The Centers for Medicare & Medicaid Services (CMS) on April 11, 2025, issued the proposed fiscal year (FY) 2026 Medicare Hospital Inpatient Prospective Payment System (IPPS) and Long-Term Acute Care Hospital (LTCH) Rule (CMS-1833-P). The proposed rule includes a range of significant policy changes that are expected to affect hospital financial performance and administrative procedures starting Oct. 1, 2025. Stakeholder comments on the IPPS proposed rule are due no later than 5 p.m. ET on June 10, 2025. A final rule is expected around Aug. 1, 2025.
Key Takeaways
Hospital Payment Updates: CMS' FY 2026 Medicare IPPS Proposed Rule will increase payments to acute care hospitals overall by 2.4 percent from FY 2025, amounting to an estimated $4 billion increase in reimbursement. This update is based on a hospital market basket increase of 3.2 percent and a 0.8 percent reduction for total factor productivity. Although the published payment update for FY 2026 is 2.4 percent, additional policy changes result in an overall average increase in inpatient payments of just over 3 percent. The proposed 2.4 percent update will likely rise by the time CMS finalizes the rates later this year.
Uncompensated Care: The total proposed uncompensated care payment to eligible disproportionate share hospitals (DSHs) for FY 2026 is $7.29 billion, reflecting a $1.5 billion increase over the $5.78 billion finalized for FY 2025.
Graduate Medical Education (GME): CMS proposes technical changes to the calculation of full-time equivalent (FTE) resident counts, caps and three-year rolling averages for direct graduate medical education. CMS also proposes technical changes to the calculation of net nursing and allied health education costs.
Quality Program Updates: Modifications to existing quality reporting programs, including measure removals, Medicare Advantage (MA) integration, the phaseout of COVID-19 measures and updates to data submission processes.
New Technology Add-On Payments (NTAPs): CMS proposed to continue NTAP status for 26 products because they continue to meet the newness criteria required under this program. In addition, within the proposed rule CMS discusses new NTAP applications for 43 additional products. Among these applications, 29 were submitted under the alternative pathways for breakthrough devices and qualified infectious disease products (QIDP).
TEAM Model Revisions: CMS proposed several modifications to the forthcoming CMS Innovation Center TEAM framework, a mandatory payment model set to begin on Jan. 1, 2026. Key changes include limiting the deferment period for certain hospitals, replacing the Area Deprivation Index (ADI) with the Community Deprivation Index (CDI), adopting a 180-day lookback period and using Hierarchical Condition Categories (HCC) for risk adjustment, removing requirements for reporting health equity and health-related social needs data, and expanding the use of the Skilled Nursing Facility (SNF) three-day rule waiver, which will allow hospitals to discharge patients more quickly to SNFs.
Requests for Information (RFIs): In response to Executive Order 14219, CMS seeks feedback on ways to streamline regulations and reduce administrative burdens in the Medicare program. Responses must be submitted through a separate web-based form.
The rule also includes an RFI on the continued advancement to digital quality measurement and use of Health Level 7® Fast Healthcare Interoperability Resources® (FHIR®) standard. The agency specifically seeks comments on its anticipated approach to FHIR-based electronic clinical quality measure (eCQM) reporting in quality reporting programs and the potential use of FHIR-based patient assessment instrument reporting for inpatient psychiatric facilities.
Summary of Major Provisions
IPPS Payment Update Proposal and Labor Share Reduction: For FY 2026, CMS proposes a 2.4 percent increase in operating payment rates under the IPPS for general acute care hospitals that submit required quality data and demonstrate meaningful use of electronic health records (EHRs). This update reflects a projected 3.2 percent market basket increase, offset by a 0.8 percentage point productivity adjustment.
CMS also plans to rebase and revise the IPPS operating basket and capital market basket to a 2023 base year. As part of this update, CMS proposes a national labor-related share of 66 percent (a decrease from the labor share of 67.6 percent). A lower hospital labor share means that a slightly smaller portion of inpatient hospital payments will be adjusted based on the hospital wage index. Though the change is subtle, it may result in reduced payments for hospitals with higher wage index values, as a smaller share of their payment rates will reflect local labor costs.
