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August 7, 2025 – Last week, the Centers for Medicare & Medicaid Services (CMS) issued all the fiscal year (FY) 2026 Medicare final regulations for different facility types: hospice facilities, inpatient psychiatric facilities, inpatient rehabilitation facilities, skilled nursing facilities (SNFs), and hospitals (inpatient services). The hospital Inpatient Prospective Payment System (IPPS) final reg is far and away the biggest reg, totaling more than 2,000 pages! Overall, CMS finalized many of the policies included in the IPPS proposed reg, but one surprise ingredient was added to the regulatory mix!
To help me highlight some key policies in the IPPS final reg, I’m bringing in my colleague Kristen O’Brien.
CMS finalized an increase of 2.6% in operating payment rates for general acute care hospitals paid under the IPPS that successfully participate in the hospital inpatient quality reporting (IQR) program and are meaningful electronic health record users – slightly higher than the proposed update of 2.4%. The 2.6% increase is based on a projected FY 2026 hospital market basket percentage increase of 3.3%, reduced by a 0.7 percentage point productivity adjustment. Unlike other payment rules that introduce new payment adjustments (such as the proposed efficiency adjustment in the Physician Fee Schedule proposed reg), the IPPS largely followed its typical methodology for updating inpatient hospital payments.
The Transforming Episode Accountability Model (TEAM) is a mandatory payment model that the CMS Innovation Center will test starting January 1, 2026. In the FY 2026 IPPS proposed reg, CMS proposed to make structural and technical modifications to the model, but did not change its core features or its targeted start date. Despite receiving many comments on the model during the proposed reg’s public comment period, including requests that the model be voluntary and the start date be delayed, CMS mainly finalized its proposed changes without any large-scale, overarching adjustments.
CMS did make smaller modifications to the model in the final reg, including a limited deferment for certain hospitals, neutral scoring on quality for hospitals with insufficient quality data, changes to the payment methodology that adopt hierarchical condition categories version 28, and an expansion of the SNF three-day rule waiver. CMS also removed the requirement that participating hospitals submit health equity plans and data on health-related social needs, as well as the option to voluntarily report to the decarbonization and resilience initiative.
Interestingly, despite not proposing a low-volume hospital policy in the proposed reg, CMS finalized one anyway. If a TEAM participant hospital does not meet the low-volume threshold of 31 episodes in a given baseline period for a given episode category, that hospital would not be responsible for any downside risk. With the model starting at the beginning of 2026, this does not leave much time for hospitals and other stakeholders to prepare. Adding to the potential complexity, the Innovation Center is publishing additional mandatory models that stakeholders will need to evaluate.
CMS monitors, rewards, and penalizes quality performance in the inpatient setting through several quality incentive programs, including the hospital IQR program, hospital readmissions reduction program, hospital value-based purchasing program, hospital acquired condition reduction program, Medicare and Medicaid promoting interoperability programs, and prospective-payment-system-exempt cancer hospital quality reporting program.
The IPPS final rule made several changes to these programs, including shortening performance periods; updating risk adjustment methods; and removing measures related to health equity, social determinants of health, and COVID-19 vaccination.
CMS finalized many other technical changes to quality measures. CMS hinted that it plans to develop new measures around nutrition and well-being going forward, which may be forecast in more detail in the next version of the Make America Healthy Again report. In the proposed reg, CMS sought input on the applicability of tools and constructs that assess integrative health, self-care, and nutrition and preventive care measures – a clear strategic priority of this administration.
Medicare payments to hospitals (and various other provider types) are adjusted by a wage index intended to account for geographic differences across labor markets (e.g., the perceived cost of labor is higher in New York City than in rural Oklahoma). CMS updates the wage index annually based on hospital cost report data and other inputs and policies.
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 FYs. However, in July 2024, the US Court of Appeals for the District of Columbia Circuit’s decision in Bridgeport Hosp. v. Becerra vacated this policy. On October 3, 2024, CMS issued an interim final rule discontinuing the low wage index policy and stating that the agency would recalculate wage index values for FY 2025. CMS also deployed a transition for certain hospitals that were substantially affected by the loss of this protection.
For FY 2026, CMS finalized its proposal to fully discontinue the low wage index adjustment policy and the accompanying budget neutrality adjustments that prompted the litigation, and to buttress hospitals that would be adversely affected with a transitional exception. For hospitals that benefitted from the FY 2024 low wage index policy, CMS will compare a hospital’s proposed FY 2026 wage index to the hospital’s FY 2024 wage index. If the hospital’s wage index would decrease by more than 9.75% from its FY 2024 wage index, then for FY 2026 that hospital’s wage index will be 90.25% of its FY 2024 wage index. CMS will implement this transitional exception in a budget neutral manner.
Here is the surprise! 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 HTI-2 proposed rule. The final policies include new and revised standards and certification criteria for real-time prescription benefit information, electronic prior authorization, and electronic prescribing. The goal of these updates is to enable improvements to workflow automation, reduce the manual effort required to conduct prior authorizations, improve operational workflow, and support more timely and transparent clinical decision-making. The final rule did not adopt all the policies outstanding from the proposed HTI-2, and the interoperability pledge by key stakeholders earlier this week signals more to come in this space.
A few other major policies include the following:
The policies in the IPPS reg go into effect at the start of the new fiscal year on October 1, 2025. McDermott+ has developed an interactive dashboard that shows total Medicare fee-for-service volume and the average cost per inpatient stay by MS-DRG, as calculated by CMS for the FY 2026 IPPS final rule. This information can be used to see trends in inpatient volume and payments and identify the resource costs to hospitals for providing care for individual MS-DRGs. Reach out to us for more details!
Until next week, this is Jeffrey (and Kristen) saying, enjoy reading regs with your eggs.
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