On April 1, the Centers for Medicare and Medicaid Services (CMS) released their proposed Inpatient Hospital Prospect Payment System rule for FY 2026. The proposed changes are a mixed bag for the nation’s inpatient hospitals. Under the proposed rule, the hospital market basket percentage would increase by 3.2% (with a 0.8% reduction for productivity). The update is in line with last year’s update of 2.6%, although it is much lower than MedPAC’s recommendation of 4.2%. The American Hospital Association and the Federation of American Hospitals have both declared that this increase is insufficient due to hospital cost inflation and labor shortages
Comments on the rule are due June 10, 2025.
LOW-WAGE HOSPITAL POLICY
The proposed rule discontinues the low wage index hospitals policy for FY 2026 and subsequent years. This policy, put in place in 2020, makes upward adjustments to the wage indices of hospitals with a wage index value below the 25th percentile. CMS referenced the court decision of Bridgeport Hosp. v. Becerra, 108 F.4th 882, 887–91 & n.6 (D.C. Cir. 2024) as a reason for discontinuing the policy.
To partially offset this change, CMS is capping any hospitals’ wage index deduction by a maximum of 5% for FY 2026.
UPDATED WAGE INDEX AREAS
As CMS does every year, the agency is recalculating all hospital wage index areas to incorporate data from cost reporting periods beginning in FY 2022. The table of changes can be found here.
Hospital Inpatient Quality Reporting (IQR) Program
CMS is removing four reporting measures beginning with the CY 2024 reporting period/FY 2026 payment determination:
- Hospital Commitment to Health Equity
- COVID-19 Vaccination Coverage among Health Care Personnel measure
- Screening for Social Drivers of Health
- Screen Positive Rate for Social Drivers of Health
CMS is modifying four current measures:
- Hospital-Level, Risk-Standardized Complication Rate (RSCR) Following Elective Primary Total Hip Arthroplasty (THA) and/or Total Knee Arthroplasty (TKA) – CMS is adding Medicare Advantage patients to the current cohort of patients, shortening the performance period from three to two years, and changing the risk adjustment methodology.
- Hospital 30-Day, All-Cause, Risk-Standardized Mortality Rate (RSMR) Following Acute Ischemic Stroke Hospitalization – CMS is adding Medicare Advantage patients to the current cohort of patients, shortening the performance period from three to two years, and making changes to the risk adjustment methodology.
- Hybrid Hospital-Wide Readmission (HWR) and Hybrid Hospital-Wide Mortality (HWM) – CMS is lowering the submission requirements to allow for up to two missing laboratory results and up to two missing vital signs, reducing the core clinical data elements (CCDEs) submission requirement to 70% or more of discharges, and reducing the submission requirement of linking variables to 70% or more of discharges.
Hospital Readmissions Reduction Program
As CMS is doing for all quality measures, CMS is modifying readmission measures to add Medicare Advantage data, for both the measures and the calculation of aggregate payments. The agency is also shortening the applicable period of measuring performance from 3 to 2 years. CMS is also removing the COVID-19 exclusions and risk-adjustment covariates from the six readmission measures. These changes will be implemented for FY 2027.
Hospital Value-Based Purchasing Program
CMS is making a few changes to the VBP. First, the agency is adding MA data to most measures. Second, CMS is removing the Health Equity Adjustment from the scoring methodology. The agency is also adding COBID-19 patients back INTO the measures’ denominators (they had been removed during the pandemic and for a few subsequent years). In the same vein, CMS is adding patients with a diagnosis of COVID-19 back into the THA/TKA complication measures numerator and denominator. CMS will also be updating the CDC’s National Healthcare Safety Network (NHSN) healthcare-associated infections (HAI) chart-abstracted measures with the new 2022 baseline.
CMS has estimated that $1.7 billion is available in FY 2026 for value-based incentive payments.
DRG GROUPER CHANGES
CMS made several grouper coding changes based on feedback. See details here. In addition, CMS made many changes to severity levels in codes – those changes can be found here. This file also includes the 50 new procedure codes that CMS added as well.
New Transforming Episode Accountability (TEAM) Model
Last year, CMS proposed a new 5-year mandatory bundled payment program for all acute-care hospitals in a yet-as-unnamed CBSA. The model begins January 1, 2026, and ends December 31, 2030. Under this model, CMS would begin by focusing on lower extremity joint replacement, surgical hip femur fracture treatment, spin al fusion, coronary artery bypass graft, and major bowel procedures. Providers would bill as normal (MS-DRGs for inpatient, HCPCs for physician, etc.) for their procedures – but would receive target prices for episodes prior to each performance year. Performance for providers would be measured by spending as well as performance on three quality measures.
For this year, CMS has added a limited deferment period for certain hospitals, quality measure performance using patient-reported outcomes in the outpatient setting, improved target price construction, and expand the three-day Skilled Nursing Facility Rule waiver.
POST-ACUTE TRANSFER POLICY
CMS is proposing to add and remove MS-DRGs from post-acute transfer payment treatment in this rule. CMS is proposing to add MS-DRGs 209, 213, 318, 359, 360, 321, 322, 403, 404, 463, 464, and 465. CMS is proposing to remove MS-DRG 294, 295, and 509.
FEEDBACK
CMS is also asking for input on many aspects of the rule from stakeholders. Below we highlight some of their requests for feedback:
- For the overall Medicare program, CMS is putting out an RFI asking stakeholders to identify areas that are redundant or burdensome in Medicare regulations, including in conditions of participation, value-based purchasing, quality and safety reporting, telehealth and digital health. The deadline for comments is June 10, 2025.
- For quality reporting, CMS is issuing a second RFI on creating a digital quality measurement. Specifically, CMS wants to hear about:
- The anticipated approach to FHIR-based electronic clinical quality measure (eCQM) reporting in quality reporting programs.
- The potential use of FHIR-based patient assessment instrument reporting for inpatient psychiatric facilities.
- For quality reporting, CMS is requesting comments regarding how to measure well-being and nutrition in future years.
- For quality reporting, CMS is seeking input on future modifications to the Query of Prescription Drug Monitoring Program (PDMP) measure, including seeking public input on changing the Query of PDMP measure from an attestation-based measure (“Yes” or “No”) to a performance-based measure (numerator and denominator), and expanding the types of drugs to which the Query of PDMP measure applies.
- For quality reporting, CMS is requesting information on the Medicare Promoting Interoperability Program’s objectives and measures moving toward performance-based reporting.
- For quality reporting, CMS is requesting information on improvements in the quality and completeness of the health information eligible hospitals and CAHs are exchanging across systems.