On Friday, April 11, 2025, CMS issued its annual Hospital Inpatient Prospective Payment System (IPPS) and Long-Term Care Hospital (LTCH) Prospective Payment System (PPS) Proposed Rule for Fiscal Year (FY) 2026 (the Proposed Rule). In the Proposed Rule, CMS proposes to, among other things, update the IPPS and LTCH PPS payment rates, modify the hospital wage index, and adjust the nursing and allied health payment formula. Comments to the Proposed Rule must be submitted by June 10, 2025. This article provides an overview of the key proposals in the Proposed Rule.
Payment Rates Overview
Under the Proposed Rule, the proposed increase in operating payment rates for general acute care hospitals under the IPPS that successfully participate in the Hospital Inpatient Quality Reporting program and are meaningful electronic health record users would be 2.4 percent. This reflects a 3.2 percent projected increase in the hospital market basket update with a projected 0.8 percent productivity adjustment reduction. This also reflects CMS’s proposal to rebase and revise the IPPS operating market basket and IPPS capital market basket to reflect a 2023 base year (CMS last rebased the hospital market basket cost weights effective for FY 2022 with 2018 data used as the base period). Based on the proposed 2023-based IPPS market basket, CMS is also proposing a national labor-related share of 66 percent for the national standardized amounts for all IPPS hospitals that have a wage index value that is greater than 1.0000. The proposed labor-related share of 66 percent is 1.6 percentage points lower than the current labor-related share of 67.6 percent. The Proposed Rule states that CMS expects that these proposed changes will increase hospital payments under the IPPS by $4 billion.
Additionally, CMS is proposing to increase the LTCH standard payment rate by 2.6 percent and proposing that LTCH PPS payments for discharges paid to the LTCH standard payment rate are to increase by approximately 2.2 percent or $52 million.
Wage Index
CMS is proposing some modest changes to the hospital wage index for acute care hospitals. Of note, the Proposed Rule is discontinuing the low wage index hospital policy, updating the IPPS labor-related share, and updating the occupational mix adjusted national average hourly wage.
CMS implemented the low wage index hospital policy in the FY 2020 rulemaking, increasing the wage index values for some facilities whose values were particularly low. However, the Court of Appeals for the D.C. Circuit ordered CMS to vacate that policy in Bridgeport Hosp. v. Becerra, 108 F.4th 882 (D.C. Cir. 2024). Though CMS already removed the adjustment for FY 2025, CMS is now officially discontinuing the low wage index policy for FY 2026 and onwards as well.
Under the IPPS, a portion of each hospital’s compensation is paid according to the hospital’s area wage index. HHS then applies the IPPS labor-related share, an estimate of how much wages and wage-related costs contribute towards hospitals’ total costs. HHS last calculated this using FY 2018 wage index data and arrived at a labor-related share of 67.6 percent. Now, using FY 2023 data, CMS is proposing a marginally lower labor-related share of 66.0 percent.
One of the factors in CMS’s formula for compensating hospitals based on their wage expense is the base occupational mix adjusted national hourly wage. CMS indicated that it is not making any changes to its methodology for calculating this for FY 2026 but has arrived at an updated amount using new data; the FY 2026 proposed rule’s occupational mix adjusted national hourly wage is $57.60, a $2.87 increase over the FY 2025 final rule’s amount of $54.73.
Graduate Medical Education
Though HHS indicated that it is not currently proposing any changes to its methodology for counting FTEs, HHS did use the FY 2026 rulemaking to announce the closure of two teaching hospitals and the reallocation of their FTE cap slots pursuant to Section 5506 of the Affordable Care Act:
Hospitals interested in applying for these slots have until July 10, 2025 to submit applications through the Medicare Electronic Application Request Information System (MEARIS) for Round 24 (Wahiawa General – Wahiawa, HI) and Round 25 (Carney Hospital – Boston MA). Though hospitals anywhere in the country can apply, HHS uses a variety of factors to determine which hospitals receive priority during the reallocation. For example, HHS will typically prioritize hospitals in the same CBSAs, same state, and based on whatever particular specialties the applying hospitals are seeking to expand.
