On April 11, 2025, CMS issued its fiscal year (FY) 2026 prospective payment system (PPS) proposed rules for inpatient rehabilitation facilities (IRFs) and inpatient psychiatric facilities (IPFs). The proposed changes are complex and multifaceted, and the impacted organizations will need to carefully model them to understand their impact on operating budgets and patient care. Below is a summary of key provisions in both rules.
Payment Updates for Inpatient Rehabilitation Facilities
CMS estimates payments to IRFs will increase by $295 million in FY 2026 as a result of all changes proposed in the rule, which include:
- IRF Market Basket Update (MBU) & Standard Payment Amount: The proposed FY 2026 IRF MBU is 2.6% (3.4% market basket percentage increase reduced by the 0.8% productivity adjustment). After applying the MBU and budget neutrality adjustment, CMS proposes a standard payment amount for IRFs of $19,364, which is approximately 2.4% greater than the FY 2025 IRF final rule ($18,907).
- Case Mix Group (CMG) Updates: CMS proposes updating the CMG weights using FY 2024 IRF claims and FY 2023 cost report data. CMS projects 99% of CMGs will experience less than a 5% change in relative value as a result of the update. The updated weights are listed in Table 2 (pg. 16) in the proposed rule, and the proposed payment amounts are listed in Table 6 (pg. 32).
- Fixed Loss Outlier Threshold: CMS proposes an IRF fixed loss outlier threshold of $11,971. This is a decrease from the FY 2025 threshold of $12,043, which will result in increased outlier payments.
- Wage Index: CMS proposes continuing the three-year budget-neutral phaseout of the rural adjustment for FY 2024 IRFs that are transitioning from rural to urban status in FY 2025 under the revised core-based statistical area (CBSA) delineations. Affected IRFs will receive the full FY 2026 wage index along with one-third of the FY 2024 rural adjustment. This step is part of a gradual reduction of the 14.9% rural adjustment over FYs 2025, 2026, and 2027. In addition, this policy does not apply to urban IRFs transitioning to rural status, as they will receive the full rural adjustment.
- CMS proposes continuing to use CBSAs for labor market area definitions, and the FY 2026 pre-reclassification and pre-floor hospital wage index is based on data submitted for FY 2022 acute hospital cost reports.
- CMS proposes an IRF labor-related share of 74.5% for FY 2026. This is up slightly from 74.4% in the 2025 IRF PPS final rule.
- Quality Reporting Program (IRF QRP): CMS proposes removing two measures from the IRF QRP:
- COVID-19 Vaccination Coverage Among Healthcare Personnel (HCP): If finalized, the removal would be effective for FY 2026. IRFs that did not report CY 2024 HCP COVID-19 vaccination data would not be penalized for FY 2026 payments.
- COVID-19 Vaccine: Percent of Patients/Residents Who Are Up to Date: If finalized, the measure would be removed for the FY 2028 IRF QRP. Beginning with patients discharged on or after October 1, 2025, IRFs would not be required to collect and submit the Patient/Resident COVID-19 Vaccine measure data to CMS.
- CMS also proposes removing the Patient/Resident COVID-19 Vaccine data item (O0350) from the IRF Patient Assessment Instrument (IRF-PAI) effective October 1, 2026. This item would become voluntary and IRFs would not be required to collect and submit Patient/Resident COVID-19 Vaccine data beginning with patients discharged on or after October 1, 2025.
- PAI Changes: CMS proposes to remove the four standardized patient assessment data elements finalized in the social determinants of health category in the FY 2025 rule. The items proposed for removal include Living Situation (R0310), Food (R0320A and R0320B), and Utilities (R0330). These items were originally finalized in the FY 2025 rule for patients discharged on or after October 1, 2026 through December 31, 2026 for purposes of the FY 2028 IRF QRP and each program year after.
In addition to the updates in the IRF PPS proposed rule, IRFs should pay attention to provisions in the Inpatient Prospective Payment System (IPPS) proposed rule related to the Transforming Episode Accountability Model (TEAM). This mandatory bundled payment model will begin on January 1, 2026 for more than 700 selected hospitals and will have a significant impact on IRFs and other post-acute care providers. To prepare for the model, IRFs should create a current state assessment based on claims data for the five high-volume surgical procedures included.
