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

In the FY 2026 IPPS/LTCH PPS proposed rule (90 FR 18450 through 18452), we discussed our proposed methodology for determining the fixed-loss amount for LTCH PPS standard Federal payment rate cases for FY 2026 and proposed an outlier fixed-loss amount of $91,247. This proposed fixed-loss amount was approximately $14,000 higher than the fixed-loss amount for FY 2025 ($77,048). In the proposed rule, we sought comments on the proposed fixed-loss amount and stated that we would consider these comments when determining the fixed-loss amount for LTCH PPS standard Federal payment rate cases for FY 2026 in the final rule. In this section, we first summarize and respond to the comments received. Later in this section, after consideration of the comments received, we present the detailed application of our finalized methodology and the resulting fixed- loss amount.

Comment: Like previous years, several commenters objected to the methodology we proposed to use to calculate the charge inflation factor we proposed to apply when determining the FY 2026 fixed-loss amount. These commenters requested that CMS return to the methodology employed prior to FY 2022 in which the charge inflation factor was set equal to the market basket update. Some commenters stated that returning to this methodology would provide greater stability and predictability to the fixed-loss amount. Several commenters asserted that the proposed charge inflation methodology has led to unnecessary increases in the fixed-loss amount in prior years and in this year's proposed rule. A few commenters stated that returning to the market basked based methodology would result in a fixed-loss amount of approximately $51,000 for FY 2026.

Response: We appreciate the feedback and suggestions that commenters provided on the proposed charge inflation factor. As we did in the FY 2025 IPPS/LTCH PPS final rule (89 FR 69981), we acknowledge that in recent years and in FY 2026, the calculated fixed-loss amount would have been lower if we had estimated charge inflation based on the market basket update. However, while the market basket methodology would have yielded lower fixed-loss amounts, we estimate the methodology would have resulted in high cost outlier payments that significantly exceeded the statutory target compared to the current methodology. Therefore, we continue to believe using a charge inflation factor based on actual growth rates in charges from historical claims data rather than one based on quarterly market basket update values leads to better accuracy in calculating the fixed-loss amount that would result in actual outlier payments meeting the statutory target.

Comment: Some commenters objected to the use of FY 2023 cost report data in the determination of the FY 2026 fixed-loss amount. These commenters stated that these data were significantly impacted by the COVID-19 pandemic and reflect LTCH utilization trends that are unlikely to be repeated in FY 2026. Examples provided by commenters included differences in patient acuity during the COVID- 19 pandemic, levels of COVID-19 hospitalizations, and changes in vaccination and immunity rates. Commenters specifically objected to the CCRs that CMS proposed to use in determining the fixed-loss amount, stating that these CCRs were derived from FY 2023 cost report data and reflect elevated costs incurred by LTCHs during the COVID-19 pandemic. A commenter specified that nursing costs significantly increased during the COVID-19 pandemic. The commenter stated that these costs have since stabilized and will not be representative of nursing costs in FY 2026. Another commenter described significant increases in both labor and supply cost incurred by LTCHs during the pandemic. However, this commenter stated that these costs remain elevated due to distortions in the labor force and supply chains caused by the pandemic. Commenters requested that CMS use modified FY 2023 cost report data or pre- pandemic cost report data when determining the fixed-loss amount for FY 2026.

Like previous years, some commenters urged CMS to exclude dialysis patients from the FY 2024 claims data when determining the fixed-loss amount. Commenters again presented evidence demonstrating that the cost of treating dialysis patients in LTCHs has risen in recent years. The commenters also provided explanations for these cost increases. As an example, some commenters stated that the withdrawal of dialysis services provided by lower-cost third-party providers has forced LTCHs to internalize these services at a higher expense. Commenters stated that the costs for dialysis services would continue escalating through FY 2026 at a rate faster than CMS's ratesetting methodology can accommodate. The commenters believe that removing these cases would ensure that these cases do not skew the calculation of the fixed-loss amount.

Similar to last year, a commenter encouraged CMS to incorporate claims data from FY 2025 into the calculation of the fixed-loss amount for FY 2026. This commenter stated that incorporating additional months of data into the ratesetting model would improve the accuracy of the fixed-loss amount calculation.

Response: We thank the commenters for their feedback regarding the FY 2023 cost report data used in calculating the fixed-loss amount to account for COVID-19 impacts. As discussed later in this section of the Addendum, we obtain CCRs used in determining the fixed-loss amount from the most recently available Provider Specific File (PSF). The PSF generally contains CCR data from an LTCH's most recently settled or tentatively settled cost report, whichever is from the latest cost reporting period. We agree with commenters that the majority of CCRs obtained from the most recently available PSF used in this final rule were derived from FY 2023 cost reports. However, we do not believe the commenters provided sufficient evidence to support why LTCH costs relative to charges in FY 2023 would differ significantly from LTCH costs relative to charges in FY 2026. While commenters discussed levels of costs in FY 2023, they did not provide information on levels of charges or the relationship between costs and charges in FY 2023. We also note that the most recently available LTCH cost-to-charge ratios (of which the majority are from FY 2023 cost reports) are lower, on average, compared to pre-pandemic levels, and as such, it appears LTCHs on average increased their charges even more than the increases in costs experienced due to the COVID-19 pandemic in FY 2023. Commenters did not provide any reasons why LTCH charges would not continue to rise or fall relative to increases or decreases in costs. As discussed in more detail later in this section of the Addendum, our current methodology already applies an adjustment factor to the most recently obtained CCRs that accounts for historical changes in the relationship between costs and charges for LTCHs. However, for the reasons discussed previously, we disagree with commenters that any further adjustment to the CCRs is appropriate for determining the FY 2026 fixed-loss amount.

We thank the commenters for the suggestion to exclude dialysis claims when calculating the fixed-loss amount. The comments provided evidence supporting the belief that the costs of treating dialysis patients reflected in the FY 2024 claims data would further increase in FY 2026. For this reason, we believe removing these claims from the calculation of the fixed-loss amount would lessen the accuracy of our payment model which sets a FY 2026 fixed-loss amount that results in total estimated outlier payments being equal to 7.975 percent of projected total LTCH PPS payments for LTCH PPS standard Federal payment rate cases.

We thank the commenters for the suggestion to use more recent claims data for calculating the fixed loss amount in this final rule. As discussed later in this section, we are using more recent claims data than we used in the proposed rule. Specifically, we are using the March 2025 update of the FY 2024 MedPAR file to calculate the fixed loss amount in this final rule. At the time of developing this final rule, this was the most recent full year of publicly available claims data. We continue to believe it is most appropriate to use one full year of publicly available claims data in our ratesetting calculations. The use of one full year of publicly available claims data is consistent with our historical practice and is not susceptible to the seasonality issues affiliated with using partial year data. We note the commenter did not provide any suggestions on how CMS could adjust partial year data for seasonality effects. For these reasons, we are not adopting commenters' suggestion to incorporate claims from the first part of FY 2025 in our calculation of the fixed-loss amount for FY 2026.

Comment: Like previous years, several commenters stated that CMS needs to update its high-cost outlier policy to better account for the effects of the dual rate LTCH PPS payment structure on outlier payments. Several commenters stated that under the dual rate payment structure, the majority of LTCH standard Federal payment rate cases have become concentrated in only a few MS-LTC-DRGs. The commenters stated that there is great variation in patient severity and costs among the cases grouped to these MS-LTC-DRGs which they believe leads to many of them qualifying for outlier payments, and that this pattern is contributing to the proposed increase in the fixed-loss amount. Commenters again highlighted standard Federal payment rate cases grouped to base MS-LTC-DRGs 189 and 207. These two base MS DRGs, which accounted for over 40 percent of standard Federal payment rate cases in FY 2024, are not subdivided based on the presence or absence of a complication or comorbidity (CC) or a major complication or comorbidity (MCC). Commenters requested that CMS refine certain MS-LTC-DRGs by creating subgroups within these base MS-DRGs based on the presence or absence of CCs and MCCs, which they believe would increase LTCH PPS payment accuracy thereby reducing the outlier payments made to cases grouped to such MS-LTC-DRGs. A commenter suggested that CMS use LTCH claims data, rather than IPPS claims data, when determining changes to the MS-LTC-DRG classifications. The commenter believes that the LTCH claims data would support splitting certain MS-LTC-DRG that the current IPPS data does not justify.

Response: We continue to appreciate commenters' suggestions on possible refinements to certain MS LTC-DRGs, in particular the concerns regarding the absence of CC or MCC subgroups within certain high-volume MS-LTC-DRGs, and commenters' thoughts on the impact this may have on LTCH PPS outlier payments. In the FY 2025 IPPS/LTCH PPS final rule, we stated that we would like to have the opportunity to explore and analyze such adjustments more before making this type of change. At this time, we have not found evidence that the MS-LTC-DRG structure is a major driver in the recent increases to the fixed- loss amount. We also note that commenters did not provide quantitative analysis of their own that would support this conclusion. For these reasons, we are not adopting any of the changes to the MS-LTC-DRGs suggested by commenters in this final rule. However, we may consider these comments for future rulemaking.

Comment: Like previous years, commenters expressed concern with the impact of the LTCH PPS dual rate payment system on the claims data CMS uses for calculating the fixed-loss amount. Commenters again asserted that because CMS only uses cases that would have been paid the standard Federal rate, the claims dataset used in the calculation is smaller and on average has a higher acuity than the claims datasets CMS used prior to the start of the dual rate payment structure. The commenters believe this change has led to fluctuations in the fixed-loss amount. To offset the decrease in standard Federal rate claims, commenters recommended that CMS use all LTCH claims, including those paid at the site neutral payment rate, to determine the fixed-loss amount. Commenters again stated that CMS should reconsider whether the statutory outlier payment target of 7.975 percent is still an appropriate target for LTCH PPS standard Federal rate cases under the dual rate payment system. One commenter stated that CMS should use its authority to implement methodological changes that will prevent large increases in the fixed loss amount caused by the dual rate payment system and the 7.975 percent criterion.

Response: We thank the commenters for this feedback. Section 1886(m)(7) of the Act directs the Secretary to establish a fixed- loss amount for LTCH PPS standard Federal payment rate cases that would result in total estimated outlier payments being equal to 7.975 percent of projected total LTCH PPS payments for LTCH PPS standard Federal payment rate cases. Therefore, we are not adopting the commenter's suggestion to modify the 7.975 percent target or include cases in our payment model other than those paid the standard Federal payment rate (or would have been paid at the LTCH PPS standard Federal payment rate if the dual rate LTCH PPS payment structure had been in effect at the time of those discharges).

Comment: Several commenters urged CMS to factor into the calculation of the fixed-loss amount a projection of the amount of outlier dollars CMS estimates it will recoup through outlier reconciliation. Commenters expressed that this is especially important given the instructions CMS issued to MACs in CR 13566, which commenters stated will increase the number of LTCHs subject to outlier reconciliation in FY 2026. Commenters also stated that not including a projection of reconciled outlier dollars in the fixed- loss amount calculation is contrary to what CMS does in other payment systems, including the IPPS. Commenters stated that CMS's failure to account for recouped outlier dollars would cause CMS to set the fixed-loss amount at an artificially high level that will not represent the actual amount of outlier payments to LTCHs after outlier reconciliations are done as part of the settlement of FY 2026 cost reports.

Response: We thank the commenters for this feedback. We agree with commenters that incorporating an estimate of reconciled

outlier dollars for the fiscal year into our methodology for determining the fixed-loss amount for that fiscal year would improve its accuracy. However, at the time of writing this final rule, we are unable to determine an appropriate estimate and predictor of outlier reconciliation for the upcoming fiscal year.

