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 and long-term care hospitals under the Medicare hospital Inpatient Prospective Payment System (IPPS) and Long-Term Care Hospital Prospective Payment System (LTCH PPS) proposed rule for fiscal year (FY) 2026. CMS is publishing this proposed rule consistent with the legal requirements to update Medicare payment policies for inpatient and long-term care hospitals annually. This fact sheet discusses the major provisions of the proposed rule.
The proposed rule would update Medicare fee-for-service payment rates and policies for inpatient hospitals and LTCHs for FY 2026. CMS is publishing this proposed rule to meet the legal requirements to update Medicare payment policies for IPPS hospitals and LTCHs on an annual basis. This fact sheet discusses major provisions of the proposed rule, which can be downloaded from the Federal Register at: https://www.federalregister.gov/public-inspection/current.
Request for Information on Streamlining Regulations and Reducing Administrative Burdens in Medicare
On January 31, 2025, President Trump issued Executive Order (EO) 14192 "Unleashing Prosperity Through Deregulation," which states the Administration’s policy to significantly reduce the private expenditures required to comply with federal regulations to secure America’s economic prosperity and national security and the highest possible quality of life for each citizen. To comply with the Executive Order, CMS is including in the proposed rule a Request for Information seeking public input on approaches and opportunities to streamline regulations and reduce burdens on those participating in the Medicare program. The RFI is available at https://www.cms.gov/medicare-regulatory-relief-rfi, and the public should submit all comments in response to this RFI through the provided weblink.
Background on the IPPS and LTCH PPS
CMS pays acute care hospitals (with a few exceptions specified in the law) for inpatient stays under the IPPS. LTCHs are paid under the LTCH PPS. Under these two payment systems, CMS sets base payment rates prospectively for inpatient stays, generally based on the patient’s diagnosis, the services or treatment provided, and the severity of illness. Subject to certain adjustments, a hospital receives a single payment for each case depending on the payment classification assigned at discharge. The classification systems are for: IPPS, Medicare Severity Diagnosis-Related Groups (MS-DRGs) and for LTCH PPS, Medicare Severity Long-Term Care Diagnosis-Related Groups (MS-LTC-DRGs).
The law requires CMS to update payment rates for IPPS hospitals annually and to account for changes in the prices of goods and services these hospitals use when treating Medicare patients, as well as for other factors. The index used to do this is known as the hospital “market basket.” 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. CMS updates LTCHs’ payment rates annually according to a separate market basket based on LTCH-specific goods and services.
Changes to IPPS Payment Rates
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 our 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, we are 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. Subject to determinations on applications for additional payments for inpatient cases involving new medical technologies following a review of public comments on the proposed rule, CMS also estimates that additional payments for inpatient cases involving new medical technologies will increase by approximately $234 million in FY 2026, primarily driven by the continuation of new technology add-on payments for several technologies. Under current law, additional payments for Medicare-Dependent Hospitals (MDHs) and the temporary change in payments for low-volume hospitals will expire 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.
Changes to LTCH PPS Payment Rates
For FY 2026, CMS is proposing an annual update of 2.6% to the LTCH standard payment rate, which reflects a projected LTCH PPS market basket percentage increase of 3.4%, reduced by a 0.8 percentage point productivity adjustment. CMS expects LTCH PPS payments for discharges paid the LTCH standard payment rate to increase by approximately 2.2%, or $52 million, due primarily to the 2.6% annual update and a projected 0.3% decrease in high-cost outlier payments as a percentage of total LTCH PPS standard federal payment rate payments. CMS is proposing an increase to the LTCH outlier threshold for FY 2026, consistent with the increases in recent years. This increase is needed to ensure that estimated outlier payments are approximately 8% of total payments, as required by statute.
Transition for the Discontinuation of the Low Wage Index Hospital Policy
In the FY 2020 IPPS/LTCH PPS 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. In addition, CMS proposes to adopt a budget-neutral narrow 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. This proposed transitional payment exception would operate similarly to our FY 2025 interim transitional policy established in an interim final action with a comment period (89 FR 80405).
Request for Information on the Transition Toward Digital Quality Measurement in CMS Quality Reporting Programs
CMS has previously issued requests for information (RFIs) on CMS’ modernization of our digital quality measurement enterprise as part of our intention to transition to a fully digital landscape. In the FY 2026 IPPS/LTCH PPS proposed rule, we are issuing an RFI to gather comment on continued advancements to digital quality measurement and the use of the Health Level 7® Fast Healthcare Interoperability Resources® (FHIR®) standard. CMS is seeking comments on:
- The anticipated approach to FHIR-based electronic clinical quality measure (eCQM) reporting in quality reporting programs.
- The potential use of FHIR-based patient assessment instrument reporting for inpatient psychiatric facilities.
Hospital Inpatient Quality Reporting (IQR) Program
The Hospital IQR Program is a pay-for-reporting quality program that reduces payments to hospitals that do not meet program requirements. Hospitals that do not submit quality data or do not meet all Hospital IQR Program requirements are subject to a one-fourth reduction in their Annual Payment Update under the IPPS.
