Insights^

On September 5, 2025, the Medicare Payment Advisory Commission (MedPAC) convened for the second day of its September meeting. Staff presented findings on the relationship between shifts in Medicare Advantage (MA) enrollment and hospital finances. Commissioners responded positively to the analysis and offered suggestions to strengthen and expand the research.

Association Between Changes in MA Enrollment and Hospital Finances

MedPAC staff examined how rising MA enrollment is affecting hospitals’ finances. Between 2014 and 2025, MA enrollment grew from 31% to 55% of Medicare beneficiaries, driven by beneficiary preferences for added benefits and employer retiree coverage shifts. Hospitals have expressed concern that MA patients often generate lower payment-to-cost ratios than fee-for-service (FFS) patients, and MA plans actively use tools like prior authorization and narrow networks to manage utilization, which can reduce hospital volumes or shift care to lower-paid settings. Additionally, MA plans negotiate rates, downgrade admissions, and deny claims in ways that can reduce hospital revenue.

Using 2013–2023 cost report data, MedPAC found that higher MA penetration is not significantly associated with changes in hospital profit margins, but it is linked to declines in both revenues and costs (about 1.3% and 1.2% for every 10-percentage-point increase in MA penetration). Effects differ by ownership: financially integrated hospitals did not experience significant revenue or cost declines, while non-integrated hospitals did. Critical Access Hospitals saw no statistically significant effects, partly due to cost-based reimbursement and MA per diem structures. Another emerging issue is uncompensated care (UC) payments—because MA plans often mirror FFS add-ons, a decline in FFS discharges raises the UC payment per discharge, potentially increasing hospitals’ UC payments as MA grows.

Overall, the findings suggest that MA growth shifts financial dynamics but does not broadly erode hospital profit margins, with effects moderated by whether hospitals are integrated with MA plans. Policymakers may need to consider integration differences and downstream effects on FFS-related payments when evaluating MA’s hospital impact.

Commissioner Discussion

The Commissioners’ discussion focused on the financial and operational impacts of MA growth on hospitals, with particular attention to integration, utilization management, and methodological considerations. Several Commissioners raised questions about how new services and prior authorization denials affect hospital operations, emphasizing that, while hospitals often maintain profit margins, they must divert resources to manage administrative burdens. Concerns were also raised about retiree health plan enrollees in MA, the role of broker incentives, and whether beneficiaries and taxpayers are truly getting value for money under the current system.

Others highlighted the importance of examining differences between financially integrated and nonintegrated hospitals, noting the leverage and pricing differentials created by integration. Commissioners suggested expanding the analysis to include dollar amounts, stratifications based on MA market characteristics, and thresholds in penetration levels. They also encouraged looking at other sectors, such as post-acute care and skilled nursing facilities, where effects may differ. There was recognition that hospitals owning MA plans tend to be larger and structurally different, and that regional market dynamics and timing of MA penetration may produce varying effects. Overall, while the analysis was well received, Commissioners urged refinement with more current data, stratified analyses, and a clearer picture of how MA growth translates into real-world financial pressures and adaptations by providers.

On September 3, 2025, the House Energy and Commerce Health Subcommittee held a hearing on advancing health care through artificial intelligence (AI). Discussion included the potential applications of AI in prior authorization, rural health care delivery, and the pharmacy sector. Members of both parties agreed that AI holds promise for improving efficiency and access in the health care system. However, they emphasized that human oversight remains essential to address errors and ensure patient safety.

Opening Statements

• Health Subcommittee Chairman Morgan Griffith (R-VA-09)
• Ranking Member Frank Pallone (D-NJ-6)

Witness Testimony

• TJ Parker, Leader Investor, General Medicine – Testimony
• Andrew Toy, Chief Executive Officer, Clover Health – Testimony
• Dr. Andrew Ibrahim, MD, MSc, Chief Clinical Officer, Viz.ai – Testimony
• Dr. Michelle Mello, JD, PhD, MPhil, Professor of Law, Stanford Law School, and Professor of Health Policy, Stanford University School of Medicine – Testimony
• Dr. C. Vaile Wright, PhD, Senior Director, Health Care Innovation, American Psychological Association – Testimony

Member Discussion

Prior Authorization

During the hearing, Ranking Member Frank Pallone (D-NJ) underscored his concern that AI could embed and even magnify existing biases in prior authorization systems if Congress does not establish sufficient guardrails. He recalled that, under the Trump administration there were efforts to incorporate AI into prior authorization processes and warned that, if left unchecked, such initiatives could lead to higher denial rates for Medicare and Medicare Advantage beneficiaries. Rep. Pallone asked how policymakers could ensure AI is deployed in a way that enhances patient care rather than creating new barriers to access. Dr. Mello responded that prior authorization is already a system with high denial rates and significant flaws. She explained that layering AI onto a broken process risks simply “amping up” existing problems rather than fixing them. According to Dr. Mello, the central question is whether AI will serve as a corrective tool that streamlines care or whether it will exacerbate inequities and inefficiencies—something policymakers and regulators cannot yet answer with certainty.

