CMS FFY 2026 Medicare IPPS proposed rule overview

When you partner with DataGen and use our Medicare fee-for-service policy analytics solution, you receive Medicare IPPS proposed rule payment briefs, along with additional essential Medicare fee-for-service (FFS) updates and materials throughout the year.  

DataGen provides an overview of the Centers for Medicare and Medicaid Services’ (CMS) federal fiscal year (FFY) 2026 proposed rule for the Medicare Inpatient Prospective Payment System (IPPS)   

Overview of policies for the FFY 2026 IPPS new proposed rule

The DataGen Medicare FFS policy analytics team summarized and analyzed the following policy changes in the new proposed rule: 

1. utilizing FFY 2024 Medicare Provider and Review (MedPAR) and FFY 2023 Hospital Cost Reporting Information System (HCRIS) data for standard calculations; 

2. updates to the Medicare Disproportionate Share Hospital (DSH) payment policies, including hospital eligibility for DSH Uncompensated Care (UCC) payments in FFY 2026 being based on audited FFYs 2020–2022 S-10 data; 

3. rebasing and revising the operating market basket and capital input price index (CIPI), including updating the labor-related share, using FFY 2023 Medicare cost report data; 

4. discontinuing the low wage index policy and implementing a budget neutral transitional wage index value for providers who were eligible for the low wage index policy in FFY 2024; 

5. changes to reclassification policies; 

6. Transforming Episode Accountability Model (TEAM) updates; 

7. Medicare Promoting Interoperability Program updates; 

8. Value-Based Purchasing (VBP) Program, Readmission Reduction Program (RRP), Hospital Acquired Conditions (HAC) Reduction Program and Hospital Inpatient Quality Reporting (IQR) Program updates;  

9. removal of the VBP Health Equity Adjustment (HEA) beginning with the FFY 2026 VBP program; and 

10. updates to the payment penalties for non-compliance with the Hospital Inpatient Quality Reporting (IQR) and Electronic Health Record (EHR) incentive programs. 

Proposed rule comments due date 

Comments on this proposed rule are due to CMS by June 10, and can be submitted electronically at regulations.gov by using the website’s search feature to search for file code “CMS-1833-P.” 

Important proposed rule areas to highlight 

When considering the policies in the new proposed rule, the team have highlighted additional areas for you to know.  

1. Rebasing and revision of the acute care hospital market basket and CIPI 

CMS rebases the IPPS market basket and the Capital Input Price Index (CIPI) every four years. This process involves updating the costs and input price indexes used in the calculation and may also include revisions to the data sources for price proxies used in the input price index. The most recent rebase occurred in federal fiscal year (FFY) 2022, using FFY 2018 Medicare cost report data as the base period for constructing the cost weights. 

For FFY 2026, CMS is proposing to rebase the hospital market basket and CIPI cost weights using FFY 2023 Medicare cost report data as the new base period. 

2. Wage index and geographic adjustment factor 

While CMS’ proposed wage index policies include changes, DataGen suggests that the most important one to focus on is the discontinuation of the low wage index hospital policy and associated budget neutrality.  

With this discontinuation, CMS proposes a budget-neutral transitional policy for hospitals that benefited from the low wage index policy in FFY 2024. If a hospital’s FFY 2026 wage index drops more than 9.75% from its FFY 2024 level, it would instead be set to 90.25% of the FFY 2024 wage index. This adjustment would occur after applying the 5% cap on wage index changes from FFY 2025 to FFY 2026. 

3. Labor-related share 

Since CMS proposes rebasing the IPPS market basket using a 2023 base year, CMS is also proposing to recalculate the labor-related share accordingly. For FFY 2026, the proposed labor-related share is 66.0% for hospitals with a wage index greater than 1.0. 

4. DSH and UCC Payments 

CMS uses the most recent three years of audited cost report data when determining Factor 3. Specifically, for FFY 2026, CMS proposes to use FFYs 2020–2022 for this determination. 

5. Updates to the MS-DRGs 

CMS uses specific criteria to determine if a new complication or comorbidity (CC), major CC (MCC) or NonCC subgroup is needed within an MS-DRG. Since FFY 2021, the criteria was supposed to include NonCC subgroups to improve resource stratification and maintain stable MS-DRG weights.  

Applying these criteria broadly would significantly alter MS-DRG groupings and affect payments. Due to the COVID-19 public health emergency (PHE), CMS delayed applying the NonCC criteria in FFYs 2022–2025. For FFY 2026, CMS is no longer proposing to delay this policy. 

