CMS Issues Final Rule For FY 2026 Inpatient And Long-Term Care Hospital Payments

Highlights

• The Centers for Medicare & Medicaid Services (CMS) finalized a 2.6 percent payment increase for Inpatient Prospective Payment Systems for Acute Care Hospitals and a 2.7 percent increase for Long-Term Care Hospitals in fiscal year (FY) 2026, while discontinuing the low-wage index hospital policy and introducing transitional safeguards for affected facilities.
• CMS also implemented significant changes to quality reporting programs, including the removal of COVID-19 exclusions, updates to readmission and value-based measures, and progress toward digital quality measurement using Fast Healthcare Interoperability Resources standards.
• New rules enhance electronic prescribing and prior authorization processes, finalize updated certification criteria for Health IT modules and support broader efforts to reduce provider burden through interoperability and potential deregulation.

The Centers for Medicare & Medicaid Services (CMS) on July 31, 2025, issued the final rule to update Medicare payment policies and rates for fiscal year 2026 under the Inpatient Prospective Payment System (IPPS) and the Long-Term Care Hospital Prospective Payment System (LTCH PPS).

Provisions in the final rule will take effect on Oct. 1, 2025.

Key Takeaways

In the FY 2026 IPPS final rule, CMS finalized a 2.6 percent payment increase for inpatient hospitals, slightly above the 2.4 percent increase initially proposed in April 2025. LTCHs receive a 2.7 percent base payment increase and, after factoring in high-cost outlier payments, an estimated 3 percent overall update. The New Technology Add-on Payment (NTAP) program will increase by an estimated $192 million.

The rule also advances the mandatory Transforming Episode Accountability Model (TEAM), which will provide bundled payments for certain surgical procedures starting Jan. 1, 2026, with limited deferments for select hospitals. It includes updates to the model's target price methodology and quality measures, among other refinements.

CMS also finalized its proposal to discontinue the low-wage index hospital policy for FY 2026 and will implement a transitional exception policy to ease the impact on affected hospitals. The policy, adopted in the 2020 IPPS final rule, created a temporary budget-neutral fix for wage index disparities that affected low-wage index hospitals, particularly rural hospitals. In July 2024, the U.S. Court of Appeals for the District of Columbia Circuit ruled that CMS lacked the authority to adopt the policy and that it must be vacated.

Additionally, as part of the broader IPPS rule, CMS issued the final rule for HTI: Electronic Prescribing, Real-Time Prescription Benefit and Electronic Prior Authorization. This includes three new certification criteria to streamline electronic prior authorization and reduce provider burden.

The rule also includes various updates to CMS quality reporting and value-based programs.

Resources

• Final Rule
• Supplemental Files
• Fact Sheet

Summary of Major Provisions

IPPS Payment Rates. CMS finalized an increase in operating payment rates for general acute care hospitals paid under the IPPS of approximately 2.6 percent, an increase from the proposed rule's 2.4 percent. This increase reflects the projected market basket update of 3.3 percent, minus a 0.7 percentage point productivity adjustment. CMS projected Medicare payments to disproportionate share hospitals (DSHs) and for uncompensated care to increase in FY 2026 by approximately $2 billion compared to FY 2025. CMS also estimated that additional payments for inpatient episodes will increase by approximately $192 million in FY 2026, primarily due to the continuation of NTAP status for several technologies. Additional payments to Medicare-Dependent Hospitals (MDHs) will expire at the end of FY 2025, saving approximately $500 million in FY 2026.

For hospitals excluded from IPPS, CMS finalized revising the IPPS operating basket to a 2023 base year. Since the proposed rule was released, more recent data has become available. CMS will adopt a 3.3 percent update, an increase from the proposed rule's 3.2 percent.

LTCH PPS Payment Rates. CMS finalized increasing the LTCH payment rate by 2.7 percent, based on the proposed market basket update of 3.4 percent minus a 0.7 percentage point productivity adjustment. Due to a projected increase in high-cost outlier payments, LTCH payments will increase by approximately 3 percent ($72 million). CMS also finalized increasing the LTCH outlier threshold for FY 2026 to ensure that outlier payments account for approximately 8 percent of total payments in the LTCH PPS.

