On April 11, 2025, the Centers for Medicare & Medicaid Services (CMS) issued the proposed rule for the Fiscal Year (FY) 2026 update to the Inpatient Prospective Payment System (IPPS) and Long-Term Care Hospital Prospective Payment System (LTCH PPS). This annual update adjusts Medicare payment policies and rates for inpatient and long-term care hospitals.
Key Takeaways
Payment Updates: Increases Across IPPS and LTCH PPS
IPPS Payment Rate Proposals: Hospitals meeting Medicare’s quality and technology criteria are slated to receive a 2.4% net payment increase in FY 2026. This reflects updated inflation projections, productivity adjustments, and a revised assumption that 66% of hospital costs are labor-related. CMS projects a $4 billion increase in overall hospital payments. This includes $1.5 billion in additional Disproportionate Share Hospital (DSH) payments for hospitals serving high volumes of uninsured patients and $234 million in additional new technology add-on payments. Special payments to rural and Medicare-dependent hospitals are scheduled to expire in late 2025, unless reauthorized by Congress. If extended, these payments would contribute an estimated $500 million in FY 2026.
LTCH PPS Payment Rate Proposals: The Long-Term Care Hospital (LTCH) standard payment rate is proposed to rise by 2.6%, which includes a 3.4% market basket increase offset by a 0.8 percentage point productivity adjustment. CMS projects a 2.2% ($52 million) increase in total standard-rate payments. Outlier payments, which support exceptionally high-cost cases, are expected to decline slightly as a percentage of total payments. CMS also proposes raising the outlier threshold to maintain statutory alignment.
Policy Reversals and Transitional Relief
End of the Low Wage Index Hospital Policy: In light of the 2024 federal appeals court ruling in Bridgeport Hosp. v. Becerra which ruled that the Department of Health and Human Services (HHS) has no authority to adjust low-wage index hospital rates, CMS proposes to fully rescind the Low Wage Index Hospital Policy in FY 2026. CMS proposes a transitional, budget-neutral exception for FY 2026 to cushion the financial impact on significantly affected hospitals.
Digital Modernization: Request for Information on FHIR Adoption
CMS is soliciting public input on its transition to digital quality measurement using the Health Level 7® Fast Healthcare Interoperability Resources® (FHIR®) standard. The Request for Information (RFI) spans eCQM reporting and potential FHIR-based patient assessments in inpatient psychiatric facilities, underscoring CMS’s commitment to a fully digital measurement ecosystem.
Quality Programs: Streamlining and Aligning Measures
Hospital Inpatient Quality Reporting (IQR) Program: CMS proposes refining several existing measures and eliminating others to reduce reporting burden and increase alignment. Modifications are proposed for the Hospital-Level Risk-Standardized Complication Rate (RSCR) Following THA/TKA and 30-Day RSMR for Stroke measure include the addition of Medicare Advantage patients, a reduction of the performance period from three to two years, and adjustments to risk methodology. For both Hybrid Hospital-Wide Readmission (HWR) and Mortality (HWM) measures, CMS proposes lowering data submission thresholds and reducing clinical data element (CCDE) requirements and linking variable submissions to 70% of discharges.
CMS also proposes removing the following four measures beginning with the CY 2024 reporting period/FY 2026 payment determination:
- Hospital Commitment to Health Equity
- COVID-19 Vaccination Coverage among Healthcare Personnel
- Screening for Social Drivers of Health
- Screen Positive Rate for Social Drivers of Health
Additionally, CMS plans to codify the Extraordinary Circumstances Exception (ECE) policy to permit partial extensions.
Medicare Promoting Interoperability Program: Key updates for CY 2026 include defining a 180-day continuous EHR reporting period and strengthening the Security Risk Analysis measure by requiring risk management attestation. The SAFER Guides measure would also be expanded, requiring completion of all eight 2025 guides. A new, optional Trusted Exchange Framework and Common Agreement (TEFCA)-based bonus measure would be introduced under the Public Health and Clinical Data Exchange objective. CMS also seeks input on converting the Prescription Drug Monitoring Program (PDMP) query measure to performance-based reporting, expanding the scope of drugs included, and shifting more objectives to performance-based formats.
Other Program Proposals
Hospital Readmissions Reduction Program: CMS proposes incorporating Medicare Advantage data into all six readmission measures and the calculation of aggregate payments for excess readmissions. The performance period would be shortened to two years, with COVID-19-related exclusions and covariates removed. Extraordinary Circumstance Exceptions (ECE) policy changes would align with other programs.
Hospital-Acquired Condition (HAC) Reduction Program: CMS would codify the ECE policy and update CDC National Healthcare Safety Network (NHSN) chart-abstracted measures using the 2022 baseline.
Hospital Value-Based Purchasing (VBP) Program: CMS proposes removing the Health Equity Adjustment from scoring beginning FY 2026, aligning the RSCR Following THA/TKA measure with IQR updates, and codifying ECE extensions. Technical updates include switching RSCR risk models to ICD-10 codes, including COVID-19 diagnoses in complications measures, and revising performance standards for FY 2027–2031.
PPS-Exempt Cancer Hospital Quality Reporting (PCHQR) Program: CMS proposes codifying the ECE policy, removing the same three SDOH-related measures proposed for IQR, and expanding public reporting from the Provider Data Catalog to Care Compare or its successor.
Long-Term Care Hospital Quality Reporting Program (LTCH QRP): Proposals include modifying the COVID-19 vaccine measure to exclude deceased patients, removing four SDOH-related data elements starting FY 2028, and amending the reconsideration policy. CMS also seeks comments on advancing digital quality measurement and updating submission deadlines.
Transforming Episode Accountability Model (TEAM): CMS proposes refining target pricing and using patient-reported outcomes in outpatient settings without additional provider burden. It also aims to expand the 3-day Skilled Nursing Facility Rule waiver to improve post-acute care access.
Conclusion
In addition to the FY 2026 IPPS and LTCH PPS Proposed Rule, CMS continues to advance updates to the Medicare payment system through additional rulemakings, including the CY 2026 OPPS and Physician Fee Schedule proposed rules. CMS anticipates finalizing the FY 2026 IPPS and LTCH PPS rule later this year. For more information on the FY 2026 IPPS and LTCH PPS Proposed Rule or other Medicare payment policies, please contact the professionals listed below or your regular Crowell Health Solutions contact.