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

As we discussed earlier, section 1886(r)(2) of the Act provides that, for each eligible hospital in FY 2014 and subsequent years, the uncompensated care payment is the product of three factors, which are discussed in the next sections. 1. Calculation of Factor 1 for FY 2026

Section 1886(r)(2)(A) of the Act establishes Factor 1 in the calculation of the uncompensated care payment. The regulations located at 42 CFR 412.106(g)(1)(i) govern the Factor 1 calculation. Under a prospective payment system, we would not know the precise aggregate Medicare DSH payment amounts that would be paid for a fiscal year until cost report settlement for all IPPS hospitals is completed, which occurs several years after the end of the fiscal year. Therefore, section 1886(r)(2)(A)(i) of the Act provides authority to estimate this amount by specifying that, for each fiscal year to which the provision applies, such amount is to be estimated by the Secretary. Similarly, we would not know the precise aggregate empirically justified Medicare DSH payment amounts that would be paid for a fiscal year until cost report settlement for all IPPS hospitals is completed. Thus, section 1886(r)(2)(A)(ii) of the Act provides authority to estimate this amount. In brief, Factor 1 is the difference between the Secretary's estimates of: (1) the amount that would have been paid in Medicare DSH payments for the fiscal year, in the absence of section 1886(r) of the Act; and (2) the amount of empirically justified Medicare DSH payments that are made for the fiscal year, which takes into account the requirement to pay 25 percent of what would have otherwise been paid under section 1886(d)(5)(F) of the Act.

In the FY 2026 IPPS/LTCH PPS proposed rule (90 FR 18255 through 18257), we proposed to continue the policy that has applied since the FY 2014 final rule (78 FR 50627 through 50631), to determine Factor 1 from the most recently available estimates of the aggregate amount of Medicare DSH payments that would be made for FY 2026 in the absence of section 1886(r)(1) of the Act and the aggregate amount of empirically justified Medicare DSH payments that would be made for FY 2026, both as calculated by CMS' Office of the Actuary (OACT). Consistent with the policy that has applied in previous years, these estimates will not be revised or updated subsequent to publication of our final projections in the FY 2026 IPPS/LTCH PPS final rule.

In the FY 2026 IPPS/LTCH PPS proposed rule (90 FR 18255 through 18257), to calculate both estimates, we used the most recently available projections of Medicare DSH payments for the fiscal year, as calculated by OACT using the most recently filed Medicare hospital cost reports with

Medicare DSH payment information and the most recent DPPs and Medicare DSH payment adjustments provided in the IPPS Impact File. The projection of Medicare DSH payments for the fiscal year is also partially based on OACT's Part A benefits projection model, which projects, among other things, inpatient hospital spending. Projections of DSH payments additionally require projections of expected increases in utilization and case-mix. The assumptions that were used in making these inpatient hospital spending, utilization, and case-mix projections and the resulting estimates of DSH payments for FY 2023 through FY 2026 are discussed later in this section and in the table titled “Factors Applied for FY 2023 through FY 2026 to Estimate Medicare DSH Expenditures Using FY 2022 Baseline.”

For purposes of calculating Factor 1 and modeling the impact of the FY 2026 IPPS/LTCH PPS proposed rule (90 FR 18255 through 18257), we used OACT's January 2025 Medicare DSH estimates, which were based on data from the December 2024 update of the Medicare Hospital Cost Report Information System (HCRIS) and the FY 2025 IPPS/LTCH PPS final rule IPPS Impact File, published in conjunction with the publication of the FY 2025 IPPS/LTCH PPS final rule. Because SCHs that are projected to be paid under their hospital-specific rate are ineligible for empirically justified Medicare DSH payments and uncompensated care payments, they were excluded from the January 2025 Medicare DSH estimates. Because Maryland hospitals are not paid under the IPPS, they are also ineligible for empirically justified Medicare DSH payments and uncompensated care payments and were also excluded from OACT's January 2025 Medicare DSH estimates.

The 16 hospitals that CMS expects will participate in the Rural Community Hospital Demonstration Program in FY 2026 were also excluded from OACT's January 2025 Medicare DSH estimates because under the payment methodology that applies during the demonstration, these hospitals are not eligible to receive empirically justified Medicare DSH payments or uncompensated care payments.

For the proposed rule, using the data sources previously discussed, OACT's January 2025 estimates of Medicare DSH payments for FY 2026 without regard to the application of section 1886(r)(1) of the Act, as corrected, was approximately $15.791 billion. (90 FR 18256 and 90 FR 23867). Therefore, also based on OACT's January 2025 Medicare DSH estimates, the estimate of empirically justified Medicare DSH payments for FY 2026, with the application of section 1886(r)(1) of the Act, as corrected, was approximately $3.95 billion (or 25 percent of the total amount of estimated Medicare DSH payments for FY 2026). (90 FR 18256 and 90 FR 23867.) Under Sec. 412.106(g)(1)(i), Factor 1 is the difference between these two OACT estimates. Therefore, in the FY 2026 IPPS/LTCH PPS proposed rule (90 FR 18255 through 18257), as corrected, we proposed that Factor 1 for FY 2026 would be $11.843 billion, which is equal to 75 percent of the total amount of estimated Medicare DSH payments for FY 2026 ($15.791 billion minus $3.95 billion). (90 FR 23867.) We noted that consistent with our approach in previous rulemakings, OACT intended to use more recent data that may become available for purposes of projecting the final Factor 1 estimates for the FY 2026 IPPS/LTCH PPS final rule.

