Medicare's skin substitute surge was a payment design failure

Medicare’s skin substitute surge was a payment design failure before it was a fraud story. According to CMS, Medicare Part B spending on skin substitutes, the sheets of processed tissue and synthetic material applied to chronic wounds, rose from $256 million in 2019 to more than $10 billion in 2024. Over a similar period, the number of patients receiving the products roughly doubled. Prices and volume per patient did the rest.

Fraud was part of it, and federal prosecutors have brought some of the largest health care fraud cases on record involving these products. But the conditions that made the fraud so lucrative were written into the payment rules. Manufacturers effectively set their own prices, and Medicare paid separately for every square centimeter applied. Coverage policies, meanwhile, lagged years behind the market. When CMS finally acted, it did not rely mainly on more audits. It changed how the products are paid.

This analysis traces how the spending grew and where it went. It also explains why Medicare Advantage saw so much less of it. The last sections cover the January 2026 changes and the lessons for anyone who designs or polices a payment system. The products themselves are not the villain. Used appropriately, skin substitutes can help wounds that have resisted everything else. The problem was a payment system that rewarded using more of them, and more expensive ones, regardless of the wound.

Key takeaways

• Spending grew about 40-fold from 2019 to 2024. CMS puts Part B skin substitute spending at $256 million in 2019 and more than $10 billion in 2024, more than 15% of all Part B drug spending that year, according to the HHS Office of Inspector General.
• Price and intensity drove it. Between early 2023 and late 2024, the number of patients rose 53%, while the average payment per unit rose 153%.
• The home was the hot spot. In the third quarter of 2024, patients treated at home were 28% of skin substitute patients and accounted for more than half of Part B spending.
• Medicare Advantage spent a fraction. In the same quarter, Medicare Advantage paid about $192 million for skin substitutes, compared with $2.9 billion in traditional Medicare Part B, despite covering more than half of beneficiaries.
• The 2026 fix is a payment change. Starting in January 2026, most skin substitutes are paid as supplies at a flat rate of $127.28 per square centimeter, which CMS expects to cut spending by nearly 90%.
• The lesson is speed. The warning signs were visible in claims data quarters before the payment rules changed.

How spending grew

For most of the last decade, skin substitutes were a modest line in Medicare’s budget. Physicians and other practitioners applied them to chronic wounds that had not healed with standard care, most often diabetic foot ulcers and venous leg ulcers. Medicare paid for each product separately as if it were a drug.

The growth came quickly and then accelerated. The OIG’s September 2025 data snapshot found that Part B spending rose from about $400 million a quarter at the start of 2023 to nearly $3 billion a quarter by the third quarter of 2024. In 2024 as a whole, Part B paid more than $10 billion for skin substitutes, over 15% of the $66 billion it spent on all Part B drugs.

From HHS OIG report OEI-BL-24-00420 (September 2025).

The pattern in that table is the first clue that this was not simply a story of more patients getting needed care. Patient counts grew, but units per patient and price per unit grew faster. Each patient was receiving more product, and each unit cost more.

The scale per patient is hard to absorb. The OIG counted about 24,000 Part B enrollees with a skin substitute claim in the third quarter of 2024, and Part B paid about $2.9 billion for skin substitutes in that quarter. By our calculation, that is roughly $120,000 per patient for the quarter.

The OIG’s conclusion was blunt. Skin substitutes, it wrote, “seem particularly vulnerable to questionable billing and fraud schemes,” and it called for urgent payment reform.

Why the payment rules made it possible

Several features of Medicare payment combined to make skin substitutes unusually profitable to use, and unusually easy to overuse.

Prices set by the seller. Outside hospitals and other institutions, including in physician offices and patients’ homes, Medicare paid for skin substitutes at 106% of each product’s average sales price, the same formula used for many Part B drugs. Average sales prices are reported by manufacturers. For a new product, payment can be based on the wholesale acquisition cost or invoice price until enough sales data exists. That gave manufacturers a way to launch new products at high prices and keep launching them.