Rep. John Joyce (R-PA-13) built on these concerns, noting that he has already heard from physicians in his congressional district who report that AI-based systems are increasing denial rates, particularly within Medicare Advantage. Rep. Joyce argued that AI should only be used as a supportive tool to assist clinical decision-making, and never as the final determinant of coverage. He called for Congress to establish clear guardrails that preserve physicians’ ability to make patient-centered judgments and protect beneficiaries from automated denials. Dr. Toy sought to reassure the subcommittee, testifying that his organization does not use AI in prior authorization decisions and stated unequivocally that AI should never be deployed to deny care. Instead, Toy emphasized that AI’s proper role is to help clinicians deliver services more efficiently, reduce administrative burdens, and ultimately improve patient outcomes.

Finally, Rep. Lizzie Fletcher (D-TX-7) questioned whether the current statutory framework is adequate to govern prior authorization in an era where AI tools are increasingly being integrated into health care. Dr. Mello was direct in her response: the existing legal framework is not sufficient. She argued that without updated oversight and regulation, patients and providers will remain vulnerable to harm, underscoring the need for congressional action to modernize policies around AI and prior authorization.

Rural Health Care

The hearing also explored how AI could support care at rural hospitals and the communities they serve. Chairman Morgan Griffith (R-VA-09) opened the discussion by asking what type of software is needed to bring AI into rural settings and whether such systems are prohibitively expensive. Dr. Toy explained that, while the cost of infrastructure is indeed higher in rural areas, smaller towns can sometimes deploy new systems more quickly, enabling AI solutions to reach patients faster than in large, complex urban health systems.

Rep. John Joyce (R-PA-13) pressed further, questioning whether rural hospitals have a stable environment to invest in new technologies. Dr. Mello acknowledged that most do not, noting that rural facilities often operate with razor-thin margins and require outside assistance to adopt advanced tools. She pointed out that certain technologies, such as radiation tools, have shown promise when paired with AI but emphasized that these opportunities are largely out of reach without federal support. Dr. Ibrahim added that some of the most impactful research on stroke care has been conducted in rural areas, underscoring the potential for innovation outside urban centers. However, he cautioned that reimbursement remains a decisive factor: hospitals are unlikely to invest in AI if payment models do not recognize and support its use.

Rep. Troy Balderson (R-OH-12) asked what steps Congress could take to support wider adoption of AI in rural health care. Witnesses highlighted the need for stronger reimbursement policies, targeted grant funding, and infrastructure investments to give rural hospitals a stable base for innovation. Rep. Kat Cammack (R-FL-03) shifted the focus to physician training, asking how AI could play a role in preparing doctors for practice in rural communities. Dr. Ibrahim responded that rural hospitals are already positioned to serve as training hubs and could leverage AI to expand education and mentorship opportunities for providers who might otherwise face isolation. Dr. Toy stressed the importance of connectivity. He argued that something as simple as linking patients and providers through consumer-friendly devices, like iPads, could make a significant difference in overcoming geographic barriers. In his view, AI is not just about cutting-edge algorithms but also about creating practical tools that connect people and care in underserved areas.

Pharmacy and Drug Development

Rep. Diana Harshbarger (R-TN-01) asked how AI could reshape the pharmacy sector. Mr. Parker answered that AI offers significant opportunities for pharmacists, particularly by applying advanced logic to streamline workflows and build stronger infrastructure for dispensing, monitoring, and counseling. When Rep. Harshbarger pressed further on rural challenges, Dr. Toy observed that limited coordination between pharmacists and physicians remains a barrier in these settings. He argued that AI should be leveraged to strengthen collaboration across the care team to ensure patients in rural areas receive consistent, high-quality services.

Rep. Troy Balderson (R-OH-20) noted that a lack of coordinated care often prevents providers from catching early warning signs of health complications. Dr. Toy responded that a stronger AI-enabled health care ecosystem could close these gaps, with pharmacies playing a central role in connecting patients to the broader system.

Rep. Buddy Carter (R-GA-01) broadened the discussion to the scale of the U.S. pharmacy system, asking how AI could improve services across such a vast network. Mr. Parker explained that AI has the potential to collect and synthesize full historical patient records, giving pharmacists a more comprehensive view of patient needs. Rep. Carter then asked about drug development, and Dr. Ibrahim emphasized that AI excels at detecting data patterns, which can accelerate the identification of promising compounds and support more efficient clinical trials.

On September 4, 2025, the Senate Finance Committee held a hearing on the President’s 2026 health care agenda. Health and Human Services (HHS) Secretary Robert F. Kennedy Jr. (RFK) testified to the committee. Democrats along with moderate Republicans raised concerns regarding vaccine mandates and guidelines while conservative Republicans applauded Sec. Kennedy’s actions addressing the chronic disease epidemic and the Rural Health Transformation Fund that was produced from the One Big Beautiful Bill Act.  

