CMS releases the FY 2026 IPPS Proposed Rule with a deregulation RFI

The Centers for Medicare & Medicaid Services (CMS) has released its annual proposed rulemaking for the Medicare Program's Hospital Inpatient Prospective Payment Systems (IPPS) for fiscal year 2026.

This Proposed Rule aims to revise and refine inpatient hospital service policies, update payment rates and introduce new policy changes. In alignment with the Administration's push to streamline regulations and reduce administrative burdens in Medicare, in accordance with Executive Order 14192, titled “Unleashing Prosperity Through Deregulation,” the Proposed Rule solicits public feedback on potential changes to Medicare regulations as a Request for Information (RFI) in an effort to reduce “the costly private healthcare expenditures required to comply with Federal regulations.”

The Proposed Rule was released alongside proposed payment rules applicable for long term care hospitals, skilled nursing facilities, inpatient rehabilitation facilities, inpatient psychiatric facilities and hospice wage index and payment rate updates. The proposed rules, scheduled for publication in the Federal Register on April 30, 2025, provide for a sixty day comment period. CMS will accept comments by 5 pm EDT on June 10, 2025. According to CMS, all comments received before the close of the comment period will be posted to regulations.gov as soon as possible after receiving them.

Key points from the Proposed Rule for the IPPS include the following:

Changes to IPPS payment rates 

The standardized amount

The proposed FY 2026 payment increase for general acute care hospitals that successfully participate in the Hospital Inpatient Quality Reporting program and meaningfully use electronic health records is 2.4 percent. If finalized, this would amount to an estimated US$4 billion in additional hospital payments compared to FY 2025, according to CMS. It reflects a projected FY 2026 hospital market basket percentage increase of 3.2 percent, reduced by an 0.8 percentage point productivity adjustment.

Hospital groups have expressed disappointment over the proposed 2.4 percent update, which many stakeholders consider insufficient. They are concerned that the 0.8 percent decrease in productivity will negatively impact hospital operations and patient care.

Rebased market basket and updated labor-related share

The proposed IPPS payment rates include a proposal to rebase and revise the 2018-based IPPS market basket to reflect a 2023 base year. To that end, CMS proposes a national labor‑related share of 66 percent to use for discharges occurring on or after October 1, 2025. The proposed labor-related share of 66 percent is 1.6 percentage points lower than the current 67.6 percent labor-related share.

Medicare DSH payment

Using the same distribution methodology for Medicare Disproportionate Share (DSH) payments as in FY 2025, CMS estimates that DSH payments will increase by US$1.5 billion, from US$9.2 billion to US$10.7 billion under the Proposed Rule.

Area wage index

In the FY 2020 IPPS final rule, CMS implemented a temporary budget-neutral policy to address wage index disparities affecting low-wage index hospitals, especially rural ones. However, on July 23, 2024, the D.C. Circuit Court ruled that the Secretary of the Department of Health and Human Services lacked the authority to establish this policy for FY 2020, vacating both the policy and its budget neutrality adjustment. See, Bridgeport Hosp. v. Becerra, 108 F.4th 882, 887–91 & n.6 (D.C. Cir. 2024).

Consequently, CMS intends to discontinue the low-wage index hospital policy for FY 2026 and beyond. Thus, the agency proposes to adopt a narrow, budget-neutral transitional exception for calculating FY 2026 IPPS payments for the impacted low-wage index hospitals. The proposed transitional exception would operate similarly to the interim policy for FY 2025.

Transforming Episode Accountability Model (TEAM)

CMS has implemented a new mandatory payment model called the "Transforming Episode Accountability Model” (TEAM), which will run for five years and began on January 1, 2026. This model aspires to test whether bundled payments can reduce Medicare expenditures for identified surgical procedures without compromising the quality of care for beneficiaries.

Proposed TEAM modifications in FY 2026 include:

• A limited deferment period for certain hospitals 
• Applying a neutral quality measure score for TEAM participants with insufficient quality data
• A methodology to construct target prices when there are coding changes
• Removing health equity plans and health-related social needs reporting, and
• Expanding the skilled nursing facility 3-day rule waiver to provide for a wider choice of and access to post-acute patient care.

CMS anticipates the model will result in savings to the Medicare program of US$481 million.

Hospital Inpatient Quality Reporting (IQR) program

CMS's proposed changes to the Hospital IQR program include refinements to and the removal of specific existing measures. The agency also proposes to update and codify the Extraordinary Circumstances Exception (ECE) policy to clarify that CMS has the discretion to grant an extension in response to a hospital's ECE request.

The agency also seeks comments on the following:

• Measure concepts related to well-being and nutrition for future consideration to advance the agency’s commitment to the Make America Healthy Again agenda including “seeking comments on tools and measures that assess overall health, happiness and satisfaction in life that could include aspects of emotional well-being, social connections, purpose and fulfillment.”
• The path forward for digital quality measurement and use of Fast Healthcare Interoperability Resources (FHIR).

Inclusion of Medicare Advantage patients in claims-based measures

Under the Proposed Rule’s hospital quality reporting and value programs, CMS proposes adding Medicare Advantage cohort data to calculate performance under certain hospital readmission reduction and mortality measures. CMS also proposes including Medicare Advantage patients in calculating all six measures used in the Hospital Readmissions Reduction Program (HRRP).  

Medicare Dependent Hospital (MDH) and low volume hospital payment adjustment

Section 2201 of the Full-Year Continuing Appropriations and Extensions Act, 2025 extended through FY 2025 the modified definition of a low-volume hospital and the methodology for calculating the payment adjustment for low-volume hospitals that had been in effect for FYs 2019 through 2024. Unless Congress acts to extend them, additional payments for the MDH program and the temporary change in payment adjustments for low-volume hospitals will expire on September 30, 2025.

The road ahead

The Proposed Rule is scheduled for publication in the Federal Register on April 30, 2025. Our team of experienced lawyers and professionals at Norton Rose Fulbright is closely monitoring the development, response and finalization of the IPPS rule, along with other payment regulations impacting the healthcare industry. If you have any questions about the IPPS Proposed Rule or other federal and state regulations, please do not hesitate to contact us.