Overall, CMS projects that total IPPS hospital payments will increase by approximately $4 billion in FY 2026. This includes an estimated $1.5 billion increase in Medicare uncompensated care payments for hospitals eligible for DSH adjustments. Payments for cases involving new medical technologies are also expected to grow by about $234 million, primarily due to the continued use of new technology add-on payments.
Finally, unless the U.S. Congress acts to extend them, the special payment adjustments for Medicare-Dependent Hospitals (MDHs) and low-volume hospitals will expire after Sept. 30, 2025. If renewed, these payments are projected to total approximately $500 million in FY 2026.
LTCH Prospective Payment System (PPS) Payment Rate Update Proposal: For FY 2026, CMS is proposing an annual update of 2.6 percent to the LTCH standard payment rate, which reflects a projected LTCH PPS market basket percentage increase of 3.4 percent, reduced by a 0.8 percentage point productivity adjustment. CMS expects LTCH PPS payments for discharges paid the LTCH standard payment rate to increase by approximately 2.2 percent, or $52 million, primarily due to the 2.6 percent annual update and a projected 0.3 percent decrease in high-cost outlier payments as a percentage of total LTCH PPS standard federal payment rate payments. CMS is proposing an increase to the LTCH outlier threshold for FY 2026, consistent with the increases in recent years. This increase is needed to ensure that estimated outlier payments are approximately 8 percent of total payments, as required by statute.
Discontinuation of Low Wage Index Hospital Policy: Under the FY 2020 IPPS/LTCH PPS final rule, CMS finalized a temporary policy to address wage index disparities affecting low-wage index hospitals. This policy increased wage indexes for hospitals with a wage index below the 25th percentile by half the difference between the hospital's wage index and the 25th percentile wage index. However, following a U.S. Court of Appeals for the District of Columbia decision that required CMS to vacate the policy, the agency issued an Interim Final Action with Comment as part of the FY 2025 IPPS final rule to outline its process for removing the adjustment.
For FY 2026 and beyond, CMS is officially discontinuing the low wage index hospital policy. In its place, the agency is proposing a budget-neutral, narrow transitional exception policy that would apply only to hospitals that benefitted from the FY 2024 policy. Under this proposal, if a hospital's wage index for FY 2026 decreases by more than 9.75 percent compared to its FY 2024 wage index, it would instead be paid as if its FY 2026 wage index were equal to 90.25 percent of the FY 2024 value. This transitional policy would be implemented in a budget-neutral manner through an adjustment to standardized rates across all hospitals.
Medicare Severity Diagnosis-Related Group (MS-DRG) Proposals: CMS proposes recalibrating the MS-DRG relative weights for FY 2026 using FY 2024 Medicare Provider Analysis and Review (MedPAR) claims data and FY 2023 Medicare cost reports. The methodology standardizes charges across 19 cost centers, excludes MA and certain nonqualifying claims, and adjusts for geographic and payment-related variations. CMS also continues its policy of resetting Present on Admission (POA) indicators to ensure accurate weight-setting and avoid skewed payment rates due to hospital-acquired conditions. To maintain consistency and accuracy, adjustments were made for transplant acquisition costs, statistical outliers and non-monotonicity in DRG severity levels (e.g., where the mean cost in the higher severity level is less than the mean cost in the lower severity level). Public comments are invited on these proposed updates and methodologies.
GME: CMS clarifies its existing policy for calculating FTE resident counts and caps for direct GME and indirect medical education (IME) payments, particularly for cost reporting periods other than 12 months. Though GME FTEs are prorated to reflect a 12-month equivalent using 365 or 366 days, IME FTEs are based on the actual number of days in the reporting period.
Additionally, CMS issued public notices of the closures of Wahiawa General Hospital in Hawaii and Carney Hospital in Massachusetts (on page 675), launching Rounds 24 and 25 of the Section 5506 GME slot redistribution process. Hospitals have 90 days from the notice to apply for available residency slots using the MEARIS system, with applications due by July 10, 2025.