 Opening Statements  

• Chairman Mike Crapo (R-ID)  

• Ranking Member Ron Wyden (D-OR) 

Witness Testimony  

• HHS Sec. Robert F. Kennedy Jr.  

Member Discussion  

Vaccines  

During the hearing, several senators pressed Sec. Kennedy on his vaccine policies and his broader approach to science and trust in public health. Sen. Michael Bennet (D-CO) highlighted that in June, Kennedy dismissed the entire federal vaccine advisory panel and challenged him on whether he truly believed one of the replacement doctors who publicly claimed that mRNA vaccines cause HIV. Kennedy defended his decision, stating the doctor he appointed has done the research.  

Sen. Bill Cassidy (R-LA) continued the line of questioning, pointing out that Kennedy had just told Sen. Bennet that the COVID-19 vaccine had killed more people than the virus itself. Sen. Cassidy noted

Kennedy’s role as a lead attorney in multiple lawsuits restricting access to COVID-19 vaccines and criticized his cancellation of $500 million in federal contracts tied to mRNA technology. Sec. Kennedy responded by praising Operation Warp Speed as a genius initiative that succeeded by delivering vaccines quickly without mandates, but he doubled down on his opposition to later vaccine requirements and contracts that, in his view, entrenched mRNA technology in federal policy. Sen. Cassidy pressed further on Kennedy’s stated commitment to avoid conflicts of interest within health agencies, pointing out that many of the individuals Kennedy has nominated for awards or advisory roles have received revenue as paid witnesses in lawsuits against vaccine manufacturers. Sec. Kennedy countered that such arrangements inherently create conflicts, arguing that “if we put people who are paid witnesses on suing vaccines, it is a conflict of interest.” Sen. Cassidy also reminded Kennedy that he had previously promised not to take vaccines away from the public, yet his policies have placed restrictions on COVID-19 vaccine use. 

Sen. John Barrasso (R-WY) stated unequivocally that vaccines have saved 54 million lives and that he personally supports their continued use. He reminded Sec. Kennedy of his promise to uphold scientific standards in federal vaccine policy and expressed concern about the Secretary’s repeated skepticism. Sen. Barrasso pressed Kennedy to explain how he would ensure vaccine policy remains “clean and trustworthy.” Kennedy replied that children are currently receiving too many vaccines that, in his view, “have not even been tested,” suggesting that the administration would focus on reevaluating the pediatric vaccine schedule rather than endorsing it wholesale. 

Sen. Maria Cantwell (D-WA) added to the critique, accusing Kennedy of undermining public trust in science by refusing to accept mRNA technology as legitimate. Kennedy believes that it has not undergone sufficient study.  

Rural Health and Hospital Financing  

Senators also focused heavily on the state of rural health care and hospital financing. Chairman Mike Crapo (R-ID) pointed to the inclusion of the Rural Health Transformation Fund in the One Big Beautiful Bill (OBBB), asking Secretary Kennedy to comment on its purpose and implementation. Kennedy framed the fund as a fulfillment of former President Trump’s campaign promise, describing it as a response to what he called a “crisis in rural health.” He noted that rural communities not only depend on hospitals for care but also for some of the highest-paying jobs in their regions, making the stability of these institutions vital to both health and local economies. Kennedy added that the administration has already directed roughly half of the fund’s investments into targeted rural initiatives.  

Sen. Mark Warner (D-VA), however, raised concerns that despite these commitments, rural hospitals remain at risk of closure, particularly in the face of projected Medicaid cuts. He asked Kennedy whether he would support legislation to raise the area wage index floor to 80%, a measure intended to level reimbursement rates for rural hospitals and prevent destabilization. Kennedy responded that President Trump supports the wage index change, indicating alignment with congressional efforts to preserve rural hospital viability. 

PBM Reform

Sen. James Lankford (R-OK) raised concerns that Medicare Advantage plans are withholding payments and asked Sec. Kennedy what actions HHS is taking to address pharmacy benefit managers (PBM) practices. Kennedy emphasized that PBM reform is a top priority for the president, noting that the administration is in active discussions with both PBMs and pharmaceutical companies to pursue meaningful changes. He underscored the administration’s intent to create a fairer system that does not disadvantage pharmacies, particularly in rural areas. 

Sen. Catherine Cortez Masto (D-NV) shifted the focus to the direct impact on patients, asking Kennedy how much Medicare Part D enrollees should expect to pay for their prescription drugs in the coming year and what the projected premium increases would be. Kennedy acknowledged that these details remain unsettled, conceding that the administration does not yet have definitive numbers. His response suggested ongoing debate within the administration and Congress over how costs will be shared between the federal government, insurers, and beneficiaries. 