In the FY2026 IPPS/LTCH PPS proposed rule, we noted that the Factor 1 estimates for IPPS/LTCH PPS proposed rules are generally consistent with the economic assumptions and actuarial analysis used to develop the President's Budget estimates under current law, and Factor 1 estimates for IPPS/LTCH PPS final rules are generally consistent with those used for the Midsession Review of the President's Budget. Consistent with historical practice, we stated in the proposed rule that we expected the Midsession Review will have updated economic assumptions and actuarial analysis, which would be used for the development of Factor 1 estimates in the FY 2026 IPPS/LTCH PPS final rule.

For a general overview of the principal steps involved in projecting future inpatient costs and utilization, we referred readers to the “2025 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds,” available on the CMS website at https://www.cms.gov/oact/tr/2025.\1\ The actuarial projections contained in these reports are based on numerous assumptions regarding future trends in program enrollment, utilization and costs of health care services covered by Medicare, as well as other factors affecting program expenditures. In addition, although the methods used to estimate future costs based on these assumptions are complex, they are subject to periodic review by independent experts to ensure their validity and reasonableness.

In the FY 2026 IPPS/LTCH proposed rule (90 FR 18255 through 18257), we included information regarding the data sources, methods, and assumptions employed by OACT's actuaries in determining our estimate of Factor 1. In summary, we indicated the historical HCRIS data update OACT used to estimate Medicare DSH payments; we explained that the most recent Medicare DSH payment adjustments provided in the IPPS Impact File were used, and we provided the components of all the update factors that were applied to the historical data to estimate the Medicare DSH payments for the upcoming fiscal year, along with the associated rationale and assumptions. The discussion also included descriptions of the “Other” and “Discharges” assumptions and provided additional information regarding how we address Medicaid expansion.

We invited public comments on our proposed Factor 1 for FY 2026.

Comment: A few commenters thanked CMS for the increase in the proposed Factor 1 amount for FY 2026. Some commenters requested clarification on a discrepancy between the Factor 1 estimate cited in the proposed rule's preamble and the figure provided in the supplemental file.

Response: We thank the commenters for their support. Regarding the discrepancy in Factor 1 estimates, we refer readers to the June 5, 2025 correction to the proposed rule (CMS-1833-CN) (90 FR 23867).

Comment: As in previous years, some commenters expressed concerns with and requested greater transparency in the methodology used by CMS and OACT to calculate Factor 1. A few commenters emphasized their inability to accurately replicate CMS' calculations without clarity on how inputs, such as the effects of the COVID-19 public health emergency (PHE) on Medicare discharges, case mix, Medicaid enrollment and subsequent disenrollment through redeterminations, impact Factor 1 estimates. Some of these commenters requested that CMS provide details of its Factor 1 calculation in advance of the publication of the IPPS/ LTCH PPS final rule and in the IPPS/LTCH PPS proposed rule each year going forward, so that sufficient data is available to replicate CMS' DSH payment calculations and enable commenters to provide more informed comments in future years. Another commenter requested that CMS provide detailed explanations for how the agency calculates Factor 1 to ensure safety net providers are not being disproportionately impacted.

A few commenters asserted that the lack of opportunity afforded to hospitals to review the data used to estimate DSH

payment calculations in rulemaking is in violation of the Administrative Procedure Act. These commenters expressed concerns about the lack of transparency in how Factor 1 is calculated, arguing that hospitals cannot meaningfully comment on the Factor 1 calculation methodology given the lack of details provided by CMS in each IPPS/LTCH PPS proposed rule. In particular, these commenters stated that the FY 2026 IPPS/LTCH proposed rule provided neither sufficient details nor a complete explanation of the treatment of Medicaid expansions in the calculation for Factor 1.

Additionally, several commenters stated that CMS failed to provide sufficient details on how the “Other” factor, including both the overall calculation and individual inputs used to determine the estimate, is calculated. These commenters noted that although CMS indicates Medicaid enrollment is included in the “Other” factor, the agency does not explain its specific impact on the overall estimate. One commenter emphasized the importance of interested parties understanding how changes in Medicaid enrollment affect Medicare DSH payments, particularly considering recent, significant shifts in Medicaid enrollment. Other commenters specifically questioned whether the “Other” factor accurately reflects the impact of the COVID-19 PHE. Some of these commenters requested that CMS publish a detailed methodology of its “Other” calculation specifying how all the components contribute to changes in its estimate from year to year. A couple commenters requested that CMS clarify why the “Other” factor frequently varies in successive rulemaking cycles. Some of these commenters requested that this information be provided in advance of the final rule publication and in the IPPS/LTCH PPS proposed rule each year going forward to ensure the data is available to replicate CMS' DSH calculation, allowing for sufficient ability to comment in future years.