Hospital-Acquired Condition Reduction Program (HACRP): The HACRP imposes payment penalties on hospitals that fall into the lowest-performing quartile nationwide based on six hospital-acquired condition quality measures. In the FY 2026 proposed rule, CMS includes routine updates to the calculation of the standardized infection ratio but does not propose any substantive policy changes to the HACRP.
Hospital Inpatient Quality Reporting (IQR) Program: The Hospital IQR Program aims to enhance healthcare quality through a pay-for-reporting model. Hospitals failing to meet program requirements face reductions in their Annual Payment Update under the IPPS. In this proposed rule, CMS proposes several significant adjustments to the IQR Program.
Modify Four Existing Measures
CMS is proposing modifications to four existing quality measures. For two measures, it includes MA patient cohort data and shortens performance period from three years to two years. This signals that CMS is moving toward broader integration of MA data into Medicare fee-for-service reimbursement systems.
- Risk-Standardized Complication Rate Following Elective Primary THA/TKA beginning with FY 2027 payment determination
- 30-Day, All-Cause, Risk-Standardized Mortality Rate Following Acute Ischemic Stroke Hospitalization beginning with FY 2027 payment determination
For two measures, it includes modifications to reporting requirements.
- Hybrid Hospital-Wide Readmission Rate for FY 2028 payment determination (reporting period of July 1, 2025-June 30, 2026)
- Hybrid Hospital-Wide All-Cause Risk Standardized Mortality Rate for FY 2028 payment determination (reporting period of July 1, 2025-June 30, 2026)
Remove Four Existing Measures for FY 2026 Payment Determination
All measures removals would begin with the calendar year (CY) 2024 reporting period/FY 2026 payment determination:
- Hospital Commitment to Health Equity
- Screening for Social Drivers of Health
- Screen Positive Rate for Social Drivers of Health
- COVID-19 Vaccination Coverage Among Healthcare Personnel
RFI on Measure Concepts Under Consideration
CMS is seeking feedback on well-being and nutrition measures for future potential inclusion in the program. Both requests cast a wide net for feedback, including potential assessments for sleep and physical activity, which CMS identifies as helping support nutritional status.
Other Proposed Changes and Removal of the COVID-19 Exclusion
Beginning in FY 2027, CMS removes the COVID-19 exclusion from all Hospital IQR measures with the conclusion of the COVID-19 public health emergency in 2023. CMS also proposes changes to the Form, Time, Manner and Timing of Hospital IQR data submission, along with a decrease in the Hybrid Measures core clinical data elements (CCDE) and linking variable submission thresholds beginning in FY 2028.
Hospital Readmissions Reduction Program (HRRP): In the HRRP, CMS applies up to a 3 percent payment reduction to hospitals based on their performance on six procedure-specific readmission measures. CMS proposed to make several modifications to the program:
- refining all six readmission measures to add MA patient data
- removing the COVID-19 patient denominator exclusion from measures
- reducing the applicable period from three years to two
- modifying the DRG payment ratios in the payment adjustment formula to include MA beneficiaries
- clarifying that CMS has the discretion to grant an extension to hospitals under the extraordinary circumstances exception (ECE)
- The inclusion of MA data in the HRRP, IQR Program and other quality reporting initiatives could have significant payment implications for many hospitals. This change may impact readmission rates, especially if a hospital's MA patient population differs meaningfully from its traditional Medicare population.
The Medicare Promoting Interoperability (PI) Program: CMS proposes maintaining the minimum EHR reporting period from any continuous 90-day period to the 180-day period established for CY 2024. Codifying this change is designed to provide stability for providers and their vendors to further develop and maintain their EHR systems. Additionally, to encourage additional security policies and efforts to modernize health infrastructure, CMS recommends modifications to the Security Risk Analysis and Safety Assurance Factors for EHR Resilience (SAFER) Guides measure, as well as adoption of an optional bonus measure for Public Health Reporting Using the Trusted Exchange Framework and Common Agreement (TEFCA). All measure changes would begin with the CY 2026 reporting period.