Sen. Marsha Blackburn (R-TN) reinforced the bipartisan concern about PBM practices by pointing to the PBM Act, which she and Ranking Member Ron Wyden (D-OR) co-authored, and highlighted its role in keeping rural pharmacies from shutting down. She asked Kennedy to confirm whether this legislation would reach President Trump’s desk for signature. Kennedy assured her that it would, signaling alignment between the administration and Congress on moving PBM reform forward.

Other Topics in the Discussion 

• Sen. Cantwell asked whether Sec. Kennedy supported maintaining the Affordable Care Act’s Advance Premium Tax Credits (APTCs), which are scheduled to expire. Kennedy responded that Democrats had failed to make the APTCs permanent, and while he supports fixing the system, his focus is on lowering premiums more broadly rather than extending temporary relief. 

• Sen. David Daines (R-MT) asked if HHS would consider Montana’s waiver to expand Medicaid with work requirements for able-bodied adults. Kennedy said yes. 

• Multiple Democrats asked about the decision to fire the CDC Director, Susan Monarez. 

• Sen. Blackburn asked about CMS’s new interoperability framework and how it aligns with existing frameworks. Kennedy admitted alignment is still uncertain. 
• Sen. Sheldon Whitehouse (D-RI) raised the “two-midnight” hospital stay requirement before patients qualify for skilled nursing care. Kennedy offered to work with senators directly on the issue. 

On July 31, 2025, the Centers for Medicare and Medicaid Services (CMS) released the Fiscal Year 2026 Skilled Nursing Facility Prospective Payment System (SNF PPS) Final Rule. A fact sheet from CMS can be found here.  The final rule takes effect on October 1, 2025.

UPDATES TO SNF PAYMENT RATES

As part of the rule, CMS will update SNF rates by 3.2%.  This update is based on a final SNF market basket of 3.3%, increased by a 0.6% market basket forecast error adjustment, and reduced by a 0.7% productivity adjustment.  The rule is projected to increase SNF payments by $1.16 billion compared to payments in FY25.

A forecasting error occurs when the projected SNF market basket increase differs from the actual increase, with CMS applying an adjustment if the difference exceeds 0.5%. For FY24, the SNF market basket was projected at 3.0% but increased by 3.6%, triggering a 0.6% forecast error adjustment. CMS attributes this error to underestimating the impact of higher-than-expected labor cost growth, particularly in wages and benefits for SNF staff, which drove the actual market basket increase above projections.

The FY26 final rule’s net market basket update of 3.2% is 0.4% higher than the 2.8% update in the proposed rule. Specifically, the market basket update rose from 3.0% to 3.3% (due to updated forecasts using more recent cost/claims data through the first quarter of 2025 and reflecting ongoing price pressures), while the productivity adjustment decreased from 0.8% to 0.7% based on revised projections of lower economic growth.

SNF QUALITY REPORTING PROGRAM (QRP)

CMS finalized amendments to the SNF QRP reconsideration policy for FY26, allowing SNFs to request extensions for filing reconsideration requests due to extraordinary circumstances. Requests must be submitted via email within 30 days of noncompliance notification, including the SNF’s CCN, business details, contact information, reason for delay, and supporting evidence like photos or media reports. For this change, CMS estimates an incremental administrative burden of 51 hours annually across 202 requests at $2,391.90.

For FY27, CMS finalized the removal of four SDOH standardized patient assessment data elements from the Minimum Data Set (MDS), effective for residents admitted on or after October 1, 2025. The removed items consist of one living situation element (R0310), two food elements (R0320A and R0320B), and one utilities element (R0330). This change reduces the SNF annual reporting burden by 31,791.20 hours and $2,228,563.12 in costs across 15,253 SNFs, based on a $70.10 hourly composite wage rate for RNs and LPNs.

CMS received varied feedback on future QRP enhancements through three RFIs, including measure concepts for delirium, interoperability, nutrition, and well-being. On a potential delirium measure, supporters noted its value for care, but opponents raised concerns over underreporting, feasibility, and added burden for rural SNFs. For shortening data submission deadlines to 45 days post-quarter, some commenters worried about error rates and advocated for 60 days or phased implementation with technical support. Regarding digital quality measurement via FHIR, stakeholders urged a minimum 12-month transition, voluntary pilots, grants for IT adoption, and safeguards for facilities with limited connectivity. Input generally stressed stakeholder engagement to minimize disparities and administrative load.

SNF VALUE-BASED PURCHASING (VBP) PROGRAM

CMS finalized the scoring methodology for the SNF Within-Stay Potentially Preventable Readmission (WS PPR) measure beginning FY28, replacing the Skilled Nursing Facility 30-Day All-Cause Readmission Measure (SNFRM) and using a hierarchical logistic regression model for risk adjustment. The measure assesses readmissions during SNF stays with a 2-year data period to enhance reportability for lowvolume SNFs. Codified at §§ 413.338(e)(1) and (e)(3), it aims to improve performance evaluation accuracy. Commenters supported adoption but raised concerns for low-volume rural SNFs, citing their historically better performance. Suggestions to avoid score inversion for clarity and add bonuses for Tribal facilities were not adopted. This adjustment encourages SNFs to focus on preventing readmissions mid-stay, which could lower overall healthcare expenditures and enhance care continuity.

