2026 Medicare final rule postpones a significant payment cut for hospitals

While implementing several policies that could constrain hospital finances next year and beyond, CMS offered temporary relief on one count.

The Medicare 2026 final rule for hospital outpatient departments and ambulatory surgical centers (ASCs) was proposed to include an across-the-board 2% cut to base payments. But CMS, acknowledging the concerns of hospitals, kept the scheduled cut at 0.5% for next year, while saying the higher decrease is likely starting in 2027.

Originally anticipated to span 16 years at 0.5% per year beginning in 2026, the reduction is a budget neutrality measure related to a $9 billion remedy payment issued in late 2023 to hospitals participating in the 340B Drug Pricing Program. The remedy stemmed from a Supreme Court ruling that CMS acted unlawfully when it reduced the payment rate for 340B drugs from 2018 through late 2022.

Because budget neutrality obligated CMS to raise the overall outpatient payment rate during the years when the lesser 340B payments were in place, the agency said the same principle requires lowering the rate as a recoupment measure now that the remedy has been paid.

In the proposed outpatient and ASC rule issued in July, however, CMS announced plans to accelerate the payment decrease to 2% per year for six years. The change was about “restoring hospitals to their financial position had the original 340B policy never existed” more quickly than under the 16-year timetable, CMS wrote in a fact sheet on the final rule.

For some hospitals, such a reduction would have entirely offset the base payment increase they’re in store to receive in 2026.

Responding to hospital feedback

Among criticisms raised by hospitals and their advocates during the comment period for the proposed rule was that “they have relied on that [0.5% projected] amount in good faith in the nearly two years since [the remedy payment] to engage in financial planning and long-term investment decisions,” CMS wrote in the final rule.

While noting that it did not necessarily agree with many of the arguments, the agency said it was “persuaded” enough to keep the reduction at the lower rate.

However, “hospitals should anticipate that we will implement a larger adjustment beginning in 2027,” CMS wrote, with specifics to be announced as part of rulemaking next year.

“We hope that delaying for a year any increase to the 0.5% reduction will allow hospitals to do any necessary planning and help to mitigate any financial strain,” the agency wrote.

While allowing for advance planning, the delay means the accelerated payment cut will hit hospitals at roughly the same time as the big Medicaid reimbursement rollbacks legislated in the budget reconciliation bill known as the One Big Beautiful Bill Act (OBBBA).

 The rescheduled payment decrease “will only bring hospitals closer to the disastrous challenges wrought by H.R. 1 [the OBBBA], and we urge CMS not to move forward with it at all,” America’s Essential Hospitals, which represents safety net hospitals, said in a written statement about the rule.

Diminishing the payment update

From the proposed rule to the final rule, hospitals gained a slight increase in the 2026 base payment update. CMS finalized a 2.6% increase for hospitals that meet quality-reporting requirements, up from 2.4% in the proposed rule. The change arose from increases in market-basket data and a slight decrease in the economywide productivity adjustment.

The 0.5% decrease related to the 340B remedy payment detracts from the base update, however, and another negative factor has been introduced as well.

Namely, CMS finalized a proposal to expand site-neutral payment policy to include drug administration services. Those services will be reimbursed at the Medicare physician payment rate rather than the outpatient rate when furnished at off-campus provider-based departments (PBDs). CMS projects the policy will take 0.3% off the average hospital’s payment update for 2026.

CMS justified the policy as fulfilling its statutory authority to ensure payment policy does not influence hospital outpatient volumes. Current payment rates give providers incentives to steer drug administration services to PBDs, according to the agency, which said utilization of those services in hospital outpatient settings grew by more than 33% per beneficiary between 2020 and 2023.

Analyses show that for each of four ambulatory payment classification levels, the same service was paid at a 200% to 300% higher rate when delivered in outpatient departments compared with physician offices, CMS also wrote.

Drug administration services thus are being added to evaluation and management visits as services subject to site-neutral payment at off-campus PBDs. Facilities designated as sole community hospitals are exempt from the lower rates.

The policy could be subject to legal challenges, as hinted at by stakeholder comments asking whether CMS legitimately is authorized to implement such measures in the name of volume control.

Doing away with the IPO list

Another new policy with implications for hospital payment is the elimination of the inpatient-only (IPO) list over a three-year period. The process begins in 2026 with the removal of 285 services, most of which are musculoskeletal procedures. Removal means the services are eligible for Medicare payment when delivered in outpatient settings.

Services taken off the IPO list will be temporarily exempt from certain medical-review activities under the two-midnight rule, according to the new regulations. The exemption covers site-of-service claim denials, initial referral to recovery audit contractors (RACs), and RAC site-of-service reviews, and it will last for a given service until HHS determines that the service is more commonly performed in outpatient settings than in inpatient settings, based on claims data.

CMS affirmed that once the exemption ends, a service can still be eligible for Part A payment based on the physician’s judgment, even if the physician does not expect the stay to cross two midnights.

ASCs stand to reap some of the outpatient volume increase resulting from the termination of the IPO list. More than 270 services are being added to Medicare’s ASC covered procedures list (CPL) in conjunction with their removal from the IPO list. In addition, 289 procedures will be added based on relaxation of the ASC CPL criteria.

CMS says phasing out the IPO list and expanding the ASC CPL are motivated by an impetus to “empower physicians to have the ultimate say in what site of service is best for their patients.”

Payment for 340B drugs to be scrutinized

In a step toward possibly slashing the Medicare payment rate for 340B drugs, the new regulations include formal plans to conduct a survey of hospitals’ drug acquisition costs during Q1 2026 and every four years thereafter.

The survey will cover acquisition costs for each separately payable Part B drug, and data will be used to inform Medicare payment regulations for 2027. Hospitals will be asked to report their acquisition cost, net of rebates and discounts, for each National Drug Code (NDC), reflecting purchases over a one-year time frame starting July 1, 2024.

Discounts should be shown as linked to NDCs where applicable, as well as based on separate arrangements (e.g., wholesaler discounts), CMS says. For 340B drugs, hospitals are supposed to provide the acquisition cost of the drug both within and outside of the program.

The decision to conduct the mandatory survey harkens back to the Supreme Court case that struck down the 2018-2022 payment rate for 340B drugs. CMS had dropped the payment rate from average sales price (ASP) plus 6% to ASP minus 22.5%, saying the new rate better reflected the discounted costs being paid by hospitals.

The Supreme Court nullified the change on the basis that CMS was statutorily obligated to conduct a comprehensive survey of drug acquisition costs before implementing a payment reduction for only a certain class of hospitals (i.e., 340B hospitals).

Administrative burden in responding to the upcoming survey was projected to amount to 73.5 hours per hospital, according to the proposed rule. In comments, hospitals and their advocates said that estimate vastly undersold the required efforts. The agency since has updated its projection to 80.5 hours.

Not much time to react

One issue facing hospitals is the short turnaround time before the effective date of the new regulations in the sprawling rule, which totals 1,657 pages in PDF form. CMS typically adheres to a Nov. 1 deadline for publishing each year’s final rule, allowing for a 60-day window before the provisions take effect.

Due to the 43-day government shutdown, publication of the rule was delayed by three weeks. Yet the agency is maintaining the Jan. 1 effective date, with the exception of delays for a few components.

“With implementation timelines now severely compressed, hospitals have little time to understand finalized changes, adjust systems, update billing processes, revise budgets and train staff,” Premier Inc. said in a written statement.