CMS’s Proposed Changes to IPPS in FFY 2026
Just over a month ago CMS Published their FY 2026 IPPS Proposed Rule on May 11th, 2025, highlighting an overall update to the IPPS Rate Adjustment at an increase of 2.59% in Medicare payment rates for inpatient services; most notably reflected in changes to the Market Basket and Wage Index Adjustments. To get a clear vision of what factors are involved in these changes it is important to draw attention to the slight changes CMS is making that ultimately lead to that proposed 2.59% increase in Medicare payment rate.
Market Basket:
The market basket is a measure used by CMS to update payments to reflect input price inflation that medical service providers experience. It’s important to note that hospitals participating in the Hospital Inpatient Quality Reporting (IQR) Program must meet specific reporting requirements. Failure to meet these requirements can result in a 25% reduction in the market basket update. The formula that sets the annual payment update before factoring in the productivity adjustment, which is what ultimately determines the Market Basket for rate setting and is an important factor in the outcome of the published IPPS rules from CMS, has numerous components to reach the result.
Every 4- or 5-years CMS rebases the market basket based on annual cost reporting, and they are proposing to rebase the market basket for FFY 2026 based on FY 2023 cost report data; however, the labor cost share of the market basket formula is projected to drop from 67.6% to 66%. This 1.6% percentage point reduction for all discharges occurring on or after October 1st, 2025, means that a slightly smaller portion of inpatient hospital payments will be adjusted based on the hospital wage index, potentially impacting hospitals in higher-wage areas. The problem with that is that labor costs are up significantly when the Market Basket has not been rebased since pre-pandemic years. This coupled with the Medicare wage index determinations also being directly linked to the labor-based share of the Wage Index; hospital's may not be eligible for higher amounts of reimbursement because of this change to the labor cost share decreasing when labor costs in 2023 were much higher than even what they are today.
Rebasing to 2023 Cost Report Data:
If CMS were to go through with rebasing to the 2023 cost data this update would incorporate more recent data on wages, salaries, employee benefits, and contract labor costs from the 2023 Medicare cost reports. Previously, the FY 2022 IPPS Rule used a 2018 base year and the general intention of rebasing to a 2023 base year would be to update the Input Cost Weights to better reflect the spending patterns of providers nationwide. These spending patterns may be related to higher contract labor usage in some regions post-Covid-19, increased technology and supply chain costs, and wage inflation compared to peak pandemic years.
Wage Index:
By lowering the labor-related share, the influence of the wage index on overall hospital reimbursement has been slightly diminished. Hospitals in areas with higher wage indexes may see a modest decrease in payments, while those in lower-wage areas might experience a relative increase. Hospitals should be actively evaluating their wage index data and strategies to stay ahead of the proposed changes CMS has put forth. Hospitals can review their geographic designation and examine whether your hospital’s county or CBSA has changed under the updated 2023 OMB delineations. On a national scale hospitals should also be assessing the impact of moving from urban to rural, or vice versa, on their wage index and reclassification options.
In conclusion:
There is some good news from Disproportionate Share Hospital's as Uncompensated Care Payments are currently set to increase by $1.5B, a 26% increase raising UCC Payments from $5.78B in FY 2025 to $7.29B in FY 2026. If it is finalized that is better than what DSH hospitals have done in recent years, in FY 2025 those UCC Payments dropped by $200M. The proposed increases vary by hospital type and size, however, urban hospitals with more than 250 beds are projected to receive a 27% increase, while rural hospitals with 0-99 beds are projected to receive a 26% increase.
There is also an additional $234M in payments earmarked for Inpatient cases involving New Medical Technologies through add-on payment continuations for hospitals. CMS has proposed increasing the New Technology Add-On Payment (NTAP) percentage from 65% to 75% for gene therapies specifically related to Sickle Cell disease for FY 2026. NTAPs such as CASGEVY and LYFGENIA (gene therapies for Sickle Cell disease) and TriClip G4 (for mitral valve repair) will continue to receive the NTAP add-on.
There is also a .3% decrease in high-cost outlier payments, which is a continuation through the rule updates. Long Term Care Hospital's LTCH are also going to be negatively impacted by the rise in the outlier threshold, down from 2.6% to 2.2% which could leave them in a bind.
In total between the operating, capital payment, and the increases to items discussed above payments to hospitals in FFY 2026 are projected to increase by $4B. Comment period for the Proposed Rule is running through June 10th, 2025, for RFI's from hospitals that are impacted by the changes set forth thus far and the Final Rule publication is anticipated for August 1st, 2025.
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