Response: We thank the commenters for their input. We disagree with commenters' assertions regarding the lack of transparency with respect to the methodology and assumptions used in the calculation of Factor 1. As explained in the FY 2026 IPPS/LTCH PPS proposed rule (90 FR 18255- 18257) and in this section of this final rule, we have been and continue to be transparent about the methodology and data used to estimate Factor 1. Regarding the commenters who reference the Administrative Procedure Act, we note that under the Administrative Procedure Act, a proposed rule is required to include either the terms or substance of the proposed rule or a description of the subjects and issues involved. In this case, the FY 2026 IPPS/LTCH PPS proposed rule (90 FR 18002) included a detailed discussion of our proposed Factor 1 methodology and the data sources that would be used in making our final estimate. Accordingly, we believe commenters were able to meaningfully comment on our proposed estimate of Factor 1.

To provide additional context, and as we have explained in prior rulemakings (see, for example, 89 FR 68986), we note that Factor 1 is not estimated in isolation from other projections made by OACT. The Factor 1 estimates for the proposed rules are generally consistent with the economic assumptions and actuarial analyses used to develop the President's Budget estimates under current law, and the Factor 1 estimates for the final rule are the latest estimates from OACT at the time of development of this final rule. We recognize that our reliance on the economic assumptions and actuarial analyses used to develop the President's Budget in estimating Factor 1 has an impact on hospitals, health systems, and other impacted parties that wish to replicate the Factor 1 calculation by, for example, modeling the relevant Medicare Part A portion of the President's Budget. Yet, we believe commenters are able to meaningfully comment on our proposed estimate of Factor 1 without replicating the budget.

For a general overview of the principal steps involved in projecting future inpatient costs and utilization, we refer readers to the “2025 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds,” available under “Downloads” on the CMS website at: https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/ReportsTrustFunds/index.html. We note that the annual reports of the Medicare Boards of Trustees to Congress represent the Federal Government's official evaluation of the financial status of the Medicare Program. The actuarial projections contained in these reports are based on numerous assumptions regarding future trends in program enrollment, utilization, and costs of health care services covered by Medicare, as well as other factors affecting program expenditures. In addition, given that the methods used to estimate future costs based on these assumptions are complex, they are subject to periodic review by independent experts to ensure their validity and reasonableness.

Additionally, in the FY 2026 IPPS/LTCH PPS proposed rule and described in more detail later in this section, we included information regarding the data sources, methods, and assumptions employed by the actuaries to determine the OACT's estimate of Factor 1. We explained that the most recent Medicare DSH payment adjustments provided in the IPPS Impact File were used, and we provided the components of all update factors that were applied to historical data to estimate the Medicare DSH payments for the upcoming fiscal year, along with the associated rationale and assumptions. This discussion also included a description of the “Other,” “Case-Mix,” and “Discharges” assumptions, as well as additional information regarding the estimated impact of the COVID-19 PHE.

Regarding the commenter who expressed concern that our proposed calculation of Factor 1 would disproportionately impact safety net providers, we continue to believe that estimating Factor 1 based on the economic data and assumptions detailed in this final rule and the FY 2026 IPPS/LTCH PPS proposed rule is appropriate and consistent with the requirements of section 1886(r)(2)(A) of the Act.

Comment: Some commenters requested that CMS provide additional detail on the calculations and assumptions related to the “Discharge” component used in the Factor 1 formula so they can evaluate the impact of Medicare Advantage (MA) growth on Medicare Fee for Service (FFS) inpatient hospital payments. These commenters noted that the continued expansion of MA has raised concerns--particularly around prior authorization requirements imposed by plans, which often create burdens for both patients and providers. The same commenters noted that these issues have prompted broader questions about the sustainability of MA growth and its implications for inpatient hospital payments, especially for hospitals serving a disproportionate share of low-income beneficiaries. The same commenters welcomed the opportunity to work with CMS in examining the impacts of MA enrollment on FFS inpatient hospital payments. Other commenters urged CMS to use more recent data and update its estimates of Medicare DSH payment amounts to reflect changes in the discharge volume more accurately.

Finally, a commenter, citing the Medicare Payment and Advisory Commission's (MedPAC) draft recommendation for 2026 and its March 2025 report to Congress, urged CMS to increase the market basket updates for

2024 through 2026 used in the FY 2026 Factor 1 “Update” component by at least 1 percentage point. The same commenter also requested that the market basket update be increased by at least 1.5 percentage points per MedPAC's March 2024 report to Congress. Another commenter argued that the proposed 0.8 percent productivity adjustment used to offset the projected 3.2 percent market basket increase in the “Update” component of Factor 1 was inappropriately high, given the significant economic volatility caused by recent cost period outliers.

Response: We thank the commenters for their input. Regarding commenters' requests for additional detail on the calculations and assumptions underlying the “Discharges” factor, we refer the commenters to the discussion elsewhere in this section of this final rule and the relevant discussion in the FY 2026 IPPS/LTCH PPS proposed rule (90 FR 18002), which detail the calculations and assumptions we used to calculate the FY 2026 “Discharges” factor. We also note that in updating our estimate of Factor 1 for this final rule, we considered, as appropriate, the same set of factors that we used in the FY 2025 IPPS/LTCH PPS proposed rule and in prior rulemakings (see example, 89 FR 35934 35934 through 36649). As we stated we would do in the FY 2026 IPPS/LTCH PPS proposed rule, we then updated our estimates for the FY 2026 “Discharges” component, and other Factor 1 components, to incorporate the latest available data based on more recent economic assumptions and actuarial analyses as available to us.