Payment Updates for Inpatient Psychiatric Facilities
CMS estimates payments to IPFs will increase by $70 million in FY 2026 as a result of all changes proposed in the rule, which include:
- IPF Market Basket Update: The proposed FY 2026 IPF MBU is 2.4% (3.2% market basket percentage increase reduced by the 0.8% productivity adjustment). After applying the MBU and budget neutrality adjustment, CMS proposes IPF per diem of $891.99, which is approximately 1.8% greater than the FY 2025 per diem of $876.53. CMS proposes an electroconvulsive therapy (ECT) payment per treatment of $673.19 in FY 2026, up from $661.52 in the FY 2025 final rule. The per diem/ECT payments for IPFs that did not meet quality reporting requirements are $874.57 and $660.04, respectively.
- Fixed Loss Outlier Threshold: CMS proposes increasing the IPF fixed dollar loss threshold amount from $38,110 in the FY 2025 final rule to $39,360. If finalized, the increased threshold will result in a decrease in outlier payments.
- Patient-Level Adjustments: In FY 2026, CMS proposes to use the same Medicare Severity Diagnosis-Related Group (MS-DRG) weights and patient age, patient comorbidity, and variable per diem adjustment factors as finalized for FY 2025.
- Wage Index: CMS proposes to continue using the concurrent pre-floor, pre-reclassified IPPS hospital wage index as the basis for the IPF wage index.
- CMS proposes an IPF labor-related share for FY 2026 of 78.9%. This is up slightly from 78.8% in the 2025 IPF PPS final rule. As in prior years, CMS proposes applying the IPF wage index adjustment to the labor-related share of the national IPF PPS base rate and ECT payment per treatment.
- Facility-Level Adjustments: CMS makes adjustments to claims payment for inpatient psychiatric services based on a variety of facility-specific factors. The IPF rule proposes updated cost-of-living adjusters for Alaska and Hawaii and will maintain the emergency department (ED) adjuster at 1.53. In the FY 2025 IPPS proposed rule, CMS solicited feedback on updating the regression analysis for the rural and teaching hospital adjusters. In this year’s rule, CMS proposes the following changes:
- Rural Location Adjustment: Increase the rural location adjustment to 18% in FY 2026. It was 17% in the FY 2025 final rule. In addition, in the FY 2025 final rule, CMS implemented a three-year budget-neutral phaseout of the rural adjustment for IPFs located in rural counties that became urban due to the new OMB delineations. In FY 2026, these IPFs will receive one-third of the rural adjustment that was applicable in FY 2024. For FY 2027, these IPFs will not receive a rural adjustment.
- Teaching Adjustment: Increase the teaching adjustment from 0.5150 in the FY 2025 final rule to 0.7981 in the FY 2026 rule. For FY 2026, CMS also proposes recognizing resident FTE cap increases awarded under Section 4122 of the Consolidated Appropriations Act. These resident FTE cap increases would align with current IPF PPS teaching regulations, which allow for increases to IPF resident FTE caps for a new approved graduate medical education program.
- Inpatient Psychiatric Facilities Quality Reporting Program (IPF QRP):CMS proposes modifying the IPF ED Visit measure to align it with similar measures and removing four other measures.
- IPF ED Visit Measure: CMS proposes changing the current one-year reporting period for the IPF ED Visit measure to a two-year period that would run from July 1, four years prior to the applicable FY payment determination, to June 30, two years prior to the applicable FY payment determination. This proposal would modify the first reporting period for the measure to the third quarter of CY 2025 through the second quarter of CY 2027 for the FY 2029 payment determination. If finalized, the reporting period for the IPF ED Visit measure would align with the IPF Unplanned Readmission measure.
- Facility Commitment to Health Equity (FCHE): CMS proposes removing the FCHE measure beginning with the FY 2026 payment determination.
- COVID–19 Vaccination Coverage Among Healthcare Personnel (HCP): CMS proposes removing the COVID–19 Vaccination Coverage Among HCP beginning with the CY 2024 reporting period/FY 2026 payment determination.
- Social Drivers of Health Screening Measures: CMS proposes removing the Screening for Social Drivers of Health measure (Screening for SDOH) and the Screen Positive Rate for Social Drivers of Health measure from the IPF QRP, beginning with the FY 2026 payment determination.
If CMS finalizes the proposed removal of the four measures, IPFs that fail to report their CY 2024 data for these removed measures will not face noncompliance penalties for FY 2026 payment determinations.
Conversely, if CMS does not finalize the removals, IPFs that do not submit CY 2024 data for these measures will be deemed noncompliant, and payment adjustments for FY 2026 fee-for-service claims will be applied as previously finalized.
How Forvis Mazars Can Help
Our professionals at Forvis Mazars are committed to helping healthcare organizations across the continuum of care achieve regulatory excellence by understanding and adapting to the impact of evolving Medicare payment policies. If you have questions about how the proposed IRF and IPF changes may affect your organization, please reach out to a professional on our team.