CMS finalized performance standards for FY28 measures, including SNF HAI (achievement threshold 0.92183, benchmark 0.94491), Total Nurse Staffing Hours (3.29119, 5.87448), Total Nursing Staff Turnover, Falls with Major Injury (Long-Stay), Hospitalizations per 1,000 Long-Stay Resident Days, and DC Function, with minor differences from proposed values. For FY29, standards cover DTC PAC SNF (0.43478, 0.68049) and SNF WS PPR (0.86219, 0.92400). Standards follow the FY17 methodology, with other FY29 measure estimates slated for the FY27 proposed rule. No baseline or performance periods were specified. No specific feedback was provided on these standards. Establishing these thresholds helps facilities prioritize specific metrics to boost their VBP scores and secure better payment adjustments.

CMS finalized the elimination of the Health Equity Adjustment (HEA) bonus points from SNF VBP scoring. Adopted in FY24, the HEA awarded extra points to SNFs serving at least 20% dual-eligible residents while excelling in quality measures like preventing readmissions or reducing falls. It was created to address health disparities, encouraging SNFs to prioritize quality for low-income patients who often face worse outcomes. As part of the HEA, the VBP payback percentage (the portion of the 2% withhold returned as incentives based on performance scores) was adjusted. By raising this payback from 60% to ~66%, the HEA would have redistributed an additional $50–60 million annually in bonuses without cutting other SNF payments.  This would have supported facilities in underserved areas without penalizing others in the program. CMS had previously projected ~15% of SNFs (~2,250 facilities) would have qualified for the enhanced HEA bonus payments.

ICD-10 MAPPING

The ICD-10 mapping in the SNF PPS refers to the system used under the Patient-Driven Payment Model (PDPM) to assign primary diagnoses from Medicare Part A claims to clinical categories for the physical therapy, occupational therapy, speech-language pathology, and non-therapy ancillary components, determining case-mix adjustments and payment rates, with mappings updated annually to reflect new codes and clinical accuracy.

In the FY26 final rule, CMS finalized technical revisions to these PDPM ICD-10 code mappings effective October 1, 2025, through September 30, 2026, specifically changing assignments for 34 new ICD10 codes effective October 1, 2024: 33 codes (covering conditions like Type 1 diabetes mellitus, hypoglycemia, obesity, anorexia nervosa, bulimia nervosa, binge eating disorder, pica, and rumination disorder) were reassigned to the “Return to Provider” category to prevent their use as primary diagnoses for SNF stays, while one code (G90.81 for serotonin syndrome) was shifted from “Acute Neurologic” to “Medical Management.”

According to CMS, these shifts ensure mappings align with current clinical guidelines and coding practices, reducing inappropriate categorizations that could affect reimbursement. No updates were made to Hierarchical Condition Category versions for the SNF Value-Based Purchasing Program or the Within-Stay Potentially Preventable Readmission measure.

REQUESTS FOR INFORMATION (RFIS)

As part of the final rule, CMS does not issue any new requests for information (RFIs).  However, it references a standalone RFI on streamlining regulations and reducing administrative burdens, issued separately on January 31, 2025, in response to Executive Order (EO) 14192.  To that end, the final rule encourages interested stakeholders to submit feedback on that matter by September 15, 2025.

We trust you found this summary useful. Please reach out to us with any questions.

©2025 Chamber Hill Strategies. All rights reserved. Any use of these materials including reproduction, modification, distribution or republication, without the prior written consent of Chamber Hill Strategies is strictly prohibited.

On July 31, 2025, the Centers for Medicare and Medicaid Services (CMS) released the Fiscal Year 2026 Medicare Hospital Inpatient Prospective Payment System (IPPS) Final Rule. A fact sheet from CMS can be found here. The final rule takes effect on October 1, 2025.

UPDATES TO IPPS PAYMENT RATES

As part of the final rule, CMS finalized a 2.8% increase in payment rates for FY26 under the IPPS for acute care hospitals that meet the Hospital Inpatient Quality Reporting Program and meaningful EHR use requirements, effective for discharges on or after October 1, 2025. This update reflects a projected FY26 hospital market basket increase of 3.3%, reduced by a 0.5% productivity adjustment. The final rule also sets a fixed loss threshold for outlier payments at $43,663 (slightly lower than the FY25 threshold of $46,217) to maintain outlier payments at 5.1% of total IPPS payments. Total IPPS payments are projected to increase by approximately $4 billion, including $1.5 billion in uncompensated care payments to disproportionate share hospitals.

