CMS Releases FY 2026 IPPS Proposed Rule: A Mixed Financial Outlook for Hospitals
On May 11, 2025, the Centers for Medicare & Medicaid Services (CMS) published the FY 2026 Inpatient Prospective Payment System (IPPS) Proposed Rule, outlining a net 2.59% increase in Medicare payment rates for inpatient hospital services. This modest upward adjustment offers a partial counterbalance to anticipated reductions in overall federal healthcare spending, a topic Microscope explored in depth in our recent article:Is the Federal Medicaid Spend in Jeopardy?
The proposed update reflects CMS’s broader initiative to better align hospital reimbursement with evolving cost structures in a post-pandemic healthcare environment, with key drivers including updates to the Market Basket Index and Wage Index calculations.
Market Basket Update: First Rebase Since the Pandemic
The Market Basket—the primary index used by CMS to estimate annual payment updates based on hospital input costs—is set for a long-overdue rebasing. For FY 2026, CMS proposes to update the Market Basket using FY 2023 cost report data, replacing the 2018 baseline. This shift is intended to more accurately reflect current hospital expenditure patterns, especially as facilities continue to grapple with inflation in labor, supply chain disruptions, and heightened use of contract labor.
Key Proposed Changes:
- Labor-Related Share: CMS proposes to decrease the labor-related share from 67.6% to 66%.
- This change reduces the influence of the Wage Index—which adjusts payments based on local labor costs—ultimately dampening payment increases for hospitals in higher-wage urban areas.
- Though the rebasing incorporates more up-to-date data on wages, benefits, and non-labor expenses, it still lags behind the actual post-pandemic cost escalation, especially for labor.
Impact:
Starting October 1, 2025, this adjustment results in a 1.6 percentage point reduction in the portion of hospital payments tied to wage variations. As a result:
- Hospitals in high-cost labor markets may see smaller increases—or even reductions—in reimbursement, despite continued cost pressures.
- This raise concerns that Medicare payments are increasingly out of sync with actual operating costs, placing added strain on hospitals already managing tight margins.
Wage Index Implications: Strategic Reclassification May Be Key
By lowering the labor share, CMS reduces the weight of the Wage Index in payment calculations, producing ripple effects:
- High-wage hospitals may experience lower-than-expected reimbursement growth.
- Lower-wage hospitals may see slight relative gains under the new formula.
- The update underscores the growing importance of geographic reclassification, especially under the revised 2023 Office of Management and Budget (OMB) Core-Based Statistical Area (CBSA) delineations.
Hospitals should reassess:
- Urban vs. Rural classifications
- CBSA designations
- Reclassification opportunities, including appeals and applications under the updated OMB standards.
Uncompensated Care (UCC): A Welcome Rebound for DSH Hospitals
On a positive note, Disproportionate Share Hospitals (DSHs) are projected to receive a $1.5 billion increase in Uncompensated Care (UCC) payments—a 26% boost, raising the pool from $5.78 billion in FY 2025 to $7.29 billion in FY 2026.
Breakdown of Projected Increases:
- Urban hospitals with more than 250 beds may see up to a 27% increase.
- Rural hospitals with fewer than 100 beds are expected to receive a 26% increase.
This represents a significant rebound from the $200 million cut in FY 2025, providing much-needed relief to hospitals serving high volumes of uninsured or underinsured patients.
New Medical Technologies: NTAP Expansion
CMS also proposes $234 million in additional payments for inpatient services involving new medical technologies, through the New Technology Add-On Payment (NTAP) program.
Highlights include:
- An increase in NTAP coverage from 65% to 75% for gene therapies targeting Sickle Cell Disease, such as CASGEVY and LYFGENIA.
- Continued NTAP eligibility for technologies like the TriClip G4, a transcatheter device for mitral valve repair.
Outlier Payments and LTCH Concerns
Despite overall payment increases, CMS proposes a 0.3% decrease in high-cost outlier payments, further tightening reimbursement for hospitals treating the most complex and resource-intensive patients.
Long-Term Care Hospitals (LTCHs) face particular vulnerability:
- The outlier threshold will drop from 2.6% to 2.2%, potentially reducing financial support for extreme-cost cases.
- This change may restrict access to necessary outlier relief for LTCHs operating with narrow margins.
Total Financial Impact
When accounting for all proposed changes—including operating, capital, UCC, NTAP, and other adjustments—Medicare payments to hospitals are expected to increase by approximately $4 billion in FY 2026.
While this signals overall growth, the distribution of that increase is uneven, with urban, high-labor-cost, and specialty hospitals facing greater reimbursement challenges.
Microscope’s Takeaway
The FY 2026 IPPS Proposed Rule offers a cautious step forward, but also underscores the structural disconnect between rising post-COVID operating costs and Medicare’s payment formulas. Hospitals must take a strategic approach to classification, cost reporting, and technology adoption to ensure they remain financially resilient under the evolving reimbursement framework.
Microscope’s Reimbursement Consulting Services
Given the scope and complexity of the proposed updates, now is the time to act. Microscope’s reimbursement strategy team offers deep expertise in interpreting CMS policy and identifying financial risks and opportunities specific to your organization.
We can provide a tailored reimbursement impact analysis to quantify how these proposed changes—especially to the Market Basket, Wage Index, UCC payments, and NTAP policies—may affect your bottom line. Beyond that, we’ll help you develop proactive strategies to optimize revenue, support reclassification efforts, and mitigate payment erosion in high-cost environments.
Reach out today to schedule a consultation and ensure your facility is fully prepared to navigate the FY 2026 IPPS landscape with confidence.
Please contact:
Kyle Lake, CHFP | | 315-446-3600