CMS also released an RFI on the Query of Prescription Drug Monitoring Program (PDMP) measure. CMS specifically requests feedback regarding the potential for transitioning this measure from attestation-based to performance-based, recommendations for alternative measures to assess utilization of PDMPs and solicits concepts for new PDMP-based measures. Any changes to this measure or the introduction of new measure(s) would be conducted through rulemaking.
PPS-Exempt Cancer Hospital Quality Reporting (PCHQR) Program: CMS proposes to remove the Hospital Commitment to Health Equity measure and two Social Drivers of Health measures citing provider burden, as well as begin publicly reporting program data on the Provider Data Catalog and Care Compare. All measure removals would be effective for the CY 2024 reporting period/FY 2026 program.
Extraordinary Circumstances Policy: CMS is proposing to codify its ECE policy, which allows hospitals to request relief from quality reporting requirements due to events beyond their control such as natural disasters or systemic data issues. Under the proposal, hospitals could continue using a single request form to seek exceptions across multiple programs (IQR, VBP, PCHQR, Hospital-Acquired Condition (HAC) Reduction). CMS would retain discretion to grant ECEs, including extensions or exemptions, and would respond in writing via email. Requests must be submitted within 30 days of the event, though CMS may grant relief at any time after the occurrence. The codification aims to clarify existing procedures without changing the current request process.
Transforming Episode Accountability Model (TEAM) Modifications: TEAM is a five-year, episode-based payment model that is mandatory for selected hospitals. The model will run from Jan. 1, 2026, to Dec. 31, 2030, and aims to improve patient experience from surgery through recovery by facilitating care coordination and transition. TEAM will test five surgical episodes, including coronary artery bypass graft surgery (CABG), lower extremity joint replacement (LEJR), major bowel procedure, surgical hip/femur fracture treatment (SHFFT) and spinal fusion. CMS announced hospitals selected for participation in September 2024. CMS estimates savings of $481 million to the Medicare program across the five performance years of the model. A key aspect of CMS' TEAM provision is the agency's decision to move forward with this Innovation Center model, even as it has recently discontinued several other Innovation Center payment models.
CMS proposed to take the following actions:
- limited deferment period for new hospitals
- Track 2 participation eligibility for hospitals currently designated as MDHs
- adding the Information Transfer Patient Reported Outcome-Based Performance Measure in Plan Year (PY) Three
- applying neutral quality measure score for hospitals with insufficient quality data
- methodology to construct target prices to account for coding changes
- reconstructing the normalization factor and prospective trend factor
- replace the ADI with the CDI
- use a 180-day lookback period and HCC for risk adjustment
- aligning date range used for episode attribution
- removing voluntary health equity plan submission and health-related social needs data reporting
- expanding use of the SNF three-day rule waiver, which will allow hospitals to discharge patients more quickly to SNFs
- removing the Decarbonization and Resilience Initiative
RFI on Deregulation: On Jan. 31, 2025, President Donald Trump signed Executive Order 14192, "Unleashing Prosperity Through Deregulation," outlining a policy goal to substantially reduce the cost of regulatory compliance to promote economic growth, national security and quality of life. In alignment with this directive, CMS includes an RFI in the proposed rule to gather public feedback on ways to simplify regulations and ease burdens for stakeholders in the Medicare program.
The RFI highlights long-standing concerns about overlapping and duplicative requirements – such as reporting obligations and Conditions of Participation (CoPs) – that may offer limited value while increasing compliance costs. CMS seeks feedback on how to streamline these rules, reduce unnecessary documentation and eliminate redundancy with state-level requirements or private insurer mandates. Responses must be submitted through a separate web-based form.
RFI on Digital Quality Improvement: CMS is seeking comment on continued advancements to digital quality measurement and use of Health Level 7® FHIR® standard. CMS is seeking comments on:
- the anticipated approach to FHIR-based eCQM reporting in quality reporting programs
- the potential use of FHIR-based patient assessment instrument reporting for inpatient psychiatric facilities