Compared to the proposed rule’s 2.4% payment rate increase (based on a 3.2% market basket increase minus a 0.8% productivity adjustment), the final rule’s 2.8% update reflects a higher market basket projection of 3.3% and a lower productivity adjustment of 0.5%, incorporating more recent 2024 data. The fixed loss outlier threshold decreased from the proposed $44,305 to $43,663, driven by updated cost and charge data. The $4 billion total payment increase aligns with the proposed rule’s estimate, but the uncompensated care payment rise reflects a refined projection of an 8.5% uninsured rate for CY26

MEDICARE-DEPENDENT HOSPITALS (MDHS) AND LOW-VOLUME HOSPITALS

The MDH program provides enhanced payments to small rural hospitals (≤100 beds, not Sole Community Hospitals) where at least 60% of inpatient days or discharges are attributable to Medicare patients, using a blended rate that includes 75% of the federal rate plus 25% of the hospital-specific rate based on historical costs. The low-volume hospital adjustment offers percentage add-ons to IPPS payments for rural hospitals with low annual discharges to offset higher per-case costs, currently on a sliding scale up to 25% for facilities with fewer than 3,800 discharges and more than 15 road miles from another subsection (d) hospital.

Both programs are set to expire at the end of FY25 (September 30, 2025). In the FY26 final rule, CMS notes that if Congress does not extend the Medicare-Dependent Hospital (MDH) program, approximately 150-160 hospitals will lose their MDH payment adjustment. Similarly, failure to renew the low-volume hospital payment adjustment would cause around 600 hospitals to miss out on additional payments in FY26. The combined loss in funding would total approximately $500 million in FY26. At this stage, we anticipate Congress will extend both programs as part of “extenders” legislation addressing expired or soon-to-expire healthcare policies (as Congress has done on a bipartisan basis for both the MDH and low-volume add-ons for several years now). However, there will be some uncertainty around this given the partisan dynamics of the appropriations process and the fact that lawmakers are likely to enact at least one (if not more) continuing resolutions before full-year FY26 appropriations legislation (to which extenders would likely be attached) will be enacted into law.

DISCONTINUATION OF THE LOW-WAGE INDEX HOSPITAL POLICY

The low wage index hospital policy was established in the FY20 IPPS final rule as a temporary, budgetneutral initiative to address wage index disparities, which benefited rural hospitals by raising their wage indices to mitigate lower payment impacts. This policy adjusted the wage index for hospitals in the bottom quartile, setting a floor at the 25th percentile value, which was offset by a corresponding reduction for higher-wage hospitals. However, in July 2024, the U.S. Court of Appeals for the D.C. Circuit in Bridgeport Hosp. v. Becerra ruled that CMS lacked the statutory authority under sections 1886(d)(3)(E) or 1886(d) (5)(I) of the Social Security Act (SSA) to implement this policy, vacating both the policy and its budget neutrality adjustment.

For FY26, CMS finalized the discontinuation of the low wage index hospital policy. To cushion the abrupt payment reductions for affected low-wage hospitals, CMS adopted a budget-neutral narrow transitional payment exception specifically for FY26 IPPS calculations. This exception replicates the interim transitional policy from the FY25 interim final rule with comment period (i.e., if the hospital’s FY26 wage index is decreasing by more than 9.75% from the hospital’s FY24 wage index, then the transitional payment exception for FY26 for that hospital is equal to the additional FY26 amount the hospital would be paid under the IPPS if its FY26 wage index were equal to 90.25% of its FY24 wage index).

UPDATE TO THE IPPS LABOR-RELATED SHARE

In the IPPS final rule, CMS finalized a reduction in the labor-related share from 67.6% to 66.6% for hospitals with a wage index greater than 1.0 and from 62% to 60.9% for those with a wage index of 1.0 or less, based on a rebased and revised 2023-based IPPS market basket. This adjustment aligns payments more closely with updated labor cost data. Still, it reduces the portion of payments adjusted by the wage index, likely lowering reimbursements for hospitals in high-wage areas.

HOSPITAL INPATIENT QUALITY REPORTING (IQR) PROGRAM

CMS finalized modifications to several existing measures in the Hospital IQR Program:

• For the Hospital 30-Day, All-Cause, Risk-Standardized Mortality Rate Following Acute Ischemic Stroke Hospitalization (MORT-30-STK) measure, changes include incorporating Medicare Advantage patients, shortening the performance period to two years (July 1, 2023–June 30, 2025), transitioning to ICD-10 risk adjustment, and removing COVID-19 exclusions, effective for FY27 payment determinations
• The Hospital-Level, Risk-Standardized Complication Rate Following Elective Primary Total Hip Arthroplasty and/or Total Knee Arthroplasty (COMP-HIP-KNEE) measure was updated similarly with Medicare Advantage inclusion, a two-year performance period (April 1, 2023–March 31, 2025), ICD10 risk adjustment, and COVID-19 exclusion removal, also effective FY27.
• For the Hybrid Hospital-Wide Readmission (HWR) and Hybrid Hospital-Wide Mortality (HWM) measures, submission thresholds were lowered to 70% for core clinical data elements and linking variables, allowing up to two missing lab results or vital signs, effective for FY28 payment determinations (July 1, 2025–June 30, 2026).

