Medicare Program; Hospital Inpatient Prospective Payment Systems for Acute Care Hospitals (IPPS) and the Long-Term Care Hospital Prospective Payment System and Policy Changes and Fiscal Year (FY) 2026 Rates; Changes to the FY 2025 IPPS Rates Due to Court Decision; Requirements for Quality Programs; and Other Policy Changes; Health Data, Technology, and Interoperability: Electronic Prescribing, Real-Time Prescription Benefit and Electronic Prior Authorization

Section 1886(d)(5)(A) of the Act provides for payments in addition to the basic prospective payments for “outlier” cases involving extraordinarily high costs. To qualify for outlier payments, a case must have costs greater than the sum of the prospective payment rate for the MS-DRG, any IME and DSH payments, uncompensated care payments, supplemental payment for eligible IHS/ Tribal hospitals and Puerto Rico hospitals, any new technology add- on payments, and the “outlier threshold” or “fixed-loss” amount (a dollar amount by which the costs of a case must exceed payments in order to qualify for an outlier payment). We refer to the sum of the prospective payment rate for the MS-DRG, any IME and DSH payments, uncompensated care payments, supplemental payment for eligible IHS/Tribal hospitals and Puerto Rico hospitals, any new technology add-on payments, and the outlier threshold as the outlier “fixed-loss cost threshold.” To determine whether the costs of a case exceed the fixed-loss cost threshold, a hospital's CCR is applied to the total covered charges for the case to convert the charges to estimated costs. Payments for eligible cases are then made based on a marginal cost factor, which is a percentage of the estimated costs above the fixed-loss cost threshold. The marginal cost factor for FY 2026 is 80 percent, or 90 percent for burn MS- DRGs 927, 928, 929, 933, 934 and 935. We have used a marginal cost factor of 90 percent since FY 1989 (54 FR 36479 through 36480) for designated burn DRGs as well as a marginal cost factor of 80 percent for all other DRGs since FY 1995 (59 FR 45367).

In accordance with section 1886(d)(5)(A)(iv) of the Act, outlier payments for any year are projected to be not less than 5 percent nor more than 6 percent of total operating DRG payments (which does not include IME and DSH payments) plus outlier payments. When setting the outlier threshold, we compute the percent target by dividing the total projected operating outlier payments by the total projected operating DRG payments plus projected operating outlier payments. As discussed in the next section, for FY 2026, we are incorporating an estimate of the impact of outlier reconciliation when setting the outlier threshold. We do not include any other payments such as IME and DSH within the outlier target amount. Therefore, it is not necessary to include Medicare Advantage IME payments in the outlier threshold calculation. Section 1886(d)(3)(B) of the Act requires the Secretary to reduce the average standardized amount by a factor to account for the estimated total of outlier payments as a proportion of total DRG payments. More information on outlier payments may be found on the CMS website at: https://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/AcuteInpatientPPS/outlier.html.

(1) Methodology To Incorporate an Estimate of the Impact of Outlier Reconciliation in the FY 2026 Outlier Fixed-Loss Cost Threshold

The regulations in 42 CFR 412.84(i)(4) state that any outlier reconciliation at cost report settlement will be based on operating and capital cost-to-charge ratios (CCRs) calculated based on a ratio of costs to charges computed from the relevant cost report and charge data determined at the time the cost report coinciding with the discharge is settled. Instructions for outlier reconciliation are in section 20.1.2.5 of chapter 3 of the Claims Processing Manual (available at https://www.cms.gov/Regulations-and-Guidance/Guidance/ Manuals/Downloads/clm104c03.pdf). The original instructions issued in July 2003 \1\ instruct MACs to identify for CMS any instances where: (1) a hospital's actual operating CCR for the cost reporting period fluctuates plus or minus 10 percentage points or more compared to the interim operating CCR used to calculate outlier payments when a bill is processed; and (2) the total operating and capital outlier payments for the hospital exceeded $500,000 for that cost reporting period. Cost reports that meet these criteria will have the hospital's outlier payments reconciled at the time of cost report final settlement if approved by the CMS Central Office. For the remainder of this discussion, we refer to these criteria as the original criteria for outlier reconciliation (or the original criteria).

\1\ Change Request 2785 (Transmittal A-03-058; July 3, 2003) found at https://www.cms.gov/regulations-and-guidance/guidance/transmittals/downloads/a03058.pdf.

On March 28, 2024, we issued Change Request (CR) 13566, which is available at https://www.cms.gov/medicare/regulations-guidance/transmittals/2024-transmittals/r12558cp. CR 13566 provides additional instructions to MACs that expand the criteria for identifying cost reports MACs are to refer to CMS for approval of outlier reconciliation. As discussed in the FY 2025 IPPS/LTCH final rule, we anticipate that MACs will identify more cost reports to refer to CMS for outlier reconciliation approval. Specifically, CR 13566 states that for cost reports beginning on or after October 1, 2024, MACs shall identify for CMS any instances where: (1) the actual operating CCR is found to be plus or minus 20 percent or more from the operating CCR used during that time period to make outlier payments, and (2) the total operating and capital outlier payments for the hospital exceeded $500,000 for that cost reporting period. For the remainder of this discussion, we refer to these criteria as the new criteria for outlier reconciliation (or the new criteria). These new criteria for identifying hospital cost reports that MACs identify for outlier reconciliation approval are in addition to the original criteria for reconciliation described previously. That is, under the new criteria, MACs identify hospitals for outlier reconciliation approval that would not have met the original criteria. In addition, CR 13566 instructs that for cost reporting periods that begin on or after October 1, 2024, a hospital in its first cost reporting period will be referred for approval of reconciliation of outlier payments at the time of cost report final settlement. As such, new hospitals will be referred for outlier reconciliation approval regardless of the change to the operating CCR and no matter the amount of outlier payments during the cost reporting period. If we determine that a hospital's outlier payments should be reconciled, we reconcile both operating and capital outlier payments. We refer readers to section 20.1.2.5 of Chapter 3 of the Medicare Claims Processing Manual for complete instructions regarding outlier reconciliation, including the update to the outlier reconciliation criteria provided in CR 13566. (Refer to the FY 2025 IPPS/LTCH PS final rule for additional information (89 FR 69950).)

Comment: One commenter objected to the new criteria adopted in CR 13566 without first going through notice and comment rulemaking.

Response: We responded to a similar comment in the FY 2025 IPPS/ LTCH final rule (89 FR 69949). Similar to our response in that final rule, CMS established the outlier reconciliation regulation under Sec. 412.84(i)(4) effective for discharges on or after August 8, 2003 which makes all hospital outlier payments subject to reconciliation. CMS has not modified the outlier regulation. The instructions CMS has issued via CR 13566 have set forth an enforcement policy that determines when MACs will identify additional hospitals for reconciliation referral. They do not change the legal standards that govern the hospitals.

We explained that we believe the new criteria balance current administrative feasibility with the goal of expanding the scope of cost reports identified for outlier reconciliation approval to increase the accuracy of outlier payments. These new criteria for identifying hospital cost reports that MACs should be referred for outlier reconciliation approval are in addition to the original criteria for reconciliation described previously. We refer the reader to the FY 2025 IPPS/LTCH final rule for a complete discussion regarding the new criteria adopted in CR 13566.

In the FY 2020 IPPS/LTCH PPS final rule (84 FR 42623 through 42635), we finalized a methodology to incorporate outlier reconciliation in the FY 2020 outlier fixed loss cost threshold. As discussed in the FY 2020 IPPS/LTCH PPS proposed rule (84 FR 19592), we stated that rather than trying to predict which claims and/or hospitals may be subject to outlier reconciliation, we believe a methodology that incorporates an

estimate of outlier reconciliation dollars based on actual outlier reconciliation amounts reported in historical cost reports would be a more feasible approach and provide a better estimate and predictor of outlier reconciliation for the upcoming fiscal year. We also stated that we believe the methodology addresses stakeholder's concerns on the impact of outlier reconciliation on the modeling of the outlier threshold. (For a detailed discussion of additional background regarding outlier reconciliation, we refer the reader to the FY 2020 IPPS/LTCH PPS final rule.)

As discussed in the FY 2025 IPPS/LTCH PPS final rule (89 FR 69949 through 69955), we finalized changes to our methodology to incorporate an estimate of outlier reconciliation in the FY 2025 outlier fixed loss cost threshold to reflect the estimated reconciled outlier payments under the new criteria in CR 13566 (described previously). In that final rule, we provided step by step details under our methodology to incorporate a projection of outlier payment reconciliations for the FY 2025 outlier threshold calculation. We refer the reader to the FY 2025 IPPS/LTCH final rule for complete details (89 FR 69950 through 69955).

(a) Incorporating a Projection of Outlier Reconciliations for the FY 2026 Outlier Threshold Calculation

Under our methodology for incorporating a projection of outlier reconciliation for the outlier threshold calculation, for each year, we typically advance the historical data used by 1 year, using cost report data that is on a 6-year lag, which is typically the most recent and complete available data to project the estimate of outlier reconciliation. Accordingly, for FY 2025 we used FY 2019 cost report data. Because the new criteria were not effective until FY 2025 cost reports, to estimate outlier reconciliation dollars under the new criteria, we applied the new criteria to FY 2019 cost reports as if they had been in place at the time of final cost report settlement.

For FY 2026, in the proposed rule, we evaluated the use of the FY 2020 cost report data under our methodology as established in FY 2020 and modified in the FY 2025 IPPS/LTCH PPS final rule, to incorporate a projection of operating outlier reconciliations for the FY 2026 outlier threshold calculation (that is, the FY 2020 methodology as modified in FY 2025 to reflect additional cost reports that would be identified for outlier reconciliation approval under the new criteria in CR 13566). Specifically, for FY 2026 we evaluated using the same steps finalized in the FY 2025 IPPS/LTCH PPS final rule.

Specifically, in the proposed rule we calculated a projection of outlier reconciliation using cost report data from FY 2020 hospital cost reports in the December 2024 HCRIS extract that were reconciled using the original criteria for referral for outlier reconciliation approval. In addition, in calculating this estimate, we used data from the Provider Specific File (PSF) and the cost report data to identify the FY 2020 cost reports that would have met the new criteria if those criteria had been in effect. This allows us to account for the additional hospital cost reports that would be referred for outlier reconciliation approval as a result of the new criteria under our methodology. For purposes of this estimate, in the proposed rule we used the latest quarterly PSF update (December 2024 for the proposed rule).

As previously explained, our 5-step methodology to incorporate a projection of outlier payment reconciliations for the outlier threshold calculation is described in detail in the FY 2025 IPPS/ LTCH final rule (see 89 FR 69950 through 69952). The 5 steps can be summarized as follows:

Step 1: Identify hospital cost reports that meet the original criteria (Step 1a) or the new criteria (Step 1b).

Step 2: Determine the aggregate amount of operating outlier reconciliation dollars (under both the original criteria (Step 2a) and the new criteria (Steps 2b)).

Step 3: Calculate the aggregate amount of total Federal operating payments across all applicable hospitals using the cost report data.

Step 4: Determine the percentage of total operating outlier reconciliation dollars to total Federal operating payments for the cost report data year.

Step 5: Adjust the outlier target using the percentage from Step 4.

With regard to incorporating outlier reconciliation in the proposed rule for the FY 2026 outlier fixed-loss cost threshold, we evaluated the use of the most recent available data at the time of the proposed rule (as described previously) using the 5-step methodology as set forth in the FY 2025 IPPS/LTCH PPS final rule. As we explained in the proposed rule, we found that using the most recent available data under our 5-step methodology appeared to produce anomalous results that may not provide an appropriate estimate and predictor of outlier reconciliation for the upcoming fiscal year. (We note, for the hospitals identified in Step 1b (hospitals that would be referred for outlier reconciliation under the new criteria), for the proposed rule we posted a public use file that includes the operating CCR calculated from the FY 2020 cost report in the most recent publicly available quarterly HCRIS extract (the December 2024 HCRIS for the proposed rule), the weighted operating CCR used for claim payment during the FY 2020 cost reporting period from the latest quarterly PSF update (December 2024 for the proposed rule), and the supplemental data from the MACs and operating outlier payment reported on the FY 2020 cost report.)