NTAP Applications. CMS assessed 13 NTAP applications under the traditional pathway, with five technologies approved for NTAP designation. CMS received 34 applications through the alternative pathway, with one application not meeting requirements, 11 applications withdrawn and 22 applications approved for NTAP designation (20 for technologies with or seeking Breakthrough Device designation and two for technologies with Qualified Infectious Disease Product designation).

Resubmission Acknowledgement Letter. Beginning in FY 2027, CMS will require NTAP applicants to provide CMS a copy of the U.S. Food and Drug Administration (FDA) resubmission acknowledgement letter indicating that the agency considers the resubmission sufficient for review and providing the new goal date for FDA review of the application.

Public Posting of Cost Criterion. CMS finalized inclusion of certain cost criterion information in public application summaries of NTAP applications beginning FY 2027. CMS will continue to share limited cost and volume information in proposed rules but not share comprehensive information publicly. The cost analysis spreadsheet attachment and other charge values provided in the applicant's responses will not be included in the public posting.

Medicare Severity Diagnosis-Related Group (MS-DRG) Updates. CMS finalized its proposal to create new MS-DRG 209 for complex aortic arch procedures, MS-DRG 213 for endovascular abdominal aorta and iliac branch procedures, MS-DRGs 359 and 360 for percutaneous coronary atherectomy with intraluminal device, and MS-DRG 318 for percutaneous coronary atherectomy without intraluminal device. CMS also finalized its proposal to delete hypertensive encephalopathy MS-DRGs 077, 078 and 079.

Payment Adjustment for Certain Clinical Trials and Expanded Access Use Immunotherapy Cases. For FY 2026, CMS finalized updating the methodology for relative weight calculations and payment adjustment for expanded access to immunotherapy and clinical trial cases that would group to MS-DRG 018. The update would exclude claims.

Discontinuation of the Low-Wage Index Hospital Policy. In FY 2020, CMS finalized a policy that boosts the wage index for hospitals with a wage index value below the 25th percentile and stated that it intended this policy to be effective for at least four years. Affected hospitals had their wage index value increased by half the difference between the otherwise applicable wage index value for a given hospital and the 25th percentile wage index value across all hospitals.

In the FY 2025 rulemaking, CMS announced that it would continue the low-wage index hospital policy for at least the next three fiscal years. However, in July 2024, the D.C. Circuit's decision in Bridgeport Hospital v. Becerra vacated this policy. On Oct. 3, 2024, CMS issued an interim final rule that discontinued the low-wage index policy and stated that the agency would recalculate wage index values for FY 2025. CMS also deployed a transition for certain hospitals substantially affected by the loss of this protection.

In this rule, CMS finalized permanently discontinuing the low-wage index hospital policy for FY 2026 following the Bridgeport Hospital v. Becerra decision. To ease the transition, CMS will apply the following transitional payment safeguard: For hospitals whose FY 2026 wage index would decline by more than 9.75 percent from their FY 2024 value, CMS will assign a floor equal to 90.25 percent of the FY 2024 wage index. CMS estimated that 52 hospitals will benefit from this safeguard, with a total payment impact of $27 million in FY 2026. CMS will continue applying the rural floor, imputed floor and state frontier floor policies. Approximately 565 hospitals are expected to receive the rural floor in FY 2026.

Rural Referral Center (RRC) Proposed Updates for FY 2026. CMS finalized the updated case mix index (CMI) and discharge thresholds for hospitals seeking initial RRC status for cost reporting periods beginning on or after Oct. 1, 2025. Hospitals with fewer than 275 beds must meet an FY 2024 CMI of at least 1.7801 or the regional urban median (excluding teaching hospitals), based on MedPAR data, by March 2025. CMS also finalized that hospitals must meet either 5,000 discharges (3,000 for osteopathic hospitals) or the regional median from FY 2023 cost reports to obtain RRC status, noting that all regional values exceeded the national threshold, making 5,000 discharges the applicable minimum.

