Medicare’s FY26 inpatient hospital proposed rule includes a restrained payment update

The Trump administration’s first set of Medicare proposals establishing inpatient payment rates continued what hospital advocates describe as a long-term trend in which the annual update is lacking.

A 3.2% increase in the market basket would be reduced by a 0.8% statutory productivity adjustment, according to the newly released FY26 proposed rule. Hospitals that meet requirements related to quality reporting and electronic health record use would average a 2.4% net increase in operating payments over FY25.

CMS is proposing to rebase and revise the market basket using the latest available hospital cost-reporting data. The labor-related share, which determines the proportion of the payment update that is variable based on the area wage index, would decrease from 67.6% to 66% starting in FY26, with CMS saying the drop reflects 2023 wage, benefits and contract-labor data.

“While CMS’s proposed [payment] update reflects the inflation formulas established by law, the reality is that patient care still faces the twin problems of hangover cost increases from hyperinflation and the cumulative effect of inadequate payment over time from Medicare and Medicaid,” the Federation of American Hospitals said in a written statement.

Comments on the rule are due by June 10 at regulations.gov. While many included policies are subject to change based on stakeholder feedback, the payment rate typically changes from the proposed rule to the final rule only based on updated market-basket data or actions by Congress.

Supplemental payments

Total payments to hospitals would increase by an estimated $4 billion through the proposed increases to operating and capital payments described in the 1,361-page PDF version of the rule.

Uncompensated care (UC) payments to disproportionate share hospitals would increase by $1.5 billion, according to a fact sheet, while new-technology add-on payments would rise by $234 million.

Interim UC payments for FY26 and subsequent years will be calculated based on the three most recent years of available discharge data, up from two years, according to a provision finalized in FY25 regulations.

For the new-technology payments, a determination of whether a technology is in its two- to three-year newness period now will be based on the start of the fiscal year (e.g., Oct. 1, 2025) instead of April 1.

A policy drafted during President Donald Trump’s first administration was intended to improve payments for rural hospitals by increasing the wage-index values of hospitals in the lowest quartile. To preserve budget neutrality, the general inpatient payment rate was reduced.

That reduction spurred hospitals to sue HHS, and in July 2024, an appeals court affirmed a lower court’s decision and vacated the policy. The Biden administration terminated the policy effective last Sept. 30. As a transitional policy, a hospital’s FY26 wage-index decrease relative to FY24 is proposed to be capped at 9.75%, with budget neutrality requiring a corresponding decrease in payments to all hospitals.

Pay for reporting

A hospital’s inpatient payment update can be reduced for noncompliance with requirements of the Inpatient Quality Reporting (IQR) and Promoting Interoperability (PI) programs. Proposed changes to those programs over the next two years are designed to reduce administrative burden by more than 660,000 hours across hospitals.

Medicare Advantage (MA) patients would be included in an IQR measure that reports complication rates following total hip and total knee arthroplasties and in another measure that reports mortality rates following acute ischemic stroke. To improve IQR reporting, the performance period would be shortened to two years and the risk adjustment methodology would use ICD-10 codes instead of hierarchical condition categories (HCCs).

A pair of IQR measures reflecting hospital readmission and mortality rates would be adjusted to ease the reporting burden, allowing for up to two missing laboratory results and two missing vital signs while reducing the submission threshold from 90% to 70% of cases.

Three IQR measures would be removed in keeping with the administration’s deemphasis of health equity and social determinants of health, and a metric regarding COVID-19 vaccination rates for healthcare personnel also would be terminated.

“We particularly welcome [CMS’s] emphasis on ways to streamline and focus quality measurement efforts, including by proposing to eliminate the outdated reporting related to staff vaccination rates,” the American Hospital Association (AHA) said in written comments.

A previously finalized PI Program change for 2026 will increase the performance-based points threshold from 70 to 80.

Pay for performance

Some of the same changes proposed for the IQR Program would be implemented in the Hospital Value-Based Purchasing (HVBP), Hospital Readmissions Reduction (HRR) and Hospital-Acquired Condition Reduction programs. The HVBP Program redistributes 2% of DRG payments based on performance in quality metrics, while the other two programs reduce payments for poorly performing hospitals.

In the HVBP Program, proposed updates over the next two years include modifications in determining the risk-standardized complication rate following knee and hip arthroplasties and a switch from HCCs to ICD-10 in risk adjustment for those procedures. The health equity adjustment would be eliminated from the scoring methodology.

Another change would require hospitals to include COVID-19 patients in the denominator for five conditions and the procedure-specific mortality measure, along with the measure on complications from knee and hip arthroplasties.

Key changes to the HRR Program would begin in FY27, incorporating MA data in the six readmission measures and the calculation of aggregate payments for excess readmissions. In addition, the performance measurement period would decrease from three years to two and the exclusion of COVID-19 patients in risk adjustment would be removed.

Mandatory bundled payments

The Transforming Episode Accountability Model (TEAM) for bundled payments, which is mandatory in 2026-2030 for more than 700 hospitals in previously selected markets, would undergo minor changes.

A bigger change would take effect in 2028, adding patient-reported outcomes in outpatient settings as a quality measure. The specific measure assesses patients’ views of how well information is transferred to them after the procedure. CMS said gauging care quality in outpatient settings is key because two of the five TEAM procedures — lower-extremity joint replacement and spinal fusion — are initiated in outpatient departments.

There also are various technical changes to the methodology for setting the price benchmarks that determine whether participating hospitals will receive incentive payments or owe money back to Medicare.

A previously proposed waiver of the three-day rule for establishing skilled nursing facility (SNF) care eligibility would be expanded to cover beneficiaries discharged to hospitals that provide post-acute care under swing-bed arrangements. The idea is to enhance access to post-acute care in rural and underserved areas.

As an effort to decrease reporting requirements, measures on readmissions would be updated to align with similar measures in the IQR and HRR programs.

The AHA expressed concern that even after the proposed changes, TEAM “may force hospitals to assume more risk than they can manage, threatening their ability to maintain access to quality care. Thus, we continue to urge the agency [CMS] to make TEAM voluntary.”

Paperwork issues

CMS is tentatively planning to add two worksheets to the hospital cost report (Form 2552-10). The worksheets would document a hospital’s payment adjustments for establishing and maintaining access to a buffer stock of essential medicines and for purchasing NIOSH-approved surgical N-95 respirators.

The first of those payments is available only to independent hospitals with fewer than 100 beds.

Other healthcare settings

Long-term care hospitals (LTCHs) would receive a 2.2% Medicare payment increase in FY26, according to the proposed rule. The update is based on a market-basket increase of 3.4% and the 0.8% productivity adjustment, along with a reduction in high-cost outlier payments.  CMS says the outlier threshold needs to rise to meet statutory requirements that set the outlier payment percentage.

The small payment increase “would lead to continued strain on these providers as they care for some of Medicare’s sickest patients,” the AHA wrote in its statement. “In recent years, the outlier threshold has skyrocketed, forcing LTCHs to absorb tens of thousands of additional dollars in losses before Medicare will help cover some costs of extremely ill beneficiaries.”

Also published recently were Medicare FY26 proposed rules for other facilities that receive Part A payments, including hospices, inpatient psychiatric facilities, inpatient rehabilitation facilities and skilled nursing facilities.

Another notable development for SNF regulations was a federal judge’s decision to vacate staffing-related and other requirements that were drafted by the Biden administration and would have begun in 2026 for most facilities. Unless the Trump administration surprisingly chooses to appeal the ruling, the regulations appear to be null and void.