It is difficult to predict the specific LTCHs that will have CCRs and outlier payments reconciled in any given year as there are many different variables that determine whether a specific case will be eligible for an outlier payment, including the CCR, the estimated costs of the case, the payment amounts, and the fixed-loss amount itself. Historically, under the IPPS, in general an outlier reconciliation adjustment to the IPPS fixed-loss threshold has been computed using the percentage of total outlier reconciliation dollars to total Federal payments for a historical cost report data year. Rather than trying to predict which claims and/or hospitals may be subject to outlier reconciliation, we adopted a methodology that incorporates an estimate of outlier reconciliation dollars based on actual outlier reconciliation amounts reported in historical cost reports as we believe such an approach would be a more feasible and provide a better estimate and predictor of outlier reconciliation for the upcoming fiscal year (84 FR 42623 through 42623). It stands to reason that any such adjustment to the determination of the fixed-loss amount for LTCH PPS standard Federal payment rate cases would encounter similar considerations or would be computed in a similar manner.

The LTCH PPS payments (including outlier payments and reconciled outlier payments) are reported on Worksheet E3, Part IV of the cost report. However, this worksheet does not separately list outlier payments or reconciled outlier payments for only standard Federal payment rate cases. We believe an accurate outlier reconciliation adjustment would require historical outlier and reconciled outlier payment data from cases that were paid the standard Federal payment rate (or would have been paid at the LTCH PPS standard Federal payment rate if the dual rate LTCH PPS payment structure had been in effect at the time of those discharges). Furthermore, as discussed in the FY 2025 IPPS/LTCH PPS final rule (89 FR 69948 through 69955), CMS modified its historical methodology for incorporating outlier reconciliation in the IPPS fixed-loss threshold to account for the additional hospitals that will be reconciled under the new criteria outlined in CR 13566. The modified methodology incorporates supplemental outlier payment data provided to CMS from MACs for IPPS hospitals that would have been identified for reconciliation had the new criteria been in place during that historical cost reporting period. CMS did not request these data from MACs for LTCHs, and due to system limitations, the MACs would need sufficient lead time to produce these supplemental data for LTCHs.

For these reasons, we are unable to adopt the commenters' suggestion. We note that the commenters did not specifically address how to project outlier reconciliation for the upcoming fiscal year, but we welcome recommendations or suggestions on how to account for the potential impact of reconciliation in the determination of the fixed-loss amount for LTCH PPS standard Federal payment rate cases. We intend to explore the data challenges discussed previously as we continue to consider the feasibility of including outlier reconciliation in the determination of the fixed-loss amount or LTCH PPS standard Federal payment rate cases and may consider this issue for future rulemaking.

Comment: In general, commenters expressed concern that the proposed fixed-loss amount would result in three consecutive years of large increase to the fixed-loss amount. The commenters stated that these increases create instability and uncertainty for LTCHs and negatively impact their ability to serve the sickest patients. Commenters believe that the proposed increase to the outlier fixed- loss amount would have negative financial impacts on LTCHs. Some commenters warned the increase would reduce access to LTCH care, increase “backups” at IPPS hospitals, and cause some LTCHs to close. Commenters expressed that the proposed increase in the fixed- loss amount would make reimbursement insufficient compared to the costs of treatment and would make admitting the most medically complex patients untenable for LTCHs. A commenter stated that CMS must account for patient access to LTCH services when setting HCO thresholds.

Commenters provided a variety of recommendations for CMS to consider when determining the fixed-loss amount in this final rule. Some commenters advocated for CMS to adopt a modified version of the alternative approach to determining the FY 2025 fixed-loss amount that CMS discussed and considered in the FY 2025 IPPS/LTCH PPS proposed rule appendix (89 FR 36644). In that FY 2025 proposed rule, CMS considered providing a non-budget neutral, one-year transition to the full increase to the fixed-loss amount by setting the amount equal to an average of the 2024 fixed-loss amount and the calculated FY 2025 fixed-loss amount. The commenters urged CMS to consider this approach for FY 2026, but requested that CMS phase in the increase to the fixed-loss amount over a longer period, such as three or four years. One commenter requested that CMS set the FY 2026 fixed-loss amount equal to the FY 2023 fixed-loss amount. Another commenter similarly requested that CMS set the FY 2026 fixed-loss amount equal to the FY 2025 fixed-loss amount.

Several commenters requested that CMS adopt a non-budget neutral cap on annual increases to the fixed-loss amount. Some commenters stated that this cap would be similar to the cap policies CMS already applies to the LTCH PPS wage index and MS-LTC-DRG relative weights. A commenter requested that the cap be 5 percent while another stated that the cap should be set equal to the annual market basket percent increase. Some commenters stated that in combination with setting the charge inflation factor equal to the market basket update when determining the FY 2026 fixed-loss amount, CMS should also adopt in a non-budget neutral manner a freeze on the fixed-loss amount for future years beginning in FY 2027.

Response: We thank the commenters for the feedback. As discussed in greater detail later in this section, with the use of more recent data available for this final rule, our proposed methodology for determining the fixed-loss amount results in a fixed-loss amount of $78,936, which is significantly lower than the fixed-loss amount of $91,247 that we proposed and similar to the FY 2025 fixed-loss amount of $77,048. At this time we do not believe it is necessary or appropriate to use our adjustments authority to adjust outlier payments by using an alternative methodology to set the fixed-loss amount that would not result in total estimated outlier payments being projected to be equal to the statutory target of 7.975 percent in section 1886(m)(7) of the Act. We understand the comments on the impact the fixed-loss amount has on LTCH finances and access to care under the LTCH PPS and will continue to consider those issues for future rulemaking.

After consideration of the comments received, we are finalizing our proposed methodology for determining the fixed-loss amount for LTCH PPS standard Federal payment rate cases for FY 2026 without modification. In this section of this Addendum, we present the detailed application of our finalized methodology.

When we implemented the LTCH PPS, we established a fixed-loss amount so that total estimated outlier payments are projected to equal 8 percent of total estimated payments (that is, the target percentage) under the LTCH PPS (67 FR 56022 through 56026). When we implemented the dual rate LTCH PPS payment structure beginning in FY 2016, we established that, in general, the historical LTCH PPS HCO policy would continue to apply to LTCH PPS standard Federal payment rate cases. That is, the fixed-loss amount for LTCH PPS standard Federal payment rate cases would be determined using the LTCH PPS HCO policy adopted when the LTCH PPS was first implemented, but we limited the data used under that policy to LTCH cases that would have been LTCH PPS standard Federal payment rate cases if the statutory changes had been in effect at the time of those discharges.

To determine the applicable fixed-loss amount for LTCH PPS standard Federal payment rate cases, we estimate outlier payments and total LTCH PPS payments for each LTCH PPS standard Federal payment rate case (or for each case that would have been an LTCH PPS standard Federal payment rate case if the statutory changes had been in effect at the time of the discharge) using claims data from the MedPAR files. In accordance with Sec. 412.525(a)(2)(ii), the applicable fixed-loss amount for LTCH PPS standard Federal payment rate cases results in estimated total outlier payments being projected to be equal to 7.975 percent of projected total LTCH PPS payments for LTCH PPS standard Federal payment rate cases.

(1) Charge Inflation Factor for Use in Determining the Fixed-Loss Amount for LTCH PPS Standard Federal Payment Rate Cases for FY 2026

Under the LTCH PPS, the cost of each claim is estimated by multiplying the charges on the claim by the provider's CCR. Due to the lag time in the availability of claims data, when estimating costs for the upcoming payment year we typically inflate the charges from the claims data by a uniform factor.

For greater accuracy in calculating the fixed-loss amount, in the FY 2022 IPPS/LTCH PPS final rule (86 FR 45562 through 45566), we finalized a technical change to our methodology for determining the charge inflation factor. Similar to the method used under the IPPS hospital payment methodology (as discussed in section II.A.4.i.(2). of this Addendum), our methodology determines the LTCH charge inflation factor based on the historical growth in charges for LTCH PPS standard Federal payment rate cases, calculated using historical MedPAR claims data. In this section of this Addendum, we describe our charge inflation factor methodology.

Step 1--Identify LTCH PPS Standard Federal Payment Rate Cases

The first step in our methodology is to identify LTCH PPS standard Federal payment rate cases from the MedPAR claim files for the two most recently available Federal fiscal year time periods. For both fiscal years, consistent with our historical methodology for determining payment rates for the LTCH PPS, we remove any claims submitted by LTCHs that were all-inclusive rate providers as well as any Medicare Advantage claims. For both fiscal years, we also remove claims from providers that only had claims in one of the fiscal years.

Step 2--Remove Statistical Outliers

The next step in our methodology is to remove all claims from providers whose growth in average charges was a statistical outlier. We remove these statistical outliers prior to calculating the charge inflation factor because we believe they may represent aberrations in the data that would distort the measure of average charge growth. To perform this statistical trim, we first calculate each provider's average charge in both fiscal years. Then, we calculate a charge growth factor for each provider by dividing its average charge in the most recent fiscal year by its average charge in the prior fiscal year. Then we remove all claims for providers whose calculated charge growth factor was outside 3 standard deviations from the mean provider charge growth factor.

Step 3--Calculate the Charge Inflation Factor

The final step in our methodology is to use the remaining claims to calculate a national charge inflation factor. We first calculate the average charge for those remaining claims in both fiscal years. Then we calculate the national charge inflation factor by dividing the average charge in the more recent fiscal year by the average charge in the prior fiscal year.

Following the methodology described previously, as we proposed, we computed a charge inflation factor based on the most recently available data. Specifically, we used the March 2025 update of the FY 2024 MedPAR file and the March 2024 update of the FY 2023 MedPAR as the basis of the LTCH PPS standard Federal payment rate cases for the two most recently available Federal fiscal year time periods, as described previously in our methodology. Therefore, we trimmed the March 2025 update of the FY 2024 MedPAR file and the March 2024 update of the FY 2023 MedPAR file as described in steps 1 and 2 of our methodology. To compute the 1-year average annual rate-of-change in charges per case, we compared the average covered charge per case of $303,404 ($12,753,897,528/42,036 cases) from FY 2023 to the average covered charge per case of $342,229 ($14,779,859,933/43,187 cases) from FY 2024. This rate-of-change was 12.7965 percent, which results in a 1-year charge inflation factor of 1.127965, and a 2- year charge inflation factor of 1.272305 (calculated by squaring the 1-year factor). We inflated the billed charges obtained from the FY 2024 MedPAR file by this 2-year charge inflation factor of 1.272305 when determining the fixed-loss amount for LTCH PPS standard Federal payment rate cases for FY 2026.

(2) CCRs for Use in Determining the Fixed-Loss Amount for LTCH PPS Standard Federal Payment Rate Cases for FY 2026

For greater accuracy in calculating the fixed-loss amount, in the FY 2022 IPPS/LTCH PPS final rule (86 FR 45562 through 45566), we finalized a technical change to our methodology for determining the CCRs used to calculate the fixed-loss amount. Similar to the methodology used for IPPS hospitals (as discussed in section II.A.4.i.(2). of this Addendum), our methodology adjusts CCRs obtained from the best available PSF data by an adjustment factor that is calculated based on historical changes in the average case- weighted CCR for LTCHs. We believe these adjusted CCRs more accurately reflect CCR levels in the upcoming payment year because they account for historical changes in the relationship between costs and charges for LTCHs. In this section of this Addendum, we describe our CCR adjustment factor methodology.

Step 1--Assign Providers Their Historical CCRs

The first step in our methodology is to identify providers with LTCH PPS standard Federal payment rate cases in the most recent MedPAR claims file (excluding all-inclusive rate providers and providers with only Medicare Advantage claims). For each of these providers, we then identify the CCR from the most recently available PSF. For each of these providers we also identify the CCR from the PSF that was made available one year prior to the most recently available PSF.

Step 2--Trim Providers with Insufficient CCR Data

The next step in our methodology is to remove from the CCR adjustment factor calculation any providers for which we cannot accurately measure changes to their CCR using the PSF data. We first remove any provider whose CCR was missing in the most recent PSF or prior year PSF. We next remove any provider assigned the statewide average CCR for their State in either the most recent PSF or prior year PSF. We lastly remove any provider whose CCR was not updated between the most recent PSF and prior year PSF (determined by comparing the effective date of the records).

