On April 11, CMS released its fiscal year (FY) 2026 Inpatient Prospective Payment System (IPPS) proposed rule. If the proposed changes are finalized, CMS estimates hospital inpatient payments will increase by $4 billion nationally (3.4%) in FY 2026. In addition to anticipated payment updates, CMS proposes refinements to the mandatory Transforming Episode Accountability Model (TEAM), which begins on January 1, 2026 for more than 700 hospitals.
Below are takeaways from the proposed rule:
CMS proposes a net IPPS market basket update (MBU) of 2.4% (3.2% market basket percentage increase reduced by the 0.8% productivity adjustment) for hospitals that meet quality reporting and promoting interoperability requirements, and a capital update of 2.6%. The resulting base operating and capital rates are available here (pg. 1,238).
The proposed MBU is considerably lower than the Medicare Payment Advisory Commission (MedPAC)’s recommendation to Congress of 3.4% (current law MBU of 2.4% plus 1%). The nonpartisan advisory body believes an increase in Medicare payments to PPS hospitals is merited, given that even “relatively efficient” hospitals1 have negative Medicare margins.
It is worth noting the proposed MBU does not account for anticipated increases in supply costs due to tariffs. Healthcare organizations should consider strategies to mitigate the impact of tariffs on operating margins and patient access to care.
CMS confirms that TEAM will begin on January 1, 2026 for the hospitals in selected core-based statistical areas (CBSAs) and those Bundled Payments for Care Improvement Advanced (BPCI-A) and Comprehensive Care for Joint Replacement (CJR) participants that opted into the model. In the FY 2026 rule, CMS proposes the following modifications to TEAM:
- Target Price Setting: The proposed rule revises the definitions of the prospective trend and final normalization factor, clarifies normalization factors are calculated before trend and discount factors are added in, reconstructs the prospective trend factor to use a linear regression model and changes certain inputs, modifies the method for calculating high-cost outlier caps in base years, and replaces the Area Deprivation Index with the Community Deprivation Index.
- Risk Adjustment: CMS proposes expanding the diagnoses lookback period to 180 days (from 90 in the FY 2025 IPPS proposed rule) and moves to Hierarchical Condition Categories (HCC) model version 28 for beneficiary risk adjustment.
- Episode Attribution: The proposed rule aligns the date range used for episode attribution. Episodes will be assigned to a baseline year based on the anchor hospitalization/anchor procedure end date, i.e., discharge date, rather than the date of admission. This change was proposed to align with the performance year attribution methodology.
- Quality Measures: Beginning in the third performance year of TEAM (2028), CMS adds the Information Transfer Patient-Reported Outcome-Based Performance Measure (PRO-PM). This will not require new reporting, as the measure is included in the Outpatient Quality Reporting Program beginning in 2027.
- Low Episode Volume Hospitals: CMS continues to seek feedback on exclusion thresholds for low-volume hospitals. If finalized, CMS would also assign a neutral quality score when a hospital lacks or has an incomplete raw quality score for a given quality measure.
Selected hospitals should consider preparations for TEAM by utilizing Medicare claims data to develop a current state assessment of their performance in the model and developing an implementation strategy aimed at capturing opportunities for improvement in patient outcomes and performance.
CMS proposes increasing the UC DSH dollars available for distribution to qualifying hospitals by $1.5 billion in 2026 compared to the FY 2025 IPPS final rule. CMS projects the CY 2026 uninsured rate will increase by one percentage point from 7.7% in CY 2025 to 8.7%, for a composite FY 2026 uninsured rate of 8.5%. While the payment increase is welcome, CMS may be under-projecting the increase in the uninsured rate due to factors including enhanced health insurance exchange subsidies expiring on December 31, 2025, anticipated provisions in the reconciliation package to extend the Tax Cuts and Jobs Act that could negatively impact Medicaid enrollment, and the Department of Homeland Security potentially redefining “public charge” to include non-cash benefits like Medicaid.
For FY 2026, CMS proposes continuing to use the same methodology and data sources (three years of audited cost reports—FYs 2020, 2021, and 2022) to calculate Factor 3 in the UC DSH formula. Factor 3 is used to distribute dollars available in the UC pool to eligible hospitals. Given CMS’ likely under-projection of the UC DSH pool, it is incumbent on DSH hospitals to capture all eligible UC costs on Worksheet S-10. An in-depth understanding of the exhibit requirements, which became effective for cost reports filed on or after October 1, 2022, is imperative to receive your hospital’s share of these funds.
The FY 2026 wage index and occupational mix adjustment is based on FY 2022 data collected from Worksheet S-3.
- Rebasing Labor-Related Share (LRS): CMS proposes rebasing the LRS, resulting in a decrease from 67.6% in the 2025 final rule to 66.0% in 2026. The downward revision to the LRS is primarily the result of incorporating the more recent 2023 Medicare cost report data for wages and salaries, employee benefits, and contract labor costs.
- Rural Floor Calculation: Based on reclassifications submitted by the deadline for the proposed rule, CMS estimates that 565 hospitals will receive their state’s rural floor wage index value in FY 2026. CMS must receive requests to withdraw an approved Medicare Geographic Classification Review Board (MGCRB) reclassification within 45 days from the date the proposed rule is posted for public inspection (May 26, 2025). With this in mind, it is possible the number of hospitals receiving the rural floor could increase, which would impact both wage index values and budget neutrality adjustments.