Price reporting that was new and uneven. Many skin substitute makers did not participate in the Medicaid drug rebate program and, until a 2021 law extended the requirement starting in 2022, were not obligated to report average sales prices at all. The OIG reported in March 2023 that it had found significant gaps in manufacturer compliance with the new reporting requirement. A price formula is only as reliable as the prices reported into it.

A spread to share. When Medicare’s payment exceeds what a provider actually pays for a product, the difference is profit on every unit applied. The OIG identified these spreads, which reached hundreds of dollars per unit for some products, as a financial incentive that can make higher-priced products more attractive to providers.

Payment by the square centimeter. Skin substitutes are paid per unit of area. A larger graft means a larger payment, whether or not the wound needed it. CMS noted that prices could exceed $2,000 per square centimeter.

Separate payment in some settings but not others. Hospital outpatient payment has long bundled skin substitutes into the payment for the application procedure, which blunts the incentive to use more expensive products. Payment in physician offices and homes did not, so growth concentrated there.

Coverage policy that lagged the market. Medicare’s local coverage determinations for skin substitutes differed by region, and new, more detailed policies for diabetic foot ulcers and venous leg ulcers were delayed repeatedly. In December 2025, CMS announced that the contractors were withdrawing those policies shortly before they were due to take effect in January 2026, as the new payment approach took over.

None of these features was hidden. Each was a reasonable rule for a small, slow-moving product category. Together, in a market where new products could enter quickly, they created a payment that grew with every product launched and every extra square centimeter applied.

A payment rule that pays more for every extra square centimeter will eventually find the people who will apply every extra square centimeter.

Where the money went

Settings and products

The OIG’s data shows the growth concentrated where oversight was thinnest. In the third quarter of 2024, patients treated at home made up 28% of those with a paid Part B skin substitute claim but accounted for more than half of Part B spending. A typical patient treated at home received 134 units at $1,718 per unit. A typical patient treated in an office received 52 units at $1,099 per unit. The cost per patient at home was about 4 times the cost in an office.

From HHS OIG report OEI-BL-24-00420 (September 2025). Blank cells were not reported in this form.

At those figures, a typical home patient’s skin substitutes in that quarter came to roughly $230,000. Part B generally requires 20% coinsurance, so a bill that size reaches beyond Medicare itself. For many patients, the coinsurance falls to a supplemental insurer or to Medicaid. For others, it falls on the patients themselves.

Spending was also concentrated by product. The top 10 products accounted for 81% of Part B skin substitute spending in the first quarter of 2023, and individual products rose and fell quickly. Part B spending on a single product fell from $244 million in a quarter to about $1.2 million within a year, while another product reached $542 million in a single quarter. That churn is consistent with a market in which a product’s attraction depended heavily on its payment rate.

The OIG also described billing patterns that program integrity teams recognize. Some newly enrolled providers billed almost exclusively for skin substitutes. Other claims showed an application on a patient’s first visit, with no documented attempt at standard wound care.

The fraud cases

The criminal cases show what the payment rules allowed at the extreme. In January 2025, an Arizona couple pleaded guilty in a scheme that submitted more than $1.2 billion in false and fraudulent claims for amniotic wound grafts between November 2022 and May 2024. Federal and private insurers paid about $615 million. According to the Justice Department, the grafts were applied to elderly and terminally ill patients, including patients in hospice, and nurse practitioners were directed to “suspend their own medical judgment” and apply every graft ordered, including on wounds that had already healed.

In the national health care fraud takedown announced in June 2025, federal prosecutors in Arizona charged additional defendants in amniotic graft schemes. In one, defendants allegedly caused more than $1 billion in false claims, of which more than $600 million was paid, by targeting elderly Medicare patients, many of them in hospice care.