Step 4 of the methodology divides the aggregate amount from Step 2 \2\ (operating outlier reconciliation dollars under both the original criteria and the new criteria or total reconciled dollars) by the amount from Step 3 \3\ (total Federal operating payments across all applicable hospitals using the cost report data) and multiplies the resulting amount by 100 to produce the percentage of total operating outlier reconciliation dollars to total Federal operating payments (89 FR 69952). As discussed in previous proposed and final rules, when the percentage of total operating outlier reconciliation dollars to total Federal operating payments in Step 4 rounds to a negative value, the effect is a decrease to the outlier threshold compared to an outlier threshold that is calculated without including this estimate of operating outlier reconciliation dollars. When the percentage of total operating outlier reconciliation dollars to total Federal operating payments in Step 4 rounds to a positive value, the effect is an increase to the outlier threshold compared to an outlier threshold that is calculated without including this estimate of operating outlier reconciliation dollars.

\2\ Step 2, the numerator of step 4, is the aggregate amount of operating outlier reconciliation dollars under both the original criteria and the new criteria which is the sum of the amounts from Steps 2a and 2b. (89 FR 69951 through 69952).

\3\ Step 3, the denominator of step 4, is the aggregate amount of total Federal operating payments across all applicable hospitals using the cost report data. The total Federal operating payments consist of the Federal payments (Worksheet E, Part A, Line 1.01 and Line 1.02, plus Line 1.03 and Line 1.04), outlier payments (Worksheet E, Part A, Lines 2.02, 2.03, and 2.04), and the outlier reconciliation amounts from Steps 2a and 2b. (89 FR 69952).

Using the most recent available data for the proposed rule (as described previously), the ratio calculated under Step 4 of the methodology was 0.095654 percent (($79,574,408/$83,189,787,222) x 100), which, when rounded to the second digit, was +0.1 percent. We stated that under Step 5 of the methodology, this percentage amount would be used to adjust the outlier target for FY 2026. This would have meant that for FY 2026, we would have incorporated a projection of outlier reconciliation dollars by targeting an outlier threshold at 5.0 percent [5.1 percent--(0.1 percent)]. This positive 0.1 percentage point was being driven by the numerator in Step 4 (that is, the total reconciled dollars or the aggregate operating outlier reconciliation dollars under both the original criteria and the new criteria).

Typically, the total reconciled dollars in Step 2 (the numerator of Step 4) is a negative amount reflecting that overall, providers would owe the Medicare program money at the time of outlier reconciliation, which then produces a negative percentage of operating outlier reconciliation dollars to total Federal operating payments in Step 4. Using the most recent available data at the time of the proposed rule (described previously), the total reconciled dollars in Step 2 (the numerator of Step 4) is a positive amount reflecting that overall, the Medicare program would owe hospitals money at the time of outlier reconciliation, which then produces a positive percentage of operating outlier reconciliation dollars to total Federal operating payments.

As mentioned previously, since FY 2020 we have incorporated outlier reconciliation into the outlier fixed loss cost threshold calculation. For the outlier fixed loss cost threshold calculation for FYs 2020 through 2025, the percentage of operating outlier reconciliation dollars to total Federal operating payments from Step 4 has resulted in a negative value (having the effect of a decrease to the outlier threshold). In the

proposed rule, we stated that using the FY 2020 cost report data and PSF values described previously under our methodology would be the first time that the percentage of operating outlier reconciliation dollars to total Federal operating payments from Step 4 was a positive value (and would have the effect of an increase to the outlier threshold). In the proposed rule we stated that we believe this positive value may be an anomaly and may not be an accurate predictor of outlier reconciliations for FY 2026 to use as an estimate of outlier reconciliation dollars for incorporating the effect of outlier reconciliation in the FY 2026 outlier fixed-loss cost threshold. Therefore, rather than use the percentage of total operating outlier reconciliation dollars to total Federal operating payments from Step 4 based on the latest available data (as described previously), for purposes of incorporating an estimate of outlier reconciliation into the outlier fixed-loss cost threshold calculation for FY 2026, we proposed to hold the data constant and to use the percentage of total operating outlier reconciliation dollars to total Federal operating payments from Step 4 from the FY 2025 IPPS/LTCH PPS final rule which is based on FY 2019 cost reports and PSF data. As discussed in that final rule (89 FR 69952), the ratio was a negative 0.041994 percent ((-$36,439,127/ $86,772,005,692) x 100), which, when rounded to the second digit, is -0.04 percent. Given the anomaly in the most recent available data described earlier, we stated that we believe that this is the best available data to estimate and predict outlier reconciliations for FY 2026 to use to incorporate the effect of outlier reconciliation in the FY 2026 outlier fixed-loss cost threshold. This percentage amount would then be used to adjust the outlier target for FY 2026 as determined in Step 5. (For complete details on the calculation, refer to the FY 2025 IPPS/LTCH final rule (89 FR 69950 through 69952).)

Under Step 5 of our methodology, because the outlier reconciliation dollars are only available on the cost reports, and not in the Medicare claims data in the MedPAR file used to model the outlier threshold, we proposed to target 5.1 percent minus the percentage determined under Step 4 in determining the outlier threshold. Consistent with the FY 2025 IPPS/LTCH PPS final rule, to incorporate a projection of outlier reconciliation dollars, we proposed to target an outlier threshold at an amount higher than 5.1 percent for outlier payments for FY 2026. Therefore, for FY 2026, we proposed to incorporate a projection of outlier reconciliation dollars by targeting an outlier threshold at 5.14 percent [5.1 percent-(-0.04 percent)]. As explained earlier, when the aggregate amount of outlier reconciliation as a percent of total operating payments rounds to a negative percent, the effect is a decrease to the outlier threshold compared to an outlier threshold that is calculated without including this estimate of operating outlier reconciliation dollars. In section II.A.4.i.(2). of the Addendum to the proposed rule, we provided the FY 2026 proposed outlier threshold as calculated for the proposed rule both with and without including this percentage estimate of operating outlier reconciliation.

Consistent with the approach taken in the FY 2020 IPPS/LTCH PPS proposed rule (84 FR 19593), we would continue to use a 5.1 percent target (or an outlier offset factor of 0.949) in calculating the outlier offset to the standardized amount. Therefore, the proposed operating outlier offset to the standardized amount was 0.949 (1- 0.051).

We noted, in the FY 2026 proposed rule, consistent with our historical practice, we planned to evaluate the updated data available at the time of the development of the final rule (such as the March 2025 HCRIS extract of the FY 2020 cost report). We stated that we would evaluate the use of that updated data in the methodology to assess whether that data still shows an anomaly such that it would not be appropriate to use in calculating the projection of outlier reconciliation dollars for FY 2026 and, depending on the results of this evaluation, may consider use of that data for purposes of projecting an estimate of outlier reconciliation dollars and incorporating that estimate into the modeling for the fixed loss cost outlier threshold for FY 2026. We invited public comment on our proposed methodology for projecting an estimate of outlier reconciliation and incorporating that estimate into the modeling for the fixed loss cost outlier threshold for FY 2026.

Comment: One commenter supported the proposal to hold the data constant from the FY2025 IPPS/LTCH PPS final rule.

Response: We appreciate the support for the proposal to hold constant the outlier reconciliation estimate. For this final rule, we evaluated the updated data available at the time of the development of this final rule (specifically, the March 2025 HCRIS extract of the FY 2020 cost report). Using the most recent available data for this final rule, the ratio calculated under Step 4 of the methodology would be 0.0937 percent (($77,958,731/$83,200,772,713) x 100), which, when rounded to the second digit, is +0.09 percent. Under Step 5 of the methodology, this percentage amount would be used to adjust the outlier target for FY 2026. This would mean that for FY 2026, we would incorporate a projection of outlier reconciliation dollars by targeting an outlier threshold at 5.1 percent [5.1 percent-(0.09 percent)]. This positive 0.09 percentage point is being driven by the numerator in Step 4 (that is, the total reconciled dollars or the aggregate operating outlier reconciliation dollars under both the original criteria and the new criteria).

As discussed earlier, typically, the total reconciled dollars in Step 2 (the numerator of Step 4) is a negative amount reflecting that overall, providers would owe the Medicare program money at the time of outlier reconciliation, which then produces a negative percentage of operating outlier reconciliation dollars to total Federal operating payments in Step 4. Using the most recent available data for this final rule (described previously), similar to the proposed rule, the total reconciled dollars in Step 2 (the numerator of Step 4) is a positive amount reflecting that overall, the Medicare program would owe hospitals money at the time of outlier reconciliation, which then produces a positive percentage of operating outlier reconciliation dollars to total Federal operating payments. Similar to the proposed rule, for this final rule, we believe this positive value may be an anomaly and may not be an accurate predictor of outlier reconciliations for FY 2026 to use as an estimate of outlier reconciliation dollars for incorporating the effect of outlier reconciliation in the FY 2026 outlier fixed-loss cost threshold.

After considering the comments received and based on our evaluation using the updated data available at the time of the development of this final rule which continues to show that that data may be an anomaly, we are finalizing as proposed. Specifically, for purposes of incorporating an estimate of outlier reconciliation into the outlier fixed-loss cost threshold calculation for FY 2026, we are holding the data constant and using the percentage of total operating outlier reconciliation dollars to total Federal operating payments from Step 4 from the FY 2025 IPPS/LTCH PPS final rule which is based on FY 2019 cost reports and PSF data.

As discussed in that final rule (89 FR 69952), the ratio was a negative 0.041994 percent ((-$36,439,127/$86,772,005,692) x 100), which, when rounded to the second digit, is -0.04 percent. Given the anomaly in the most recent available data described earlier, we continue to believe that this is the best available data to estimate and predict outlier reconciliations for FY 2026 to use to incorporate the effect of outlier reconciliation in the FY 2026 outlier fixed-loss cost threshold. We are using this percentage to adjust the outlier target for FY 2026 as determined in Step 5. (For complete details on the calculation, refer to the FY 2025 IPPS/LTCH final rule (89 FR 69950 through 69952).)

Under Step 5 of our methodology, because the outlier reconciliation dollars are only available on the cost reports, and not in the Medicare claims data in the MedPAR file used to model the outlier threshold, we are finalizing to target 5.1 percent minus the percentage determined under Step 4 in determining the outlier threshold. Consistent with the FY 2025 IPPS/LTCH PPS final rule, to incorporate a projection of outlier reconciliation dollars, we are targeting an outlier threshold at an amount higher than 5.1 percent for outlier payments for FY 2026. Therefore, for FY 2026, we are incorporating a projection of outlier reconciliation dollars by targeting an outlier threshold at 5.14 percent [5.1 percent-(-0.04 percent)]. As explained earlier, when the aggregate amount of outlier reconciliation as a percent of total operating payments rounds to a negative percent, the effect is a decrease to the outlier threshold compared to an outlier threshold that is calculated without including this estimate of operating outlier reconciliation dollars. In section II.A.4.i.(2). of this Addendum, we provide the FY 2026 outlier threshold as calculated for this final rule both with and without including this percentage estimate of operating outlier reconciliation.

Consistent with the approach taken in the FY 2020 IPPS/LTCH PPS proposed rule (84 FR 19593), we would continue to use a 5.1

percent target (or an outlier offset factor of 0.949) in calculating the outlier offset to the standardized amount. Therefore, the final operating outlier offset to the standardized amount is 0.949 (1-- 0.051).

(b) Adjustment To Account for Capital Outlier Reconciliation Payments in the Projected Proportion of Capital IPPS Payments Paid as Outliers in Determining the FY 2026 Capital Federal Rate

We are establishing an outlier threshold that is applicable to both hospital inpatient operating costs and hospital inpatient capital related costs (58 FR 46348). Similar to the calculation of the adjustment to the standardized amount to account for the projected proportion of operating payments paid as outlier payments, as discussed in greater detail in section III.A.2. of this Addendum, we are reducing the FY 2026 capital standard Federal rate by an adjustment factor to account for the projected proportion of capital IPPS payments paid as outliers. The regulations in 42 CFR 412.84(i)(4) state that any outlier reconciliation at cost report settlement would be based on operating and capital CCRs calculated based on a ratio of costs to charges computed from the relevant cost report and charge data determined at the time the cost report coinciding with the discharge is settled. As such, any reconciliation also applies to capital outlier payments.