Step 3--Remove Statistical Outliers

The next step in our methodology is to remove providers whose change in their CCR is a statistical outlier. To perform this statistical trim, for those providers remaining after application of Step 2, we calculate a provider-level CCR growth factor by dividing the provider's CCR from the most recent PSF by its CCR in the prior year's PSF. We then remove any provider whose CCR growth factor was outside 3 standard deviations from the mean provider CCR growth factor. These statistical outliers are removed prior to calculating the CCR adjustment factor because we believe that they may represent aberrations in the data that would distort the measure of average annual CCR change.

Step 4--Calculate a CCR Adjustment Factor

The final step in our methodology is to calculate, across all remaining providers after application of Step 3, an average case- weighted CCR from both the most recent PSF and prior year PSF. The provider case counts that we use to calculate the case-weighted average are determined from claims for LTCH standard Federal rate cases from the most recent MedPAR claims file. We note when determining these case counts, consistent with our historical methodology for determining the MS-LTC-DRG relative weights, we do not count short stay outlier claims as full cases but instead as a fraction of a case based on the ratio of covered days to the geometric mean length of stay for the MS-LTC-DRG grouped to the case. We calculate the national CCR adjustment factor by dividing the case-weighted CCR from the most recent PSF by the case-weighted CCR from the prior year PSF.

Following the methodology described previously, as we proposed, we computed a CCR adjustment factor based on the most recently available data. Specifically, we used the March 2025 PSF as the most recently available PSF and the March 2024 PSF as the PSF that was made available one year prior to the most recently available PSF, as described in our methodology. In addition, we used claims from the March 2025 update of the FY 2024 MedPAR file in our calculation of average case-weighted CCRs described in Step 4 of our methodology. Specifically, following the methodology described previously and, for providers with LTCH PPS standard Federal payment rate cases in the March 2025 update of the FY 2024 MedPAR file, we identified their CCRs from both the March 2024 PSF and March 2025 PSF. After performing the trims outlined in our methodology, we used the LTCH PPS standard Federal payment rate case counts from the FY 2024 MedPAR file (classified using finalized Version 43 of the GROUPER) to calculate case-weighted average CCRs. Based on this data, we calculated a March 2024 national average case-weighted CCR of 0.235922 and a March 2025 national average case-weighted CCR of 0.220240. We then calculated the national

CCR adjustment factor by dividing the March 2025 national average case-weighted CCR by the March 2024 national average case-weighted CCR. This results in a 1-year national CCR adjustment factor of 0.933527. When calculating the fixed-loss amount for FY 2026, we assigned the statewide average CCR for the upcoming fiscal year to all providers who were assigned the statewide average in the March 2025 PSF or whose CCR was missing in the March 2025 PSF. For all other providers, we multiplied their CCR from the March 2025 PSF by the 1-year national CCR adjustment factor of 0.933527. We note that the March 2025 PSF national average case-weighted CCR was 2.8 percent lower than the December 2024 PSF national average case- weighted CCR. We also note that the 1-year national adjustment CCR adjustment factor calculated in this final rule is 1.7 percent lower than the 1-year national adjustment CCR factor that we proposed. The incorporation of more recent cost-to-charge ratio data into our payment model was the primary driver of the reduction in the fixed- loss amount calculated in this final rule compared to the fixed-loss amount calculated in the proposed rule.

(3) Fixed-Loss Amount for LTCH PPS Standard Federal Payment Rate Cases for FY 2026

In this final rule, for FY 2026, using the best available data and the steps described previously, we calculated a fixed-loss amount that would maintain estimated HCO payments at the projected 7.975 percent of total estimated LTCH PPS payments for LTCH PPS standard Federal payment rate cases as required by section 1886(m)(7) of the Act and in accordance with Sec. 412.525(a)(2)(ii) (based on the payment rates and policies for these cases presented in this final rule). Consistent with our historical practice, we use the best available LTCH claims data and CCR data when determining the fixed-loss amount for LTCH PPS standard Federal payment rate cases for FY 2026 in the final rule. Therefore, based on LTCH claims data from the March 2025 update of the FY 2024 MedPAR file adjusted for charge inflation and adjusted CCRs from the March 2025 update of the PSF, under the broad authority of section 123(a)(1) of the BBRA and section 307(b)(1) of the BIPA, we are establishing a fixed-loss amount for LTCH PPS standard Federal payment rate cases for FY 2026 of $78,936 that will result in estimated outlier payments projected to be equal to 7.975 percent of estimated FY 2026 payments for such cases. As such, we will make an additional HCO payment for the cost of an LTCH PPS standard Federal payment rate case that exceeds the HCO threshold amount that is equal to 80 percent of the difference between the estimated cost of the case and the outlier threshold (the sum of the adjusted LTCH PPS standard Federal payment rate payment and the fixed-loss amount for LTCH PPS standard Federal payment rate cases of $78,936).

When we implemented the application of the site neutral payment rate in FY 2016, in examining the appropriate fixed-loss amount for site neutral payment rate cases issue, we considered how LTCH discharges based on historical claims data would have been classified under the dual rate LTCH PPS payment structure and the CMS' Office of the Actuary projections regarding how LTCHs will likely respond to our implementation of policies resulting from the statutory payment changes. We again relied on these considerations and actuarial projections in FY 2017 and FY 2018 because the historical claims data available in each of these years were not all subject to the LTCH PPS dual rate payment system. Similarly, for FYs 2019 through 2025, we continued to rely on these considerations and actuarial projections because, due to the transitional blended payment policy for site neutral payment rate cases and the provisions of section 3711(b)(2) of the CARES Act, the historical claims data available in each of these years were not subject to the full effect of the site neutral payment rate.

For FYs 2016 through 2025, our actuaries projected that the proportion of cases that would qualify as LTCH PPS standard Federal payment rate cases versus site neutral payment rate cases under the statutory provisions would remain consistent with what is reflected in the historical LTCH PPS claims data. Although our actuaries did not project an immediate change in the proportions found in the historical data, they did project cost and resource changes to account for the lower payment rates. Our actuaries also projected that the costs and resource use for cases paid at the site neutral payment rate would likely be lower, on average, than the costs and resource use for cases paid at the LTCH PPS standard Federal payment rate and would likely mirror the costs and resource use for IPPS cases assigned to the same MS-DRG, regardless of whether the proportion of site neutral payment rate cases in the future remains similar to what is found based on the historical data. As discussed in the FY 2016 IPPS/LTCH PPS final rule (80 FR 49619), this actuarial assumption is based on our expectation that site neutral payment rate cases would generally be paid based on an IPPS comparable per diem amount under the statutory LTCH PPS payment changes that began in FY 2016, which, in the majority of cases, is much lower than the payment that would have been paid if these statutory changes were not enacted. In light of these projections and expectations, we discussed that we believed that the use of a single fixed-loss amount and HCO target for all LTCH PPS cases would be problematic. In addition, we discussed that we did not believe that it would be appropriate for comparable LTCH PPS site neutral payment rate cases to receive dramatically different HCO payments from those cases that would be paid under the IPPS (80 FR 49617 through 49619 and 81 FR 57305 through 57307). For those reasons, we stated that we believed that the most appropriate fixed-loss amount for site neutral payment rate cases for FYs 2016 through 2025 would be equal to the IPPS fixed-loss amount for that particular fiscal year. Therefore, we established the fixed-loss amount for site neutral payment rate cases as the corresponding IPPS fixed-loss amounts for FYs 2016 through 2025. In particular, in FY 2025, we established the fixed-loss amount for site neutral payment rate cases as the FY 2025 IPPS fixed-loss amount of $46,217 (89 FR 80412).

For this final rule, we used FY 2024 data in the FY 2026 LTCH PPS ratesetting. We note that section 3711(b)(2) of the CARES Act provided a waiver of the application of the site neutral payment rate for LTCH cases. This waiver applied to patients admitted during the COVID-19 PHE period and expired on May 11, 2023. Although the vast majority of LTCH discharges in FY 2024 were not subject to the waiver of the application of the site neutral payment rate, we believe LTCHs' admission patterns may still have been adapting to the expiration of the waiver of the application of the site neutral payment rate. Therefore, at this time, we do not believe it would be appropriate to use FY 2024 data to develop a fixed-loss amount for site neutral payment rate cases for FY 2026. As discussed earlier in this section, we also continue to believe LTCH PPS site neutral payment rate cases should not receive dramatically different HCO payments from those cases that would be paid under the IPPS while we continue to evaluate the actuarial assumptions discussed previously and the use of LTCH PPS site neutral payment rate data to determine an appropriate outlier threshold for such cases.

For these reasons, we continue to believe that the most appropriate fixed-loss amount for site neutral payment rate cases for FY 2026 is the IPPS fixed-loss amount for FY 2026. Accordingly, for FY 2026, as we proposed, we are establishing that the applicable HCO threshold for site neutral payment rate cases is the sum of the site neutral payment rate for the case and the IPPS fixed-loss amount. That is, we are establishing a fixed-loss amount for site neutral payment rate cases of $40,397, which is the same FY 2026 IPPS fixed-loss amount discussed in section II.A.4.i.(2). of this Addendum. Accordingly, under this policy, for FY 2026, we will calculate an HCO payment for site neutral payment rate cases with costs that exceed the HCO threshold amount that is equal to 80 percent of the difference between the estimated cost of the case and the outlier threshold (the sum of the site neutral payment rate payment and the fixed-loss amount for site neutral payment rate cases of $40,397).

In establishing an HCO policy for site neutral payment rate cases, we established a budget neutrality adjustment under Sec. 412.522(c)(2)(i). We established this requirement because we believed, and continue to believe, that the HCO policy for site neutral payment rate cases should be budget neutral, just as the HCO policy for LTCH PPS standard Federal payment rate cases is budget neutral, meaning that estimated site neutral payment rate HCO payments should not result in any change in estimated aggregate LTCH PPS payments.

To ensure that estimated HCO payments payable to site neutral payment rate cases in FY 2026 would not result in any increase in estimated aggregate FY 2026 LTCH PPS payments, under the budget neutrality requirement at Sec. 412.522(c)(2)(i), it is

necessary to reduce site neutral payment rate payments by 5.1 percent to account for the estimated additional HCO payments payable to those cases in FY 2026. Consistent with our historical practice, as we proposed, we are continuing this policy.

As discussed earlier, consistent with the IPPS HCO payment threshold, we estimate the fixed-loss threshold would result in FY 2026 HCO payments for site neutral payment rate cases to equal 5.1 percent of the site neutral payment rate payments that are based on the IPPS comparable per diem amount. As such, to ensure estimated HCO payments payable for site neutral payment rate cases in FY 2026 would not result in any increase in estimated aggregate FY 2026 LTCH PPS payments, under the budget neutrality requirement at Sec. 412.522(c)(2)(i), it is necessary to reduce the site neutral payment rate amount paid under Sec. 412.522(c)(1)(i) by 5.1 percent to account for the estimated additional HCO payments payable for site neutral payment rate cases in FY 2026. To achieve this, for FY 2026, as we proposed, we are applying a budget neutrality factor of 0.949 (that is, the decimal equivalent of a 5.1 percent reduction, determined as 1.0-5.1/100 = 0.949) to the site neutral payment rate for those site neutral payment rate cases paid under Sec. 412.522(c)(1)(i). We note that, consistent with our current policy, this HCO budget neutrality adjustment will not be applied to the HCO portion of the site neutral payment rate amount (81 FR 57309).

We did not receive any public comments on our proposals regarding HCO payments for site neutral payment rate cases and are finalizing these proposals as described previously, without modification.