Regarding the comments on the impacts of MA enrollment on the Medicare FFS discharge volume, we refer commenters to the actuarial projections and assumptions regarding future trends in Medicare FFS and MA program enrollment, utilization, and costs of health care services covered by Medicare, as well as other factors affecting Medicare FFS and MA program expenditures, contained in the “2025 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds,” available under “Downloads” on the CMS website at: https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/ReportsTrustFunds/index.html. We considered these projections, assumptions, and other factors when developing our estimate of the “Discharges” factor for FY 2026. We also note that in this final rule, consistent with prior years (see, for example, 89 FR 68986), our estimate of the “Discharges” component for FY 2026 incorporates only claims from the Medicare FFS program rather than claims from the MA program. Accordingly, we believe that the FY 2026 “Discharges” factor in this final rule accurately reflects trends in Medicare FFS discharges.

Regarding the commenter who requested that CMS increase the FY 2026 Factor 1 “Update” component consistent with the MedPAC recommended increases to the IPPS market basket used to estimate DSH payments for FY 2024, FY 2025, and FY 2026, we note that consistent with the inpatient hospital update discussion in section VI.B of the preamble of this final rule, OACT is using the final inpatient hospital market basket update and productivity adjustment for FY 2026, based on the more recent data available for this final rule, for the final FY 2026 “Update” component in the Factor 1 calculation. We refer readers to the discussion of the finalized inpatient hospital update for FY 2026 in section VI.B of the preamble of this final rule. Regarding the commenter expressing concern that the productivity adjustment used to offset the projected market basket was inappropriately high, we also refer to the discussion in section VI.B of the preamble of this final rule.

After consideration of the public comments we received, we are finalizing, as proposed, the methodology for calculating Factor 1 for FY 2026. We discuss the resulting Factor 1 amount for FY 2026 in this final rule. Consistent with prior rulemakings, for this final rule, OACT used the most recently submitted Medicare cost report data from the March 31, 2025, update of HCRIS to identify Medicare DSH payments and the most recent Medicare DSH payment adjustments provided in the Impact File and applied update factors and assumptions for projected changes in utilization and case-mix to estimate Medicare DSH payments for the upcoming fiscal year.

The June 2025 OACT estimate for Medicare DSH payments for FY 2026, without regard to the application of section 1886(r)(1) of the Act, is approximately $16.550 billion. This estimate excluded Maryland hospitals, which participate in the Maryland Total Cost of Care Model and are not paid under the IPPS, hospitals participating in the Rural Community Hospital Demonstration, and SCHs paid under their hospital- specific payment rate. Therefore, based on this June 2025 estimate, the estimate of empirically justified Medicare DSH payments for FY 2026, with the application of section 1886(r)(1) of the Act, is approximately $4.14 billion (or 25 percent of the total amount of estimated Medicare DSH payments for FY 2026). Under Sec. 412.106(g)(1)(i), Factor 1 is the difference between these two OACT estimates. Therefore, the final Factor 1 for FY 2026 is $12,412,500,000, which is equal to 75 percent of the total amount of estimated Medicare DSH payments for FY 2026 ($16,550,000,000 minus $4,137,500,000).

OACT's estimates for FY 2026 for this final rule began with a baseline of $13.022 billion in Medicare DSH expenditures for FY 2022. The following table shows the factors applied to update this baseline through the current estimate for FY 2026: [GRAPHIC] [TIFF OMITTED] TR04AU25.238

In this table, the discharges column shows the changes in the number of Medicare FFS inpatient hospital discharges. The discharge figures for FY 2023 and FY 2024 are based on Medicare claims data that have been adjusted by a completion factor to account for incomplete claims data. The discharge figures for FY 2025 and FY 2026 are assumptions based on recent historical experience and assumptions related to how many beneficiaries will be enrolled in MA plans.

The case-mix column shows the estimated change in case-mix for IPPS hospitals. The case-mix figures for FY 2023 and FY 2024 are based on actual claims data adjusted by a completion factor to account for incomplete claims data. The case-mix figures for FY 2025 and for FY 2026 are assumptions based on the 2012 “Review of Assumptions and Methods of the Medicare Trustees' Financial Projections” report by the 2010-2011 Medicare Technical Review Panel.\154\

\154\ https://www.cms.gov/research-statistics-data-and-systems/statistics-trends-and-reports/reportstrustfunds/downloads/technicalpanelreport2010-2011.pdf.

The “Other” column reflects the change in other factors that contribute to the Medicare DSH estimates. These factors include the difference between the total inpatient hospital discharges and IPPS discharges and various adjustments to the payment rates that have been included over the years but are not reflected in the other columns. In addition, the “Other” column includes a factor for the estimated changes in Medicaid enrollment through FY 2023.