Payment Adjustment for Low-Volume Hospitals. CMS finalized all proposals for Payment Adjustment for Low-Volume Hospitals. It also finalized reverting to the original low-volume hospital payment policy beginning in FY 2026, following the expiration of temporary changes extended through Sept. 30, 2025. Starting Oct. 1, 2025, hospitals must be located more than 25 road miles from the nearest subsection hospital and have fewer than 200 total discharges in the fiscal year to qualify. Hospitals meeting these criteria will receive a 25 percent add-on payment adjustment. CMS also finalized that hospitals with 200 to 799 discharges will not receive the low-volume adjustment.

Graduate Medical Education. CMS finalized technical changes to the calculation of full-time-equivalent resident counts, caps and three-year rolling averages for direct graduate medical education. CMS did not finalize proposed technical changes to the calculation of net nursing and allied health education costs.

Medicare-Dependent, Small Rural Hospital Program. CMS finalized regulatory updates to reflect the extension of the MDH program through Sept. 30, 2025, under current law. Beginning on Oct. 1, 2025, the MDH program will expire, and hospitals previously classified as MDHs will be paid under the standard IPPS federal rate unless Congress enacts further extensions. CMS also finalized that if the program is extended again, the agency will revise the regulations as needed based on the timing and terms of any new legislation.

Transforming Episode Accountability Model (TEAM). In the FY26 IPPS final rule, CMS finalized multiple updates to the TEAM, effective Jan. 1, 2026, for five episode categories (Coronary Artery Bypass Grafting (CABG), Total Hip and Knee Arthroplasty (THA/TKA), spinal fusion, major bowel procedure and acute myocardial infarction). The basic structure of the model remains intact, but adjustments aim to facilitate smoother participation.

CMS is implementing:

• limited deferment period and Track 2 MDH Eligibility, applying only to hospitals that opened on or after Jan. 1, 2024, and before Jan. 1, 2026
• addition of a Patient-Recorded Outcomes (PROs) measure for the outpatient setting
• a methodology to construct target prices when there are coding changes, using Hierarchical Condition Category (HCC) Version 28 to improve condition coding accuracy
• reconstruction of the normalization factor and prospective trend factor
• replacement of the Area Deprivation Index (ADI) with the Community Deprivation Index (CDI)
• a 180-day lookback period and HCC Version 28 for beneficiary risk adjustment
• alignment of the date range used for episode attribution to the anchor hospitalization or anchor procedure discharge date
• removal of health equity plans and the Decarbonization and Resilience Initiative
• expansion of the Skilled Nursing Facility (SNF) Three-Day Rule Waiver

HTI. Although it was not included in the IPPS proposed rule, the final rule includes the Health Data, Technology and Interoperability: Electronic Prescribing, Real-Time Prescription Benefit and Electronic Prior Authorization Rule (HTI-4), which finalizes certain proposals in the Assistant Secretary for Technology Policy's (ASTP) HTI-2 proposed rule.

This final rule from the ASTP outlines new and revised standards and certification criteria for prescription benefit information and prior authorization. The final rule did not adopt all the policies outstanding from the proposed HTI-2, and the interoperability pledge by key stakeholders in August 2025 signals more to come in this space.

However, CMS finalized several changes, initially proposed in the HTI-2 proposed rules, focused on certification criteria for Health IT Modules. These changes include:

• update to RxNorm, Dec. 4, 2023, Full Update Release in 45 CFR for standards of clinical drugs
• revising several components of the "electronic prescription" certification criteria
• revising the "real-time prescription benefit" certification criteria for Health IT Modules to require users to be able to perform specific transactions, specified in a non-expired version of 45 CFR, using XML format
• replacing the term "therapeutic alternative" with "alternative product"
• revising several components of the coverage requirements discovery, documentation templates and rules, and prior authorization support criteria of the "prior authorization API-provider" certification

Digital Quality Measurement (dQM) in CMS Quality Programs. CMS issued a Request for Information (RFI) related to the use of the Health Level 7 Fast Healthcare Interoperability Resources (FHIR) for electronic clinical quality measures (eCQMs). Specifically, CMS sought information related to anticipated challenges of using the FHIR, timeline and support considerations that CMS should make prior to future proposals requiring reporting FHIR-based eCQM data, and the current use of information technology (IT) resources, including electronic health records (EHRs), in inpatient facilities.