In the FY 2026 IPPS/LTCH PPS proposed rule, CMS is requesting comment regarding measure concepts under consideration for future years, proposing to modify four current quality measures, and proposing to remove four quality measures. CMS is also proposing an update to the current Extraordinary Circumstances Exception (ECE) policy.
Specifically, CMS is requesting comment related to measure concepts focusing on well-being and nutrition for consideration in future years.
CMS is proposing to modify four current measures:
- (1) Hospital-Level, Risk-Standardized Complication Rate (RSCR) Following Elective Primary Total Hip Arthroplasty (THA) and/or Total Knee Arthroplasty (TKA) to add Medicare Advantage patients to the current cohort of patients, shorten the performance period from three to two years, and change the risk adjustment methodology.
- (2) Hospital 30-Day, All-Cause, Risk-Standardized Mortality Rate (RSMR) Following Acute Ischemic Stroke Hospitalization with Claims-Based Risk Adjustment for Stroke Severity to add Medicare Advantage patients to the current cohort of patients, shorten the performance period from three to two years, and make changes to the risk adjustment methodology.
- (3) Hybrid Hospital-Wide Readmission (HWR) and (4) Hybrid Hospital-Wide Mortality (HWM) measures to lower the submission thresholds to allow for up to two missing laboratory results and up to two missing vital signs, reduce the core clinical data elements (CCDEs) submission requirement to 70% or more of discharges, and reduce the submission requirement of linking variables to 70% or more of discharges.
CMS is proposing to remove four measures:
- (1) Hospital Commitment to Health Equity beginning with the CY 2024 reporting period/FY 2026 payment determination.
- (2) COVID-19 Vaccination Coverage among Health Care Personnel measure, beginning with the CY 2024 reporting period/FY 2026 payment determination.
- Both the (3) Screening for Social Drivers of Health and (4) Screen Positive Rate for Social Drivers of Health measures, beginning with the CY 2024 reporting period/FY 2026 payment determination.
CMS is also proposing to update and codify the ECE policy to clarify that it has the discretion to grant an extension rather than only a full exception in response to ECE requests.
Medicare Promoting Interoperability Program
In 2011, CMS established the Medicare and Medicaid Electronic Health Record (EHR) Incentive Programs (now known as the Medicare Promoting Interoperability Program and the Promoting Interoperability performance category of the Merit-based Incentive Payment System) to encourage eligible professionals, eligible hospitals, and critical access hospitals (CAHs) to adopt, implement, upgrade, and demonstrate the meaningful use of certified EHR technology (CEHRT).
In the FY 2026 IPPS/LTCH PPS proposed rule, CMS is proposing to:
- Define the EHR reporting period in CY 2026 and subsequent years as a minimum of any continuous 180-day period within that CY for eligible hospitals and CAHs participating in the Medicare Promoting Interoperability Program and make corresponding revisions at 42 CFR 495.4.
- Modify the Security Risk Analysis measure for eligible hospitals and CAHs to attest “Yes” to having conducted security risk management in addition to security risk analysis, beginning with the EHR reporting period in CY 2026.
- Modify the Safety Assurance Factors for EHR Resilience (SAFER) Guides measure by requiring eligible hospitals and CAHs to attest “Yes” to completing an annual self-assessment using all eight 2025 SAFER Guides, beginning with the EHR reporting period in CY 2026.
- Add an optional bonus measure under the Public Health and Clinical Data Exchange objective for data exchange to occur with a public health agency (PHA) using the Trusted Exchange Framework and Common Agreement® (TEFCA), beginning with the EHR reporting period in CY 2026.
CMS is not proposing any changes to the previously finalized performance-based scoring threshold of 80 points, beginning with the EHR reporting period in CY 2026.
CMS is also requesting information on:
- Future modifications to the Query of Prescription Drug Monitoring Program (PDMP) measure, including seeking public input on changing the Query of PDMP measure from an attestation-based measure (“Yes” or “No”) to a performance-based measure (numerator and denominator), and expanding the types of drugs to which the Query of PDMP measure applies.
- The Medicare Promoting Interoperability Program’s objectives and measures moving toward performance-based reporting.
- Improvements in the quality and completeness of the health information eligible hospitals and CAHs are exchanging across systems.
PPS-Exempt Cancer Hospital Quality Reporting (PCHQR) Program
The PCHQR Program is a quality reporting program for the 11 cancer hospitals that are statutorily exempt from the IPPS. CMS collects and publishes data from PCHs on applicable quality measures. In the FY 2026 IPPS/LTCH PPS proposed rule, CMS is proposing the following:
- Update and codify the ECE policy to clarify that CMS has the discretion to grant an extension in response to ECE requests.
- Remove the Hospital Commitment to Health Equity, beginning with the CY 2024 reporting period/FY 2026 program year.
- Remove the Screening for Social Drivers of Health and Screen Positive Rate for Social Drivers of Health measures, beginning with the CY 2024 reporting period/FY 2026 payment determination.