The following table shows the factors that are included in the “IPPS Hospital Market Basket Update Factor” column of the previous table: [GRAPHIC] [TIFF OMITTED] TR04AU25.239

2. Calculation of Factor 2 for FY 2026 a. Background

Section 1886(r)(2)(B) of the Act establishes Factor 2 in the calculation of the uncompensated care payment. Section 1886(r)(2)(B)(ii) of the Act provides that, for FY 2018 and subsequent fiscal years, the second factor is 1 minus the percent change in the percent of individuals who are uninsured, as determined by comparing the percent of individuals who were uninsured in 2013 (as estimated by the Secretary, based on data from the Census Bureau or other sources the Secretary determines appropriate, and certified by the Chief Actuary of CMS) and the percent of individuals who were uninsured in the most recent period for which data are available (as so estimated and certified).

We are continuing to use the methodology that was used in FY 2018 through FY 2025 to determine Factor 2 for FY 2026--to use the National Health Expenditure Accounts (NHEA) data to determine the percent change in the percent of individuals who are uninsured. We refer readers to the FY 2018 IPPS/LTCH PPS final rule (82 FR 38197 and 38198) for a complete discussion of the NHEA and why we determined, and continue to believe, that it is the data source for the rate of uninsurance that, on balance, best meets all our considerations and is consistent with the statutory requirement that the estimate of the rate of uninsurance be based on data from the Census Bureau or other sources the Secretary determines appropriate.

In brief, the NHEA represents the government's official estimates of economic activity (spending) within the health sector. The NHEA includes comprehensive enrollment estimates for total private health insurance (PHI) (including direct-purchase and employer-sponsored plans), Medicare, Medicaid, the Children's Health Insurance Program (CHIP), and other public programs, and estimates of the number of individuals who are uninsured. The NHEA data are publicly available on the CMS website at https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/index.html.

To compute Factor 2 for FY 2026, the first metric that is needed is the proportion of the total U.S. population that was uninsured in 2013. For a complete discussion of the approach OACT used to prepare the NHEA's estimate of the rate of uninsurance in 2013, including the data sources used, we refer readers to the FY 2024 IPPS/LTCH PPS final rule (88 FR 58998-58999).

The next metrics needed to compute Factor 2 for FY 2026 are projections of the rate of uninsurance in both CY 2025 and CY 2026 for the total U.S. population. On an annual basis, OACT projects enrollment and spending trends for the coming 10-year period. The most recent projections are for 2024 through 2033 and were published on June 25, 2025. Those projections used the latest NHEA historical data that were available at the time of their construction (that is, historical data through 2023). The NHEA projection methodology accounts for expected changes in enrollment across all of the categories of insurance coverage previously listed. For a complete discussion of how the NHEA data account for expected changes in enrollment across all the categories of insurance coverage previously listed, we refer readers to the FY 2024 IPPS/LTCH PPS final rule (88 FR 58999). b. Factor 2 for FY 2026

Using these data sources and the previously described methodologies, at the time of developing the FY 2026 IPPS/LTCH proposed rule, OACT had estimated that the uninsured rate for the historical, baseline year of 2013 was 14 percent, and that the uninsured rates for CYs 2025 and 2026 were 7.7 percent and 8.7 percent, respectively (90 FR 18258). As required by section 1886(r)(2)(B)(ii) of the Act, the Chief Actuary of CMS certified these estimates. We refer readers to OACT's Memorandum on Certification of Rates

of Uninsured prepared for the FY 2026 IPPS/LTCH PPS proposed rule for further details on the methodology and assumptions that were used in the projection of these rates of uninsurance.\155\

\155\ https://www.cms.gov/files/document/certification-rates-uninsured-2026-proposed-rule.pdf.

As with the CBO estimates on which we based Factor 2 for fiscal years before FY 2018, the NHEA estimates are for a calendar year. Under the approach originally adopted in the FY 2014 IPPS/LTCH PPS final rule, we have used a weighted average approach to project the rate of uninsurance for each fiscal year. We continue to believe that, in order to estimate the rate of uninsurance during a fiscal year accurately, Factor 2 should reflect the estimated rate of uninsurance that hospitals will experience during the fiscal year, rather than the rate of uninsurance during only one of the calendar years that the fiscal year spans. Accordingly, in the FY 2026 IPPS/LTCH PPS proposed rule, we proposed to continue to apply the weighted average approach used in past fiscal years to estimate this final rule's rate of uninsurance for FY 2026.

OACT certified the estimate of the rate of uninsurance for FY 2026 determined using this weighted average approach to be reasonable and appropriate for purposes of section 1886(r)(2)(B)(ii) of the Act. In the proposed rule (90 FR 18258), we noted that we may also consider the use of more recent data that may become available for purposes of estimating the rates of uninsurance used in the calculation of the final Factor 2 for FY 2026.

In the proposed rule, we outlined the calculation of the proposed Factor 2 for FY 2026 as follows:

Percent of individuals without insurance for CY 2013: 14 percent.

Percent of individuals without insurance for CY 2025: 7.7 percent.

Percent of individuals without insurance for CY 2026: 8.7 percent.

Percent of individuals without insurance for FY 2026: (0.25 times 0.077) + (0.75 times 0.087) = 8.5 percent.

