.
Three factors contributed to this growth in spending: an increase in the number of beneficiaries undergoing treatment with a skin substitute, an increase in the quantity of skin substitutes used per patient, and an increase in the cost per unit of the skin substitute. Notably, similar increases have not been observed in the Medicare Advantage (MA) program. The Department of Health and Human Services Office of Inspector General (HHS OIG) found that in the third quarter of 2024, total spending for skin substitutes in Medicare Advantage (MA) was $192 million—about 7 percent of the $2.9 billion spent under traditional Medicare during the same period. This contrast is particularly striking given that more than half of all Medicare beneficiaries are now enrolled in MA plans.
OIG also identified patterns suggesting that the existing reimbursement structure created opportunities for inappropriate or excessive billing. For more than a decade, Medicare’s payment rules for skin substitutes have varied by setting. In hospital outpatient departments, CMS has bundled skin substitutes into the payment for the graft application procedure, placing products into high-cost or low-cost tiers. In non-provider-based settings—including physician offices, patient homes, assisted living facilities, and skilled nursing facilities billed under Part B—the same products have typically been paid separately as if they were Part B drugs, at the average sales price (ASP) plus 6 percent.[1]
Providers using skin substitutes in non-facility settings have been able to profit from significant “spreads” between their acquisition costs and Medicare’s payment rates. This differential was even greater when Medicare relied on wholesale acquisition cost or invoice-based payments in the absence of ASP data.
In addition to this “gaming of the spread,” the OIG also found such problems as multiple claims submitted on the same date to stay below automated payment-denial thresholds, billing by clinicians in specialties unrelated to wound care, use of skin substitutes without prior conservative treatment, and discrepancies between manufacturer-reported sales volumes and units billed to Medicare. These irregularities allowed a small number of providers to generate millions of dollars in Part B payments with very few patients, raising “major concerns about fraud, waste, and abuse.”
In one high-profile case jointly investigated by the OIG, the FBI, and other federal agencies, a couple in Arizona ultimately pleaded guilty to orchestrating a $1.2 billion fraud scheme involving medically unnecessary wound grafts.
Reimbursement
Under previous iterations of the PFS, clinicians in non-facility settings billed separately for both the application procedure and the product. Critics argued that this structure created incentives to select higher-priced products in non-provider-based settings and contributed to rapid increases in Medicare spending. It also reinforced the perception that CMS’s reimbursement approach played a significant role in determining which skin substitute products were used.
The Consolidated Appropriations Act of 2021 requires manufacturers of drugs and biologicals—including skin substitutes billed under Part B—to submit ASP data to CMS. However, compliance among skin substitute manufacturers was uneven. A 2023 OIG investigation into skin substitutes found that nearly half of the relevant billing codes lacked the required pricing information, leaving CMS to rely on inflated benchmarks to determine payments.
Managing responsibilities
While there is variation in the strength of clinical evidence for individual skin substitute products, the broader product category offers a “reasonable and necessary” benefit when used to treat DFUs that do not respond to other treatment options. Their potential value in Medicare is underscored by statistics: diabetes affects more than 18 percent of Part B beneficiaries over age 65, and research indicates that approximately 6 percent of patients with diabetes will develop a DFU. Accordingly, CMS has worked to maintain access to skin substitutes as clinically necessary products while meeting its statutory responsibility to maintain program integrity and protect Medicare Trust Funds.
In November 2024, Noridian finalized a Local Coverage Determination (LCD) establishing new criteria for the use of skin substitute grafts and cellular and tissue–based products in treating DFUs and VLUs. Originally scheduled to take effect February 12, 2025, the LCD limited coverage to chronic ulcers that had not improved after at least four weeks of standard care and restricted payment to products supported by peer-reviewed evidence of clinical benefit. It also capped covered applications at eight per wound and required documentation of continued improvement for ongoing use.
CMS has proposed a restructured payment model under which most skin substitutes would be reclassified as “incident-to” supplies, with their cost incorporated into the practice expense component of the graft application procedure, eliminating separate product reimbursement in physician offices under Medicare Part B.
Implementation of these changes was halted after President Trump returned to office in January 2025 and initiated a general review of late Biden-era regulations. In April, CMS announced a second delay, specific to the LCDs for skin substitute grafts/cellular and tissue-based products for the treatment of diabetic foot ulcers and venous leg ulcers, citing the need for additional stakeholder engagement and further analysis of product classification.
In between these delays, President Trump criticized the policy change on social media, saying he would not support reforms that could “create more suffering and death” among patients with chronic wounds. The statement prompted speculation that the policy might be abandoned altogether. However, when the Department of Justice subsequently announced indictments for alleged fraud in skin substitute billing, it made clear that the category would remain under close scrutiny.
In July 2025, CMS included a revised skin substitute policy framework in the proposed CY 2026 PFS. Incorporating several elements first advanced under the Biden administration, the proposal emphasized program integrity concerns and cited evidence of waste, fraud, and abuse in the current system. An OIG report released prior to finalization found that Medicare spending on skin substitutes had increased by more than 640 percent over two years and accounted for over 15 percent of all Part B drug expenditures. The report also identified aberrant billing patterns, including unusually high-volume claims from clinicians in specialties not typically associated with the use of these products.
In finalizing the skin substitute policy for physician offices in the CY 2026 PFS final rule issued on October 31, 2025, CMS set reimbursement for most skin substitutes at $127.28 per square centimeter, effective January 1, 2026. The technical correction announced on November 26, 2025, CMS revised the rate to $127.14 per square centimeter based on updated utilization data and recalculated practice-expense inputs.
(While the restructured payment methodology finalized in the CY 2026 PFS remains scheduled to take effect, the updated LCDs will not be implemented following CMS’s December 2025 decision to withdraw the finalized coverage determinations. As a result, the coverage limitations outlined in the withdrawn LCDs—including requirements related to duration of standard care, documentation of clinical progress, vascular assessment, and evidentiary support—will not take effect on January 1, 2026. CMS has indicated that existing coverage policies will remain in place while the agency continues its review, even as payment reforms move forward to address concerns about utilization and program integrity.)
Stakeholder reactions have been divided. In a statement last month, the Alliance of Wound Care Stakeholders expressed support for the change, praising CMS for its “efforts to combat fraud, waste and abuse of these products and address the excessive spending that has made the current payment methodology unsustainable.” By contrast, the Medicare Access to Skin Substitutes—which represents manufacturers, processors, and distributors of skin substitutes—argues that the changes will put “patients at risk of infection, amputation, and death.”
According to CMS, the program changes will reduce fee-for-service spending on skin substitutes by more than $19 billion in 2026. The agency has stated that it will closely monitor utilization, claims patterns, and clinical outcomes following implementation.
This story was updated on December 29, 2025, to reflect changes in CMS policy announced December 24, 2025.
[1] Provider-based billing applies to services provided in a hospital or hospital facility. The hospital facility may be called an outpatient center, doctor’s office, or practice. Clinicians caring for patients in a provider-based facility are paid only for their professional services. Practice expenses, including supplies, support staff, and other overhead, are covered by the hospital which is reimbursed for those costs by Medicare.