Under our methodology for incorporating an adjustment to account for capital outlier reconciliation payments in the projected proportion of capital IPPS payments paid as outliers in determining the FY 2026 capital Federal rate, each year, we typically advance the historical data used by 1 year and use cost report data that is on a six year lag, which is typically the most recent and complete available data to project the estimate of outlier reconciliation. Accordingly, for FY 2025 we used FY 2019 cost report data. Because the new criteria were not effective until FY 2025 cost reports, to estimate outlier reconciliation dollars under the new criteria, we applied the new criteria to FY 2019 cost reports as if they had been in place at the time of final cost report settlement.

For FY 2026, in the proposed rule we evaluated the use of the FY 2020 cost report data under the methodology we used for FY 2025 to incorporate an adjustment to the FY 2026 capital standard Federal rate to account for the projected proportion of capital IPPS payments paid as outliers (that is, the FY 2020 methodology as modified in FY 2025 to reflect additional cost reports that would be identified for reconciliation under the new criteria in CR 13566). Specifically, in the proposed rule we calculated an estimate of outlier reconciliation using cost report data from FY 2020 hospital cost reports in the December 2024 HCRIS extract that were reconciled using the original criteria for referral for outlier reconciliation. Similarly, in calculating this estimate, we used data from the Provider Specific File (PSF) and the cost report data to identify the FY 2020 cost reports that would have met the new criteria if those criteria had been in effect. This allowed us to account for the additional hospital cost reports that would be referred for outlier reconciliation approval as a result of the new criteria under our methodology. For purposes of the estimate, we used the latest quarterly PSF update (December 2024) for the proposed rule.

As previously explained, in the FY 2025 IPPS/LTCH PPS final rule (89 FR 699540 through 69955), we finalized changes to our methodology to incorporate an estimate of outlier reconciliation in the FY 2025 outlier fixed loss cost threshold to reflect the estimated reconciled outlier payments under the new criteria in CR 13566 (described previously). In that final rule, we provided step by step details under our methodology to incorporate a projection of outlier payment reconciliations for the FY 2025 outlier threshold calculation. (For complete details on our 5-step methodology to incorporate an adjustment to the capital outlier adjustment factor, we refer readers to the FY 2025 IPPS/LTCH final rule (89 FR 69953 through 69955).) The 5 steps can be summarized as follows:

Step 1: Identify hospital cost reports that meet the original criteria (Step 1a) or the new criteria (Step 1b).

Step 2: Determine the aggregate amount of capital outlier reconciliation dollars (under both the original criteria (Step 2a) and the new criteria (Steps 2b)).

Step 3: Calculate the aggregate amount of total Federal capital Federal payments across all applicable hospitals using the cost report data.

Step 4: Determine the percentage of total capital outlier reconciliation dollars to total capital Federal payments for the cost report data year.

Step 5: Adjust the capital outlier adjustment factor using the percentage from Step 4.

Under this methodology, because the outlier reconciliation dollars are only available on the cost reports, and not in the specific Medicare claims data in the MedPAR file used to estimate outlier payments, in Step 5 the estimate of capital outlier payments are determined by adding the percentage determined in Step 4 to the estimated percentage of capital outlier payments otherwise determined using the shared outlier threshold that is applicable to both hospital inpatient operating costs and hospital inpatient capital-related costs. (We note that this percentage is added for capital outlier payments but subtracted in the analogous step for operating outlier payments. We have a unified outlier payment methodology that uses a shared threshold to identify outlier cases for both operating and capital payments. The difference stems from the fact that operating outlier payments are determined by first setting a “target” percentage of operating outlier payments relative to aggregate operating payments which produces the outlier threshold. Once the shared threshold is set, it is used to estimate the percentage of capital outlier payments to total capital payments based on that threshold. Because the threshold is already set based on the operating target, rather than adjusting the threshold (or operating target), we adjust the percentage of capital outlier to total capital payments to account for the estimated effect of capital outlier reconciliation payments. This percentage is adjusted by adding the capital outlier reconciliation percentage from Step 4 to the estimate of the percentage of capital outlier payments to total capital payments based on the shared threshold.)

As discussed in previous proposed and final rules, when the aggregate capital outlier reconciliation dollars in Step 2 is negative, the estimate of capital outlier payments under our methodology would be lower than the percentage of capital outlier payments otherwise determined using the shared outlier threshold. Under Step 5 this would be a relatively smaller outlier budget neutrality adjustment factor which would have the effect of an increase to the capital Federal rate. When the aggregate capital outlier reconciliation dollars from Step 2 are positive, the estimate of capital outlier payments under our methodology would be higher than the percentage of capital outlier payments otherwise determined using the shared outlier threshold. Under Step 5 this would be a relatively larger outlier budget neutrality adjustment factor which would have the effect of a decrease to the capital Federal rate.

With regard to incorporating an adjustment to account for capital outlier reconciliation payments in the projected proportion of capital IPPS payments paid as outliers in the proposed rule, we evaluated the use of the most recent available data (as described previously) using the 5-step methodology as set forth in the FY 2025 IPPS/LTCH PPS final rule. As we explained in the proposed rule, we found that using the most recent available data under our 5-step methodology appeared to produce anomalous results that may not provide an appropriate estimate and predictor of outlier reconciliation for the upcoming fiscal year. (We noted, for the hospitals identified in Step 1b (hospitals that would be referred for outlier reconciliation approval under the new criteria), for the proposed rule we posted a public use file that includes the capital CCR calculated from the FY 2020 cost report in the most recent publicly available quarterly HCRIS extract (the December 2024 HCRIS for the proposed rule), the weighted capital CCR used for claim payment during the FY 2020 cost reporting period from the latest quarterly PSF update (December 2024 for the proposed rule), and the supplemental data from the MACs and capital outlier payment reported on the FY 2020 cost report.)

Step 4 of the methodology divides the aggregate amount from Step 2 \4\ (capital outlier reconciliation dollars under both the original criteria and the new criteria or total reconciled dollars) by the amount from Step 3 \5\ (total Federal capital payments across all

applicable hospitals using the cost report data) and multiplies the resulting amount by 100 to produce the percentage of total capital outlier reconciliation dollars to total capital Federal payments (89 FR 69955). Under the methodology, in Step 5 this amount is added to the estimated percentage of capital outlier payments otherwise determined using the shared outlier threshold (as explained previously).

\4\ Step 2, the numerator of step 4, is the aggregate amount of capital outlier reconciliation dollars under both the original criteria and the new criteria which is the sum of the amounts from Steps 2a and 2b. (89 FR 69954 through 69955).

\5\ Step 3, the denominator of step 4, is the aggregate amount of total capital Federal payments across all applicable hospitals using the cost report data. The total capital Federal payments consist of the capital DRG payments, capital outlier payments, capital indirect medical education (IME) Payments, capital disproportionate share hospital (DSH) payments (Worksheet E, Part A, Line 50, Column 1) and the capital outlier reconciliation amounts from Steps 2a and 2b. (89 FR 69955).

For the proposed rule, the estimated percentage of FY 2026 capital outlier payments otherwise determined using the shared outlier threshold was 4.16 percent (estimated capital outlier payments of $289,418,426 divided by (estimated capital outlier payments of $289,418,426 plus the estimated total capital Federal payment of $6,670,448,919)). Using the most recent available data at the time of the proposed rule (described previously), the total in Step 2 was $1,529,376, which was a positive amount. The percentage calculated in Step 4 was a positive 0.021188 percent (($1,529,376/ $7,218,168,555) x 100), which, when rounded to the second digit, was +0.02 percent. Under Step 5 of the methodology, this percentage amount would be used to adjust the estimate of capital outlier payments for FY 2026. This would mean that for the FY 2026 proposed rule we would have increased the estimated percentage of FY 2026 aggregate capital outlier payments by 0.02 percent. This positive 0.02 percentage point was being driven by the numerator in Step 4 (that is, the total reconciled dollars or the aggregate capital outlier reconciliation dollars under both the original criteria and the new criteria).

Typically, the total reconciled dollars in Step 2 (the numerator of Step 4) is a negative amount reflecting that overall, providers would owe the Medicare program money at the time of outlier reconciliation, which then produces a negative percentage of capital outlier reconciliation dollars to total Federal capital payments in Step 4. Using the most recent available data at the time of the proposed rule (described previously), the total reconciled dollars in Step 2 (the numerator of Step 4) is a positive amount reflecting that overall, the Medicare program would owe hospitals money at the time of outlier reconciliation, which then produces a positive percentage of capital outlier reconciliation dollars to total Federal capital payments.

As previously mentioned, since FY 2020 we have incorporated an adjustment to account for capital outlier reconciliation payments in the projected proportion of capital IPPS payments paid as outliers in determining the FY 2026 capital Federal rate. This adjustment (the percentage of capital outlier reconciliation dollars to total capital Federal payments from Step 4) has resulted in a negative value for FYs 2020 through 2025 (having the effect of an increase to the capital Federal amount, as described previously). In the proposed rule, using the FY 2020 cost report data and PSF values described previously under our methodology would be the first time that the adjustment under Step 4 (the percentage of capital outlier reconciliation dollars to total capital Federal payments) is a positive value (and would have the effect of a decrease to the capital Federal amount). We stated in the proposed rule that we believe this positive value may be an anomaly and may not be an accurate predictor of outlier reconciliations for FY 2026 to use as an estimate of outlier reconciliation dollars for incorporating the effect of outlier reconciliation to adjust the capital standard Federal rate. Therefore, rather than use the percentage of total capital outlier reconciliation dollars to total capital Federal payments from Step 4 based on the latest available data (as described previously), for purposes of incorporating an adjustment to the capital standard Federal rate for FY 2026, we proposed to hold the data constant and to use the percentage of total capital outlier reconciliation dollars to total capital Federal payments from Step 4 from the FY 2025 IPPS/LTCH PPS final rule which is based on FY 2019 cost reports and PSF data. As discussed in that final rule (89 FR 69955), the ratio was a negative 0.028042 percent ((- $2,181,440/$7,779,306,800) x 100), which, when rounded to the second digit, is -0.03 percent. Accordingly, for the proposed rule, taking into account projected capital outlier reconciliation under our methodology would decrease the estimated percentage of FY 2026 aggregate capital outlier payments by 0.03 percent. This percentage amount was used to adjust the proposed estimated percentage of FY 2026 aggregate capital outlier payments under Step 5 of the methodology. (For complete details on the calculation, refer to the FY 2025 IPPS/LTCH final rule (89 FR 69953 through 69955).) Given the anomaly in the most recent available data described earlier, we stated that we believed that this is the best available data to estimate and predict outlier reconciliations for FY 2026 to use to incorporate an adjustment to the FY 2026 capital standard Federal rate.

As discussed in section III.A.2. of the Addendum of the proposed rule, we incorporated the capital outlier reconciliation dollars from Step 5 when applying the outlier adjustment factor in determining the proposed capital Federal rate based on the estimated percentage of capital outlier payments to total capital Federal rate payments for FY 2026.

We noted in the proposed rule, for the FY 2026 final rule, consistent with our historical practice, we planned to evaluate the updated data available at the time of the development of that final rule (such as the March 2025 HCRIS extract of the FY 2020 cost report). We stated that we would evaluate the use of that updated data in the methodology to assess whether that data still shows an anomaly such that it would not be appropriate to use in calculating the projection of outlier reconciliation dollars for FY 2026 and, depending on the results of this evaluation, may consider use of that data for purposes of projecting an estimate of outlier reconciliation dollars and incorporating an adjustment to the FY 2026 capital standard Federal rate to account for the projected proportion of capital IPPS payments paid as outliers. We invited public comment on our proposed methodology for incorporating an adjustment to account for capital outlier reconciliation payments in the projected proportion of capital IPPS payments paid as outliers in determining the FY 2026 capital Federal rate.

Comment: As previously mentioned, we received one comment supporting our proposal to hold the data constant from the FY 2025 IPPS/LTCH PPS final rule.

