The California Division of Workers’ Compensation (CA DWC) raised Physician Fee Schedule rates effective March 1, 2026. The agency increased the Conversion Factor used to calculate reimbursements by 5.78% (the largest single-period increase since 2014), bringing fee schedule rates to 155% of Medicare rates.

Sadly, physicians treating injured workers under Preferred Provider Organization (PPO) contracts won’t see much of this increase.

This is the predictable result of how PPO contracts keep reimbursements low by applying “lesser of” language to negate fee schedule increases. Every dollar California adds to the gap between fee schedule rates and Medicare rates benefits PPOs more than it benefits providers.

California employers pay rising premiums, which they believe fund medical care for injured workers. Instead, those dollars are often captured by PPOs, many of which are owned or controlled by private equity, leaving physicians underpaid to the point that treating injured workers is not financially justifiable.

How "Lesser of" Contracts Work (and Who They Work For)

PPO contracts typically cap provider reimbursement at the “lesser of” several options. The Prime Health Services PPO contract below is a perfect example. Under it, the provider receives the lesser of:

• 90% of the provider's billed charges
• 125% of the Medicare rate
• 90% of any applicable state fee schedule rate

Under this contract, the “lesser” amount is almost always 125% Medicare. As long as the California fee schedule rate exceeds that threshold (and at 155% of Medicare rates, it always does), the fee schedule rate is irrelevant to what the provider actually receives.

Other contracts are even worse. daisyBill has documented PPO contracts that cap payment at as low as 110% of Medicare. Because of contracts like these, when California raises its fee schedule, but Medicare stays flat, the physician's payment does not move. The PPO's discount margin simply grows wider.

The March 2026 fee schedule increase only continues this trend.

The CA DWC raised the Physician Fee Schedule Conversion Factor by 5.78%, from 48.79 to 51.6091. Over the same period, the Medicare Conversion Factor increased by just 3.26%, from 32.3465 to 33.4009. Here’s what that means for a provider under a "lesser of” contract that includes 125% Medicare:

*The Medicare Conversion Factor increased effective 1/1/2026; the CA fee schedule Conversion Factor increased effective 3/1/2026.

The fee schedule rate went up 5.78%. Yet, the physician's payment went up only 3.26%, tracking Medicare, not the fee schedule. The CA DWC's increase was, for this provider, a fiction.

What happened to the difference? PPOs profit by cutting provider reimbursement rates down from fee schedule rates. The higher the fee schedule rates, the more they can cut. The spread between the fee schedule rate and the capped payment grew from 3.48 to 4.70: a 35% increase in the PPO's discount margin.

California didn’t give physicians a 5.78% raise. They gave PPOs wider discount margins to profit from.

Prime Health EOR Example

Below is an Explanation of Review issued under the Prime Health Services contract above. Tristar Risk Management paid 125% of the Medicare rate (the "lesser of" the three contractual options) for services the provider billed at the California Physician Fee Schedule rate.

The final reimbursement equals 83% of the fee schedule amount.

125% of Medicare is a far cry from the 155% of Medicare that the Physician Fee Schedule establishes. That gap is the inevitable result of a contract structure that converts every increase in state fee schedules into PPO revenue.

Compounding this problem, many physicians don't know it is happening.

PPO contracts are dense, and the "lesser of" language is rarely highlighted. Providers who may believe they are receiving a percentage of the California fee schedule rates are, in reality, receiving a percentage of Medicare rates. The state fee schedule reimbursement is a ceiling no one reaches.

Worse, California has not established a mechanism for providers to dispute improper PPO reductions, leaving physicians vulnerable to discounts that no contract actually substantiates.

Until the scourge of PPO contracts is over, state fee schedule increases will continue to function as profit increases for PPOs, paid for by California employers, enjoyed by private equity, and invisible to the physicians who earn them.

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