CMS Proposes FY 2026 Medicare IPPS Rule with Payment and Quality Updates
The Centers for Medicare & Medicaid Services (CMS) released the proposed Fiscal Year (FY) 2026 Medicare Hospital Inpatient Prospective Payment System (IPPS) and Long-Term Acute Care Hospital (LTCH) Rule, which outlines several key payment and policy updates affecting hospital reimbursements and administrative procedures starting October 1, 2025.
Stakeholder comments on the proposed rule are due by June 10, 2025, with a final rule expected by early August. The rule proposes a 2.4% overall increase in payments to acute care hospitals, translating to an estimated $4 billion increase, driven by a 3.2% market basket increase offset by a 0.8% productivity adjustment. Additionally, uncompensated care payments to eligible disproportionate share hospitals (DSHs) are proposed to rise by $1.5 billion to $7.29 billion.
The rule includes technical updates to Graduate Medical Education (GME) funding methodologies and refinements to quality reporting programs, including the phase-out of COVID-19 specific measures and integration considerations for Medicare Advantage. The proposal maintains New Technology Add-On Payments (NTAPs) for 26 products and evaluates 43 new applications, including breakthrough devices and qualified infectious disease products. CMS plans modifications to the Innovation Center’s Transforming Episode Accountability Model (TEAM), with changes to risk adjustment, data collection, and the SNF three-day rule waiver to facilitate patient discharge. The IPPS operating payment area will see a rebasing to a 2023 base year, with a slight reduction in the national labor-related share from 67.6% to 66%, potentially affecting payments to hospitals with higher wage indices.
The rule also addresses the discontinuation of the Low Wage Index hospital policy, proposing a budget-neutral transitional exception for hospitals adversely affected. LTCH payment rates are set to increase by 2.6%, with adjustments to the outlier payment threshold to maintain statutory outlier payment levels around 8%. CMS proposes recalibrations to Medicare Severity Diagnosis-Related Group (MS-DRG) relative weights, using updated claims data and cost reports to ensure payment accuracy and address outliers and non-monotonicity.
The Hospital-Acquired Condition Reduction Program and Hospital Inpatient Quality Reporting (IQR) Program see updates in measure modifications, removals, and reporting changes. CMS seeks public comment on potential new measures addressing well-being and nutrition. The Hospital Readmissions Reduction Program includes modifications impacting payment penalties based on readmission measures.
The Medicare Promoting Interoperability Program’s reporting period remains stabilized at 180 days, with potential updates to security and public health reporting measures. A codification of the Extraordinary Circumstances Exception policy is proposed to allow hospitals relief from reporting requirements due to uncontrollable events. CMS also issued Requests for Information (RFIs) aimed at reducing regulatory burdens in Medicare and advancing digital quality measurement using the HL7 FHIR standard.
These updates collectively reflect CMS's strategic adjustments to hospital payment systems, quality enforcement, and administrative streamlining for FY 2026, impacting hospital financial management and compliance obligations.