Proposed Medicare hospital payment rule includes a surprising cut

Although payment rates technically would increase under Medicare’s 2026 proposed rule for hospital outpatient care, various provisions would chip away at the finances of hospitals and health systems.

Specifically, key provisions would equalize certain site-based payments and also accelerate a planned across-the-board payment decrease related to 2022 remedy payments that were made to 340B Drug Pricing Program participants.

In drafting the rule, CMS was intent on “holding providers accountable and ensuring taxpayer dollars are spent wisely,” Mehmet Oz, MD, CMS administrator, said in a news release. “These reforms expand options and enforce the transparency Americans deserve to ensure they receive high-quality care without hidden costs.”

Chris Klomp, director of Medicare, said the proposed changes “help make hospital care more predictable, accountable and affordable.”

Comments on the rule are due by Sept. 13.

The payment update

As a group, hospitals that meet quality-reporting requirements would receive a base increase of 2.4% in their Medicare payment rate for 2026, before factoring in adjustments. The update is based on a 3.2% increase in the market basket and a decrease of 0.8 percentage points linked to economywide productivity, as required by the Affordable Care Act. Ambulatory surgical centers (ASCs) would receive the same 2.4% increase.

The update falls short, especially when looking at the big picture for healthcare policy, said Shawn Stack, director for perspectives and analysis with HFMA.

“With the passage of the One Big Beautiful Bill, the projected rise in uninsured individuals will only intensify the strain on access to care, frontline caregivers and the financial stability of hospitals serving our most vulnerable communities,” Stack said.

An unexpected rate reduction

Payments in 2026 and upcoming years would be lower than the base update suggests and less than hospitals had reason to anticipate.

After a 2022 Supreme Court ruling established that CMS lacked a legal basis for reducing Medicare payments for 340B drugs starting in 2018, the agency agreed to make up the shortfall via a $9 billion remedy payment to affected hospitals.

Determining that the payments needed to be budget neutral, per the Medicare statute, CMS then instituted a 0.5% reduction in the annual outpatient payment update for non-drug items and services over a 16-year period beginning in 2026.

However, in considering the idea behind the remedy payment, the Trump administration now says it would be more appropriate to increase the annual reduction to 2% starting in 2026 and extending over an estimated six-year time frame.

“The more a hospital’s utilization of non-drug items and services diverges [over time], the less hospitals would be restored to as close as possible to the approximate financial position as they would have been in had the 340B Payment Policy [i.e., the 2018 rate cut] never been implemented,” CMS explained in the rule.

For many hospital categories, the higher reduction would negate virtually the entire net payment update they otherwise would receive (see the table beginning on page 850 of the rule PDF)

HFMA’s Stack called the proposal “deeply troubling.”

“Such an abrupt financial correction imposes undue hardship, particularly on 340B hospitals that deliver care to low-income, medically underserved and rural populations,” Stack said. “To now retract its original repayment schedule raises serious legal and ethical concerns. It effectively penalizes hospitals for CMS’s own regulatory overreach and undermines the financial viability of safety-net providers at a time when health disparities and uncompensated care are rising nationwide.”

Another 340B-related concern

In 2027, participants in the 340B program also could face a regulatory reduction in the payments they receive for Medicare Part B drugs.

The newly proposed rule includes a notice of intent to conduct a survey to gauge hospitals’ acquisition costs for covered outpatient drugs. The survey, first called for in an executive order issued this year by President Donald Trump, would take place by early 2026, with results used to inform policymaking in 2027 and beyond.

With the Supreme Court having said the lower payment rate for 340B drugs likely would have been permissible if based on a formal survey, the upcoming survey results could lead to a decrease from the current rate of average sales price (ASP) plus 6%. The 2018-2022 rate implemented by CMS was ASP minus 22.5%.

Results of a 2020 survey could have triggered a further decrease in the payment rate, to ASP minus 28.7%, for 2021, CMS announced at the time. But the agency kept the rate at ASP minus 22.5%, citing the financial turmoil facing hospitals during the pandemic.

A future cut in the payment rate “could result in hospitals potentially losing the entire benefit of 340B pricing when they prescribe those drugs to Medicare patients,” Maureen Testoni, president and CEO of the provider advocacy group 340B Health, said in a written statement.

Incorporating site neutrality

Drug administration services furnished in off-campus hospital outpatient departments (HOPDs) would be reimbursed at the physician payment rate starting in 2026, according to the proposed rule, with CMS saying the policy is needed to stanch “unnecessary” growth in volume of those services.

According to a 2023 report by the Actuarial Research Corporation, Medicare payments for drug administration services are at least 229% higher in off-campus HOPDs, compared with physician offices. For Level 3 drug administration services, as designated by ambulatory payment classification, the difference is 304%.

It’s notable that, according to the report, only 5.6% of such services are performed in off-campus HOPDs. Thus, the impact of the provision may be limited. CMS says 2026 savings would amount to $280 million — with $70 million for beneficiaries, stemming from reduced coinsurance, and the rest accruing to the Medicare program.

The provision would expand on a policy set during the first Trump administration to establish site-neutral payment for clinic visits furnished in off-campus HOPDs. CMS is seeking stakeholder feedback on widening the policy to include clinic visits provided in on-campus HOPDs and additional services delivered in off-campus sites.

CMS used the proposed rule to describe its statutory authority to implement the change for off-campus HOPDs, possibly as an attempt to head off legal challenges should the provision be finalized. The agency said the change does not have to be budget neutral, which would necessitate increasing the payment rate for other services.

Phasing out the inpatient-only (IPO) list

CMS wants to increase the availability of services outside the acute-care setting. The agency plans to eliminate the IPO list over a three-year period starting in 2026, when 285 musculoskeletal and other procedures would be removed. By 2029, all 1,731 procedures currently on the list would be payable in ambulatory settings.

“We believe that this change would ensure maximum availability of services to beneficiaries in the outpatient setting,” CMS wrote, saying the site of any such service should be based on clinical judgment.

The Trump administration began a gradual elimination of the IPO list going into payment year 2021, but the policy was reversed — with most procedures restored to the list — by the Biden administration heading into 2022.

Stack sees reason for concern with the proposals regarding the IPO list and the expansion of site neutrality.

“Both proposals risk placing high-acuity patients in harm’s way by enabling Medicare, Medicaid and managed care payers to steer individuals to care settings that may lack the clinical resources and infrastructure necessary to manage complex comorbidities — even during routine procedures,” Stack said. “These policies fail to recognize the critical role hospital-based care plays in safely treating vulnerable populations, particularly those with elevated medical risks.”

In an accommodation for providers, any procedure removed from the IPO list would be exempt from medical review activities related to the two-midnight policy, at least until claims data demonstrate that the service is most commonly billed in outpatient settings.

Criteria for inclusion on the ASC Covered Procedures List would be loosened, with 276 procedures added to the list next year as a result. Another 271 procedures would be added in conjunction with their removal from the IPO list.