In the FY 2014 IPPS/LTCH PPS final rule (78 FR 50766), we established a policy to reflect the changes to the Medicare IPPS DSH payment adjustment methodology made by section 3133 of the Affordable Care Act in the calculation of the “IPPS comparable amount” under the SSO policy at Sec. 412.529 and the “IPPS equivalent amount” under the site neutral payment rate at Sec. 412.522. Historically, the determination of both the “IPPS comparable amount” and the “IPPS equivalent amount” includes an amount for inpatient operating costs “for the costs of serving a disproportionate share of low-income patients.” Under the statutory changes to the Medicare DSH payment adjustment methodology that began in FY 2014, in general, eligible IPPS hospitals receive an empirically justified Medicare DSH payment equal to 25 percent of the amount they otherwise would have received under the statutory formula for Medicare DSH payments prior to the amendments made by the Affordable Care Act. The remaining amount, equal to an estimate of 75 percent of the amount that otherwise would have been paid as Medicare DSH payments, reduced to reflect changes in the percentage of individuals under the age of 65 who are uninsured, is made available to make additional payments to each hospital that qualifies for Medicare DSH payments and that has uncompensated care. The additional uncompensated care payments are based on the hospital's amount of uncompensated care for a given time period relative to the total amount of uncompensated care for that same time period reported by all hospitals that receive Medicare DSH payments.

To reflect the Medicare DSH payment adjustment methodology statutory changes in section 3133 of the Affordable Care Act in the calculation of the “IPPS comparable amount” and the “IPPS equivalent amount” under the LTCH PPS, we stated in the FY 2014 IPPS/LTCH PPS final rule (78 FR 50766) that we will include a reduced Medicare DSH payment amount that reflects the projected percentage of the payment amount calculated based on the statutory Medicare DSH payment formula prior to the amendments made by the Affordable Care Act that will be paid to eligible IPPS hospitals as empirically justified Medicare DSH payments and uncompensated care payments in that year (that is, a percentage of the operating Medicare DSH payment amount that has historically been reflected in the LTCH PPS payments that are based on IPPS rates). We also stated, in the FY 2014 IPPS/LTCH PPS final rule (78 FR 50766), that the projected percentage will be updated annually, consistent with the annual determination of the amount of uncompensated care payments that will be made to eligible IPPS hospitals. We believe that this approach results in appropriate payments under the LTCH PPS and is consistent with our intention that the “IPPS comparable amount” and the “IPPS equivalent amount” under the LTCH PPS closely resemble what an IPPS payment would have been for the same episode of care, while recognizing that some features of the IPPS cannot be translated directly into the LTCH PPS (79 FR 50766 through 50767).

As discussed in the FY 2026 IPPS/LTCH PPS proposed rule (90 FR 18453), for FY 2026, based on the most recent data available at that time, we proposed to establish that the calculation of the “IPPS comparable amount” under Sec. 412.529 would include an applicable operating Medicare DSH payment amount that is equal to 70.53 percent of the operating Medicare DSH payment amount that would have been paid based on the statutory Medicare DSH payment formula absent the amendments made by the Affordable Care Act. Furthermore, consistent with our historical practice, we proposed that, if more recent data became available, we would use that data to determine the applicable operating Medicare DSH payment amount used to calculate the “IPPS comparable amount” in the final rule.

We did not receive any public comments in response to our proposal, and as such are finalizing this proposal. However, as we proposed, we are determining the applicable operating Medicare DSH payment amount used to calculate the “IPPS comparable amount” in this final rule using more recent data.

For FY 2026, as discussed in greater detail in section IV.E.2.b. of the preamble of this final rule, based on the most recent data available, our estimate of 75 percent of the amount that would otherwise have been paid as Medicare DSH payments (under the methodology outlined in section 1886(r)(2) of the Act) is adjusted to 62.14 percent of that amount to reflect the change in the percentage of individuals who are uninsured. The resulting amount is then used to determine the amount available to make uncompensated care payments to eligible IPPS hospitals in FY 2026. In other words, the amount of the Medicare DSH payments that would have been made prior to the amendments made by the Affordable Care Act is adjusted to 46.61 percent (the product of 75 percent and 62.14 percent) and the resulting amount is used to calculate the uncompensated care payments to eligible hospitals. As a result, for FY 2026, we project that the reduction in the amount of Medicare DSH payments pursuant to section 1886(r)(1) of the Act, along with the payments for uncompensated care under section 1886(r)(2) of the Act, will result in overall Medicare DSH payments of 71.61 percent of the amount of Medicare DSH payments that would otherwise have been made in the absence of the amendments made by the Affordable Care Act (that is, 25 percent + 46.61 percent = 71.61 percent).

Therefore, for FY 2026, consistent with our proposal, we are establishing that the calculation of the “IPPS comparable amount” under Sec. 412.529 will include an applicable operating Medicare DSH payment amount that is equal to 71.61 percent of the operating Medicare DSH payment amount that would have been paid based on the statutory Medicare DSH payment formula absent the amendments made by the Affordable Care Act.

Under the dual rate LTCH PPS payment structure, only LTCH PPS cases that meet the statutory criteria to be excluded from the site neutral payment rate are paid based on the LTCH PPS standard Federal payment rate. Under Sec. 412.525(c), the LTCH PPS standard Federal payment rate is adjusted to account for differences in area wages; we make this adjustment by multiplying the labor-related share of the LTCH PPS standard Federal payment rate for a case by the applicable LTCH PPS wage index (the FY 2026 values are shown in Tables 12A through 12B listed in section VI. of this Addendum and are available via the internet on the CMS website). The LTCH PPS standard Federal payment rate is also adjusted to account for the higher costs of LTCHs located in Alaska and Hawaii by the applicable COLA factors (the FY 2026 factors are shown in the chart in section V.C. of this Addendum) in accordance with Sec. 412.525(b). In this final rule, we are establishing an LTCH PPS standard Federal payment rate for FY 2026 of $50,824.51, as discussed in section V.A. of this Addendum. We illustrate the methodology to adjust the LTCH PPS standard Federal payment rate for FY 2026, applying our LTCH PPS amounts for the standard Federal payment rate, MS-LTC-DRG relative weights, and wage index in the following example:

Example:

During FY 2026, a Medicare discharge that meets the criteria to be excluded from the site

neutral payment rate, that is, an LTCH PPS standard Federal payment rate case, is from an LTCH that is located in CBSA 16984, which has a FY 2026 LTCH PPS wage index value of 1.0228 (as shown in Table 12A listed in section VI. of this Addendum). The Medicare patient case is classified into MS-LTC-DRG 189 (Pulmonary Edema & Respiratory Failure), which has a relative weight for FY 2026 of 0.9443 (as shown in Table 11 listed in section VI. of this Addendum). The LTCH submitted quality reporting data for FY 2026 in accordance with the LTCH QRP under section 1886(m)(5) of the Act.

To calculate the LTCH's total adjusted Federal prospective payment for this Medicare patient case in FY 2026, we computed the wage-adjusted Federal prospective payment amount by multiplying the unadjusted FY 2026 LTCH PPS standard Federal payment rate ($50,824.51) by the labor-related share (72.9 percent) and the wage index value (1.0228). This wage-adjusted amount was then added to the nonlabor-related portion of the unadjusted LTCH PPS standard Federal payment rate (27.1 percent; adjusted for cost of living, if applicable) to determine the adjusted LTCH PPS standard Federal payment rate, which is then multiplied by the MS-LTC-DRG relative weight (0.9443) to calculate the total adjusted LTCH PPS standard Federal payment for FY 2026 ($48,791.30). The table illustrates the components of the calculations in this example.

Unadjusted LTCH PPS Standard Federal Prospective $50,824.51

Payment Rate........................................ Labor-Related Share.................................. x 0.729 Labor-Related Portion of the LTCH PPS Standard = $37,051.07

Federal Payment Rate................................ Wage Index (CBSA 16984).............................. x 1.0228 Wage-Adjusted Labor Share of the LTCH PPS Standard = $37,895.83

Federal Payment Rate................................ Nonlabor-Related Portion of the LTCH PPS Standard + $13,773.44

Federal Payment Rate ($50,824.51 x 0.271)........... Adjusted LTCH PPS Standard Federal Payment Amount.... = $51,669.27 MS-LTC-DRG 189 Relative Weight....................... x 0.9443

Total Adjusted LTCH PPS Standard Federal = $48,791.30

Prospective Payment.............................

This section lists the tables referred to throughout the preamble of this final rule and in the Addendum. In the past, a majority of these tables were published in the Federal Register as part of the annual proposed and final rules. However, similar to FYs 2012 through 2025, for the FY 2026 rulemaking cycle, the IPPS and LTCH PPS tables will not be published in the Federal Register in the annual IPPS/LTCH PPS proposed and final rules and will be on the CMS website. Specifically, all IPPS tables listed in the final rule, with the exception of IPPS Tables 1A, 1B, 1C, and 1D, and LTCH PPS Table 1E, will generally be available on the CMS website. IPPS Tables 1A, 1B, 1C, and 1D, and LTCH PPS Table 1E are displayed at the end of this section and will continue to be published in the Federal Register as part of the annual proposed and final rules.

Tables 7A and 7B historically contained the Medicare prospective payment system selected percentile lengths of stay for the MS-DRGs for the prior year and upcoming fiscal year. We note, in the FY 2023 IPPS/LTCH PPS final rule (87 FR 49452), we finalized beginning with FY 2023, to provide the percentile length of stay information previously included in Tables 7A and 7B in the supplemental AOR/BOR data file. The AOR/BOR files can be found on the FY 2026 IPPS final rule home page on the CMS website at https://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/AcuteInpatientPPS/index.html.

As discussed in section II.E.6. of the preamble to this final rule, we are making available separate tables listing the ICD-10-CM codes or ICD-10-PCS codes that would be used to identify cases relevant to the Breakthrough Device-designated indication for the RECELL[supreg] Autologous Cell Harvesting Device for purposes of the new technology add-on payment for FY 2026, in Table 10 associated with this final rule.

After hospitals have been given an opportunity to review and correct their calculations for FY 2026, we will post Table 15 (which will be available via the CMS website) to display the final FY 2026 readmissions payment adjustment factors that will be applicable to discharges occurring on or after October 1, 2025. We expect Table 15 will be posted on the CMS website in the Fall 2025.

Readers who experience any problems accessing any of the tables that are posted on the CMS websites identified in this final rule should contact Michael Treitel at (410) 786-4552.

The following IPPS tables for this final rule are generally available on the CMS website at https://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/AcuteInpatientPPS/index.html. Click on the link on the left side of the screen titled “FY 2026 IPPS Final Rule Home Page” or “Acute Inpatient -Files- for Download.”

