On July 31, 2025, the Centers for Medicare & Medicaid Services (CMS) issued the fiscal year (FY) 2026 Medicare Hospital Inpatient Prospective Payment System (IPPS) and Long-Term Care Hospital (LTCH) Prospective Payment System final rule. The rule updates Medicare fee-for-service payment rates and policies for inpatient hospitals and LTCHs for FY 2026.
Key highlights of the final rule include:
- Standardized amount: CMS finalized a 2.6% increase to operating payment rates for general acute care hospitals paid under the IPPS that successfully participate in the hospital inpatient quality reporting program and are meaningful electronic health record users. This 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.
- 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.
- Transforming Episode Accountability Model (TEAM): Although CMS largely finalized the TEAM policies as proposed, the agency added a new low-volume hospital policy in response to extensive stakeholder feedback. The policy removes downside risk for any episode category in which a hospital had fewer than 31 episodes during the three-year baseline.
- Special designations: While Congress typically extends the Medicare-dependent hospital program and low-volume hospital payment adjustment, both are set to expire on September 30, 2025, and Congress has not yet acted to extend them further. CMS therefore could not assume these programs will continue for FY 2026, and the final rule reflects this.
- New technology add-on payments: For new technology add-on payment applications for FY 2027 onward, CMS finalized one minor policy change and broadened the application details that it will publicly post online (starting with FY 2027 applications).
- Quality reporting programs: CMS signaled future quality measure concepts supporting the Administration’s Make America Healthy Again priorities of well-being and nutrition, and finalized proposals to remove quality measures on health equity and social determinants of health.
- HTI-4 and electronic prior authorization: The IPPS rule includes the Health Data, Technology, and Interoperability: Electronic Prescribing, Real-Time Prescription Benefit and Electronic Prior Authorization Rule (HTI-4). This final rule from the Assistant Secretary for Technology Policy outlines new and revised standards and certification criteria for prescription benefit information and prior authorization.
- Wage index: CMS will discontinue the low wage index policy but will implement a transitional policy to phase out the low wage index adjustment for affected hospitals.
- Disproportionate share hospital payments and uncompensated care payments: Finalized uncompensated care payments and supplemental payments for FY 2026 total $7.8 billion, a 35.2% increase from the FY 2025 total of $5.78 billion.
- 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.
The FY 2026 IPPS final rule is available here.
A fact sheet on the entire final rule is available here.
This rule is scheduled to be published in the Federal Register on August 4, 2025.
The full summary of the proposed rule is for McDermott+ clients only; please contact your relationship consultant with questions. For inquiries, please contact info@mcdermottplus.com.
INTERACTIVE IPPS DATA DASHBOARD
McDermott+ has developedan 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 illuminate trends in inpatient volume and payments and identify the resource costs to hospitals for providing care for individual MS-DRGs.
ACCESS DASHBOARD
