The IPCI phase-out, explained

In the 2027 physician fee schedule, Medicare starts removing a long-standing adjustment called the indirect practice cost index (IPCI). It is one reason many dermatology codes pay less in 2027. This page explains what the IPCI was, what changes in 2027 and 2028, and what our tools do and don't show.

The short version

The IPCI adjusts only the practice expense part of a payment (the share for staff, rent, equipment and supplies), not the doctor's work part.
It goes away in two steps: half in 2027, and gone completely in 2028.
Medicare names dermatology as one of the specialties expected to lose the most. It puts that down mainly to the IPCI removal and the new modifier 25 cut.
A new 5% cap limits how much any code's practice expense can move in one year, so some changes will reach codes slowly, over several years.
The 2027 amounts on this site come straight from Medicare's 2027 files, so the first half of the phase-out is already in them. The site can't split out the IPCI's share; Medicare doesn't publish it separately.

How is a Medicare payment built?

Every code has three relative value units (RVUs). Each one is multiplied by a geographic index (GPCI) for your locality. The total is then multiplied by a national dollar amount, the conversion factor:

(Work RVU × work GPCI+ Practice expense RVU × PE GPCI+ Malpractice RVU × MP GPCI)× Conversion factor

Practice expense (PE) is split into two parts:

Direct costs Medicare can tie to a specific service: clinical staff minutes, supplies, and equipment time.
Indirect costs that can't be tied to one service: rent, front-desk and billing staff, utilities, IT, office overhead. Medicare spreads these across codes using a formula. The IPCI was one step in that formula.

What was the IPCI?

Since 2007, Medicare has used surveys of what each specialty spends on practice costs per hour of physician time (called "PE per hour" data). The main data come from 2007 or earlier. The IPCI used those surveys to rescale every code's indirect practice expense, so that each specialty's total came out roughly where the old surveys said it should be.

For a single code, the IPCI was a weighted average across the specialties that bill that code. So a code's indirect payment depended partly on who tends to bill it and what those specialties reported spending nearly twenty years ago. It did not depend only on what the service itself costs to provide.

Why is Medicare removing it?

Medicare gives three reasons in the final rule:

The survey data are close to twenty years old. Recent attempts to update them got low response rates and weren't randomly sampled, so Medicare chose not to adopt them.
The IPCI "privileges the historic survey data" over newer code-level cost information. That limited the effect of other improvements Medicare made to its cost inputs.
It produced "unpredictable and counterintuitive results that are not transparent to the public." One example: the 2026 change to facility payments shifted IPCI values between specialties in ways unrelated to their actual costs.

MedPAC (the commission that advises Congress on Medicare payment) supported the removal. Some commenters wanted Medicare to run a new cost survey first; Medicare declined.

What happens in 2027 and 2028?

2026 and earlierThe IPCI is fully applied to every code's indirect practice expense.
2027Half of the IPCI's effect is applied. In the rule's words, "only half of the measured variation in the IPCI will be applied."
2028"The IPCI will no longer be applied." Indirect practice expense is calculated without it.

Two other limits sit on top of the phase-out, so the full effect can take longer than two years to show up in a code's payment:

The 5% practice expense cap (new in 2027). A code's PE RVU can't rise or fall by more than 5% a year because of changes to how Medicare calculates practice expense. Medicare says that for codes with big swings, this "effectively serves to phase in those changes over many years." The cap doesn't apply to codes that were revalued, or to new and revised codes.
The 19% limit (long-standing, set by law). No existing code's total RVUs can drop by more than 19% in a single year; anything beyond that rolls into the next year.

So "gone in 2028" describes the formula. A code that loses a lot may keep losing a little each year after 2028 while the 5% cap releases the rest.

What else changed in practice expense for 2027?

In the same section of the rule, Medicare also changed how indirect costs are spread across codes. Before 2027, it used the larger of a code's work RVU and its clinical staff cost. For 2027 it uses the sum of both, for every code except 10-day and 90-day global codes.

Global period	Dermatology examples	2027 indirect cost method
Office visits (no global)	99213 office visit, 96910 UVB light treatment	New: sum of work and clinical staff
0-day	11102 shave biopsy, 11300–11301 shave removals, 17311 Mohs	New: sum of work and clinical staff
10-day	17000 and 17110 destruction, 11400 and 11600 excisions, 12031 layered closure	Unchanged: larger of the two
90-day	Larger flap and graft codes	Unchanged: larger of the two

Because of this, two codes that look alike can move in different directions in 2027 just because their global periods differ.

What does Medicare say about dermatology?

"Specialties that we estimate would see a significant decrease include dermatology, otolaryngology, orthopedic surgery, and hand surgery… These changes can largely be attributed to the proposed changes to modifier -25 and the proposal to remove the Indirect Practice Cost Index (IPCI) from the calculation of the PE RVUs, although the effects on PE are mitigated by the proposed PE stabilization adjustment." CY 2027 PFS final rule, 91 FR 71654

That is Medicare's specialty-wide average. What a given practice sees depends on which codes it bills and how often.

Is the IPCI why my 2027 rates are lower?

It's one of several reasons. Here's everything that changes between our 2026 and 2027 columns:

The conversion factor drops 2.31% ($33.4009 to $32.6286 for clinicians not in an Advanced APM). The 2.5% one-year boost Congress gave for 2026 expired. Then a 0.12% budget-neutrality cut and a 0.25% statutory update were applied. This hits every code equally.
Practice expense changes: the first half of the IPCI removal, the new indirect cost method above, and the 5% cap. These vary code by code.
Revaluations and other RVU changes to individual codes.
The expired work GPCI floor, in the 49 localities whose work index is below 1.0. Our rates page shows this one separately.
The modifier 25 same-day cut, only when an office visit and a 0-day procedure are billed on the same day. See the modifier 25 page and the visit calculator.

What do our tools show, and what don't they?

They show: the 2027 amounts Medicare published, with the first year of the IPCI phase-out and the 5% cap already applied by Medicare.
They don't show: how much of a code's change comes from the IPCI alone. Medicare runs all its practice expense changes at once and says it does "not typically publish disaggregated policy impacts."
They don't show 2028. 2028 payments depend on next year's rule: a new conversion factor, new revaluations and how the 5% cap plays out. We'll add 2028 once Medicare publishes it.

Where can I read the rule itself?

CY 2027 physician fee schedule final rule (Federal Register, November 9, 2026). The IPCI and the 5% cap are at 91 FR 71002–71006; dermatology's projected impact is at 91 FR 71654.
CMS fact sheet for the 2027 final rule (see "Practice Expense").
CMS physician fee schedule rule downloads, including the file that lists codes subject to the 5% cap.