Medicare final rule brings a mixed bag for FY26 hospital inpatient payments

Hospitals collectively will receive a base payment increase of 2.6% in Medicare reimbursement for inpatient care provided in FY26, according to a newly published final rule.

It’s a somewhat uneventful set of regulations compared with the recently released 2026 proposed rule for Medicare outpatient payments. But hospitals were hoping for a bigger inpatient update, with the base increase falling short relative to FY25 (2.9%), FY24 (3.1%) and FY23 (4.3%).

With rising costs and reimbursement constraints projected in upcoming years, especially after passage of the budget reconciliation bill, the update may not offer much of a cushion.

“The anticipated increase is not sufficient to make up for the recent historic levels of inflation nor expected increases in the number of uninsured Americans,” Chip Kahn, president and CEO of the Federation of American Hospitals, said as part of a written statement.

The rate change is a small increase from the proposed version of the rule, which had put forth a 2.4% update. Market-basket input data then rose incrementally and the economywide productivity adjustment eased slightly.

As was proposed, CMS is rebasing the market basket to reflect a 2023 base year, per its policy of doing so every few years using the latest available hospital cost-reporting data. Based on the revision, the labor-related share of the market basket is dropping from 67.6% to 66%. One result is that a hospital’s wage-index adjustment will be applied to a lesser share of overall payments and thus will translate to less funding.

Other healthcare settings

Long-term care hospitals, which also are covered by the final rule, will receive a 2.7% base payment increase and, after factoring in high-cost outlier payments, an estimated 3% overall update.

“Given the changes in the rule, LTCHs will have an increasingly difficult time caring for some of the sickest Medicare patients and may be unable to continue relieving pressure on their acute-care hospital partners,” Ashley Thompson, senior vice president with the American Hospital Association (AHA), said in a written statement.

CMS separately released the FY26 final rule for skilled nursing facilities, which are set for a 3.2% payment increase before accounting for significant reductions arising from the SNF Value-Based Purchasing (VBP) Program. The base update is projected to equate to $1.16 billion, with the VBP reductions amounting to more than $208 million.

Hospital supplemental payments

Uncompensated care (UC) payments to disproportionate share hospitals are expected to bring a $2 billion boost and help push the industrywide inpatient payment increase to an estimated 4.3% ($5 billion). UC payments will vary considerably based on a hospital’s DSH percentage but nonetheless represent a major turnaround from FY25, when they dropped by more than $200 million.

The AHA expressed appreciation that “CMS’s payment updates and support for hospitals that treat a disproportionately high number of low-income patients are improved in this final rule. However, we are still concerned that these updates are not adequate enough for the many hospitals that are struggling in today’s challenging operating environment.”

Outlier payments for high-cost cases are projected to be 0.3% higher than in FY25, mainly because CMS’s current simulations indicate outlier payments will fall short of the target figure this year.

The New Technology Add-on Payment (NTAP) program will increase by an estimated $192 million. A determination of whether a technology is in its two- to three-year newness period now will be based on the start of the federal fiscal year instead of April 1.

Hospitals that received a low-wage-index payment adjustment starting in 2020 and ending in 2024, when the policy was ruled unlawful by an appeals court, will be granted a supplemental payment if needed to ensure their wage index does not decrease by more than 9.75% in FY26 relative to FY24. A similar policy has applied in FY25, but next year it will be budget-neutral, meaning general Medicare inpatient payments to all hospitals subsequently will be reduced.

Supplemental payments for low-volume hospitals and Medicare-dependent hospitals need to be reauthorized by Congress for FY26.

Inpatient quality reporting

As usual, hospitals need to comply with Inpatient Quality Reporting (IQR) Program requirements to receive the full annual payment increase.

Changes effective immediately in the IQR Program include accounting for Medicare Advantage (MA) patients in measures of complication rates following hip and knee replacement procedures, as well as mortality rates following hospitalization for acute ischemic stroke

The performance periods for those measures are being shortened from three years to two effective with the FY27 payment determination, meaning that year’s corresponding performance periods are shrinking to a 24-month window that began in 2023. In addition, ICD-10 codes are replacing hierarchical condition categories in the risk adjustment methodology for those measures.

CMS is eliminating an IQR measure on health equity and two pertaining to social drivers of health. The agency also touted the repeal of a measure regarding COVID-19 vaccination of healthcare personnel (a measure on flu vaccination remains in place).

“Doctors and other providers should have the same autonomy to choose what’s right for their own individual healthcare needs as the patients for whom they care,” Mehmet Oz, MD, administrator of CMS, said in a statement.

New items available for hospitals to report starting next year include electronic clinical quality measures (eCQMs) on falls with injury and postoperative respiratory failure. The number of eCQMs to be reported is expanding from six to eight, with CMS-mandated measures increasing from three to five (safe use of opioids, cesarean birth, severe obstetric complications, and hospital-harm measures on hyperglycemia and hypoglycemia). The total number to report is set to increase to nine in 2027 and 11 in 2028.

Promoting Interoperability Program

As with the IQR Program, compliance with PIP reporting is needed to ensure a full payment update. The number of eCQMs for reporting is increasing in tandem with the IQR requirements.

Heightened cybersecurity risk has brought additional required attestations for hospitals, including with respect to having conducted security risk management — not just security risk analysis, as already is required — and to having completed an annual self-assessment using all eight 2025 guides in the Safety Assurance Factors for EHR Resilience (SAFER) measure.

As previously stipulated, the PIP’s performance-based points threshold — meaning the score that hospitals must achieve to avoid penalties — is increasing from 70 to 80 after having been at 60 two years ago.

Pay for performance

Changes loom in the Hospital Value-Based Purchasing (VBP) Program and the Hospital Readmissions Reduction Program (HRRP), although most of the updates will not be effective until FY27 or later.

For FY26, the health equity adjustment is being removed from the Hospital VBP Program. Among program changes for FY27, measures of complications following total hip and total knee arthroplasty will account for patients with a principal or secondary diagnosis of COVID-19. The final rule also updates the FY27 performance benchmarks for the six measures in the clinical outcomes domain.

In the HRRP, FY27 will bring the inclusion of MA data in the six readmission measures and a reduction in the performance measurement period from three years to two, among other changes.