Response: We appreciate the support for the proposal to hold constant the outlier reconciliation estimate. For this final rule, we evaluated the updated data available at the time of the development of this final rule (specifically, the March 2025 HCRIS extract of the FY 2020 cost report). Using the most recent available data for this final rule, similar to the proposed rule, the total in Step 2 is $1,500,253, which is a positive amount. The percentage calculated in Step 4 is a positive 0.020782 percent (($1,500,253/ $7,219,087,289) x 100), which, when rounded to the second digit, is +0.02 percent. Under Step 5 of the methodology, this percentage amount would be used to adjust the estimate of capital outlier payments for FY 2026. This would mean that for this final rule we would increase the estimated percentage of FY 2026 aggregate capital outlier payments by 0.02 percent. This positive 0.02 percentage point is being driven by the numerator in Step 4 (that is, the total reconciled dollars or the aggregate capital outlier reconciliation dollars under both the original criteria and the new criteria). This adjustment (the percentage of capital outlier reconciliation dollars to total capital Federal payments from Step 4) has resulted in a negative value for FYs 2020 through 2025 (having the effect of an increase to the capital Federal amount, as described previously). Similar to the proposed rule, for this final rule we believe this positive value may be an anomaly and may not be an accurate predictor of outlier reconciliations for FY 2026 to use as an estimate of outlier reconciliation dollars for incorporating the effect of outlier reconciliation to adjust the capital standard Federal rate.

After considering the comments received and based on our evaluation using the updated data available at the time of the development of this final rule which continues to show that that data may be an anomaly, we are finalizing as proposed. Specifically, rather than use the percentage of total capital outlier reconciliation dollars to total capital Federal payments from Step 4 based on the latest available data (as described previously), for purposes of incorporating an adjustment to the capital standard Federal rate for FY 2026, we are holding the data constant and using the percentage of total capital outlier reconciliation dollars to total capital Federal payments from Step 4 from the FY 2025 IPPS/ LTCH PPS final rule which is based on FY 2019 cost reports and PSF data. As discussed in that final rule (89 FR 69955), the ratio was a negative 0.028042 percent ((-$2,181,440/$7,779,306,800) x 100), which, when rounded to the second digit, is -0.03 percent. Accordingly, for this final rule, taking into account projected capital

outlier reconciliation under our methodology would decrease the estimated percentage of FY 2026 aggregate capital outlier payments by 0.03 percent. This percentage amount is being used to adjust the proposed estimated percentage of FY 2026 aggregate capital outlier payments under Step 5 of the methodology. (For complete details on the calculation, refer to the FY 2025 IPPS/LTCH final rule (89 FR 69953 through 69955).) Given the anomaly in the most recent available data described earlier, we believe that this is the best available data to estimate and predict outlier reconciliations for FY 2026 to use to incorporate an adjustment to the FY 2026 capital standard Federal rate.

As discussed in section III.A.2. of this Addendum of this final rule, we incorporated the capital outlier reconciliation dollars from Step 5 when applying the outlier adjustment factor in determining the capital Federal rate based on the estimated percentage of capital outlier payments to total capital Federal rate payments for FY 2026.

(2) FY 2026 Outlier Fixed-Loss Cost Threshold

In the FY 2014 IPPS/LTCH PPS final rule (78 FR 50977 through 50983), in response to public comments on the FY 2013 IPPS/LTCH PPS proposed rule, we made changes to our methodology for projecting the outlier fixed-loss cost threshold for FY 2014. We refer readers to the FY 2014 IPPS/LTCH PPS final rule for a detailed discussion of the changes.

As we have done in the past, to calculate the FY 2026 outlier threshold, we simulated payments by applying FY 2026 payment rates and policies using cases from the FY 2024 MedPAR file. As noted in section II.C. of this Addendum, we specify the formula used for actual claim payment which is also used by CMS to project the outlier threshold for the upcoming fiscal year. The difference is the source of some of the variables in the formula. For example, operating and capital CCRs for actual claim payment are from the Provider-Specific File (PSF) while CMS uses an adjusted CCR (as described later in this section) to project the threshold for the upcoming fiscal year. In addition, charges for a claim payment are from the bill while charges to project the threshold are from the MedPAR data with an inflation factor applied to the charges (as described earlier).

In order to determine the FY 2026 outlier threshold, we inflated the charges on the MedPAR claims by 2 years, from FY 2024 to FY 2026. Consistent with the FY 2020 IPPS/LTCH PPS final rule (84 FR 42626 and 42627), we are using the following methodology to calculate the charge inflation factor for FY 2026:

Include hospitals whose last four digits fall between 0001 and 0899 (section 2779A1 of Chapter 2 of the State Operations Manual on the CMS website at https://www.cms.gov/Regulations-and-Guidance/Guidance/Manuals/Downloads/som107c02.pdf); include CAHs and REHs that were IPPS hospitals for the time period of the MedPAR data being used to calculate the charge inflation factor; include hospitals in Maryland; and remove PPS-excluded cancer hospitals that have a “V” in the fifth position of their provider number or a “E” or “F” in the sixth position.

Include providers that are in both periods of charge data that are used to calculate the 1-year average annual rate of- change in charges per case. We note this is consistent with the methodology used since FY 2014.

We excluded Medicare Advantage IME claims for the reasons described in section I.A.4. of this Addendum. We refer readers to the FY 2011 IPPS/LTCH PPS final rule for a complete discussion on our methodology of identifying and adding the total Medicare Advantage IME payment amount to the budget neutrality adjustments.

In order to ensure that we capture only FFS claims, we included claims with a “Claim Type” of 60 (which is a field on the MedPAR file that indicates a claim is an FFS claim).

In order to further ensure that we capture only FFS claims, we excluded claims with a “GHOPAID” indicator of 1 (which is a field on the MedPAR file that indicates a claim is not an FFS claim and is paid by a Group Health Organization).

We examined the MedPAR file and removed pharmacy charges for anti-hemophilic blood factor (which are paid separately under the IPPS) with an indicator of “3” for blood clotting with a revenue code of “0636” from the covered charge field. We also removed organ acquisition charges from the covered charge field because organ acquisition is a pass-through payment not paid under the IPPS. As noted previously, we proposing to remove allogeneic hematopoietic stem cell acquisition charges from the covered charge field for budget neutrality adjustments. As discussed in the FY 2021 IPPS/LTCH PPS final rule, payment for allogeneic hematopoietic stem cell acquisition costs is made on a reasonable cost basis for cost reporting periods beginning on or after October 1, 2020 (85 FR 58835 through 58842).

Because this payment simulation uses the FY 2026 relative weights, consistent with our policy discussed in section IV.I. of the preamble to this final rule, we applied the adjustor for certain cases that group to MS-DRG 018 in our simulation of these payments.

Our general methodology to inflate the charges computes the 1- year average annual rate-of-change in charges per case which is then applied twice to inflate the charges on the MedPAR claims by 2 years since we typically use claims data for the fiscal year that is 2 years prior to the upcoming fiscal year.

In the FY 2020 IPPS/LTCH PPS final rule (84 FR 42627), we modified our charge inflation methodology. We stated that we believe balancing our preference to use the latest available data from the MedPAR files and stakeholders' concerns about being able to use publicly available MedPAR files to review the charge inflation factor can be achieved by modifying our methodology to use the publicly available Federal fiscal year period (that is, for FY 2020, we used the charge data from Federal fiscal years 2017 and 2018), rather than the most recent data available to CMS which, under our prior methodology, was based on calendar year data. We refer the reader to the FY 2020 IPPS/LTCH PPS final rule for a complete discussion regarding this change.

For the same reasons discussed in that rulemaking, for FY 2026, we proposed to use the same methodology as FY 2020 to determine the charge inflation factor. That is, for FY 2026, we proposed to use the MedPAR files for the two most recent available Federal fiscal year time periods to calculate the charge inflation factor, as we did for FY 2020. Specifically, for the proposed rule we used the December 2023 MedPAR file of FY 2023 (October 1, 2023, to September 30, 2023) charge data (released for the FY 2025 IPPS/LTCH PPS proposed rule) and the December 2024 MedPAR file of FY 2024 (October 1, 2023, to September 30, 2024) charge data (released for the FY 2026 IPPS/LTCH PPS proposed rule) to compute the proposed charge inflation factor. We proposed that for the FY 2026 final rule, we would use more recently updated data, that is the MedPAR files from March 2024 for the FY 2023 time period and March 2025 for the FY 2024 time period.

For FY 2026, under this proposed methodology, to compute the 1- year average annual rate-of-change in charges per case, we compared the average covered charge per case of $86,031.03 ($592,911,386,867/ 6,891,832) from October 1, 2022, through September 30, 2023, to the average covered charge per case of $90,711.54 ($624,034,862,796/ 6,879,333) from October 1, 2023, through September 30, 2024. This rate-of-change was 5.440 percent (1.05440) or 11.18 percent (1.1118) over 2 years. The billed charges are obtained from the claims from the MedPAR file and inflated by the inflation factor specified previously.

As we have done in the past, in the FY 2026 IPPS/LTCH PPS proposed rule, we proposed to establish the FY 2026 outlier threshold using hospital CCRs from the December 2024 update to the Provider-Specific File (PSF), the most recent available data at the time of the development of the proposed rule. We proposed to apply the following edits to providers' CCRs in the PSF. We believe these edits are appropriate to accurately model the outlier threshold. We first search for Indian Health Service providers and those providers assigned the statewide average CCR from the current fiscal year. We then replace these CCRs with the statewide average CCR for the upcoming fiscal year. We also assign the statewide average CCR (for the upcoming fiscal year) to those providers that have no value in the CCR field in the PSF or whose CCRs exceed the ceilings described later in this section (3.0 standard deviations from the mean of the log distribution of CCRs for all hospitals). We do not apply the adjustment factors described later in this section to hospitals assigned the statewide average CCR. For FY 2026, we proposed to continue to apply an adjustment factor to the CCRs to account for cost and charge inflation (as explained later in this section). We also proposed that, if more recent data become available, we would use that data to calculate the final FY 2026 outlier threshold.

In the FY 2014 IPPS/LTCH PPS final rule (78 FR 50979), we adopted a new methodology to adjust the CCRs. Specifically,

we finalized a policy to compare the national average case-weighted operating and capital CCR from the most recent update of the PSF to the national average case-weighted operating and capital CCR from the same period of the prior year.

Therefore, as we have done in the past, we proposed to adjust the CCRs from the December 2024 update of the PSF by comparing the percentage change in the national average case weighted operating CCR and capital CCR from the December 2023 update of the PSF to the national average case weighted operating CCR and capital CCR from the December 2024 update of the PSF. We note that, in the proposed rule, we used total transfer-adjusted cases from FY 2024 to determine the national average case weighted CCRs for both sides of the comparison. As stated in the FY 2014 IPPS/LTCH PPS final rule (78 FR 50979), we believe that it is appropriate to use the same case count on both sides of the comparison because this will produce the true percentage change in the average case-weighted operating and capital CCR from one year to the next without any effect from a change in case count on different sides of the comparison.

Using the proposed methodology, for the proposed rule, we calculated a December 2023 operating national average case-weighted CCR of 0.252119 and a December 2024 operating national average case- weighted CCR of 0.244584.We then calculated the percentage change between the two national operating case-weighted CCRs by subtracting the December 2023 operating national average case-weighted CCR from the December 2024 operating national average case-weighted CCR and then dividing the result by the December 2023 national operating average case-weighted CCR. This resulted in a proposed one-year national operating CCR adjustment factor of 0.970113.

We used this same proposed methodology to adjust the capital CCRs. Specifically, we calculated a December 2023 capital national average case-weighted CCR of 0.017659 and a December 2024 capital national average case-weighted CCR of 0.016912. We then calculated the percentage change between the two national capital case-weighted CCRs by subtracting the December 2023 capital national average case- weighted CCR from the December 2024 capital national average case- weighted CCR and then dividing the result by the December 2023 capital national average case-weighted CCR. This resulted in a proposed one-year national capital CCR adjustment factor of 0.957699.

For purposes of estimating the proposed outlier threshold for FY 2026, we used a wage index that reflects the policies discussed in the proposed rule. This includes the following:

Application of the proposed rural and imputed floor adjustment.

The proposed frontier State floor adjustments in accordance with section 10324(a) of the Affordable Care Act.

The proposed out-migration adjustment as added by section 505 of Pub. L. 108-173.