Table 2.--Case-Mix Index and Wage Index Table by CCN--FY 2026 Final Rule Table 3.--Wage Index Table by CBSA--FY 2026 Final Rule Table 4A.--List of Counties Eligible for the Out-Migration Adjustment under Section 1886(d)(13) of the Act--FY 2026 Final Rule Table 4B.--Counties Redesignated under Section 1886(d)(8)(B) of the Act (LUGAR Counties)--FY 2026 Final Rule Table 5.--List of Medicare Severity Diagnosis-Related Groups (MS- DRGs), Relative Weighting Factors, and Geometric and Arithmetic Mean Length of Stay--FY 2026 Final Rule Table 6A.--New Diagnosis Codes--FY 2026 Table 6B.--New Procedure Codes--FY 2026 Table 6C.--Invalid Diagnosis Codes--FY 2026 Table 6D.--Invalid Procedure Codes--FY 2026 Table 6E.--Revised Diagnosis Code Titles--FY 2026 Table 6F.--Revised Procedure Code Titles--FY 2026 Table 6G.1.--Secondary Diagnosis Order Additions to the CC Exclusions List--FY 2026 Table 6G.2.--Principal Diagnosis Order Additions to the CC Exclusions List--FY 2026 Table 6H.1.--Secondary Diagnosis Order Deletions to the CC Exclusions List--FY 2026 Table 6H.2.--Principal Diagnosis Order Deletions to the CC Exclusions List--FY 2026 Table 6I.--Complete MCC List--FY 2026 Table 6I.1.--Additions to the MCC List--FY 2026 Table 6J.--Complete CC List -FY 2026 Table 6J.1.--Additions to the CC List--FY 2026 Table 6J.2.--Deletions to the CC List--FY 2026 Table 6K.--Complete CC Exclusions List--FY 2026 Table 6P.--ICD-10-CM and ICD-10-PCS Codes for MS-DRG Changes--FY 2026 (Table 6P contains multiple tables, 6P.1a. through 6P.8a that include the ICD-10-CM and ICD-10-PCS code lists relating to specific MS-DRG changes or other analyses). These tables are referred to throughout section II.C. of the preamble of this final rule. Table 8A.--FY 2026 Statewide Average Operating Cost-to-Charge Ratios (CCRs) for Acute Care Hospitals (Urban and Rural)--FY 2026 Final Rule Table 8B.--FY 2026 Statewide Average Capital Cost-to-Charge Ratios (CCRs) for Acute Care Hospitals--FY 2026 Final Rule Table 10.--Relevant ICD-10 Codes for Certain FY 2026 New Technology Add-On Payments Table 16.--Proxy Hospital Value-Based Purchasing (VBP) Program Adjustment Factors for FY 2026 Table 18.--FY 2026 Medicare DSH Uncompensated Care Payment Factor 3

The following LTCH PPS tables for this FY 2026 final rule are available through the internet on the CMS website at https://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/LongTermCareHospitalPPS/index.html under the list item for Regulation Number CMS-1833-P:

Table 8C.--FY 2026 Statewide Average Total Cost-to-Charge Ratios (CCRs) for LTCHs (Urban and Rural)--FY 2026 Final Rule Table 11.--MS-LTC-DRGs, Relative Weights, Geometric Average Length of Stay, and Short-Stay Outlier (SSO) Threshold for LTCH PPS Discharges Occurring from October 1, 2025, through September 30, 2026--FY 2026 Final Rule Table 12A.--LTCH PPS Wage Index for Urban Areas for Discharges Occurring from October 1, 2025, through September 30, 2026--FY 2026 Final Rule Table 12B.--LTCH PPS Wage Index for Rural Areas for Discharges Occurring from October 1, 2025, through September 30, 2026--FY 2026 Final Rule

Table 1A--National Adjusted Operating Standardized Amounts, Labor/Nonlabor (66.0 Percent Labor Share/34.0 Percent Nonlabor Share if Wage Index Is

Greater Than 1)--FY 2026 Final Rule

Hospital submitted quality data and is Hospital submitted quality data and Hospital did NOT submit quality data Hospital did NOT submit quality data

a meaningful EHR user (update = 2.6 is NOT a meaningful EHR user (update and is a meaningful EHR user (update and is NOT a meaningful EHR user

percent) = 0.125 percent) = 1.775 percent) (update = -0.7 percent)

Labor Nonlabor Labor Nonlabor Labor Nonlabor Labor Nonlabor

$4,456.72 $2,295.89 $4,349.21 $2,240.51 $4,420.88 $2,277.43 $4,313.38 $2,222.05

Table 1B--National Adjusted Operating Standardized Amounts, Labor/Nonlabor (62 Percent Labor Share/38 Percent Nonlabor Share if Wage Index Is Less Than

or Equal to 1)--FY 2026 Final Rule

Hospital submitted quality data and is Hospital submitted quality data and Hospital did NOT submit quality data Hospital did NOT submit quality data

a meaningful EHR user (update = 2.6 is NOT a meaningful EHR user (update and is a meaningful EHR user (update and is NOT a meaningful EHR user

percent) = 0.125 percent) = 1.775 percent) (update = -0.7 percent)

Labor Nonlabor Labor Nonlabor Labor Nonlabor Labor Nonlabor

$4,186.62 $2,565.99 $4,085.63 $2,504.09 $4,152.95 $2,545.36 $4,051.97 $2,483.46

Table 1C--Adjusted Operating Standardized Amounts for Hospitals in Puerto Rico, Labor/Nonlabor (National: 62 Percent Labor Share/38 Percent Nonlabor

Share Because Wage Index Is Less Than or Equal to 1)--FY 2026 Final Rule

Rates if wage index greater than 1 Hospital is a meaningful EHR Hospital is NOT a meaningful EHR

---------------------------------------------------- user and wage index less than or user and wage index less than or

equal to 1 (update = 2.6 equal to 1 (update = 0.125

percent) percent)

Labor Nonlabor -------------------------------------------------------------------

Labor Nonlabor Labor Nonlabor

National \1\.................... Not Applicable.......... Not Applicable.......... $4,186.62 $2,565.99 $4,085.63 $2,504.09

\1\ For FY 2026, there are no CBSAs in Puerto Rico with a national wage index greater than 1.

Table 1D--Capital Standard Federal Payment Rate--FY 2026 Final Rule

Rate

National............................................ $524.15

Table 1E--LTCH PPS Standard Federal Payment Rate--FY 2026 Final Rule

Full update (2.7 Reduced update *

percent) (0.7 percent)

Standard Federal Rate................................................... $50,824.51 $49,834.74

* For LTCHs that fail to submit quality reporting data for FY 2026 in accordance with the LTCH Quality Reporting

Program (LTCH QRP), the annual update is reduced by 2.0 percentage points as required by section 1886(m)(5) of

the Act.

As discussed in section IV. of the preamble of this final rule, we are finalizing our proposal to rebase and revise the 2018-based IPPS market basket to reflect a 2023 base year. In addition, using the cost category

weights from the 2023-based IPPS market basket, we calculated a labor-related share of 66.0 percent, which we will use for discharges occurring on or after October 1, 2025. The labor-related share of 66.0 percent is 1.6 percentage points lower than the current labor-related share of 67.6 percent. As discussed in section IV.B.3. of the preamble of this final rule, this downward revision to the labor-related share is primarily the result of incorporating the more recent 2023 Medicare cost report data for Wages and Salaries, Employee Benefits, and Contract Labor costs. This is partially offset by an increase in the Professional Fees: Labor- Related cost weight.

In accordance with section 1886(b)(3)(B) of the Act and as described in section VI.B. of the preamble of this final rule, we are updating the national standardized amount for inpatient hospital operating costs by the applicable percentage increase of 2.6 percent (that is, a 3.3 percent market basket percentage increase with a reduction of 0.7 percentage point for the productivity adjustment). We are also updating the hospital-specific rates by the applicable percentage increase (including the market basket percentage increase and the productivity adjustment).

Subsection (d) hospitals that do not submit quality information under rules established by the Secretary and that are meaningful EHR users under section 1886(b)(3)(B)(ix) of the Act will receive an applicable percentage increase of 1.775 percent which reflects a one-quarter percent reduction of the market basket update for failure to submit quality data. Hospitals that are not meaningful EHR users and do submit quality information under section 1886(b)(3)(B)(viii) of the Act will receive an applicable percentage increase of 0.125 percent which reflects a three-quarter percent reduction of the market basket update for being identified as not a EHR meaningful user.

Hospitals that are not meaningful EHR users under section 1886(b)(3)(B)(ix) of the Act and also do not submit quality data under section 1886(b)(3)(B)(viii) of the Act will receive an applicable percentage increase of -0.70 percent, which reflects a one-quarter percent reduction of the market basket update for failure to submit quality data and a three-quarter percent reduction of the market basket update for not meeting the requirements to be a meaningful EHR user.

To help mitigate wage index disparities between high wage and low wage hospitals, in the FY 2020 IPPS/LTCH PPS rule (84 FR 42326 through 42332), we adopted a policy to increase the wage index values for certain hospitals with low wage index values (the low wage index hospital policy). This policy was adopted in a budget neutral manner through an adjustment applied to the standardized amounts for all hospitals. We indicated our intention that this policy would be effective for at least 4 years, beginning in FY 2020, to allow employee compensation increases implemented by these hospitals sufficient time to be reflected in the wage index calculation. We also stated we intended to revisit the issue of the duration of this policy in future rulemaking as we gained experience under the policy. In the FY 2025 IPPS/LTCH PPS final rule (89 FR 69301 through 69308), we adopted an extension of the low wage index hospital policy and the related budget neutrality adjustment effective for at least three more years, beginning in FY 2025, in order for sufficient wage data from after the end of the COVID-19 Public Health Emergency to become available.

As discussed in section III.F.5. of the preamble of this final rule, on July 23, 2024, the Court of Appeals for the D.C. Circuit held that the Secretary lacked authority under section 1886(d)(3)(E) of the Act or under the “adjustments” language of section 1886(d)(5)(I)(i) of the Act to adopt the low wage index hospital policy for FY 2020, and that the policy and related budget neutrality adjustment must be vacated. After considering the D.C. Circuit's decision in Bridgeport Hosp. v. Becerra, in the FY 2025 IFC (89 FR 80405 through 80421), we recalculated the FY 2025 IPPS hospital wage index to remove the low wage index hospital policy for FY 2025. We also removed the low wage index budget neutrality factor from the FY 2025 standardized amounts. In addition, we established an interim transition policy for hospitals significantly impacted by the removal of the FY 2025 low wage index hospital policy using our authority under section 1886(d)(5)(I) of the Act.

For FY 2026 and subsequent fiscal years, after considering the D.C. Circuit's decision in Bridgeport Hosp. v. Becerra, we are discontinuing the low wage index hospital policy and are no longer applying a low wage index budget neutrality factor to the standardized amounts. As discussed in section III.F.7. of the preamble of this final rule, we are using our authority under section 1886(d)(5)(I)(i) of the Act to adopt a narrow transitional exception to the calculation of FY 2026 IPPS payments for low wage index hospitals significantly impacted by the discontinuation of the low wage index hospital policy, that is being implemented in a budget neutral manner. This transitional exception policy applies to hospitals that benefitted from the FY 2024 low wage index hospital policy and compares the hospital's FY 2026 wage index to the hospital's FY 2024 wage index. If the hospital's FY 2026 wage index is decreasing by more than 9.75 percent from the hospital's FY 2024 wage index, then the transitional payment exception for FY 2026 for that hospital will be equal to the additional FY 2026 amount the hospital would be paid under the IPPS if its FY 2026 wage index were equal to 90.25 percent of its FY 2024 wage index. We are making this policy budget neutral through an adjustment applied to the standardized amounts for all hospitals.

Section 1886(b)(3)(B)(viii) of the Act requires subsection (d) hospitals to report data in accordance with the requirements of the Hospital IQR Program for purposes of measuring and making publicly available information on health care quality and links the quality data submission to the annual applicable percentage increase. Sections 1886(b)(3)(B)(ix), 1886(n), and 1814(l) of the Act require eligible hospitals and CAHs to demonstrate they are meaningful users of certified EHR technology for purposes of electronic exchange of health information to improve the quality of health care and link the submission of information demonstrating meaningful use to the annual applicable percentage increase for eligible hospitals and the applicable percent for CAHs. Section 1886(m)(5) of the Act requires each LTCH to submit quality measure data in accordance with the requirements of the LTCH QRP for purposes of measuring and making publicly available information on health care quality, and in order to avoid a 2-percentage point reduction. Section 1886(o) of the Act requires the Secretary to establish a value-based purchasing program under which value-based incentive payments are made in a fiscal year to hospitals that meet the performance standards established on an announced set of quality and efficiency measures for the fiscal year. The purposes of the Hospital VBP Program include measuring the quality of hospital inpatient care, linking hospital measure performance to payment, and making publicly available information on hospital quality of care. Section 1886(p) of the Act requires a reduction in payment for subsection (d) hospitals that rank in the worst-performing 25 percent with respect to measures of hospital- acquired conditions under the HAC Reduction Program for the purpose of measuring HACs, linking measure performance to payment, and making publicly available information on health care quality. Section 1886(q) of the Act requires a reduction in payment for subsection (d) hospitals for excess readmissions based on measures for applicable conditions under the Hospital Readmissions Reduction Program for the purpose of measuring readmissions, linking measure performance to payment, and making publicly available information on health care quality. Section 1866(k) of the Act applies to hospitals described in section 1886(d)(1)(B)(v) of the Act (referred to as “PPS-exempt cancer hospitals” or “PCHs”) and requires PCHs to report data in accordance with the requirements of the PCHQR Program for purposes of measuring and making publicly available information on the quality of care furnished by PCHs. However, there is no reduction in payment to a PCH that does not report data.