6. Low-volume hospital adjustment 

Congress has expanded low-volume hospital adjustment criteria in recent years, allowing more hospitals to qualify and modifying payment amounts. The Full-Year Continuing Appropriations and Extensions Act of 2025 extended the current criteria through FFY 2025 only. Currently, hospitals with 500–3,800 discharges and located more than 15 miles from another subsection (d) hospital receive a payment adjustment based on a specific formula, while those with fewer than 500 discharges receive a 25% increase. 

Starting Oct. 1, 2026, the criteria will revert to stricter statutory requirements: hospitals must be more than 25 miles from another subsection (d) hospital and have fewer than 200 discharges annually to qualify. Based on CMS’ proposed rule files, there would no longer be any hospitals that meet the criteria for the low-volume hospital adjustment. 

For FFY 2026, hospitals must submit a written request with documentation to their MAC by Sept. 1, to receive the adjustment starting Oct. 1. Late submissions may still qualify, with adjustments applied prospectively within 30 days of determination. 

7. Medicare-Dependent, Small Rural Hosptial (MDH) program 

The Medicare Dependent Hospital (MDH) program, originally established in FFY 2012, has been extended multiple times, most recently through FFY 2025 under the Full-Year Continuing Appropriations and Extensions Act of 2025. Starting Oct. 1, hospitals with MDH status will lose that designation and begin being paid under the IPPS federal rate. These hospitals may apply for Sole Community Hospital status before the MDH program expires. 

8. Updates to the IQR program and electronic reporting under the program 

Notably, CMS proposes to: 

1. Expand the Hospital 30-Day, All-Cause, Risk-Standardized Mortality Rate (RSMR) Following Acute Ischemic Stroke Hospitalization with Claims-Based Risk Adjustment for Stroke Severity (MORT-30-STK) and Hospital-Level, Risk-Standardized Complication Rate (RSCR) Following Elective Primary Total Hip Arthroplasty (THA) and/or Total Knee Arthroplasty (TKA) (COMP-HIP-KNEE) measures’ inclusion criteria to include Medicare Advantage (MA) patients.  

2. Shorten the performance period from three years to two years for these measures. 
   

9. Removals in Hospital IQR program measure set 

Starting with the CY 2024 reporting period and FFY 2026 payment determination, CMS proposes removing four measures from the IQR program: Hospital Commitment to Health Equity, COVID-19 Vaccination Coverage among HCP and the two Social Drivers of Health (SDOH) measures.  

Additionally, for the FFY 2027 program year, CMS plans to eliminate the COVID-19 exclusion from six existing IQR measures, including COMP-HIP-KNEE, MORT-30-STK, Hybrid Hospital-Wide Readmission and various Excess Days in Acute Care measures. These acute measures are:  

• Excess Days in Acute Care after Hospitalization for Acute Myocardial Infarction (AMI) (AMI Excess Days). 

• Excess Days in Acute Care after Hospitalization for Heart Failure (HF) (HF Excess Days). 

• Excess Days in Acute Care after Hospitalization for Pneumonia (PN) (PN Excess Days). 

10. Quality-based payment programs 

For FFY 2026, IPPS payments will be adjusted for quality performance under the VBP program, RRP and the HAC Reduction Program. Here, we’ll cover VBP and RRP proposed changes. 

Value-based Purchasing (VBP) program  

For the FFY 2026 program year, CMS proposes removing the Health Equity Adjustment (HEA) from the Hospital VBP Program. The HEA was adopted in the FFY 2024 IPPS final rule to reward high-performing hospitals serving more dual-eligible patients. Additionally, for the FFY 2033 program year, CMS plans to update the COMP-HIP-KNEE measure by including MA beneficiaries and shortening the performance period from three years to two. 

Readmission Reduction Program (RRP) program 

Starting with the FFY 2027 program year, CMS proposes updating all six readmission measures to include MA beneficiaries. Alongside this change, CMS also plans to shorten the applicable performance period from three years to two. 

June 10 comment deadline’s approaching: How DataGen can help! 

The FFY 2026 IPPS Proposed Rule introduces a wide range of impactful changes — from reimbursement updates and measure refinements to quality program realignments and data source revisions. These shifts present both challenges and opportunities for hospitals striving to maintain financial stability and care quality in a complex Medicare environment. 

With DataGen’s Medicare Fee-for-Service policy analytics, your team is equipped to translate these policy changes into actionable insights. From decoding payment adjustments to forecasting the impact of evolving quality programs, our tools and expertise empower you to respond confidently and strategically. As the June 10 comment deadline approaches, now is the time to review the proposed rule, assess its implications and prepare for what’s ahead.