CMS FY27 rule expands bundled payments, adjusts Medicare inpatient reimbursement rate

For the first time, a value-based payment model is set to become mandatory for almost all hospitals nationwide.

The expansion of the Comprehensive Care for Joint Replacement (CJR) Model is a headlining provision of the newly released Medicare FY27 proposed rule for hospital inpatient services and long-term care hospitals (LTCHs).

Also in the rule, CMS projects a payment increase of 2.4%, or $1.4 billion, when the new fiscal year begins Oct. 1. The update is based on a 3.2% increase to the market basket and a 0.8% reduction via the mandatory economywide productivity adjustment.

Hospital advocates were displeased with the preliminary payment increase.

“CMS’s proposed update is a step in the right direction, but it does not negate the compounding effects of rising inflation, record levels of uncompensated care and a growing uninsured population,” Charlene McDonald, president and CEO of the Federation of American Hospitals, said in a written statement.

LTCHs would receive a payment update of 2.3% per discharge, according to the proposed rule. The LTCH outlier payment threshold would stay at its FY26 level, equating to 8% of estimated total payments, according to a fact sheet.

Net impact after outlier, wage index and UC adjustments

For acute-care hospitals, reductions to supplementary payments would bring down the Medicare inpatient payment increase to 1.2%, on average, albeit with significant regional variation (see the table on page 1474 of the pre-published PDF).

Among the projected drags on the update are a 0.7% negative impact from a year-over-year drop in payments for high-cost outlier cases. The anticipated decrease is because FY26 outlier payments are estimated to exceed the statutory target, CMS wrote.

A 0.2% decline in the net update would stem from an estimated $253 million reduction in uncompensated care (UC) payments. That’s based on projections regarding the uninsured rate relative to a baseline year.

A concern for hospitals is that the UC payment decrease would apply just as numbers of uninsured are rising due to the termination of Affordable Care Act marketplace insurance enhanced subsidies, with another increase anticipated in 2027 from Medicaid cutbacks.

Changes to the wage index would trim the FY27 payment update by 0.1%, due to implementation of refreshed cost-report data, along with the usual budget neutrality adjustments.

As is customary, hospitals would receive a lesser payment increase if they fail to participate in quality reporting or don’t meet the criteria to be designated a meaningful user of electronic health records (EHRs).

Shifts in the market basket inputs could change the payment update between the proposed rule and the FY27 final rule, which is due out in August. Also, projected payments would increase for Medicare-dependent hospitals (MDHs) if Congress renews the MDH supplemental payment ahead of its scheduled Jan. 1 expiration.

CJR-X model to bring mandatory bundled payments

The big policy proposal in the rule is for a nationwide iteration of the CJR Model to launch Oct. 1, 2027. CJR originally took place from 2016 through 2024 as a mandatory bundled payment model covering hip and knee replacements in select markets.

In the new model, known as CJR-X (Comprehensive Care for Joint Replacement Expanded), ankle replacement surgeries also would be part of the program, and the model would apply in hospital outpatient settings along with inpatient units.

The rationale for expanding the model across the country, according to CMS, is strong evidence of cost savings from applying bundled payments to joint replacement, with no adverse impact on quality and outcomes.

The new model would be expected to “create strong incentives for hospitals to coordinate care more effectively, avoid unnecessary services like avoidable rehospitalization and emergency care, and focus on delivering the best outcomes for patients,” CMS states in a news release. “It would specifically encourage better communication with post-acute care providers to support recovery.”

Financial accountability for an episode would encompass the procedure, the subsequent hospital stay and a 90-day post-discharge window. As in CJR and the two Bundled Payments for Care Improvement models, episode spending would be compared to a target price to determine whether the hospital receives a reconciliation payment or owes money back to CMS. Hospitals would need to meet quality-based thresholds to secure shared savings.

“While we appreciate CMS’s efforts to expand the reach of value-based models, we believe that mandatory participation presents significant challenges, particularly for hospitals that lack the scale or financial capacity to make the necessary investments in care redesign,” Ashley Thompson, vice president with the American Hospital Association, said in a written statement.

The transition from TEAM to CJR-X

Not participating in CJR-X at the outset would be the 700-plus hospitals engaging with bundled payments via the mandatory Transforming Episode Accountability Model (TEAM) starting this year. Participants in TEAM would shift to CJR-X in 2031, following the expiration of the former.

Also excluded from the model would be hospitals (e.g., critical access hospitals, rural emergency hospitals) that are not paid under the prospective payment systems for inpatient and outpatient care, along with Maryland hospitals, given that state’s all-payer rate-setting model.

CMS says lower-resourced participants in CJR-X would be protected via a 5% stop loss applied to various categories of rural and safety-net hospitals.

“CJR-X would also adopt a robust risk adjustment methodology that uses 29 risk adjusters compared to three in the CJR Model,” the agency states.

Quality reporting and interoperability changes

Among the other provisions in the proposed rule, the Inpatient Quality Reporting (IQR) Program would add a measure starting with the CY27 reporting period to gauge excess days in acute care after hospitalization for diabetes.

Two new electronic clinical quality measures (eCQMs) to be reported starting in CY28 would assess advance care planning and hospital harm from postoperative venous thromboembolism (VTE). In turn, two current VTE-related eCQMs and an antithrombotic therapy eCQM would be removed.

Five mortality measures would be modified by incorporating Medicare Advantage patients and shortening the reporting period from three years to two beginning in CY26 (with the effective date of the final rule). The modifications also would apply to the same measures in the Hospital Value-Based Purchasing Program.

Reporting would become mandatory in CY28 for current eCQMs reflecting malnutrition care and hospital harm, although the latter set would carry a two-year voluntary period.

Modifications to the Promoting Interoperability (PI) Program, which assesses EHR meaningful use, would align measure additions and removals with the changes to the IQR Program in CY28. The PI Program would be streamlined by eliminating certain surveillance attestations (in CY26) and referral-loop measures (in CY28), while a measure reflecting electronic prior authorization would be modified and a new CY27 measure would incorporate implantable medical device identifiers.

Among changes to the Medicare pay-for-performance programs, the Hospital Readmissions Reduction Program in FY29 would require reporting of 2025-2027 sepsis readmission data.