In section XI.A. of the preamble of this final rule, we discuss the alternative payment model called the Transforming Episode Accountability Model (TEAM), which will be tested under the authority at section 1115A of the Act. Section 1115A of the Act authorizes the testing of innovative payment and service delivery models that preserve or enhance the quality of care furnished to Medicare, Medicaid, and CHIP beneficiaries while reducing program expenditures. The underlying issue addressed by TEAM is that under the traditional fee-for-service (FFS) payment system, Medicare makes separate payments to providers and suppliers for items and services furnished to a beneficiary over the course of an episode of care. Because providers and suppliers are paid for each individual item or service delivered, this may lead to care that is fragmented, unnecessary or duplicative, while making it challenging to invest in quality improvement or care coordination that would maximize patient benefit. We anticipate TEAM may reduce costs while maintaining or improving quality of care by bundling payment for items and services for a given episode and holding TEAM participants accountable for spending and quality performance, as well as by providing incentives to promote high quality and efficient care. Further, testing TEAM would allow us to learn more about the patterns of potentially inefficient utilization of health care services, as well as how to improve the beneficiary care experience during care transitions and incentivize quality improvements for common surgical episodes. This information could inform future Medicare payment policy and potentially establish the framework for managing clinical episodes as a standard practice in Traditional Medicare.

TEAM was finalized in the FY 2025 IPPS/LTCH PPS final rule (89 FR 68986) and we indicated that we intended to go through future rulemaking to promulgate new policies before the model start date. The proposals finalized within this final rule address policy gaps, make technical or conforming updates, and establish new policies to ensure TEAM has sound and well developed technical, administrative, and operational policies before the model starts.

We have examined the impacts of this final rule as required by Executive Order 12866, “Regulatory Planning and Review”; Executive Order 13132, “Federalism“; Executive Order 13563, “Improving Regulation and Regulatory Review”; Executive Order 14192, ” Unleashing Prosperity Through Deregulation”; the Regulatory Flexibility Act (RFA) (Pub. L. 96-354); section 1102(b) of the Social Security Act; section 202 of the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4).

Executive Orders 12866 and 13563 direct agencies to assess all costs and benefits of

available regulatory alternatives and, if regulation is necessary, to select those regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety, and other advantages; distributive impacts; and equity). Section 3(f) of Executive Order 12866 defines a “significant regulatory action” as any regulatory action that is likely to result in a rule that may: (1) have an annual effect on the economy of $100 million or more or adversely affect in a material way the economy, a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or State, local, or tribal governments or communities; (2) create a serious inconsistency or otherwise interfere with an action taken or planned by another agency; (3) materially alter the budgetary impact of entitlements, grants, user fees, or loan programs or the rights and obligations of recipients thereof; or (4) raise novel legal or policy issues arising out of legal mandates, or the President's priorities.

A regulatory impact analysis (RIA) must be prepared for a regulatory action that is significant under section 3(f)(1) of E.O. 12866. Based on our estimates, OMB's Office of Information and Regulatory Affairs has determined this rulemaking is significant per section 3(f)(1). We have prepared a regulatory impact analysis that to the best of our ability presents the costs and benefits of the rulemaking. OMB has reviewed these regulations, and the Departments have provided the following assessment of their impact.

We estimate that the changes for FY 2026 acute care hospital operating and capital payments will redistribute amounts in excess of $100 million to acute care hospitals. The applicable percentage increase to the IPPS rates required by the statute, in conjunction with other payment changes in this final rule, will result in an estimated $5.0 billion increase in FY 2026 payments, primarily driven by the net effect of changes in FY 2026 operating payments, including uncompensated care payments, FY 2026 capital payments, the expiration of the temporary changes in the low-volume hospital program, the expiration of the MDH program, and new technology add- on payment changes. These changes are relative to payments made in FY 2025. The impact analysis of the capital payments can be found in section I.I. of this Appendix. In addition, as described in section I.J. of this Appendix, LTCHs are expected to experience an increase in payments of approximately $83 million in FY 2026 relative to FY 2025.

Our operating payment impact estimate includes the 2.6 percent applicable percentage increase to the standardized amount (reflecting the 3.3 percent market basket rate-of-increase reduced by the 0.7 percentage point productivity adjustment). The estimates of IPPS operating payments to acute care hospitals generally do not reflect any changes in hospital admissions or real case-mix intensity, which would also affect overall payment changes.

The analysis in this Appendix, in conjunction with the remainder of this document, demonstrates that this final rule is consistent with the regulatory philosophy and principles identified in Executive Orders 12866 and 13563, the RFA, and section 1102(b) of the Act. This final rule will affect payments to a substantial number of small rural hospitals, as well as other classes of hospitals, and the effects on some hospitals may be significant. Finally, in accordance with the provisions of Executive Order 12866, the Office of Management and Budget has reviewed this final rule.

The prospective payment systems for hospital inpatient operating and capital related- costs of acute care hospitals encompass most general short-term, acute care hospitals that participate in the Medicare program. There were 26 Indian Health Service hospitals in our database, which we excluded from the analysis due to the special characteristics of the prospective payment methodology for these hospitals. Among other short term, acute care hospitals, hospitals in Maryland are paid in accordance with the Maryland Total Cost of Care Model, and hospitals located outside the 50 States, the District of Columbia, and Puerto Rico (that is, 6 short-term acute care hospitals located in the U.S. Virgin Islands, Guam, the Northern Mariana Islands, and American Samoa) receive payment for inpatient hospital services they furnish on the basis of reasonable costs, subject to a rate-of-increase ceiling.

As of March 2025, there were 3,033 IPPS acute care hospitals included in our analysis. This represents approximately 52 percent of all Medicare-participating hospitals. The majority of this impact analysis focuses on this set of hospitals. There also are approximately 1,381 CAHs. These small, limited-service hospitals are paid on the basis of reasonable costs, rather than under the IPPS. IPPS-excluded hospitals and units, which are paid under separate payment systems, include IPFs, IRFs, LTCHs, RNHCIs, children's hospitals, cancer hospitals, extended neoplastic disease care hospital, and short-term acute care hospitals located in the Virgin Islands, Guam, the Northern Mariana Islands, and American Samoa. Changes in the prospective payment systems for IPFs and IRFs are made through separate rulemaking. Payment impacts of changes to the prospective payment systems for these IPPS-excluded hospitals and units are not included in this final rule. The impact of the update and policy changes to the LTCH PPS for FY 2026 is discussed in section I.J. of this Appendix.

In this final rule, we are announcing policy changes and payment rate updates for the IPPS for FY 2026 for operating costs of acute care hospitals and for uncompensated care payments. The FY 2026 updates to the capital payments to acute care hospitals are discussed in section I.I. of this Appendix. A more detailed analysis of the update to uncompensated care payments is discussed in section I.G.2 of this Appendix.

Based on the overall percentage change in payments per case estimated using our payment simulation model, we estimate that total FY 2026 operating payments and uncompensated care payments, will increase by 4.3 percent, compared to FY 2025. The operating payment impacts generally do not reflect changes in the number of hospital admissions or real case-mix intensity, which would also affect overall payment changes.

We have prepared separate impact analyses of the changes on the operating and capital prospective payment systems. This section primarily deals with the changes to the operating inpatient prospective payment system for acute care hospitals. Our payment simulation model relies on the best available claims data to enable us to estimate the impacts on payments per case of certain changes in this final rule. However, there are other changes for which we do not have data available that would allow us to estimate the payment impacts using this model. For those changes, we have attempted to predict the payment impacts based upon our experience and other more limited data.

The data used in developing the quantitative analyses of changes in operating payments per case presented in this section

are taken from the FY 2024 MedPAR file and the most current Provider-Specific File (PSF) that is used for payment purposes. Although the analyses of the changes to the operating PPS do not incorporate cost data, data from the best available hospital cost reports were used to categorize hospitals. Our analysis has several qualifications. First, in this analysis, we do not generally adjust for future changes in such variables as admissions, lengths of stay, or underlying growth in real case-mix. Second, due to the interdependent nature of the IPPS payment components, it is very difficult to precisely quantify the impact associated with each change. Third, we use various data sources to categorize hospitals in the tables. In some cases, particularly the number of beds, there is a fair degree of variation in the data from the different sources. We have attempted to construct these variables with the best available source overall. However, for individual hospitals, some miscategorizations are possible.

Using cases from the FY 2024 MedPAR file, we simulate payments under the operating IPPS given various combinations of payment parameters. As described previously, Indian Health Service hospitals and hospitals in Maryland were excluded from the simulations. The impact of payments under the capital IPPS, and the impact of payments other than inpatient operating payments and uncompensated care payments are not analyzed in this section. Estimated payment impacts of the capital IPPS for FY 2026 are discussed in section I.I. of this Appendix.

We discuss the following changes:

The estimated effects of outlier payments returning to their targeted levels in FY 2026 as compared to the estimated outlier payments for FY 2025 produced from our payment simulation model.

The effects of the application of the applicable percentage increase of 2.6 percent (that is, a 3.3 percent market basket rate-of-increase with a reduction of 0.7 percentage point for the productivity adjustment), and the applicable percentage increase (including the market basket rate-of-increase and the productivity adjustment) to the hospital-specific rates.

The effects of the changes to estimated uncompensated care payments in FY 2026 as compared to FY 2025.

The effects of the expiration of the special payment status for MDHs beginning October 1, 2025 under current law.

The effects of the changes to the relative weights and MS-DRG GROUPER.

The effects of the changes in hospitals' wage index values due to the effects of the incorporation of updated wage data from hospitals' cost reporting periods, the update to the labor and non-labor share percentages, and the changes in wage index reclassifications.

The total estimated change in payments based on the FY 2026 policies relative to payments based on FY 2025 policies.

To illustrate the impact of the FY 2026 changes, our analysis begins with a FY 2025 baseline simulation model using: the FY 2025 national adjusted operating standardized amount; the FY 2025 MS-DRG GROUPER (Version 42); the FY 2025 CBSA designations for hospitals based on the OMB definitions from the 2020 Census; the FY 2025 wage index, including the FY 2025 labor and nonlabor share percentages; FY 2025 uncompensated care payments; and FY 2025 outlier payments which reflects our estimate of 4.6 percent of total operating MS-DRG and outlier payments as produced by our payment simulation model based on FY 2024 MedPAR data.

Our comparison illustrates the percent change in payments per case from FY 2025 to FY 2026. The update to the standardized amount is a significant factor in the percent change in payments per case. In accordance with section 1886(b)(3)(B)(i) of the Act, each year we update the national standardized amount for inpatient hospital operating costs by a factor called the “applicable percentage increase.” For FY 2026, depending on whether a hospital submits quality data under the rules established in accordance with section 1886(b)(3)(B)(viii) of the Act (hereafter referred to as a hospital that submits quality data) and is a meaningful EHR user under section 1886(b)(3)(B)(ix) of the Act (hereafter referred to as a hospital that is a meaningful EHR user), there are four possible applicable percentage increases that can be applied to the national standardized amount. We refer readers to section VI.B. of the preamble of this final rule for a complete discussion of the FY 2026 inpatient hospital update, including the four possible applicable percentage increases. For purposes of the simulations shown later in this section, we modeled the payment changes for FY 2026 using a reduced update for hospitals that (1) failed to submit quality data but are meaningful EHR users; (2) are identified as not meaningful EHR users that do submit quality data; and (3) are identified as not meaningful EHR users that do not submit quality data. The reduced updates used for these hospitals are discussed previously and in section VI.B. of the preamble of this final rule and these hospitals are identified in the impact file posted in conjunction with this final rule.