- Modify the public reporting requirements to allow for public reporting of PCHQR Program on Care Compare or a successor website in addition to current publication in the Provider Data Catalog.
Hospital Readmissions Reduction Program
The Hospital Readmissions Reduction Program reduces payments to hospitals with excess readmissions. It also supports CMS’ goal of improving health care for patients by linking payment to the quality of hospital care. In the FY 2026 IPPS/LTCH PPS proposed rule, CMS is proposing to:
- Modify the six readmission measures to add Medicare Advantage (MA) data, in addition to Medicare fee-for-service (FFS) data.
- Shorten the “applicable period” for measuring performance from three to two years and codify this update to the definition of “applicable period.”
- Modify the calculation of aggregate payments for excess readmissions to include MA data in addition to Medicare FFS data.
- Update and codify the ECE policy to clarify that CMS has the discretion to grant an extension, rather than only an exception, in response to ECE requests. The program’s update to the ECE policy would align with other quality programs.
- Remove a COVID-19 exclusions and risk-adjustment covariates from the six readmission measures.
These proposals would begin with the FY 2027 program year.
Hospital-Acquired Condition (HAC) Reduction Program
The HAC Reduction Program creates an incentive for hospitals to reduce the incidence of hospital-acquired conditions, reducing payment by 1% for applicable hospitals that rank in the worst-performing quartile on select measures of hospital-acquired conditions.
In the FY 2026 IPPS/LTCH PPS proposed rule, CMS is proposing to update and codify the ECE policy to clarify that it has the discretion to grant an extension, rather than only an exception, in response to ECE requests. Additionally, CMS is providing notice of updating the CDC National Healthcare Safety Network (NHSN) healthcare-associated infections (HAI) chart-abstracted measures with the new 2022 baseline.
Hospital Value-Based Purchasing (VBP) Program
The Hospital VBP Program is a budget-neutral program funded by reducing participating hospitals’ base operating DRG payments each fiscal year by 2% and redistributing the entire amount back to the hospitals as value-based incentive payments.
In the FY 2026 IPPS/LTCH PPS proposed rule, CMS is proposing to:
- Modify the Hospital-Level RSCR Following Elective Primary THA and/or TKA measure in alignment with updates proposed in the Hospital IQR Program.
- Remove the Health Equity Adjustment from the Hospital VBP Program’s scoring methodology beginning, with the FY 2026 payment determination.
- Update the program’s ECE policy to align with other quality programs and to clarify that CMS has the discretion to grant an extension, rather than only an exception, in response to ECE requests.
In addition, CMS is notifying the public of:
- Technical updates to the Hospital-Level RSCR Following Elective Primary THA and/or TKA measure’s risk adjustment model to use International Classification of Diseases (ICD)-10 codes instead of Hierarchical Condition Categories (HCCs).
- Technical updates to the five conditions and procedure-specific mortality measure to include patients with a principal or secondary diagnosis of COVID-19 in the measures’ denominators.
- Technical update to the THA/TKA Complications measure to include patients with a principal or secondary diagnosis of COVID-19 in the measures’ numerator and denominator.
- Updates to the CDC NHSN HAI chart-abstracted measures with the new 2022 baseline.
- Updates to performance standards for the FY 2027, FY 2028, FY 2029, FY 2030, and FY 2031 program years.
Long-Term Care Hospital Quality Reporting Program (LTCH QRP)
The LTCH QRP is a pay-for-reporting program that requires LTCHs to submit quality data to CMS. Any LTCHs that do not meet reporting requirements may be subject to a 2 percentage-point reduction in their Annual Payment Update (APU). In the FY 2026 IPPS/LTCH PPS proposed rule, CMS is proposing to:
- Modify reporting requirements for the COVID-19 Vaccine: Percent of Patients/Residents Who Are Up to Date measure to exclude patients who have expired in the LTCH by removing an item on the LTCH expired discharge assessment instrument.
- Remove four SDOH-standardized patient assessment data elements to reduce the current burden. Beginning with the FY2028 LTCH QRP, LTCHs will no longer be required to submit data on one item for Living Situation (R0310), two items for Food (R0320A and R0320B), and one item for Utilities (R0330).
- Amend the reconsideration policy and process.
- Seek public comment on several RFIs, specifically: 1) future measure concepts for the LTCH QRP; 2) revisions to the data submission deadlines for assessment data collected for the LTCH QRP; and 3) advancing dQMs in the LTCH QRP.
Changes to the Transforming Episode Accountability Model (TEAM)
In TEAM, selected acute care hospitals will coordinate care for patients with Original Medicare who are undergoing one of five surgical procedures. The five-year mandatory episode-based payment model will run from January 1, 2026, to December 31, 2030. Selected acute care hospitals will take responsibility for the cost and quality of care from a hospital-based surgery through the first 30 days after the patient’s surgery. Proposed changes to TEAM would capture quality measure performance using patient-reported outcomes in the outpatient setting without increasing participant burden, improve target price construction, and expand the three-day Skilled Nursing Facility Rule waiver, giving patients a wider choice of and access to post-acute care.
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