Incorporating our policy (described in section III.6. of the preamble of this final rule) to apply a 5-percent cap on any decrease to a hospital's wage index from its wage index in the prior FY, regardless of the circumstances causing the decline.

The proposed transition for the discontinuation of the low wage index hospital policy (as described in section III.F.7. of the preamble of this final rule).

If we did not take the aforementioned into account, our estimate of total FY 2026 payments would be too low, and, as a result, the proposed outlier threshold would be too high, such that estimated outlier payments would be less than our projected 5.1 percent of total payments (which includes outlier reconciliation).

As described in sections V.K. and V.L., respectively, of the preamble of this final rule, sections 1886(q) and 1886(o) of the Act establish the Hospital Readmissions Reduction Program and the Hospital VBP Program, respectively. We do not believe that it is appropriate to include the hospital VBP payment adjustments and the hospital readmissions payment adjustments in the proposed outlier threshold calculation or the proposed outlier offset to the standardized amount. Specifically, consistent with our definition of the base operating DRG payment amount for the Hospital Readmissions Reduction Program under Sec. 412.152 and the Hospital VBP Program under Sec. 412.160, outlier payments under section 1886(d)(5)(A) of the Act are not affected by these payment adjustments. Therefore, outlier payments would continue to be calculated based on the unadjusted base DRG payment amount (as opposed to using the base- operating DRG payment amount adjusted by the hospital readmissions payment adjustment and the hospital VBP payment adjustment). Consequently, we proposed to exclude the estimated hospital VBP payment adjustments and the estimated hospital readmissions payment adjustments from the calculation of the proposed outlier fixed-loss cost threshold.

We note that, to the extent section 1886(r) of the Act modifies the DSH payment methodology under section 1886(d)(5)(F) of the Act, the uncompensated care payment under section 1886(r)(2) of the Act, like the empirically justified Medicare DSH payment under section 1886(r)(1) of the Act, may be considered an amount payable under section 1886(d)(5)(F) of the Act such that it would be reasonable to include the payment in the outlier determination under section 1886(d)(5)(A) of the Act. As we have done since the implementation of uncompensated care payments in FY 2014, for FY 2026, we proposed to allocate an estimated per-discharge uncompensated care payment amount to all cases for the hospitals eligible to receive the uncompensated care payment amount in the calculation of the outlier fixed-loss cost threshold methodology. We continue to believe that allocating an eligible hospital's estimated uncompensated care payment to all cases equally in the calculation of the outlier fixed-loss cost threshold would best approximate the amount we would pay in uncompensated care payments during the year because, when we make claim payments to a hospital eligible for such payments, we would be making estimated per-discharge uncompensated care payments to all cases equally.

Furthermore, we continue to believe that using the estimated per-claim uncompensated care payment amount to determine outlier estimates provides predictability as to the amount of uncompensated care payments included in the calculation of outlier payments. Therefore, consistent with the methodology used since FY 2014 to calculate the outlier fixed-loss cost threshold, for FY 2026, we proposed to include estimated FY 2026 uncompensated care payments in the computation of the proposed outlier fixed-loss cost threshold. Specifically, we proposed to use the estimated per-discharge uncompensated care payments to hospitals eligible for the uncompensated care payment for all cases in the calculation of the proposed outlier fixed-loss cost threshold methodology.

In addition, consistent with the methodology finalized in the FY 2023 final rule, we proposed to include the estimated supplemental payments for eligible IHS/Tribal hospitals and Puerto Rico hospitals in the computation of the FY 2026 proposed outlier fixed-loss cost threshold. Specifically, we proposed to use the estimated per- discharge supplemental payments to hospitals eligible for the supplemental payment for all cases in the calculation of the proposed outlier fixed-loss cost threshold methodology.

Using this methodology, we used the formula described in section I.C.1. of this Addendum to simulate and calculate the Federal payment rate and outlier payments for all claims. In addition, as described in the earlier section to this Addendum, we proposed to incorporate an estimate of FY 2026 outlier reconciliation in the methodology for determining the outlier threshold. As noted previously, for the FY 2026 proposed rule, we proposed to hold the data constant and to use the FY 2025 final rule percentage of total operating outlier reconciliation dollars to total Federal operating payments from Step 4 from the FY 2025 IPPS/LTCH PPS final rule which is based on FY 2019 cost reports and PSF data. As discussed in the FY 2025 IPPS/LTCH PPS final rule, the ratio of outlier reconciliation dollars to total Federal Payments (Step 4) was a negative 0.041994 percent, which, when rounded to the second digit, is -0.04 percent. Therefore, for FY 2026, we proposed to incorporate a projection of outlier reconciliation dollars by targeting an outlier threshold at 5.14 percent [5.1 percent-(-.04 percent)]. Under this proposed approach, we determined a proposed threshold of $44,305 and calculated total outlier payments of $4,420,494,091and total operating Federal payments of $81,579,487,131. We then divided total outlier payments by total operating Federal payments plus total outlier payments and determined that this threshold matched with the 5.14 percent target, which reflected our proposal to incorporate an estimate of outlier reconciliation in the determination of the outlier threshold (as discussed in more detail in the previous section of this Addendum). We note that, if calculated without applying our proposed

methodology for incorporating an estimate of outlier reconciliation in the determination of the outlier threshold, the proposed threshold would be $44,644. We proposed an outlier fixed-loss cost threshold for FY 2026 equal to the prospective payment rate for the MS-DRG, plus any IME, empirically justified Medicare DSH payments, estimated uncompensated care payment, estimated supplemental payment for eligible IHS/Tribal hospitals and Puerto Rico hospitals, and any add-on payments for new technology, plus $44,305.

Comment: A commenter requested that CMS apply trims when calculating charge inflation as it does under the LTCH PPS to “remove all claims from providers whose growth in average charges was a statistical outlier”.

Response: We responded to a similar comment in the FY 2024 IPPS/ LTCH PPS final rule (88 FR 59351). As we explained in that final rule, there are many more providers and claims under the IPPS compared to the LTCH PPS. When we analyzed the LTCH PPS claims data, a single LTCH provider had substantial increases in its charges with average charges per case of approximately $10 million which significantly influenced the charge inflation factor. Since there are fewer hospitals and claims under the LTCH PPS, the potential for a single provider to influence the charge inflation factor is much more significant. We are not aware of a similar situation with a hospital having such high average charges under the IPPS. Therefore, we believe it is not necessary to apply the same trim to hospitals included in the IPPS charge inflation factor. We refer the reader to the FY 2024 IPPS/LTCH final rule for our complete response.

Comment: Commenters supported the proposed decrease in the high- cost outlier threshold from the FY 2025 threshold.

Response: We appreciate the commenters' feedback. We note that the FY 2026 final rule's fixed-loss threshold is lower than the proposed rule's fixed-loss threshold.

Comment: A commenter requested that CMS consider whether it is appropriate to include extreme cases when calculating the threshold. This commenter explained that high charge cases have a significant impact on the threshold. The commenter stated that it examined the data to understand the factors that drove a doubling of the threshold between FY 2016 and FY 2025, and stated that it observed that the inclusion of extreme cases in the calculation of the threshold, the rate of which are increasing over time, significantly impacts CMS' determination of the fixed-loss threshold. If this trend continues (that is, if the number (and proportion) of extreme cases continues to increase each year), the commenter stated that the impact of this population of cases on the threshold will likewise increase. Thus, the commenter recommended that CMS carefully consider what is causing this trend, whether the inclusion of these cases in the calculation of the threshold is appropriate, or whether a separate outlier mechanism should apply to these cases that more closely hews outlier payments to marginal costs. One commenter requested that CMS release greater detail on how the fixed loss threshold is calculated, with particular attention to the treatment of extreme cases. The commenter recommend CMS remove statistical outliers from the calculation, as is done when extreme cases appear in the data used to calculate the MS-DRG relative weights.

Response: We responded to a similar comment in prior rulemaking, most recently in the FY 2025 IPPS/LTCH PPS final rule (89 FR 69959- 69960). As we explained in the FY 2018 IPPS/LTCH PPS final rule (82 FR 38526) and other prior rulemaking, the methodology used to calculate the outlier threshold includes all claims to account for all different types of cases, including high charge cases, to ensure that CMS meets the 5.1 percent target. As the commenter pointed out, the volume of these cases continues to rise, making their impact on the threshold significant. We continue to believe excluding these cases would artificially lower the threshold. We continue to believe it is important to include all cases in the calculation of the threshold no matter how high or low the charges. Including these cases with high charges lends more accuracy to the threshold, as these cases have an impact on the threshold and continue to rise in volume. Therefore, we believe the inclusion of the high-cost outlier cases in the calculation of the outlier threshold is appropriate.

Also, as we explained in the FY 2024 IPPS/LTCH final rule (88 FR 59352), in response to commenter's recommendation that CMS consider whether a separate outlier mechanism should apply to these cases that more closely hews outlier payments to marginal costs, we believe the current calculation of outlier payment meets these goals. If a case has high charges that once reduced to cost significantly exceed the payment plus the threshold, then the case will receive a larger outlier payment reflective of the higher costs. Therefore, we believe the current payment system provides such a mechanism.

With regard to the commenter that requested that CMS release greater detail on how the fixed loss threshold is calculated, with particular attention to the treatment of extreme cases, we believe we have provided detailed information regarding how the fixed loss threshold is calculated. Also, for the reasons stated earlier, including cases with high charges lends more accuracy to the threshold. We welcome more specific information from the commenter with regard to the detail the commenter is requesting.

Comment: A commenter noted the final fixed-loss threshold established by CMS has consistently been lower than the threshold set forth in the proposed rule, and the variance between the proposed and final thresholds has generally exceeded 4 percent. The commenter emphasized that this demonstrates that CMS must ordinarily use the most recent data to appropriately calculate the outlier threshold.

Response: We responded to similar comments in the FY 2015 IPPS/ LTCH PPS final rule (79 FR 50378 through 50379) and refer readers to that rule for our response. We reiterate that CMS' historical policy is to use the best available data when setting the payment rates and factors in both the proposed and final rules. Sometimes there are variables that change between the proposed and final rule as result of the availability of more recent data, such as the charge inflation factor and the CCR adjustment factors that can cause fluctuations in the threshold amount. Other factors such as changes to the wage indexes and market basket increase can also cause the outlier fixed loss cost threshold to fluctuate between the proposed rule and the final rule each year. We use the latest data that is available at the time of the development of the proposed and final rules, such as the most recent update of MedPAR claims data and CCRs from the most recent update of the PSF.

Comment: A few commenters believe Congress required CMS to calculate the standardized amount using the “average standardized amount computed for the previous fiscal year under paragraph (2)(D) or this subparagraph” (with the subparagraph referring to section 1886(d)(3)(A) of the Act). The commenters believe that CMS should use the FY 1985 standardized amount before it was adjusted to offset projected outlier payments under section 1886(d)(3)(B) of the Act and the neutrality provisions of sections 1886(d)(3)(C)(i) and (e)(1)(B) of the Act. The commenters believe that the FY 1986 IPPS rates reduced the standardized rate in that year and all subsequent years, including the time-period at issue here. To correct this error, the commenters believe CMS should either adjust the standardized amount or adjust the standardized amount and the MS-DRG weights.

Response: We appreciate the commenters' concerns. We note that this issue was raised and addressed during the FY 1986 IPPS rulemaking process. In setting the standardized amount for FY 1986, we explained at the time that the “latest measure is more accurate than the earlier measurements used to compute the previously published factors because of the availability of more complete and later data, [and] its use should result in a more precise approximation of the amounts that should have been paid in FY 1984 and FY 1985, if we had been able to achieve budget neutrality accurately.” 50 FR at 35697. We declined to engage in “retroactive implementation of revised budget neutrality adjustments” for FYs 1984 and 1985 because doing so “would not comport with the basic principle of prospectivity of the prospective payment system.” Id. But we “converted these factors prospectively by adjusting the FY1986 rates accordingly.” Id.

We further disagreed with those earlier commenters that “the prior years' standardized rates before budget neutrality should serve as the basis for updating the FY 1986 rates.” Id. We stated that “section 1886(d)(3)(A) and (C) of the Act does not explicitly require that the update factor apply to the FY 1985 payment rate prior to the adjustments for budget neutrality in FY 1985.” Id.