We note, 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 for hospitals that fail to submit quality data or are not a meaningful EHR users. Accordingly, the applicable percentage increases to the hospital- specific rates applicable to SCHs (and MDHs, if the program is extended by subsequent legislation) for FY 2026 are the same as the four applicable percentage increases discussed in section VI.B. of the preamble of this final rule.

Table I displays the results of our analysis of the changes for FY 2026 on payments for IPPS operating costs and uncompensated care payments. The table categorizes hospitals by various geographic and special payment consideration groups to illustrate the varying impacts on different types of hospitals. The top row of the table shows the overall impact on the acute care hospitals included in the analysis.

The next two rows of Table I contain hospitals categorized according to their geographic location: urban and rural. The next two groupings are by bed-size categories, shown separately for urban and rural hospitals. The last groupings by geographic location are by census divisions, also shown separately for urban and rural hospitals.

The second part of Table I shows hospital groups based on hospitals' FY 2026 payment classifications, including any reclassifications under sections 1886(d)(8) and 1886(d)(10) of the Act. For example, the rows labeled urban and rural show that the numbers of hospitals paid based on these categorizations after consideration of geographic reclassifications (including reclassifications under section 1886(d)(8)(B) of the Act, also known as Lugar hospitals, and section 1886(d)(8)(E) of the Act as implemented at 42 CFR 412.103).

The next three groupings examine the impacts of the changes on hospitals grouped by whether or not they have GME residency programs (teaching hospitals that receive an IME adjustment) or receive Medicare DSH payments, or some combination of these two adjustments.

In the DSH categories, hospitals are grouped according to their DSH payment status, and whether they are considered urban or rural for DSH payment purposes. The next category groups together hospitals considered urban or rural, in terms of whether they receive the IME adjustment, the DSH adjustment, both, or neither.

The next six rows examine the impacts of the changes on rural hospitals by special payment groups (SCHs and RRCs) and reclassification status from urban to rural in accordance with section 1886(d)(8)(E) of the Act.

The next series of groupings are based on the type of ownership and the hospital's Medicare and Medicaid utilization expressed as a percent of total inpatient days. These data were taken from the most recent available Medicare cost reports.

The next grouping concerns the geographic reclassification status of hospitals. The first subgrouping is based on whether a hospital is reclassified or not. The second and third subgroupings are based on whether urban and rural hospitals were reclassified by the MGCRB for FY 2026 or not, respectively. The fourth subgrouping displays hospitals that reclassified from urban to rural in accordance with section 1886(d)(8)(E) of the Act as implemented at 42 CFR 412.103. The fifth subgrouping displays hospitals deemed urban in accordance with section 1886(d)(8)(B) of the Act, also known as Lugar hospitals.

Table I--Impact Analysis of Changes on Payments for IPPS Operating Costs and Uncompensated Care Payments for FY 2026

FY 2026 weights

FY 2026 FY 2026 and DRG changes FY 2026

Number of outlier FY 2026 MDH uncompensated with application wage index All FY 2026

hospitals payments hospital rate expiration care payments of recalibration (6) \7\ \8\ changes (7)

\1\ (1) \2\ update (2) \3\ (3) \4\ (4) \5\ budget neutrality \9\ \10\

(5) \6\

All Hospitals...................... 3,033 0.3 2.5 -0.1 1.7 0.0 -0.1 4.3 By Geographic Location:

Urban hospitals.................. 2,372 0.4 2.5 -0.1 1.7 0.0 -0.1 4.4

Rural hospitals.................. 661 0.1 2.5 -0.6 1.4 -0.4 0.0 2.9 Bed Size (Urban):

0-99 beds........................ 647 0.2 2.5 -1.5 1.7 0.1 -0.1 2.9

100-199 beds..................... 673 0.2 2.5 -0.3 1.5 -0.2 -0.3 3.5

200-299 beds..................... 406 0.3 2.5 0.0 1.8 -0.1 -0.2 4.2

300-499 beds..................... 392 0.3 2.5 0.0 1.6 0.0 -0.3 4.2

500 or more beds................. 252 0.5 2.4 0.0 1.9 0.2 0.0 5.0 Bed Size (Rural):

0-49 beds........................ 313 0.1 2.4 -1.3 2.1 -0.5 0.3 3.0

50-99 beds....................... 180 0.1 2.5 -1.6 1.4 -0.5 -0.1 1.7

100-149 beds..................... 95 0.1 2.5 -0.1 1.4 -0.6 0.1 3.4

150-199 beds..................... 42 0.1 2.5 0.0 1.2 -0.3 0.1 3.7

200 or more beds................. 31 0.2 2.5 0.0 0.9 -0.1 -0.3 3.2 Urban by Region:

New England...................... 104 0.3 2.5 -0.2 0.8 -0.1 -1.7 1.6

Middle Atlantic.................. 274 0.4 2.5 -0.1 1.3 -0.1 0.7 4.8

East North Central............... 366 0.3 2.5 -0.3 1.1 0.0 -0.3 3.2

West North Central............... 156 0.4 2.5 0.0 1.1 0.1 1.4 5.5

South Atlantic................... 393 0.3 2.4 -0.1 2.4 0.0 0.4 5.5

East South Central............... 141 0.4 2.4 0.0 2.4 0.0 -0.1 5.2

West South Central............... 355 0.3 2.3 -0.1 4.4 0.1 0.5 7.7

Mountain......................... 180 0.3 2.5 0.0 1.5 0.1 -0.6 3.8

Pacific.......................... 351 0.5 2.5 0.0 0.9 0.0 -1.7 2.3 Rural by Region:

New England...................... 19 0.3 2.6 -1.6 0.3 -0.2 -0.5 0.8

Middle Atlantic.................. 48 0.1 2.5 -0.2 0.7 -0.4 0.1 2.9

East North Central............... 106 0.1 2.5 -1.5 1.1 -0.4 -0.3 1.5

West North Central............... 74 0.1 2.6 -0.4 0.6 -0.4 1.3 3.7

South Atlantic................... 108 0.1 2.4 -0.8 2.5 -0.5 -0.3 3.5

East South Central............... 127 0.1 2.5 -0.4 1.9 -0.5 -0.3 3.1

West South Central............... 116 0.1 2.4 -0.2 2.8 -0.4 0.4 5.2

Mountain......................... 39 0.1 2.6 0.0 0.3 -0.1 0.3 3.1

Pacific.......................... 24 0.1 2.6 0.0 0.2 -0.6 -0.7 1.6 Puerto Rico:

Puerto Rico Hospitals............ 52 0.1 1.8 0.0 11.2 0.0 -1.7 11.4 By Payment Classification:

Urban hospitals.................. 1,611 0.3 2.5 0.0 2.0 -0.1 -0.4 4.3

Rural areas...................... 1,422 0.4 2.5 -0.2 1.6 0.0 0.1 4.3 Teaching Status:

Nonteaching...................... 1,756 0.3 2.5 -0.4 1.6 -0.1 -0.3 3.6

Fewer than 100 residents......... 986 0.3 2.5 -0.1 1.5 0.0 -0.1 4.1

100 or more residents............ 291 0.5 2.4 0.0 2.0 0.1 -0.1 4.9 Urban DSH:

Non-DSH.......................... 346 0.3 2.6 -0.1 0.1 0.2 0.3 3.4

100 or more beds................. 909 0.4 2.5 0.0 2.2 -0.1 -0.5 4.4

Less than 100 beds............... 356 0.2 2.4 -0.4 2.9 -0.3 -0.1 4.7 Rural DSH:

Non-DSH.......................... 93 0.3 2.6 -1.8 0.0 0.1 -0.3 0.9

SCH.............................. 227 0.0 2.5 0.0 0.8 -0.5 0.2 3.1

RRC.............................. 863 0.4 2.5 -0.1 1.5 0.1 0.0 4.4

100 or more beds................. 41 0.3 2.3 -0.5 5.1 0.1 1.0 8.4

Less than 100 beds............... 198 0.1 2.4 -4.0 3.1 -0.5 0.1 0.9 Urban teaching and DSH:

Both teaching and DSH............ 527 0.4 2.4 0.0 2.3 -0.1 -0.5 4.6

Teaching and no DSH.............. 58 0.3 2.6 -0.3 0.1 0.0 0.3 3.0

No teaching and DSH.............. 738 0.3 2.5 0.0 2.1 -0.2 -0.6 4.1

No teaching and no DSH........... 288 0.3 2.7 0.0 0.0 0.4 0.3 3.6 Special Hospital Types:

RRC.............................. 131 0.2 2.5 -0.6 1.7 -0.2 -0.5 3.1

RRC that reclassified from urban 657 0.4 2.5 -0.1 1.6 0.1 0.0 4.5

to rural in accordance with

section 1886(d)(8)(E) as

implemented at 42 CFR 412.103...

SCH.............................. 218 0.0 2.5 0.0 1.1 -0.5 0.2 3.4

SCH that reclassified from urban 37 0.0 2.6 0.0 0.1 -0.4 0.1 2.4

to rural in accordance with

section 1886(d)(8)(E) as

implemented at 42 CFR 412.103...

SCH and RRC...................... 119 0.1 2.6 0.0 0.7 -0.4 0.0 3.0

SCH and RRC that reclassified 49 0.0 2.6 0.0 0.3 0.0 0.2 3.1

from urban to rural in

accordance with section

1886(d)(8)(E) as implemented at

42 CFR 412.103.................. Type of Ownership:

Voluntary........................ 1,902 0.4 2.5 -0.2 1.3 0.0 -0.1 3.8

Proprietary...................... 724 0.2 2.5 -0.1 1.9 0.0 -0.1 4.4

Government....................... 406 0.5 2.3 -0.1 3.9 0.0 -0.1 6.6 Medicare Utilization as a Percent

of Inpatient Days:

0-25............................. 1,548 0.4 2.4 0.0 2.5 0.0 0.0 5.3

25-50............................ 1,388 0.3 2.6 -0.3 0.8 -0.1 -0.3 3.0

50-65............................ 65 0.2 2.6 -0.4 0.3 0.1 0.4 3.2

Over 65.......................... 13 0.6 2.7 -0.6 0.1 2.0 -0.2 4.5 Medicaid Utilization as a Percent

of Inpatient Days:

0-25............................. 1,917 0.3 2.5 -0.2 1.3 0.0 -0.1 3.7

25-50............................ 992 0.4 2.4 0.0 1.9 0.0 -0.1 4.6

50-65............................ 91 0.4 2.1 0.0 8.2 -0.3 -0.4 10.1

Over 65.......................... 32 0.3 1.9 0.0 10.9 -0.2 -1.0 12.1 FY 2026 Reclassifications:

All Reclassified Hospitals....... 1,093 0.3 2.5 -0.2 1.6 0.0 -0.1 4.2

Non-Reclassified Hospitals....... 1,940 0.4 2.5 -0.1 1.9 0.0 -0.2 4.4

Urban Hospitals Reclassified..... 979 0.4 2.5 -0.1 1.6 0.1 0.0 4.4

Urban Non-reclassified Hospitals. 1,407 0.3 2.5 0.0 1.9 0.0 -0.4 4.3

Rural Hospitals Reclassified Full 268 0.1 2.5 -0.4 1.3 -0.4 0.0 3.1

Year............................

Rural Non-reclassified Hospitals 379 0.2 2.5 -0.8 1.5 -0.4 0.1 3.0

Full Year.......................

All hospitals that reclassified 811 0.4 2.5 -0.2 1.6 0.1 0.1 4.4

from urban to rural in

accordance with section

1886(d)(8)(E) as implemented at

42 CFR 412.103..................

Other Reclassified Hospitals 50 0.1 2.5 -2.5 1.6 -0.5 -0.1 1.1

(Section 1886(d)(8)(B), also

known as Lugar hospitals).......