Many comments supported this transition while acknowledging several challenges, such as concerns around backward compatibility, EHR implementation and inconsistencies in eCQM measure specifications. Commenters also expressed mixed support on the 24-month timeline for this transition, with some commenters supporting the timeline and others critiquing it as inadequate for implementing all the necessary changes.

Medicare Promoting Interoperability Program. CMS finalized keeping the EHR reporting period for payment adjustments to a minimum of any continuous 180-day span within the calendar year. CMS also finalized revisions to the current Security Risk Analysis (SRA) measure to require management of security risks associated with the use of EHRs beginning in calendar year (CY) 2026.

Additionally, CMS finalized that starting in CY 2026, hospitals and critical access hospitals (CAHs) must complete annual self-assessments using the 2025 Safety Assurance Factors for EHR Resilience (SAFER) Guides. CMS also finalized adding a bonus measure under the Public Health and Clinical Data Exchange for public health reporting using the Trusted Exchange Framework and Common Agreement (TEFCA). Eligible hospitals or CAHs can earn five bonus points with the new optional bonus measure.

CMS did not propose any changes to eCQMs for the CY 2026 reporting period.

CMS also sought input on two RFIs in the proposed rule, one on modifying the Query of Prescription Drug Monitoring Program to a performance-based measure covering all Schedule II drugs and another on addressing data quality issues to improve data accuracy and usability. CMS neither proposed specific policies on these topics nor summarized the comments it received on these two RFIs.

Quality Reporting and Performance Programs. CMS made updates across several interconnected quality and performance-based programs:

• Hospital Readmissions Reduction Program (HRRP). Beginning in FY 2027, CMS will:
  • add Medicare Advantage (MA) data to all six readmission measures
  • shorten the applicable period from three to two years
  • update and codify the policy allowing CMS to grant an Extraordinary Circumstances Exception (ECE) extension with modifications
  • remove the COVID-19 exclusion from all readmission measures

Note: CMS did not finalize the proposal to include MA payment data in aggregate payment calculations.

• Hospital-Acquired Condition (HAC) Reduction Program:
  • technical updates to healthcare-associated infection (HAI) baseline data
  • codification of CMS discretion to grant ECE extensions with modifications
• Hospital Value-Based Purchasing (VBP) Program:
  • modify the THA/TKA Complications measure (starting FY 2033)
  • remove COVID-19 exclusions from six Clinical Outcomes measures (starting FY 2027) and five HAI measures (FY 2029)
  • eliminate the Health Equity Adjustment (HEA) in FY 2026
  • codify ECE policy
  • finalize performance standards for FY 2027 to 2031
• Hospital Inpatient Quality Reporting (IQR) Program:
  • update four measures, including stroke mortality and hybrid readmission/mortality measures (FY 2027 and 2028)
  • remove four measures related to health equity, social drivers of health and COVID-19 vaccination (beginning CY 2024/FY 2026)
  • codify ECE policy
  • solicit feedback on future measures related to well-being, nutrition and dQM using FHIR
• Medicare Prospective Payment System (PPS)-Exempt Cancer Hospital Quality Reporting (PCHQR) Program:
  • public reporting of PPS-Exempt Cancer Hospitals (PCH) data on CMS platforms
  • remove three Social Determinant of Health (SDOH)-related measures (starting CY 2024/FY 2026)
  • codify ECE policy
• LTCH QRP:
  • remove one Local Coverage Determination (LCD) item for deceased patients and four SDOH data elements
  • amend the reconsideration process
  • summarize comments on future measures, data submission timelines and advancing digital quality measurement

Deregulation Request for Information. A separate RFI on deregulation is still open for comment. In line with President Donald Trump's Executive Order 14192, "Unleashing Prosperity Through Deregulation," CMS included an RFI in the proposed rule (and in the FY 2026 proposed rules for inpatient psychiatric hospitals, SNFs, inpatient rehabilitation facilities and hospice providers) soliciting input on potential changes to Medicare regulations, with the "goal of reducing the costly private healthcare expenditures required to comply with federal regulations."

In the final rule, CMS has not responded to any comments received thus far and has invited stakeholders to continue to submit responses separately through a dedicated web-based form.