We understand that commenters now express disagreement with those decisions made after notice and comment nearly forty years ago. However, we do not believe it is appropriate to address these concerns again now, particularly in light of the fact that we

did not solicit comments on the issue of revisiting the FY 1986 adjustment. It would be inappropriate to revise a long-standing decision made following notice and an opportunity for comment without providing notice that we were considering revisions of the issue.

Comment: A commenter requested that CMS make a reduction to the outlier threshold due to the proposed productivity adjustment of 0.8 percent, so that there is compatibility with the 2025 threshold.

Response: As noted previously, section 1886(d)(5)(A)(iv) of the Act states that outlier payments may not be less than 5 percent nor more than 6 percent of the total payments projected or estimated to be made based on DRG prospective payment rates for discharges in that year. We believe that the commenter's suggestion to make a reduction to the FY 2026 outlier fixed-loss cost threshold due to the productivity adjustment would be inconsistent with the statute as such a threshold would not result in a projection of outlier payments that are not less than 5 percent nor more than 6 percent of projected total payments for FY 2026.

After consideration of the public comments we received and for the reasons discussed, we are finalizing to use the same methodology we proposed, without modifications, to calculate the final outlier threshold for FY 2026.

For the FY 2026 final outlier threshold, we used the March 2024 MedPAR file of FY 2023 (October 1, 2022 through September 30, 2023) charge data (released in conjunction with the FY 2025 IPPS/LTCH PPS final rule) and the March 2025 MedPAR file of FY 2024 (October 1, 2023 through September 30, 2024) charge data (released in conjunction with this FY 2026 IPPS/LTCH PPS final rule) to determine the charge inflation factor. To compute the 1-year average annual rate-of-change in charges per case, we compared the average covered charge per case of $ 86,123.88 ($596,284,630,184/6,923,569 cases) from October 1, 2022 through September 31, 2023, to the average covered charge per case of $ 90,864.64 ($628,751,420,329/6,919,649 cases) from October 1, 2023 through September 31, 2024. This rate- of-change was 5.5 percent (1.05505) or 11.3 percent (1.11313) over 2 years. The billed charges are obtained from the claims from the MedPAR file and inflated by the inflation factor specified previously.

As we have done in the past, we are establishing the FY 2026 outlier threshold using hospital CCRs from the March 2025 update to the Provider-Specific File (PSF), the most recent available data at the time of the development of the final rule. We applied the following edits to providers' CCRs in the PSF. We believe these edits are appropriate to accurately model the outlier threshold. We first search for Indian Health Service providers and those providers assigned the statewide average CCR from the current fiscal year. We then replaced these CCRs with the statewide average CCR for the upcoming fiscal year. We also assigned the statewide average CCR (for the upcoming fiscal year) to those providers that have no value in the CCR field in the PSF or whose CCRs exceed the ceilings described later in this section (3.0 standard deviations from the mean of the log distribution of CCRs for all hospitals). We did not apply the adjustment factors described later in this section to hospitals assigned the statewide average CCR. For FY 2026, we also are continuing to apply an adjustment factor to the CCRs to account for cost and charge inflation (as explained later in this section).

For this final rule, as we have done since FY 2014 (with the exception of FYs 2022 and 2023, as discussed in the FY 2022 and FY 2023 IPPS/LTCH PPS proposed and final rules), we are adjusting the CCRs from the March 2025 update of the PSF by comparing the percentage change in the national average case-weighted operating CCR and capital CCR from the March 2024 update of the PSF to the national average case-weighted operating CCR and capital CCR from the March 2025 update of the PSF. We note that we used total transfer-adjusted cases from FY 2024 to determine the national average case weighted CCRs for both sides of the comparison. As stated in the FY 2014 IPPS/LTCH PPS final rule (78 FR 50979), we believe that it is appropriate to use the same case count on both sides of the comparison because this will produce the true percentage change in the average case-weighted operating and capital CCR from one year to the next without any effect from a change in case count on different sides of the comparison.

Using the methodology noted earlier, for this final rule, we calculated a March 2024 operating national average case-weighted CCR of 0.251988 and a March 2025 operating national average case- weighted CCR of 0.240921. We then calculated the percentage change between the two national operating case-weighted CCRs by subtracting the March 2024 operating national average case weighted CCR from the March 2025 operating national average case-weighted CCR and then dividing the result by the March 2024 national operating average case-weighted CCR. This resulted in a national operating CCR adjustment factor of 0.956081.

We used the same methodology earlier to adjust the capital CCRs. Specifically, for this final rule, we calculated a March 2024 capital national average case-weighted CCR of 0.017642 and a March 2025 capital national average case-weighted CCR of 0.016453. We then calculated the percentage change between the two national capital case weighted CCRs by subtracting the March 2024 capital national average case-weighted CCR from the March 2025 capital national average case-weighted CCR and then dividing the result by the March 2024 capital national average case-weighted CCR. This resulted in a national capital CCR adjustment factor of 0.932604.

As discussed previously, for purposes of estimating the final outlier threshold for FY 2026, we used a wage index that reflects the policies discussed in this final rule. This includes the following:

Application of the rural and imputed floor adjustment.

The frontier State floor adjustments in accordance with section 10324(a) of the Affordable Care Act.

The out migration adjustment as added by section 505 of Public Law 108-173.

Incorporating our policy (described in section III.6. of the preamble of this final rule) to apply a 5-percent cap on any decrease to a hospital's wage index from its wage index in the prior FY, regardless of the circumstances causing the decline.

The transition for the discontinuation of the low wage index hospital policy (as described in section III.F.7. of the preamble of this final rule).

As stated previously, if we did not take the above into account, our estimate of total FY 2026 payments would be too low, and, as a result, the outlier threshold would be too high, such that estimated outlier payments would be less than our projected 5.14 percent of total payments (which reflects the estimate of outlier reconciliation calculated for this final rule).

We excluded the hospital VBP payment adjustments and the hospital readmissions payment adjustments from the calculation of the outlier fixed-loss cost threshold.

We used the estimated per-discharge uncompensated care payments to hospitals eligible for the uncompensated care payment for all cases in the calculation of the outlier fixed-loss cost threshold methodology.

Based on the policy finalized, as previously described, we used the estimated per-discharge supplemental payments to hospitals eligible for the supplemental payment for all cases in the calculation of the outlier fixed-loss cost threshold methodology.

Using this methodology, we used the formula described in section I.C.1. of this Addendum to simulate and calculate the Federal payment rate and outlier payments for all claims. In addition, as described in the earlier section to this Addendum, we are finalizing to incorporate an estimate of FY 2026 outlier reconciliation in the methodology for determining the outlier threshold. As noted previously, we are finalizing to hold the data constant and to use the FY 2025 final rule percentage of total operating outlier reconciliation dollars to total Federal operating payments from Step 4 from the FY 2025 IPPS/LTCH PPS final rule which is based on FY 2019 cost reports and PSF data. As discussed in the FY 2025 IPPS/ LTCH PPS final rule, the ratio of outlier reconciliation dollars to total Federal Payments (Step 4) was a negative 0.041994 percent, which, when rounded to the second digit, is -0.04 percent. Therefore, for FY 2026, we incorporated a projection of outlier reconciliation dollars by targeting an outlier threshold at 5.14 percent [5.1 percent-(-.04 percent)]. Under this approach, we determined a threshold of $ 40,397 and calculated total outlier payments of $4,457,496,335 and total operating Federal payments of $82,262,071,135. We then divided total outlier payments by total operating Federal payments plus total outlier payments and determined that this threshold matched with the 5.14 percent target, which incorporated an estimate of outlier reconciliation in the determination of the outlier threshold (as discussed in more detail in the previous section of this Addendum). We note that, if calculated without applying our methodology for incorporating an estimate of outlier reconciliation in the

determination of the outlier threshold, the threshold would be $40,714. We are finalizing an outlier fixed-loss cost threshold for FY 2026 equal to the prospective payment rate for the MS-DRG, plus any IME, empirically justified Medicare DSH payments, estimated uncompensated care payment, estimated supplemental payment for eligible IHS/Tribal hospitals and Puerto Rico hospitals, and any add on payments for new technology, plus $40,397.

(3) Other Changes Concerning Outliers

As stated in the FY 1994 IPPS final rule (58 FR 46348), we establish an outlier threshold that is applicable to both hospital inpatient operating costs and hospital inpatient capital-related costs. When we modeled the combined operating and capital outlier payments, we found that using a common threshold resulted in a higher percentage of outlier payments for capital-related costs than for operating costs. We project that the threshold for FY 2026 (which reflects our methodology to incorporate an estimate of operating outlier reconciliation) would result in outlier payments that would equal 5.1 percent of operating DRG payments and we estimate that capital outlier payments would equal 3.84 percent of capital payments based on the Federal rate (which reflects our methodology discussed previously to incorporate an estimate of capital outlier reconciliation).

In accordance with section 1886(d)(3)(B) of the Act and as discussed previously, we reduce the FY 2026 standardized amount by 5.1 percent to account for the projected proportion of payments paid as outliers.

The outlier adjustment factors that would be applied to the operating standardized amount and capital Federal rate based on the FY 2026 outlier threshold are as follows:

Operating Capital

standardized Federal

amounts rate *

National................................... 0.949 0.957704

* The adjustment factor for the capital Federal rate includes an

adjustment to the estimated percentage of FY 2025 capital outlier

payments for capital outlier reconciliation, as discussed in the FY

2025 IPPS/LTCH final rule.

We are applying the outlier adjustment factors to the FY 2026 payment rates after removing the effects of the FY 2025 outlier adjustment factors on the standardized amount.

To determine whether a case qualifies for outlier payments, we currently apply hospital-specific CCRs to the total covered charges for the case. Estimated operating and capital costs for the case are calculated separately by applying separate operating and capital CCRs. These costs are then combined and compared with the outlier fixed-loss cost threshold.

Under our current policy at Sec. 412.84, we calculate operating and capital CCR ceilings and assign a statewide average CCR for hospitals whose CCRs exceed 3.0 standard deviations from the mean of the log distribution of CCRs for all hospitals. Based on this calculation, for hospitals for which the MAC computes operating CCRs greater than 1.263 or capital CCRs greater than 0.132 or hospitals for which the MAC is unable to calculate a CCR (as described under Sec. 412.84(i)(3) of our regulations), statewide average CCRs are used to determine whether a hospital qualifies for outlier payments. Table 8A listed in section VI. of this Addendum (and available via the internet on the CMS website) contains the statewide average operating CCRs for urban hospitals and for rural hospitals for which the MAC is unable to compute a hospital-specific CCR within the range previously specified. These statewide average ratios would be effective for discharges occurring on or after October 1, 2025, and would replace the statewide average ratios from the prior fiscal year. Table 8B listed in section VI. of this Addendum (and available via the internet on the CMS website) contains the comparable statewide average capital CCRs. As previously stated, the CCRs in Tables 8A and 8B would be used during FY 2026 when hospital-specific CCRs based on the latest settled cost report either are not available or are outside the range noted previously. Table 8C listed in section VI. of this Addendum (and available via the internet on the CMS website) contains the statewide average total CCRs used under the LTCH PPS as discussed in section V. of this Addendum.

We finally note that section 20.1.2 of chapter three of the Medicare Claims Processing Manual (on the internet at https:// www.cms.gov/Regulations-and-Guidance/Guidance/Manuals/Downloads/ clm104c03.pdf) covers an array of topics, including CCRs, reconciliation, and the time value of money. We encourage hospitals that are assigned the statewide average operating and/or capital CCRs to work with their MAC on a possible alternative operating and/ or capital CCR as explained in the manual. Use of an alternative CCR developed by the hospital in conjunction with the MAC can avoid possible overpayments or underpayments at cost report settlement, thereby ensuring better accuracy when making outlier payments and negating the need for outlier reconciliation. We also note that a hospital may request an alternative operating or capital CCR at any time as long as the guidelines of the manual are followed. In addition, the manual outlines the outlier reconciliation process for hospitals and Medicare contractors. We refer hospitals to the manual instructions for complete details on outlier reconciliation.