CMS also finalized the elimination of multiple measures from the Hospital IQR Program. The Hospital Commitment to Health Equity (HCHE), COVID-19 Vaccination Coverage Among Healthcare Personnel (HCP), Screening for Social Drivers of Health, and Screen Positive Rate for Social Drivers of Health measures were removed effective for the CY24 reporting period and FY26 payment determination.

As part of the final rule, CMS finalized enhancements to the Extraordinary Circumstances Exception (ECE) policy in the Hospital IQR Program to provide greater flexibility and reduce penalties during disruptions. The ECE request submission deadline was extended from 90 to 180 days, and partial exceptions for individual measures were allowed rather than requiring all-or-nothing requests, effective immediately upon f inal rule publication. Hospitals can now receive ECEs for up to three consecutive years, with exceptions due to public health emergencies and data submission delays. The post-event request deadline was extended to 60 days, and full cost reporting period exceptions were permitted for widespread impacts.

MEDICARE PROMOTING INTEROPERABILITY PROGRAM

As part of the final rule, CMS made several modifications to the Medicare Promoting Interoperability Program:

• CMS finalized the definition of the EHR reporting period for CY26 and subsequent years as a minimum of any continuous 180-day period within the calendar year for eligible hospitals and CAHs participating in the Medicare Promoting Interoperability Program. This change, codified at 42 CFR 495.4, provides greater flexibility in selecting reporting windows to accommodate operational needs. It maintains consistency with CY25 requirements while supporting EHR vendors in certification processes.
• CMS modified the Security Risk Analysis measure to require eligible hospitals and CAHs to attest “Yes” to both conducting a security risk analysis and performing security risk management activities, in accordance with 45 CFR 164.308(a)(1)(ii)(A) and (B), starting with the EHR reporting period in CY26. This includes addressing the security of data created or maintained by CEHRT, such as encryption under 45 CFR 164.312(a)(2)(iv) and 164.306(d)(3). Attesting “No” to either component results in failing the measure and potential downward payment adjustments. The update enhances cybersecurity practices without adding economic impacts beyond existing requirements.
• CMS updated the Safety Assurance Factors for EHR Resilience (SAFER) Guides measure, mandating eligible hospitals and CAHs to attest “Yes” to completing an annual self-assessment using all eight 2025 SAFER Guides at any point during the calendar year, effective for the EHR reporting period in CY26 and beyond. The 2025 Guides are streamlined to address high-risk issues through technology or practice changes, focusing on foundational, infrastructure, and clinical processes. No specific implementation status is required, and the change does not increase burden estimates. This promotes proactive EHR safety assessments to mitigate common vulnerabilities.
• CMS introduced an optional bonus measure under the Public Health and Clinical Data Exchange objective, allowing eligible hospitals and CAHs to earn five bonus points for exchanging health information with a public health agency using the Trusted Exchange Framework and Common Agreement (TEFCA), beginning with the EHR reporting period in CY26. Requirements include being a signatory to a Framework Agreement, not suspended, submitting data consistent with exchange measures, achieving active engagement under Option 2, and using CEHRT functions. No exclusions were proposed, and attestation is voluntary with no additional burden for those already using TEFCA. This incentivizes advanced interoperability while accommodating varying hospital capabilities.

Separately, CMS reflected on the comments it received in response to three requests for information (RFIs) relating to potential future policy changes regarding the interoperability program:

• Commenters supported transitioning the Query of PDMP measure to a performance-based format for better accountability in tracking queries and preventing opioid misuse and expanding the measure to include additional drug types. However, opponents highlighted increased administrative burdens, especially for rural hospitals, along with concerns over privacy, legal barriers, data accuracy, and interoperability issues with state PDMP systems. Suggestions included phased implementation, technical assistance, EHR integration, federal funding, and pilot testing to ensure smoother adoption.
• Many commenters endorsed moving the Medicare Promoting Interoperability Program’s objectives and measures toward performance-based reporting to align with value-based care, reduce administrative burdens, and provide real-time metrics that benefit low-volume hospitals. Opponents raised issues about heightened reporting complexity, resource strains on smaller practices, data reliability, and potential unfair penalties due to readiness disparities. Recommendations focused on phased rollouts, technical support, risk adjustments, clear thresholds, and pilot testing.
• Stakeholders advocated for improvements in health information exchange quality and completeness through standardized APIs, real-time data sharing, and updated standards like USCDI Version 3 and FHIR, which would enhance care coordination, public health reporting, and address technology disparities. Concerns centered on implementation costs, data security/privacy risks, survey fatigue, and the immaturity of certain standards. Suggestions included provider education, incentives for early adopters, robust security measures, phased approaches, and the collection of disaggregated data.