FY 2026's proposed Factor 2 is calculated as 1 minus the percent change in the percent of individuals without insurance between CY 2013 and FY 2026.

Proposed Factor 2 is as follows: 1-[verbar]((0.14-0.085)/ 0.14)[verbar]= 1-0.3929 = 0.6071.

We proposed that Factor 2 for FY 2026 would be 60.71 percent.

The proposed FY 2026 uncompensated care amount was equivalent to proposed Factor 1 multiplied by proposed Factor 2, which was $ 7,190,037,075.

We invited public comments on our proposed Factor 2 for FY 2026.

Comment: Several commenters expressed their support for CMS' proposed increase in Factor 2 and Medicare DSH uncompensated care payments. Most commenters that discussed Factor 2 expressed their concern that CMS has an underestimate of the uninsured rate for FY 2026. Commenters noted that the proposed Factor 2 amount does not account for several finalized and proposed policy changes that could dramatically increase the uninsured rates in FY 2026. These commenters referenced the expiration of the American Rescue Plan's Marketplace enhanced premium tax credits, the unwinding of the Medicaid continuous coverage protections, pending or proposed federal policy changes that may restrict Medicaid and marketplace insurance access, and reconciliation bills and tax changes (that is, the One Big Beautiful Bill Act) that could increase the uninsured population in FY 2026.

Many commenters also referenced data sources and analyses estimating the impact of proposed federal legislation on the FY 2026 uninsured rate. Several commenters cited the Congressional Budget Office's (CBO) projections, which estimated that the number of uninsured individuals will increase by 2.2 million in 2026, 3.7 million in 2027, and 3.8 million on average each year from 2026 to 2034 due to the expiration of the enhanced premium tax credits. Other commenters cited the CBO's projection that 16 million individuals will lose their health insurance by 2034, and of these, almost 11 million will become uninsured due to the One Big Beautiful Bill Act (as referred to by commenters, which became Pub. L. 119-21), with the other 5 million losing their insurance due to the expired enhanced premium tax credits. A few commenters referenced a memorandum issued by the White House Council of Economic Advisers, which projected an increase of 9.2 million in the uninsured population if the proposed reconciliation budget bill does not pass by the end of Summer 2025. A commenter stated that 35 percent of enrollees in Louisiana were disenrolled from Medicaid between 2023 and 2024 according to a Kaiser Family Foundation analysis. Accordingly, these commenters requested that CMS increase Factor 2 to reflect the anticipated increase in the FY 2026 uninsured population. A commenter requested that CMS use administrative discretion to adjust Factor 2 upward in the final rule, stating that the current NHEA projections were certified before the introduction of recent legislative and regulatory proposals that could significantly reshape the insurance coverage landscape. Another commenter requested that CMS commit to recalculate the total DSH uncompensated payments for FY 2026 once the fate of the reconciliation bill is known.

Citing CMS' statement in the proposed rule that the agency could consider more recent data that may become available for the calculation of Factor 2 in FY 2026, many commenters urged CMS to use more recent and accurate data sources to account for the anticipated increase in the uninsured rate. Some of these commenters urged CMS to consider utilizing alternative data sources and calculations, such as real-world data from interested parties and researchers, to ensure that the Factor 2 estimate appropriately reflects the current coverage landscape and accurately estimates uninsured projections. A few commenters stated that the current Factor 2 methodology may have been appropriate during periods of stable insurance coverage but may no longer be adequate given recent and anticipated policy-driven shifts in the uninsured rate. As such, these commenters urged CMS to re-evaluate the current data sources and methodologies used to estimate Factor 2. Given that OACT updates its projected enrollment and spending trends for the coming 10-year period, including the estimated uninsured rate for the upcoming fiscal year, using NHEA data annually between the proposed and final IPPS/LTCH rules, a few commenters requested that CMS update the proposed rule's estimate of the uninsurance rate for the upcoming fiscal year earlier in the rulemaking cycle issue an earlier update to enhance the reliability of the proposed rule in projecting changes to uncompensated care payments for upcoming fiscal years.

Response: We thank the commenters for their input and diligence regarding the estimate of Factor 2 included in the proposed rule. In response to comments concerning the NHEA data source used for calculating Factor 2 for FY 2026, we refer readers to the FY 2018 IPPS/ LTCH PPS final rule (82 FR 38197 and 38198) for a complete discussion of the NHEA and why we determined, and continue to believe, that it is the data source for the rate of uninsurance that, on balance, best meet all of our considerations for ensuring that the data source meets the statutory requirement that the estimate

be based on data from the Census Bureau or other sources the Secretary determines appropriate. We continue to believe that the NHEA will provide reasonable estimates for the rate of uninsurance that are available in conjunction with the IPPS rulemaking cycle.

In the FY 2026 IPPS/LTCH PPS proposed rule, we explained that we used the most recent available estimates from the NHEA at that time (that were released in June 2024), and we refer readers to the relevant discussion in the proposed rule and OACT's memorandum on “Certification of Rates of Uninsured” prepared for the proposed rule for further details on the methodology and assumptions used in the proposed rule's calculation of the projected uninsured rate. In brief, we indicated that our projection of the rates of uninsurance for CY 2025 and CY 2026 were from the latest NHEA historical data available and accounted for expected changes in enrollment across all categories of insurance coverage. We note, in particular, that OACT's estimates in the proposed rule considered the expiration of the American Rescue Plan's Marketplace enhanced premium tax credits and the latest Medicaid projections publicly available at that time.