\1\ Because data necessary to classify some hospitals by category were missing, the total number of hospitals in each category may not equal the

national total. Discharge data are from FY 2024, and hospital cost report data are from the latest available reporting periods. \2\ This column displays the effects of estimated outlier payments returning to their targeted levels in FY 2026 as compared to the estimated outlier

payments for FY 2025. \3\ This column displays the payment impact of the hospital rate update, including the 2.6 percent update to the national standardized amount and the

hospital-specific rate (the 3.3 percent IPPS market basket rate-of-increase reduced by the 0.7 percentage point for the productivity adjustment). \4\ This column displays the impact of the expiration of the MDH status on October 1, 2025, a non-budget neutral payment provision. \5\ This column displays the effects of the changes to estimated uncompensated care payments in FY 2026 as compared to FY 2025. See also the table in

section I.G.2 of this Appendix. \6\ This column displays the payment impact of Version 43 GROUPER, the changes to the relative weights and the recalibration of the MS[dash]DRG weights

based on FY 2024 MedPAR data, and the 10-percent cap where the relative weight for a MS-DRG will decrease by more than ten percent in a given fiscal

year. This column displays the application of the recalibration budget neutrality factor and the 10-percent cap budget neutrality factor (which can be

found in section II.A.4 of the Addendum of this final rule). \7\ This column displays the effects of the changes to the FY 2026 wage index. This includes (1) the update to wage index data using FY 2022 cost report

data, the application of the wage budget neutrality factor and the update to the labor and nonlabor shares. (2) The effects of geographic

reclassifications by the Medicare Geographic Classification Review Board (MGCRB), showing the payment impact of going from FY 2025 reclassifications

to the reclassifications scheduled to be in effect for FY 2026. (3) The effects of the application of the rural floor. (4) The effects of urban to

rural reclassifications under section 1886(d)(8) of the Act on the wage index. (5) The effects of the application of “LUGAR” status under section

1886(d)(10) of the Act on the wage index. (6) The adjustments to the wage index driven by non-budget neutral policies. These include (a) the imputed

floor for all-urban states; (b) the policy that requires hospitals located in frontier States have a wage index no less than 1.0; and (c) the policy

which provides for an increase in a hospital's wage index if a threshold percentage of residents of the county where the hospital is located commute

to work at hospitals in counties with higher wage indexes. The budget neutrality factors for the effects that are budget neutral can be found in

section II.A.4 of the Addendum of this final rule. \8\ For the traditional wage index information showing the effect of including or excluding particular wage index polices from the computation of the FY

2026 wage index instead of the impact of the wage index changes from FY 2025 to FY 2026 shown in Table I, we refer readers to the data file available

at https://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/AcuteInpatientPPS/index.html (click on the link on the left side of the screen titled

“FY 2026 IPPS Final Rule Home Page”.) \9\ We note that because the low wage index hospital policy was removed for FY 2025, the discontinuation of the policy effective FY 2026 has no impact

on the estimated change in payments from FY 2025 to FY 2026. However, the budget neutral transition for the discontinuation of the low wage index

hospital policy will redistribute payments from hospitals that do not benefit from the transition to hospitals that do benefit (primarily all the

hospitals located in Puerto Rico) due to the associated budget neutrality factor. The budget neutrality factor for the transition can be found in

section II.A.4 of the Addendum of this final rule. \10\ This column shows the estimated change in payments from FY 2025 to FY 2026.

Column 5 shows the effects of the changes to the MS-DRGs and relative weights with the application of the recalibration budget neutrality factor to the standardized amounts. Section 1886(d)(4)(C)(i) of the Act requires us annually to make appropriate classification changes to reflect changes in treatment patterns, technology, and any other factors that may change the relative use of hospital resources. Consistent with section 1886(d)(4)(C)(iii) of the Act, we calculated a recalibration budget neutrality factor to account for the changes in MS-DRGs and relative weights to ensure that the overall payment impact is budget neutral. We also applied the permanent 10-percent cap on the reduction in a MS-DRG's relative weight in a given year and an associated recalibration cap budget neutrality factor to account for the 10-percent cap on relative weight reductions to ensure that the overall payment impact is budget neutral.

As discussed in section II.D. of the preamble of this final rule, for FY 2026, we calculated the MS-DRG relative weights using the FY 2024 MedPAR data grouped to the Version 43 (FY 2026) MS-DRGs. The reclassification changes to the GROUPER are described in more detail in section II.C. of the preamble of this final rule.

The “All Hospitals” line in Column 5 indicates that changes due to the MS-DRGs and relative weights are expected to result in a 0.0 percent change in payments with the application of the recalibration budget neutrality factor (discussed in section II.A.4.a. of the Addendum to this final rule) and the recalibration cap budget neutrality factor to the standardized amount (discussed in section II.A.4.b. of the Addendum to this final rule).

Column 6 shows the impact of the changes to hospitals' FY 2026 wage index as compared to hospitals' FY 2025 wage index. Overall, the FY 2026 wage index changes are expected to lead to a 0.1 percent decrease for all hospitals, as shown in Column 6. This change is a result of the updates to the wage data reported by hospitals, the change to the labor and nonlabor shares, changes in the geographic reclassifications of hospitals, and the interactions of those changes with statutory wage index floors and exceptions. We combine these changes because the complex and interactive ways in which hospitals increasingly seek to maximize their wage index values in a given year render isolation of these effects in a year-over-year context less informative. For example, the impact of the updates to the wage data reported by hospitals in the absence of the changes in geographic reclassification and especially the interaction of both of those with statutory wage index floors and exceptions is less meaningful than showing the combined effect of those factors. For the traditional wage index information showing the effect of including or excluding particular wage index polices from the computation of the FY 2026 wage index instead of the impact of the wage index changes from FY 2025 to FY 2026 shown in Table I, we refer readers to the data file available at https://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/AcuteInpatientPPS/index.html (click on the link on the left side of the screen titled “FY 2026 IPPS Final Rule Home Page”).

Specifically, this column in Table I shows the combined effects of the application of the following FY 2026 wage index changes relative to FY 2025:

(1) Effects of the Final Changes to the Wage Data

Column 6 reflects the effects of the updated wage data and the labor and non-labor shares, with the application of the wage index budget neutrality factor for FY 2026 relative to FY 2025.

Section 1886(d)(3)(E) of the Act requires that, beginning October 1, 1993, we annually update the wage data used to calculate the wage index. In accordance with this requirement, the wage index for acute care hospitals for FY 2026 is based on data submitted for hospital cost reporting periods, beginning on or after October 1, 2021, and before October 1, 2022. Column 6 reflects the percentage change in payments when going from a model using the FY 2025 wage index based on FY 2025 reclassifications and the FY 2025 labor- related share of 67.6 percent, to a model using the FY 2026 wage index based on FY 2026 reclassifications (as described in further detail in the next section) and the labor-related share of 66.0 percent, while holding other payment parameters, such as use of the Version 43 MS-DRG GROUPER, constant.

In addition, the column incorporates the application of the wage budget neutrality to the national standardized amount. As discussed in section II.A.4.c. of the Addendum to this final rule, for FY 2026 we calculated the wage budget neutrality factor to ensure that payments under the updated wage data and the labor-related share of 66.0 percent are budget neutral, without regard to the lower labor- related share of 62 percent

applied to hospitals with a wage index less than or equal to 1.0. This budget neutrality factor can be found in the summary table of the FY 2026 budget neutrality factors in section II.A.4. of the Addendum to this final rule.

(2) Effects of MGCRB, Urban to Rural and “Lugar” Reclassifications

Column 6 reflects the impact of MGCRB reclassification decisions under section 1886(d)(10) of the Act, urban to rural reclassifications under section 1886(d)(8)(E) of the Act, and Lugar status redesignations under section 1886(d)(8)(B) of the Act on the wage index for FY 2026 relative to FY 2025. The overall effect of geographic reclassification is required by section 1886(d)(8)(D) of the Act to be budget neutral. Therefore, as discussed in section II.A.4.d. of the Addendum to this final rule, we apply a reclassification budget neutrality adjustment to ensure that the effects of the reclassifications under sections 1886(d)(8)(B) and (C) and 1886(d)(10) of the Act are budget neutral. This budget neutrality factor can be found in the summary table of the final FY 2026 budget neutrality factors in section II.A.4. of the Addendum to this final rule.

Table 2 listed in section VI. of the Addendum to this final rule and available on the CMS website reflects the reclassifications for FY 2026 at the time of development of this final rule. For further information on MGCRB reclassifications, urban to rural reclassifications and Lugar status redesignations, we refer readers to section III.E of the preamble of this final rule.

(3) The Effects of the Rural Floor, Including Budget Neutrality Adjustment

Column 6 reflects the effects of the application of the rural floor and the application of the rural floor budget neutrality on the wage index for FY 2026 relative to FY 2025. As discussed in section III.F.1. of the preamble of this final rule, section 4410 of Pub. L. 105-33 established the rural floor by requiring that the wage index for a hospital in any urban area cannot be less than the wage index applicable to hospitals located in rural areas in the same state. We apply a uniform budget neutrality adjustment to the wage index as discussed in section II.A.4.e. of the Addendum to this final rule. All IPPS hospitals in our model have their wage indexes reduced by the rural floor budget neutrality adjustment. This budget neutrality factor can be found in the summary table of the FY 2026 budget neutrality factors in section II.A.4. of the Addendum to this final rule.

(4) Effects the Application of the Imputed Floor, Frontier State Wage Index and Out-Migration Adjustment

Lastly, this column also reflects the combined effects of the application of the following non-budget neutral provisions for FY 2026 relative to FY 2025: (a) the imputed floor under section 1886(d)(3)(E)(iv)(I) and (II) of the Act for certain all-urban States (as discussed in section III.F.2. of the preamble of this final rule); (b) the minimum post-reclassified wage index of 1.00 for all hospitals located in “frontier States” as required by section 1886(d)(3)(E)(iii) Act (as discussed in section III.F.3. of the preamble of this final rule); and (c) the effects of the out- migration adjustment under section 1886(d)(13) of the Act (as discussed in section III.F.4. of the preamble of this final rule).

Column 7 shows our estimate of the changes in payments per discharge from FY 2025 and FY 2026, resulting from all changes for FY 2026 included in Table I. It includes the combined effects of the year-over-year change of the factors described in the previous columns in the table.

The average increase in payments under the IPPS for all hospitals is approximately 4.3 percent for FY 2026 relative to FY 2025, which is primarily driven by the changes reflected in Column 2 (hospital update) and Column 4 (uncompensated care payments). As described in Column 2, the annual hospital update for hospitals paid under the national standardized amount, combined with the annual hospital update for hospitals paid under the hospital-specific rates are expected to result in a 2.5 percent increase in payments in FY 2026 relative to FY 2025 for all hospitals. As described in Column 4, uncompensated care payments are expected to result in a 1.7 percent increase in payments in FY 2026 relative to FY 2025 for all hospitals.

Overall payments to hospitals paid under the IPPS are estimated to increase by 4.3 percent for FY 2026 (as compared to FY 2025) due to the outlier adjustment, the applicable percentage increase, the MDH program expiration, uncompensated care payments, and changes to the wage index and labor and nonlabor shares. Hospitals in urban areas are expected to experience a 4.4 percent increase in payments per discharge in FY 2026 compared to FY 2025. Hospital payments per discharge in rural areas are estimated to increase by 2.9 percent in FY 2026. The relatively lower projected increase for rural hospitals is due in part to the MDH program expiration (Column 3) and the MS- DRG and relative weight changes with application budget neutrality (Column 5). Hospital categories that generally treat relatively less complex cases, such as rural hospitals and smaller urban hospitals, are expected to experience a decrease in their payments, while hospitals that generally treat relatively more complex cases, such as larger urban hospitals, are expected to experience an increase in their payments as a result of the changes to the relative weights.