HOSPITAL READMISSIONS REDUCTION PROGRAM

In the final rule, CMS finalized updates to the Hospital Readmissions Reduction Program by modifying all six condition-specific readmission measures (AMI, HF, PN, COPD, THA/TKA, CABG) to include Medicare Advantage (MA) beneficiaries in performance calculations starting FY27, using a shortened twoyear applicable period (July 1, 2023–June 30, 2025), while removing COVID-19 diagnosis exclusions and updating risk adjustment to individual ICD-10 codes. Due to concerns about data reliability from commenters, CMS did not finalize including MA data in aggregate payment calculations for excess readmissions. The rule extends the Extraordinary Circumstances Exception (ECE) submission deadline from 30 to 60 days, allowing CMS discretion to grant extensions or exceptions proactively for systemic issues.

HOSPITAL ACQUIRED CONDITION (HAC) REDUCTION PROGRAM

For FY26, CMS will maintain the 1% payment reduction for hospitals in the worst-performing quartile based on measures including CMS PSI 90 and CDC NHSN HAI indicators such as CAUTI, CLABSI, SSI, MRSA Bacteremia, and CDI. The rule updates the Extraordinary Circumstances Exception (ECE) policy by extending the submission deadline from 30 to 60 days after public comments, allowing CMS to grant extensions or ECEs proactively for systemic issues, and clarifying notification processes. It also provides notice of rebasing NHSN HAI measures using CY22 data (effective for FY28 program year scoring with CY24-25 performance periods) and removes COVID-19 diagnosis exclusions from PSI 90 and other measures starting FY27. Scoring methodology remains unchanged, with equal weighting of domains and public reporting on Hospital Compare.

HOSPITAL VALUE-BASED PURCHASING (VBP) PROGRAM

CMS finalized modifications to several retained measures in the Hospital VBP Program:

• The Hospital-Level Risk-Standardized Complication Rate Following Elective Primary THA/TKA (COMPHIP-KNEE) was updated to include Medicare Advantage beneficiaries, shorten the performance period to two years (April 1, 2023–March 31, 2025), transition to ICD-10 risk adjustment, and remove COVID-19 exclusions, effective for the FY33 program year.
• Similarly, the Hospital 30-Day, All-Cause, Risk-Standardized Mortality Rate Following Acute Ischemic Stroke (MORT-30-STK) incorporated Medicare Advantage patients aged 65+, reduced the performance period to two years (July 1, 2023–June 30, 2025), updated risk adjustment to ICD-10 codes, and eliminated COVID-19 exclusions, starting FY27.
• For the Hybrid Hospital-Wide Readmission (HWR) and Hybrid Hospital-Wide Mortality (HWM) measures, submission thresholds for core clinical data elements and linking variables were lowered to 70%, allowing up to two missing lab values or vital signs, effective FY28 with performance periods from July 1, 2025–June 30, 2026.

CMS eliminated several measures from the Hospital VBP Program:

• The Health Equity Adjustment (HEA) was removed effective FY26 to simplify scoring, as its impact on payment adjustments was minimal (0.168% vs. 0.170%).
• The Health Equity Adjustment (HEA) was removed effective FY26 to simplify scoring, as its impact on payment adjustments was minimal (0.168% vs. 0.170%).
• The Medicare Spending Per Beneficiary (MSPB) Hospital measure and Hospital-Level Risk-Standardized Complication Rate Following Elective Primary THA/TKA were eliminated effective FY28 to minimize overlap and address low case volumes with limited scoring impact.

TRANSFORMING EPISODE ACCOUNTABILITY MODEL (TEAM)

In the FY26 IPPS final rule, CMS finalized multiple updates to the Transforming Episode Accountability Model (TEAM), effective January 1, 2026, for five-episode categories (CABG, THA/TKA, spinal fusion, major bowel procedure, acute myocardial infarction), including:

• To support hospital participation, CMS introduced a limited deferment period for certain hospitals, excluded Indian Health Service hospitals, and eliminated downside financial risk for low-volume hospitals with fewer than 31 episodes.
• For quality and performance measurement, CMS added the Information Transfer Patient Reported Outcome-based Performance Measure, assigned neutral scores for participants with insufficient quality data, and removed health equity plans and social needs data reporting, alongside eliminating the Decarbonization and Resilience Initiative to streamline reporting.
• Risk adjustment and pricing were refined by adopting a 180-day lookback period with HCC version 28, replacing the Area Deprivation Index with the Community Deprivation Index, reconstructing normalization trend factors, and establishing a methodology for target pricing during coding changes.
• The SNF 3-day rule waiver was broadened to allow TEAM participants to bypass the 3-day inpatient hospital stay requirement for SNF admissions across all episode categories, modifying the primary care services referral requirement, and aligning episode attribution date ranges.

REQUESTS FOR INFORMATION (RFIS)

As part of the final rule, CMS includes an RFI on streamlining regulations and reducing administrative burdens for those participating in the Medicare program (a response to Executive Order (EO) 14192). To that end, CMS encourages interested stakeholders to submit feedback on that matter by September 15, 2025.