- Low Wage Index Policy Terminated: Following the D.C. Circuit’s decision in Bridgeport Hosp. v. Becerra, CMS proposes discontinuing the low wage index hospital policy for FY 2026 and subsequent years. The agency will no longer apply a low wage index budget neutrality factor to the standardized amounts. However, like in the FY 2025 interim final rule, CMS proposes a transitional policy for low wage index hospitals significantly impacted by the discontinuation of the policy. If finalized, this policy would be implemented in a budget neutral manner.
Under the proposed transitional policy, for those benefitting from the FY 2024 low wage index hospital policy, CMS will compare the hospital’s proposed FY 2026 wage index to the hospital’s FY 2024 wage index. If the proposed FY 2026 wage index is more than 9.75% lower than the FY 2024 wage index, then the proposed transitional payment exception for FY 2026 would equal the additional FY 2026 amount the hospital would be paid if its FY 2026 wage index were equal to 90.25% of its FY 2024 wage index. This proposed transitional payment exception would be applied after the application of the 5% cap.
The proposed rule reminds hospitals receiving the LVA that unless Congress acts to extend the current eligibility criteria and payment mechanism, it will revert on October 1, 2025 to the statutory requirements in effect prior to the Affordable Care Act (ACA). Below is a summary of the criteria and payment mechanisms for FY 2025 and FY 2026.
LVA Qualifying Criteria & Payment Adjustment for FY 2019 & Subsequent Years2
| Fiscal Years | Road Miles | Total Discharges | Payment Adjustment |
|---|---|---|---|
| 2019 through 2025 | >15 | <= 500 | 0.25 |
| > 500 < 3,800 | 0.25 - [0.25/3300] x (number of total discharges - 500) = (95/330) - (number of total discharges/13,200) | ||
| 2026 and subsequent years | >25 | < 200 | 0.25 |
The proposed rule reminds hospitals that, by statute, MDH status expires for discharges occurring on or after September 30, 2025, unless Congress passes another extension before FY 2026 begins.
CMS proposes a fixed loss acute outlier threshold of $44,305 for FY 2026. This is lower than the FY 2025 final rule threshold of $46,217 (decrease of 4%). The decrease in the threshold will result in an increase in outlier payments relative to FY 2024.
The proposed rule “restates and clarifies” CMS policies related to full-time equivalent counts and caps for cost reporting periods other than 12 months.
CMS also announces the redistribution of FTE resident caps from the recently closed Wahiawa General Hospital in Hawaii and Carney Hospital in Massachusetts. By statute, priority is given to hospitals located in the same core-based statistical area (CBSA), in a contiguous CBSA, or in the same state as the closed hospital. To apply for slots, hospitals must use the Medicare Electronic Application Request Information System™ (MEARIS™). Submissions are due no later than July 10, 2025. Additional information is available here.
CMS proposes a net 2.6% payment update (3.4% market basket percentage increase reduced by the 0.8% productivity adjustment) for LTCHs. Based on all changes proposed, LTCH payments in FY 2026 will increase by $52 million (2.2%) compared to the FY 2025 final rule. CMS proposes a FY 2026 standard rate of $50,728.77 for LTCHs that meet reporting requirements, an increase from the current $49,383.26. CMS proposes an LTCH fixed loss outlier threshold of $91,247, a significant increase from $77,048 in the FY 2025 final rule.
CMS proposes removing four measures and modifying four measures in CY 2026 in the IQR program.
- Removals: As of the end of the 2024 reporting period, CMS proposes removing four measures related to health equity and COVID-19:
- Hospital Commitment to Health Equity
- COVID-19 Vaccination Coverage Among Health Care Personnel
- Screening for Social Drivers of Health
- Screen Positive Rate for Social Drivers of Health
- Modifications: CMS proposes to include Medicare Advantage (MA) data and shorten the measure application period for:
- Hospital-Level Risk-Standardized Complication Rate (RSCR) Following Elective Primary Total Hip Arthroplasty (THA) and/or Total Knee Arthroplasty (TKA)
- Hospital 30-Day, All-Cause, Risk-Standardized Mortality Rate (RSMR) Following Acute Ischemic Stroke Hospitalization with Claims-Based Risk Adjustment for Stroke Severity
For Hybrid Hospital-Wide Readmission (HWR) and Hybrid Hospital-Wide Mortality (HWM), CMS proposes lowering the submission thresholds to allow for up to two missing laboratory results and vital signs, reducing the core clinical data elements submission requirement to 70% or more of discharges, and reducing the submission requirement of linking variables to 70% or more of discharges.
CMS also proposes changes to the VBP program, removing the health equity adjustment from the scoring methodology and adjusting the Hospital-Level RSCR Following Elective Primary THA and/or TKA measure to align with the updates described above. CMS estimates the VBP program will redistribute approximately $1.7 billion in FY 2026.
CMS proposes the following changes to all six measures included in the HRRP:
- MA Data: Incorporate MA patient data into the calculation of HRRP measures and aggregate Medicare Severity Diagnosis-Related Group (MS-DRG) payments for excess readmissions.
- COVID-19 Exclusions: Remove COVID-19 risk adjustment and exclusions from readmission measure calculations.
- Applicable Period: Reduce the measure performance period from three to two years.
- Extraordinary Circumstances Exception (ECE) Policy: Clarify that CMS has the discretion to grant extensions of an ECE in response to a hospital’s request.
How Forvis Mazars Can Help
Our professionals at Forvis Mazars are committed to helping healthcare organizations achieve regulatory excellence by understanding and adapting to the impact of evolving Medicare payment policies. If you have questions about how changes proposed in the FY 2026 IPPS rule may affect your organization, please reach out to a professional on our team.