Uncompensated Care Payment
The Proposed Rule includes CMS’s calculation of the uncompensated care payment pool for FY 2026. The Affordable Care Act (ACA) modified the Medicare DSH payment formula to reduce DSH payments to hospitals by 75 percent. Each year, CMS is required to estimate the dollar amount by which the ACA has reduced Medicare DSH payments (Factor 1) and multiply that amount by a factor equal to 1 minus the percent change in the uninsured population since the ACA was implemented in 2013 (Factor 2). The resulting payment pool is distributed to hospitals based on their proportionate share of uncompensated care as reported in Worksheet S-10 of their cost reports.
For FY 2026, CMS has calculated a proposed Factor 1 of $11.761 billion, which is equal to CMS’s estimate of DSH payments hospitals would receive in FY 2026 but for the ACA changes ($15.682 billion) multiplied by 75 percent. By comparison, the Factor 1 CMS finalized in the FY 2025 final rule was $10.509 billion.
For Factor 2, CMS estimates that 8.85 percent of the population will be uninsured in FY 2026 compared to 14 percent when the ACA was implemented in 2013, for a percent change of 39.29 percent. Accordingly, for FY 2026 CMS has proposed a Factor 2 of 60.71 percent [1 – 39.29 percent]. By comparison, in FY 2025 CMS finalized a Factor 2 of 54.29 percent.
The product of proposed Factors 1 and 2 for FY 2026 would produce an uncompensated care pool of $7.140 billion. By comparison, the final uncompensated care pool for FY 2025 was $5.705 billion.
Changes to Nursing and Allied Health Payment Formula
In the Proposed Rule, CMS is proposing to change its regulatory formula for calculating the pass-through payment owed to hospitals for their nursing and allied health education (NAHE) programs. The Medicare program reimburses hospitals for the “net cost” incurred operating NAHE programs in recognition of the value that these programs bring to the healthcare workforce and Medicare beneficiaries. These payments are made on a pass-through basis, meaning they are paid outside of the prospective payment systems.
CMS has adopted a regulation for calculating the reimbursable net cost of a NAHE program. The starting point of that calculation is “total costs” that are “directly related to” the program, which consists of the direct costs of the program, such as trainee stipends and teacher salaries, and indirect program costs, including the additional overhead costs associated with operating a NAH program. Total costs are offset by tuition the hospital collects from students enrolled in the program. The remainder, if any, is the net cost of the program, which is the basis for Medicare payment. Thus, the regulatory formula for calculating the net costs of NAH programs can be expressed as follows:
total (direct + indirect) costs – tuition = net costs
In the Proposed Rule, CMS is proposing to change the order of operations in the payment formula. Instead of deducting tuition from total costs (i.e., the sum of direct and indirect costs), CMS proposes to deduct tuition from direct costs, and then add indirect costs to the remainder. The new payment formula would be as follows:
direct costs – tuition + indirect costs = net costs
When addition and subtraction are involved, changing the order of operations typically does not affect the result. But Medicare is different. The amount of indirect costs a NAHE program has incurred is determined in part by its direct costs. Under Medicare’s cost-finding principles, NAHE programs are apportioned administrative and general (A&G) costs based on the program’s proportionate share of direct costs relative to the other departments in the hospital. By offsetting the direct costs of NAHE programs by tuition, CMS’s proposal would put those programs at a disadvantage in the cost-finding process, because it would reduce their proportionate share of direct costs relative to the other departments in the hospital, resulting in a smaller share of A&G costs.
Despite the current language in the regulation, CMS has historically calculated NAHE payments using the formula it now proposes to codify. NAHE payments are calculated in the Medicare cost report. The current cost report instructions require hospitals to deduct tuition from direct costs before calculating indirect costs in the cost-finding process. CMS’s proposal would align the regulation with the cost report instructions.
CMS is proposing this change in direct response to the D.C. District Court’s decision in Mercy Health-St. Vincent Medical Center LLC v. Becerra, 717 F. Supp. 3d 33, 35 (D.D.C. 2024) (St. Vincent). In that case, several hospitals challenged CMS over the fact that the cost report did not calculate their NAHE payments in the manner required by the regulation. The court ruled that the text of the regulation says that CMS cannot deduct tuition until after determining a hospital’s total (direct and indirect) costs. “This order of operations comes straight from the regulation—one [CMS] devised, and one [CMS] must follow.” King & Spalding represented the plaintiffs in St. Vincent.
The Proposed Rule is available here, a CMS fact sheet is available here, and the MEARIS portal for submitting 5506 applications is accessible here. The Proposed Rule is scheduled to be published in the Federal Register on April 30, 2025. As stated above, comments are due by June 10, 2025.