CMS reported that in 2025 its Fraud Defense Operations Center stopped nearly $185 million in improper payments to suspect providers billing for skin substitutes. That is a significant sum. It is also less than a tenth of what Part B was paying for these products in a single quarter of 2024.

The managed care contrast

The most striking comparison in the OIG’s data is between traditional Medicare and Medicare Advantage. Medicare Advantage covers more than half of Medicare beneficiaries, yet its skin substitute use was a small fraction of Part B’s.

From HHS OIG report OEI-BL-24-00420 (September 2025).

The price gap is large. Medicare Advantage paid about half as much per product. The patient gap is larger still. Traditional Medicare had more than 6 times as many patients with a skin substitute claim, even though it covers fewer beneficiaries. Pricing alone does not explain that.

The OIG did not attempt to explain the gap, and several factors could contribute. Medicare Advantage plans negotiate prices with providers and suppliers, and many use prior authorization for services like these. They are not bound to pay a product’s average sales price plus 6%. Their enrollees may also differ from traditional Medicare beneficiaries in ways that affect wound care.

The comparison does not prove that any one tool made the difference. It does show that the same products, in the same years, cost far less where a payer had the ability to set prices and review use before paying. That observation sits behind CMS’s decision to include skin and tissue substitutes in its WISeR model, which brings prior authorization to selected services in traditional Medicare in 6 states starting in January 2026. According to CMS’s provider fact sheet, the skin substitute portion of the model applies only in selected contractor jurisdictions and states with an active local coverage determination.

The 2026 fixes

The central change came in the calendar year 2026 physician fee schedule final rule, released in October 2025. CMS stopped treating most skin substitutes as biologicals for payment and began paying for them as supplies furnished incident to a physician’s service. According to a summary by Polsinelli, products in 3 FDA regulatory categories are paid at a single rate of $127.28 per square centimeter in 2026.

• Devices approved through premarket approval
• Devices cleared through 510(k)
• Tissue products regulated under section 361 of the Public Health Service Act

Biological products licensed under section 351 remain under the average sales price method.

CMS said it expects the change to reduce Medicare spending on these products by nearly 90%, and to reduce gross fee-for-service spending on skin substitute services by $19.6 billion in 2026.

The logic of the fix is worth noting. A flat rate removes the incentive to choose the most expensive product, because every product in a category pays the same. It also removes the manufacturer’s ability to raise Medicare’s payment by raising its own price. What it does not remove is the incentive to apply more square centimeters, which is why coverage criteria and clinical review still matter.

The change also reaches beyond traditional Medicare only where other payers follow it. Payers whose rates are tied to Medicare’s will see the new rate flow through. Payers that set their own rates for these products, including some state Medicaid programs and commercial plans, will not unless they change them. A scheme squeezed out of Part B can look for a payer that still pays the old way.

Lessons for program integrity

The skin substitute episode is unusually well documented, which makes it a useful case study for anyone who designs payment rules or watches claims.

• Watch price times volume, not either alone. Claim counts grew far less than spending. A monitoring program that tracked only the number of claims or patients would have seen a manageable trend while dollars per patient soared.
• Flag single-product entities. New providers whose billing is almost entirely one high-cost product are among the clearest signals in the OIG’s analysis.
• Watch site-of-service shifts. When a service moves into a setting with separate payment and less oversight, such as the home, the move itself is a signal worth investigating.
• Track spreads. When reported prices and payment rates diverge from what providers actually pay, the gap becomes an incentive. Payment integrity teams rarely see acquisition prices, but large price changes at product launch are visible in claims.
• Compare against other payers. A service whose cost per patient in one program is several times its cost in another program covering similar people deserves a closer look, even before anyone can explain the difference.
• Act in quarters, not years. Quarterly spending grew about 7-fold from the start of 2023 to the third quarter of 2024. Policy fixes that take several annual rulemaking cycles arrive after most of the money is gone.
• Move coverage and payment together. Detailed coverage criteria without payment reform leave the incentive in place. Payment reform without criteria leaves volume unchecked.