In response to commenters who requested that we update the Factor 2 estimates in the FY 2026 IPPS/LTCH PPS proposed rule to account for any anticipated changes in the uninsured rate using more recent or alternative data sources, in the proposed rule, we stated we may consider the use of more recent data that may become available for purposes of estimating the rates of uninsurance used in the calculation of the final Factor 2 for FY 2026. In this final rule, we are using the most recent NHEA estimates for the rate of uninsurance, which became available on June 25, 2025 and account for all updates to the CY 2025 and CY 2026 uninsured rate, and reflect current law and administrative actions as of March 25, 2025, including the legislative impacts of the expiration of the American Rescue Plan's Marketplace enhanced premium tax credits. At this stage of the FY 2026 IPPS/LTCH PPS final rule development, there is not an available estimate of the impact of Public Law 119-21 on the uninsured rate, and there is a wide range of uncertainty associated with the demographic, economic and programmatic outcomes. Consistent with prior final IPPS/LTCH PPS rulemakings (see, for example, 89 FR 68986), we are using the updated NHEA data for the final Factor 2 calculation because we believe that it is the most appropriate measure of changes in the rate of uninsurance.

Regarding the comments requesting that CMS update the Factor 2 methodology and data sources and increase Factor 2 we continue to believe that estimating Factor 2 based on the best available data is appropriate and consistent with the requirements of Section 1886(r)(2)(B)(ii) of the Act.

Regarding the comments requesting that CMS issue an earlier update of the uninsured rate for the upcoming FY during each annual rulemaking cycle, we note that we use the most recent NHEA projections available at the time of developing the proposed and final rules.

Comment: Several commenters urged CMS to be transparent in the calculation of Factor 2 and how it accounts for the current coverage landscape, while others urged CMS to be transparent regarding the data sources used for calculating Factor 2 and the assumptions behind the uninsured rate. One commenter asserted that the proposed rule did not provide sufficient details nor an explanation of the treatment of Medicaid expansions in the calculation for Factor 2. A few commenters requested that CMS publish a detailed methodology on the calculation of Factor 2 and how the NHEA projections are incorporated into the estimate.

Response: In response to the comments concerning transparency, we note that OACT's updated memorandum “Certification of Rates of Uninsured” contains additional background describing the methods used to derive the FY 2026 rate of uninsured for this final rule. Section 1886(r)(2)(B)(ii) of the Act permits us to use a data source other than CBO estimates to determine the percent change in the rate of uninsurance beginning in FY 2018. As explained elsewhere in this section of this final rule, the NHEA data and methodology that were used to estimate Factor 2 for this final rule are transparent and best meet all our considerations for ensuring reasonable estimates for the rate of uninsurance that are available in conjunction with the IPPS rulemaking cycle, and we have concluded it is appropriate to update the projection of the FY 2026 rate of uninsurance using the most recent NHEA data. For additional information on the projection of the uninsured rate, see the projection's methodology documentation. (Available on the CMS website at: https://www.cms.gov/research-statistics-data-and-systems/statistics-trends-and-reports/nationalhealthexpenddata/downloads/projectionsmethodology.pdf).

After consideration of the public comments we received, we are updating the calculation of Factor 2 for FY 2026 to incorporate the most recent NHEA data. The final estimates of the percentage of uninsured individuals have been certified by the Chief Actuary of CMS.

The calculation of the final Factor 2 for FY 2026 using a weighted average of OACT's updated projections for CY 2025 and CY 2026 is as follows:

Percent of individuals without insurance for CY 2013: 14.0 percent

Percent of individuals without insurance for CY 2025: 7.9 percent

Percent of individuals without insurance for CY 2026: 9.0 percent

Percent of individuals without insurance for FY 2026: (0.25 times 7.9) + (0.75 times 9.0) = 8.7 percent

Factor 2: 1-[verbar]((0.087-0.14)/0.14)[verbar] = 1-0.3786 = 0.6214 (62.14 percent)

Therefore, the final Factor 2 for FY 2026 is 62.14 percent. The final FY 2026 uncompensated care amount is $12,412,500,000 * 0.6214 = $ 7,713,127,500. 3. Calculation of Factor 3 for FY 2026 a. General Background

Section 1886(r)(2)(C) of the Act defines Factor 3 in the calculation of the uncompensated care payment. As we have discussed earlier, section 1886(r)(2)(C) of the Act states that Factor 3 is equal to the percent, for each subsection (d) hospital, that represents the quotient of: (1) the amount of uncompensated care for such hospital for a period selected by the Secretary (as estimated by the Secretary, based on appropriate data (including, in the case where the Secretary determines alternative data are available that are a better proxy for the costs of subsection (d) hospitals for treating the uninsured, the use of such alternative data)); and (2) the aggregate amount of uncompensated care for all subsection (d) hospitals that receive a payment under section 1886(r) of the Act for such period (as so estimated, based on such data).