(4) FY 2024 Outlier Payments

Our current estimate, using available FY 2024 claims data, is that actual outlier payments for FY 2024 were approximately 5.17 percent of actual total MS-DRG payments. Therefore, the data indicate that, for FY 2024, the percentage of actual outlier payments relative to actual total payments is higher than we projected for FY 2024. Consistent with the policy and statutory interpretation we have maintained since the inception of the IPPS, we do not make retroactive adjustments to outlier payments to ensure that total outlier payments for FY 2024 are equal to 5.1 percent of total MS-DRG payments. As explained in the FY 2003 Outlier final rule (68 FR 34502), if we were to make retroactive adjustments to all outlier payments to ensure total payments are 5.1 percent of MS- DRG payments (by retroactively adjusting outlier payments), we would be removing the important aspect of the prospective nature of the IPPS. Because such an across-the-board adjustment would either lead to more or less outlier payments for all hospitals, hospitals would no longer be able to reliably approximate their payment for a patient while the patient is still hospitalized. We believe it would be neither necessary nor appropriate to make such an aggregate retroactive adjustment. Furthermore, we believe it is consistent with the statutory language at section 1886(d)(5)(A)(iv) of the Act not to make retroactive adjustments to outlier payments. This section states that outlier payments be equal to or greater than 5 percent and less than or equal to 6 percent of projected or estimated (not actual) MS-DRG payments. We believe that an important goal of a PPS is predictability. Therefore, we believe that the fixed-loss outlier threshold should be projected based on the best available historical data and should not be adjusted retroactively. A retroactive change to the fixed-loss outlier threshold would affect all hospitals subject to the IPPS, thereby undercutting the predictability of the system as a whole.

We note that, because the MedPAR claims data for the entire FY 2025 period would not be available until after September 30, 2025, we are unable to provide an estimate of actual outlier payments for FY 2025 based on FY 2025 claims data in this final rule. We will provide an estimate of actual FY 2025 outlier payments in the FY 2027 IPPS/LTCH PPS proposed rule.

The adjusted standardized amount is divided into labor-related and nonlabor-related portions. Tables 1A and 1B listed and published in section VI. of this Addendum (and available via the internet on the CMS website) contain the national standardized amounts that we are applying to all hospitals, except hospitals located in Puerto Rico, for FY 2026. The standardized amount for hospitals in Puerto Rico is shown in Table 1C listed and published in section VI. of this Addendum (and available via the internet on the CMS website). The amounts shown in Tables 1A and 1B differ only in that the labor- related share applied to the standardized amounts in Table 1A is 66.0 percent, and the labor-related share applied to the standardized amounts in Table 1B is 62 percent. In accordance with sections 1886(d)(3)(E) and 1886(d)(9)(C)(iv) of the Act, we are applying a labor-related share of 62 percent, unless application of that percentage would result in lower payments to a hospital than would otherwise be made. In effect, the statutory provision means that we would apply a labor-related share of 62 percent for all hospitals whose wage indexes are less than or equal to 1.0000.

In addition, Tables 1A and 1B include the standardized amounts reflecting the applicable percentage increases for FY 2026.

The labor-related and nonlabor-related portions of the national average standardized amounts for Puerto Rico hospitals for FY

2026 are set forth in Table 1C listed and published in section VI. of this Addendum (and available via the internet on the CMS website). Similarly, section 1886(d)(9)(C)(iv) of the Act, as amended by section 403(b) of Public Law 108-173, provides that the labor-related share for hospitals located in Puerto Rico be 62 percent, unless the application of that percentage would result in lower payments to the hospital.

The following table illustrates the changes from the FY 2025 national standardized amounts to the FY 2026 national standardized amounts. The second through fifth columns display the changes from the FY 2025 standardized amounts for each applicable FY 2026 standardized amount. The first row of the table shows the updated (through FY 2025) average standardized amount after restoring the FY 2025 offsets for outlier payments, geographic reclassification, rural demonstration, and wage index cap policy budget neutrality. The MS-DRG reclassification and recalibration wage index, and stem cell acquisition budget neutrality factors are cumulative (that is, we have not restored the offsets). Accordingly, those FY 2025 adjustment factors have not been removed from the base rate in the following table.

Changes From FY 2025 Standardized Amounts to the Final FY 2026 Standardized Amounts

Hospital submitted Hospital did NOT Hospital did NOT

Hospital submitted quality data and submit quality submit quality

quality data and is NOT a data and is a data and is NOT a

is a meaningful meaningful EHR meaningful EHR meaningful EHR

EHR user user user user

FY 2026 Base Rate after If Wage Index is If Wage Index is If Wage Index is If Wage Index is

removing:. Greater Than Greater Than Greater Than Greater Than 1. FY 2025 Geographic 1.0000: Labor 1.0000: Labor 1.0000: Labor 1.0000: Labor

Reclassification Budget (66.0%): (66.0%): (66.0%): (66.0%):

Neutrality (0.962786). $4,790.03; $4,790.03; $4,790.03; $4,790.03; 2. FY 2025 Operating Outlier Nonlabor (34.0%): Nonlabor (34.0%): Nonlabor (34.0%): Nonlabor (34.0%):

Offset (0.949). $2,467.59. $2,467.59. $2,467.59. $2,467.59. 3. FY 2025 Rural Demonstration If Wage Index is If Wage Index is If Wage Index is If Wage Index is

Budget Neutrality Factor less Than or less Than or less Than or less Than or

(0.999811). Equal to 1.0000: Equal to 1.0000: Equal to 1.0000: Equal to 1.0000: 4. FY 2025 Cap Policy Wage Index Labor (62%): Labor (62%): Labor (62%): Labor (62%):

Budget Neutrality Factor $4,499.73; $4,499.73; $4,499.73; $4,499.73;

(0.999166). Nonlabor (38%): Nonlabor (38%): Nonlabor (38%): Nonlabor (38%):

$2,757.90. $2,757.90. $2,757.90. $2,757.90. FY 2026 Update Factor........... 1.026............. 1.00125........... 1.01775........... 0.993. FY 2026 MS[dash]DRG 0.998580.......... 0.998580.......... 0.998580.......... 0.998580.

Reclassification and

Recalibration Budget Neutrality

Factor Before Cap. FY 2026 Cap Policy MS-DRG Weight 0.999897.......... 0.999897.......... 0.999897.......... 0.999897.

Budget Neutrality Factor. FY 2026 Wage Index Budget 1.001531.......... 1.001531.......... 1.001531.......... 1.001531.

Neutrality Factor. FY 2026 Reclassification Budget 0.956835.......... 0.956835.......... 0.956835.......... 0.956835.

Neutrality Factor. FY 2026 Cap Policy Wage Index 0.999397.......... 0.999397.......... 0.999397.......... 0.999397.

Budget Neutrality Factor. Transition for the 0.999726.......... 0.999726.......... 0.999726.......... 0.999726.

Discontinuation of the Low Wage

Index Hospital Policy Budget

Neutrality Factor. FY 2026 RCH Demonstration Budget 0.999552.......... 0.999552.......... 0.999552.......... 0.999552.

Neutrality Factor. FY 2026 Operating Outlier Factor 0.949............. 0.949............. 0.949............. 0.949. National Standardized Amount for Labor: $4,456.72; Labor: $4,349.21; Labor: $4,420.88; Labor: $4,313.38;

FY 2026 if Wage Index is Nonlabor: Nonlabor: Nonlabor: Nonlabor:

Greater Than 1.0000; Labor/Non- $2,295.89. $2,240.51. $2,277.43. $2,222.05.

Labor Share Percentage (66.0/

34.0). National Standardized Amount for Labor: $4,186.62; Labor: $4,085.63; Labor: $4,152.95; Labor: $4,051.97;

FY 2026 if Wage Index is Less Nonlabor: Nonlabor: Nonlabor: Nonlabor:

Than or Equal to 1.0000; Labor/ $2,565.99. $2,504.09. $2,545.36. $2,483.46.

Non-Labor Share Percentage (62/

38).

Section 1886(d)(5)(H) of the Act provides discretionary authority to the Secretary to make adjustments as the Secretary deems appropriate to take into account the unique circumstances of hospitals located in Alaska and Hawaii. Higher labor-related costs for these two States are taken into account in the adjustment for area wages described previously. To account for higher non-labor- related costs for these two States, we multiply the nonlabor-related portion of the standardized amount for hospitals in Alaska and Hawaii by an adjustment factor.

In the FY 2013 IPPS/LTCH PPS final rule, we established a methodology to update the COLA factors for Alaska and Hawaii that were published by the U.S. Office of Personnel Management (OPM) every 4 years (coinciding with the update to the labor-related share of the IPPS market basket), beginning in FY 2014. We refer readers to the FY 2013 IPPS/LTCH PPS proposed and final rules for additional background and a detailed description of this methodology (77 FR 28145 through 28146 and 77 FR 53700 through 53701, respectively). In the FY 2022 IPPS/LTCH PPS final rule (86 FR 45546 through 45547), we updated the COLA factors published by OPM for 2009 (as these are the last COLA factors OPM published prior to transitioning from COLAs to locality pay) using the methodology that we finalized in the FY 2013 IPPS/LTCH PPS final rule and Consumer Price Indices (CPIs) data through 2020. Based on the policy finalized in the FY 2013 IPPS/LTCH PPS final rule, we utilized these COLA factors for FYs 2022 through 2025 to adjust the nonlabor-related portion of the standardized amount for hospitals located in Alaska and Hawaii.

In general, under our existing methodology, we update the 2009 OPM COLA factors by a comparison of the growth in the CPIs for the areas of Urban Alaska and Urban Hawaii, relative to the growth in the

CPI for the average U.S. city as published by the Bureau of Labor Statistics (BLS). We use the comparison of the growth in the overall CPI relative to the growth in the CPI for those areas to update the COLA factors for all areas in Alaska and Hawaii, respectively, because BLS publishes CPI data for only Urban Alaska and Urban Hawaii. Using the respective CPI commodities index and CPI services index and using the approximate commodities/services shares obtained from the IPPS market basket, we create reweighted CPIs for each of the respective areas to reflect the underlying composition of the IPPS market basket nonlabor-related share. Lastly, we exercised our discretionary authority to adjust payments to hospitals in Alaska and Hawaii by incorporating the statutorily mandated cap of 25 percent that was applied when determining OPM's COLA factors. (For additional information, refer to the FY 2022 IPPS/LTCH PPS final rule (86 FR 45546 through 45547).)

We previously stated our intention to update the COLA factors at the same time as the update to the labor-related share of the IPPS market basket. In section III.H. of the preamble of the FY 2026 IPPS/LTCH PPS proposed rule, we proposed to update the labor-related share of the IPPS market basket. The following table lists the COLA factors for Alaska and Hawaii hospitals as calculated under our current methodology, using updated CPI data through 2024 and the approximate 60 percent commodities/40 percent services shares obtained from the 2023-based IPPS market basket. We note, as described in section IV. of the preamble of this final rule, effective beginning FY 2026, we are finalizing to rebase and revise the IPPS market basket to reflect a 2023 base year. We also are finalizing to recalculate the labor- related share for discharges occurring on or after October 1, 2025, using the final 2023-based IPPS market basket.

FY 2022 through Updated COLA factors

Area FY 2025 COLA under current Difference

factors methodology

Alaska:

City of Anchorage and 80-kilometer (50-mile) radius 1.22 1.18 -0.04

by road...........................................

City of Fairbanks and 80-kilometer (50-mile) radius 1.22 1.18 -0.04

by road...........................................

City of Juneau and 80-kilometer (50-mile) radius by 1.22 1.18 -0.04

road..............................................

Rest of Alaska..................................... 1.24 1.20 -0.04 Hawaii:

City and County of Honolulu........................ 1.25 1.25 0

County of Hawaii................................... 1.22 1.21 -0.01

County of Kauai.................................... 1.25 1.25 0

County of Maui and County of Kalawao............... 1.25 1.25 0

We stated in the proposed rule that at this time, we believe it would be appropriate to maintain the current COLA factors for FY 2026 to allow us to consider whether it would be appropriate to incorporate additional data sources or other methodology changes in determining the adjustment we make to IPPS payments to account for the unique circumstances of hospitals located in Alaska and Hawaii. Therefore, we proposed to continue to use the FY 2025 COLA factors to adjust the nonlabor-related portion of the standardized amount for hospitals located in Alaska and Hawaii for FY 2026. We stated we were interested in and solicited comments on any possible data sources that could be considered in the development of the COLA factors beyond the methodology (as summarized previously and described in more detail in the FY 2022 IPPS/LTCH PPS final rule, 86 FR 45546) that relies on service and commodity prices as measured by the CPI for the average U.S. city and for the areas of Urban Hawaii and Urban Alaska.

