On April 11, 2025, the Centers for Medicare & Medicaid Services (CMS) issued a proposed rule that would update Medicare payment policies and rates for inpatient hospitals under the Medicare hospital Inpatient Prospective Payment System (IPPS) for fiscal year (FY) 2026. CMS also published a fact sheet that discusses the major provisions of the proposed rule. The following will act to summarize the most pertinent sections of the fact sheet.
Payment Rates
The IPPS pays hospitals for services provided to Medicare beneficiaries using a national base payment rate, adjusted for a number of factors that affect hospitals’ costs, including the patient’s condition and the cost of hospital labor in the hospital’s geographic area. The proposed increase in IPPS operating payment rates for general acute care hospitals that successfully participate in the Hospital Inpatient Quality Reporting (IQR) program and are meaningful electronic health record (EHR) users under the Medicare Promoting Interoperability Program is projected to be 2.4%. This reflects a projected FY 2026 hospital market basket percentage increase of 3.2%, reduced by a 0.8 percentage point productivity adjustment. This also reflects CMS’s proposal to rebase and revise the IPPS operating market basket and IPPS capital market basket to reflect a 2023 base year. Based on the proposed 2023-based IPPS market basket, CMS is also proposing a national labor‑related share of 66%.
Overall, for FY 2026, CMS expects the proposed changes in operating and capital IPPS payment rates (in addition to other changes) will generally increase hospital payments by $4 billion. This includes a projected increase in Medicare uncompensated care payments to disproportionate share hospitals in FY 2026 of approximately $1.5 billion.
CMS also estimates that additional payments for inpatient cases involving new medical technologies will increase by approximately $234 million in FY 2026. Under current law, additional payments for Medicare-Dependent Hospitals (MDHs) and the temporary change in payments for low-volume hospitals will expire on September 30, 2025. In the past, legislation has extended these payments, and if they were to be extended, CMS estimates that these hospitals would receive payments of approximately $0.5 billion in FY 2026.
Low Wage Index Hospital Policy
In the FY 2020 IPPS final rule, CMS finalized a temporary budget-neutral policy to address wage index disparities affecting low-wage index hospitals, which includes many rural hospitals. On July 23, 2024, the Court of Appeals for the D.C. Circuit held that the Secretary lacked authority under section 1886(d)(3)(E) or 1886(d)(5)(I)(ii) of the Act to adopt the low wage index hospital policy for FY 2020 and that the policy and related budget neutrality adjustment must be vacated [Bridgeport Hosp. v. Becerra, 108 F.4th 882, 887–91 & n.6 (D.C. Cir. 2024)].
After considering the appellate court’s decision, CMS proposes to discontinue the low wage index hospital policy for FY 2026 and subsequent years. CMS proposes adopting a budget-neutral transitional exception to the calculation of FY 2026 IPPS payments for low-wage index hospitals significantly impacted by the discontinuation of the low-wage index hospital policy.
In next week’s alert, we will summarize what the proposed rule has to say about quality and other incentive programs.