Where Redlake stands

We build tools health plans use in utilization review, and skin substitutes are a case where clinical criteria and payment integrity point the same way. Coverage policies generally expect standard wound care to be tried and documented first, and they expect the product size to fit the measured wound. Those are facts in the record. A review that checks them would catch a graft applied at the first visit, or a graft far larger than the wound it covers.

Our rules apply here as everywhere. A machine can say yes to a request whose record clearly meets the criteria. Only a person can say no. Every recommendation shows the criteria and the facts behind it, and every decision can be reconstructed. That matters for wound care in particular, because the patients involved are often elderly and seriously ill, and legitimate treatment can be urgent.

We also think the episode argues against treating fraud control as a downstream function. The most effective intervention in this story was a change to the payment rule. Review before payment, which Medicare Advantage plans could apply and traditional Medicare mostly could not, likely mattered too.

What to watch in 2026

• First-quarter claims. Whether Part B skin substitute spending falls as sharply as CMS projected once the flat rate takes effect, and whether volume per patient falls with it.
• Product reclassification. Whether manufacturers seek licensure under section 351, which keeps products under average sales price payment, and how CMS responds.
• Shifts to other products and payers. Whether the same billing patterns move to other separately paid products, or to payers that have not changed how they pay.
• WISeR results. How often requests for skin and tissue substitutes are affirmed in the model states, and what CMS reports about the model’s first year.
• Coverage policy. Whether CMS or its contractors propose new coverage criteria for skin substitutes after the withdrawal of the planned policies.

About this analysis

Basis. We reviewed the HHS OIG data snapshot on Part B skin substitute payment trends and CMS’s announcements on the 2026 physician fee schedule and the withdrawn coverage policies. We also used CMS’s WISeR provider fact sheet and Justice Department releases on the fraud cases. A law firm summary of the final payment rule supplied the product category details.

Data notes. The 2019 and 2024 spending figures are from CMS. The quarterly figures and the comparisons by setting and payer are from the OIG and refer to the periods stated. The 40-fold growth figure is our calculation from those numbers, as are the per-patient amounts. Figures from fraud cases are allegations unless the release describes a guilty plea or conviction.

Sources. CMS, calendar year 2026 physician fee schedule press release (October 2025). HHS OIG, OEI-BL-24-00420 (September 2025). CMS, fact sheet on skin substitute local coverage determinations (December 2025). CMS, WISeR provider fact sheet. US Department of Justice, Office of Public Affairs (January 2025). US Attorney’s Office, District of Arizona (June 2025). Polsinelli (November 2025).

Frequently asked questions

What are skin substitutes?

They are products, made from processed human or animal tissue or from synthetic materials, that are applied to chronic wounds such as diabetic foot ulcers and venous leg ulcers to support healing when standard wound care has not worked.

How much did Medicare spend on skin substitutes?

According to CMS, Medicare Part B spending rose from $256 million in 2019 to more than $10 billion in 2024. The OIG reported that Part B spending reached nearly $3 billion in the third quarter of 2024 alone.

What changed in 2026?

Under the calendar year 2026 physician fee schedule, most skin substitutes are paid as incident-to supplies at a flat rate of $127.28 per square centimeter instead of at 106% of each product’s average sales price. CMS expects spending to fall by nearly 90%.

Does Medicare still cover skin substitutes?

Yes, when they are reasonable and necessary for the patient’s wound. The 2026 change is to how Medicare pays for the products, not to whether it covers them. In the WISeR states and jurisdictions, some applications also need prior authorization.

Why did Medicare Advantage spend so much less?

The OIG did not determine the cause. Medicare Advantage plans negotiate prices and can require prior authorization. Their enrollees may also differ from traditional Medicare beneficiaries, and any of these factors could contribute.