Comment: A commenter supported CMS' proposal to maintain the current COLA methodology temporarily while we evaluate alternative approaches. The commenter requested that CMS utilize a more sensitive adjustment to reflect cost variation across Alaska. The commenter stated that tying Alaska's COLA to a single urban index does not reflect higher costs in more remote areas. The commenter also requested that CMS reconsider the 25% cap on COLA adjustments and engage with providers during the development of the new methodology.

Response: We appreciate the commenter's support for our proposal and may consider the commenter's suggestions for future rulemaking.

After consideration of the public comment we received, we are finalizing our proposal to continue to use the FY 2025 COLA factors to adjust the nonlabor related portion of the standardized amount for hospitals located in Alaska and Hawaii for FY 2026.

The following table lists the COLA factors for FY 2026.

FY 2026 Cost-of-Living Adjustment (COLA) Factors: Alaska and Hawaii

Hospitals

Area COLA

Alaska:

City of Anchorage and 80-kilometer (50-mile) 1.22

radius by road..................................

City of Fairbanks and 80-kilometer (50-mile) 1.22

radius by road..................................

City of Juneau and 80-kilometer (50-mile) radius 1.22

by road.........................................

Rest of Alaska................................... 1.24 Hawaii:

City and County of Honolulu...................... 1.25

County of Hawaii................................. 1.22

County of Kauai.................................. 1.25

County of Maui and County of Kalawao............. 1.25

In general, the operating prospective payment rate for all hospitals (including hospitals in Puerto Rico) paid under the IPPS, except SCHs and MDHs, for FY 2026 equals the Federal rate (which includes uncompensated care payments). As previously discussed, section 2202 of the Full-Year Continuing Appropriations and Extensions Act, 2025 further extended the MDH program through FY 2025. Therefore, under current law, the MDH program will expire for discharges on or after October 1, 2025.

SCHs are paid based on whichever of the following rates yields the greatest aggregate payment:

The Federal national rate (which, as discussed in section V.E. of the preamble of this final rule, includes uncompensated care payments).

The updated hospital-specific rate based on FY 1982 costs per discharge.

The updated hospital-specific rate based on FY 1987 costs per discharge.

The updated hospital-specific rate based on FY 1996 costs per discharge.

The updated hospital-specific rate based on FY 2006 costs per discharge to determine the rate that yields the greatest aggregate payment.

The prospective payment rate for SCHs for FY 2026 equals the higher of the applicable Federal rate, or the hospital-specific rate as described later in this section. The prospective payment rate for MDHs for discharges occurring before September 30, 2025, equals the higher of the Federal rate, or the Federal rate plus 75 percent of the difference between the Federal rate and the hospital-specific rate as described in this section. For MDHs, the updated hospital- specific rate is based on FY 1982, FY 1987, or FY 2002 costs per discharge, whichever yields the greatest aggregate payment.

Note: The formula specified in this section is used for actual claim payment and is also used by CMS to project the outlier threshold for the upcoming fiscal year. The difference is the source of some of the variables in the formula. For example, operating and capital CCRs for actual claim payment are from the PSF while CMS uses an adjusted CCR (as described previously) to project the threshold for the upcoming fiscal year. In addition, charges for a claim payment are from the bill while charges to project the threshold are from the MedPAR data with an inflation factor applied to the charges (as described earlier).

Step 1--Determine the MS-DRG and MS-DRG relative weight (from Table 5) for each claim primarily based on the ICD-10-CM diagnosis and ICD-10-PCS procedure codes on the claim.

Step 2--Select the applicable average standardized amount depending on whether the hospital submitted qualifying quality data and is a meaningful EHR user, as described previously.

Step 3--Compute the operating and capital Federal payment rate:

--Federal Payment Rate for Operating Costs = MS-DRG Relative Weight x [(Labor-Related Applicable Standardized Amount x Applicable CBSA Wage Index) + (Nonlabor-Related Applicable Standardized Amount x Cost-of-Living Adjustment)] x (1 + IME + (DSH * 0.25)) --Federal Payment for Capital Costs = MS-DRG Relative Weight x Federal Capital Rate x Geographic Adjustment Fact x (l + IME + DSH)

Step 4--Determine operating and capital costs:

--Operating Costs = (Billed Charges x Operating CCR) --Capital Costs = (Billed Charges x Capital CCR).

Step 5--Compute operating and capital outlier threshold (CMS applies a geographic adjustment to the operating and capital outlier threshold to account for local cost variation):

--Operating CCR to Total CCR = (Operating CCR)/(Operating CCR + Capital CCR) --Operating Outlier Threshold = [Fixed Loss Threshold x ((Labor- Related Portion x CBSA Wage Index) + Nonlabor-Related portion)] x Operating CCR to Total CCR + Federal Payment with IME, DSH + Uncompensated Care Payment + supplemental payment for eligible IHS/ Tribal hospitals and Puerto Rico hospitals + New Technology Add-On Payment Amount --Capital CCR to Total CCR = (Capital CCR)/(Operating CCR + Capital CCR) --Capital Outlier Threshold = (Fixed Loss Threshold x Geographic Adjustment Factor x Capital CCR to Total CCR) + Federal Payment with IME and DSH

Step 6--Compute operating and capital outlier payments:

--Marginal Cost Factor = 0.80 or 0.90 (depending on the MS-DRG) --Operating Outlier Payment = (Operating Costs-Operating Outlier Threshold) x Marginal Cost Factor --Capital Outlier Payment = (Capital Costs-Capital Outlier Threshold) x Marginal Cost Factor

The payment rate may then be further adjusted for hospitals that qualify for a low-volume payment adjustment under section 1886(d)(12) of the Act and 42 CFR 412.101(b). The base-operating DRG payment amount may be further adjusted by the hospital readmissions payment adjustment and the hospital VBP payment adjustment as described under sections 1886(q) and 1886(o) of the Act, respectively. Payments also may be reduced by the 1-percent adjustment under the HAC Reduction Program as described in section 1886(p) of the Act. We also make new technology add-on payments in accordance with section 1886(d)(5)(K) and (L) of the Act. Finally, we add the uncompensated care payment and supplemental payment for eligible IHS/Tribal hospitals and Puerto Rico hospitals to the total claim payment amount. As noted in the previous formula, we take uncompensated care payments, supplemental payments for eligible IHS/ Tribal hospitals and Puerto Rico hospitals, and new technology add- on payments into consideration when calculating outlier payments.

Section 1886(b)(3)(B)(iv) of the Act provides that the applicable percentage increase applicable to the hospital-specific rates for SCHs and MDHs equals the applicable percentage increase set forth in section 1886(b)(3)(B)(i) of the Act (that is, the same update factor as for all other hospitals subject to the IPPS). Because the Act sets the update factor for SCHs and MDHs equal to the update factor for all other IPPS hospitals, the update to the hospital-specific rates for SCHs and MDHs is subject to the amendments to section 1886(b)(3)(B) of the Act made by sections 3401(a) and 10319(a) of the Affordable Care Act. As discussed in section V.F. of the preamble of this final rule, section 2202 of the Full-Year Continuing Appropriations and Extensions Act, 2025 further extended the MDH program through FY 2025. Therefore, under current law, the MDH program will expire for discharges on or after October 1, 2025. We refer readers to section V.F. of the preamble of this final rule for further discussion of the MDH program. We note that if the MDH program were to be extended by law beyond September 30, 2025, into FY 2026, the updates to the hospital-specific rates for SCHs as described in this section would also apply to the hospital- specific rates for MDHs for FY 2026.

Accordingly, the applicable percentage increases to the hospital-specific rates applicable to SCHs are the following:

Hospital Hospital Hospital did NOT Hospital did NOT

submitted quality submitted quality submit quality submit quality

FY 2026 data and is a data and is NOT a data and is a data and is NOT a

meaningful EHR meaningful EHR meaningful EHR meaningful EHR

user user user user

Market Basket 3.3 3.3 3.3 3.3

Rate[dash]of[dash]Increase.........

Adjustment for Failure to Submit 0 0 -0.825 -0.825

Quality Data under Section

1886(b)(3)(B)(viii) of the Act..... Adjustment for Failure to be a 0 -2.475 0 -2.475

Meaningful EHR User under Section

1886(b)(3)(B)(ix) of the Act....... Productivity Adjustment under -0.7 -0.7 -0.7 -0.7

Section 1886(b)(3)(B)(xi) of the

Act................................ Applicable Percentage Increase 2.6 0.125 1.775 -0.7

Applied to Standardized Amount.....

For a complete discussion of the applicable percentage increase applied to the hospital-specific rates for SCHs and MDHs, we refer readers to section V.F. of the preamble of this final rule.

In addition, because SCHs and MDHs use the same MS-DRGs as other hospitals when they are paid based in whole or in part on the hospital-specific rate, the hospital-specific rate is adjusted by a budget neutrality factor to ensure that changes to the MS-DRG classifications and the recalibration of the MS-DRG relative weights are made in a manner so that aggregate IPPS payments are unaffected. Therefore, the hospital specific-rate for an SCH or MDH is adjusted by the MS-DRG reclassification and recalibration budget neutrality factor, as discussed in section III. of this Addendum and listed in the table in section II. of this Addendum. In addition, as discussed in section II.E.2.d. of the preamble this final rule and previously, we are applying a permanent 10-percent cap on the reduction in a MS- DRG's relative weight in a given fiscal year, as finalized in the FY 2023 IPPS/LTCH PPS final rule. Because SCHs and MDHs use the same MS-DRGs as other hospitals when they are paid based in whole or in part on the hospital-specific rate, consistent with the policy adopted in the FY 2023 IPPS/LTCH PPS final rule (87 FR 48897 through 48900 and 49432 through 49433), the hospital specific-rate for an SCH would be adjusted by the MS-DRG 10-percent cap budget neutrality factor. The resulting rate is used in determining the payment rate that an SCH would receive for its discharges beginning on or after October 1, 2025.

The PPS for acute care hospital inpatient capital-related costs was implemented for cost reporting periods beginning on or after October 1, 1991. The basic methodology for determining Federal capital prospective rates is set forth in the regulations at 42 CFR 412.308 through 412.352. In this section of this Addendum, we discuss the factors that we used to determine the capital Federal rate for FY 2026, which would be effective for discharges occurring on or after October 1, 2025.

All hospitals (except “new” hospitals under Sec. 412.304(c)(2)) are paid based on the capital Federal rate. We annually update the capital standard Federal rate, as provided in Sec. 412.308(c)(1), to account for capital input price increases and other factors. The regulations at Sec. 412.308(c)(2) also provide that the capital Federal rate be adjusted annually by a factor equal to the estimated proportion of outlier payments under the capital Federal rate to total capital payments under the capital Federal rate. In addition, Sec. 412.308(c)(3) requires that the capital Federal rate be reduced by an adjustment factor equal to the estimated proportion of payments for exceptions under Sec. 412.348. (We note that, as discussed in the FY 2013 IPPS/LTCH PPS final rule (77 FR 53705), there is generally no longer a need for an exceptions payment adjustment factor.) However, in limited circumstances, an additional payment exception for extraordinary circumstances is provided for under Sec. 412.348(f) for qualifying hospitals. Therefore, in accordance with Sec. 412.308(c)(3), an exceptions payment adjustment factor may need to be applied if such payments are made. Section 412.308(c)(4)(ii) requires that the capital standard Federal rate be adjusted so that the effects of the annual DRG reclassification and the recalibration of DRG weights and changes in the geographic adjustment factor (GAF) are budget neutral.

Section 412.374 provides for payments to hospitals located in Puerto Rico under the IPPS for acute care hospital inpatient capital-related costs, which currently specifies capital IPPS payments to hospitals located in Puerto Rico are based on 100 percent of the Federal rate.