CMS Publishes the 2026 IPPS Final Rule

On August 1, 2025, the Centers for Medicare & Medicaid Services (“CMS”) issued the final rule to update Medicare payment policies and rates for Fiscal Year 2026 under the Inpatient Prospective Payment System (IPPS) and the Long-Term Care Hospital Prospective Payment System (LTCH PPS). This is part of CMS’s annual rulemaking that addresses reimbursement, policy, and quality reporting updates affecting inpatient and long-term care hospitals serving Medicare fee-for-service (FFS) patients.

1. Payment Rate Updates

   • IPPS (Acute Care Hospitals)

     • Operating payment rates for acute care hospitals are to rise 2.6%. This calculation reflects a 3.3% hospital market-basket increase, minus a 0.7 percentage productivity adjustment.
     • CMS projects that these updates and related adjustments will increase overall hospital payments by approximately $5 billion in FY2026, with new technology addon payments contributing roughly an additional $192 million.

   • LTCH PPS (Long-Term Care Hospitals)

     • The LTCH standard payment rate will increase by 2.7%, reflecting a 3.4% LTCH care market basket increases minus the same 0.7% productivity cut.

2. MSDRG Updates & New Technology Add-On Payments (NTAPs)

   CMS will add new MSDRGs to better classify high-complexity cases:

   • MSDRG 209: complex aortic arch procedures
   • MSDRG 213: endovascular abdominal aorta & iliac branch procedures
   • MSDRGs 359 & 360: percutaneous coronary atherectomy (with and without intraluminal device)
   • MSDRG 318: percutaneous coronary atherectomy without device
   • MSDRGs 403 & 404: hip/knee procedures with principal diagnosis of periprosthetic joint infection
   • Meanwhile, MSDRGs 077–079 for hypertensive encephalopathy is eliminated. Also, MS-DRGs 294-295 or deep vein thrombophlebitis is eliminated.
   • CMS is continuing NTAP status for 26 existing technologies and is reviewing 43 new applications, many via alternative pathways like breakthrough devices or QIDP (Qualified Infectious Disease Products).

3. Rural Hospital Relief: MDH and Low-Volume Hospital Programs

   MedicareDependent Hospital (MDH) and Low-Volume Hospital (LVH) adjustments currently run through September 30, 2025, and require Congressional extension to continue.

   If extension is not approved this would mean hospitals that qualified under MDH or LVH would from October 1, 2025, be paid at standard federal IPPS rates, without those supplemental adjustments.

4. Quality Reporting & Performance Programs

   CMS made updates across several interconnected quality and performance-based programs:

   • Hospital Readmissions Reduction Program (HRRP)
   • Hospital Value-Based Purchasing (HVBP)
   • Hospital-Acquired Condition (HAC) Reduction Program
   • Inpatient Quality Reporting (IQR) Program

   Key changes include:

   • Phasing out COVID19 related measures from quality programs.
   • Integration of Medicare Advantage data where applicable.
   • Removal of health equity and social determinants of health quality measures.

5. Transforming Episode Accountability Model (TEAM) & Hospital Participation

   TEAM is a mandatory five-year bundled payment model starting January 1, 2026. The basic structure of the model remains intact, but adjustments aim to improve fairness and facilitate smoother participation.

   CMS is implementing:

   • Limited deferment options for certain hospitals.
   • Neutral quality scoring for low-data hospitals.
   • Refined payment methodology and risk adjustment.
   • Expansion of the SNF 3-day rule waiver under the model.

6. Administrative Burden & Regulatory Streamlining: Request for Information (RFI)

   In line with Executive Order 14192, CMS includes a request for information seeking input on ways to reduce regulatory burden in Medicare. This includes multiple items like digital quality reporting to nutrition and well-being measures.

7. LTCH PPS-Specific Updates

   Alongside the IPPS updates, CMS’s fact sheet includes key LTCH PPS developments such as:

   • 3.0% payment rate increase.
   • Policy and rate adjustments tailored to the LTCH environment.
   • Many of the quality, wage index, and structural changes echo the IPPS policy proposals, adapted for LTCH providers and their operational context.

Stakeholders (especially hospitals, health systems, and trade organizations) are encouraged to review the entire rule and make sure they are aware of the updates surrounding MSDRG changes, NTAP applications, and quality program modifications. Also, review the specific impact the changes on MDH and LVH can have on rural hospital relief.

Implications for Hospitals and Providers

Financial Impact

• The 2.6% IPPS payment growth, combined with 2.7% LTCH increases and enhanced uncompensated care funding, offers modest revenue growth. Providers who are quality compliant will see the biggest impact.
• New MS-DRGs and expanded NTAPs may generate additional reimbursement for advanced procedures and breakthrough technologies.
• Hospitals losing MDH/LVH status could face financial strain if congressional relief or smoother implementation mechanisms are not established.

Compliance & Reporting

• CMS continues to push for meaningful EHR use and quality reporting compliance; failure to meet those standards could jeopardize rate updates and other incentives.
• Removal of equity focused quality metrics and social determinants measures signals a programmatic shift—providers may need to pivot performance tracking and resource allocation accordingly.

Strategic & Operational Considerations

• Hospitals must evaluate participation in TEAM given its impending January 2026 start date and understand deferred scoring, SNF waiver access, and risk adjustment rules.
• Because many proposals like DRG reassignments require operational readiness, facilities should begin planning for coding, billing, staffing, and training changes.

Conclusion

The FY 2026 IPPS and LTCH PPS final rule outlines a moderate payment increase and major policy revisions spanning DRGS, NTAPs, quality measurement, and rural hospital policies. Combined with CMS’s Regulatory Streamlining RFI, the rule underscores a broader shift toward efficiency-driven, data-informed Medicare policy, while balancing cost controls with targeted financial support.

Hospital administrators, health policy professionals, and industry stakeholders should align their internal strategies with the changes. The rule represents a critical point in the evolving Medicare payment models, with implications from financial margins to regulatory compliance and care delivery frameworks.