Therefore, Factor 3 is a hospital-specific value that expresses the proportion of the estimated uncompensated care amount for each subsection (d) hospital and each subsection (d) Puerto Rico hospital with the potential to receive Medicare DSH payments relative to the estimated uncompensated care amount for all hospitals estimated to receive Medicare DSH payments in the fiscal year for which the uncompensated care payment

is to be made. Factor 3 is applied to the product of Factor 1 and Factor 2 to determine the amount of the uncompensated care payment that each eligible hospital will receive for FY 2014 and subsequent fiscal years. In order to implement the statutory requirements for this factor of the uncompensated care payment formula, it was necessary for us to determine: (1) the definition of uncompensated care or, in other words, the specific items that are to be included in the numerator (that is, the estimated uncompensated care amount for an individual hospital) and the denominator (that is, the estimated uncompensated care amount for all hospitals estimated to receive Medicare DSH payments in the applicable fiscal year); (2) the data source(s) for the estimated uncompensated care amount; and (3) the timing and manner of computing the quotient for each hospital estimated to receive Medicare DSH payments. The statute instructs the Secretary to estimate the amounts of uncompensated care for a period based on appropriate data. In addition, we note that the statute permits the Secretary to use alternative data in the case where the Secretary determines that such alternative data are available that are a better proxy for the costs of subsection (d) hospitals for treating individuals who are uninsured. For a discussion of the methodology, we used to calculate Factor 3 for fiscal years 2014 through 2022, we refer readers to the FY 2024 IPPS/ LTCH final rule (88 FR 59001 and 59002). b. Background on the Methodology Used To Calculate Factor 3 for FY 2024 and Subsequent Years

Section 1886(r)(2)(C) of the Act governs the selection of the data to be used in calculating Factor 3 and allows the Secretary the discretion to determine the time periods from which we will derive the data to estimate the numerator and the denominator of the Factor 3 quotient. Specifically, section 1886(r)(2)(C)(i) of the Act defines the numerator of the quotient as the amount of uncompensated care for a subsection (d) hospital for a period selected by the Secretary. Section 1886(r)(2)(C)(ii) of the Act defines the denominator as the aggregate amount of uncompensated care for all subsection (d) hospitals that receive a payment under section 1886(r) of the Act for such period. In the FY 2014 IPPS/LTCH PPS final rule (78 FR 50634 through 50647), we adopted a process of making interim payments with final cost report settlement for both the empirically justified Medicare DSH payments and the uncompensated care payments required by section 3133 of the Affordable Care Act. Consistent with that process, we also determined the time period from which to calculate the numerator and denominator of the Factor 3 quotient in a way that would be consistent with making interim and final payments. Specifically, we must have Factor 3 values available for hospitals that we estimate will qualify for Medicare DSH payments for a fiscal year and for those hospitals that we do not estimate will qualify for Medicare DSH payments for that fiscal year but that may ultimately qualify for Medicare DSH payments for that fiscal year at the time of cost report settlement.

As described in the FY 2022 IPPS/LTCH PPS final rule, commenters expressed concerns that the use of only 1 year of data to determine Factor 3 would lead to significant variations in year-to-year uncompensated care payments. Some stakeholders recommended the use of 2 years of historical data from Worksheet S-10 data of the Medicare cost report (86 FR 45237). In the FY 2022 IPPS/LTCH PPS final rule, we stated that we would consider using multiple years of data when the vast majority of providers had been audited for more than 1 fiscal year under the revised reporting instructions. Audited FY 2020 cost reports were available for the development of the FY 2024 IPPS/LTCH PPS proposed and final rules. Feedback from previous audits and lessons learned were incorporated into the audit process for the FY 2020 reports.

In consideration of the comments discussed in the FY 2022 IPPS/LTCH PPS final rule, in the FY 2023 IPPS/LTCH PPS final rule (87 FR 49036 through 49047), we finalized a policy of using a multi-year average of audited Worksheet S-10 data to determine Factor 3 for FY 2023 and subsequent fiscal years. We explained our belief that this approach would be generally consistent with our past practice of using the most recent single year of audited data from the Worksheet S-10, while also addressing commenters' concerns regarding year-to-year fluctuations in uncompensated care payments. Under this policy, we used a 2-year average of audited FY 2018 and FY 2019 Worksheet S-10 data to calculate Factor 3 for FY 2023. We also indicated that we expected FY 2024 would be the first year that 3 years of audited data would be available at the time of rulemaking. For FY 2024 and subsequent fiscal years, we finalized a policy of using a 3-year average of the uncompensated care data from the 3 most recent fiscal years for which audited data are available to determine Factor 3. Consistent with the approach that we followed when multiple years of data were previously used in the Factor 3 methodology, if a hospital does not have data for all 3 years used in the Factor 3 calculation, we will determine Factor 3 based on an average of the hospital's available data. For IHS and Tribal hospitals and Puerto Rico hospitals, we use the same multi-year average of Worksheet S-10 data to determine Factor 3 for FY 2024 and subsequent fiscal years as is used to determine Factor 3 for all other DSH- eligible hospitals (in other words, hospitals eligible to receive empirically justified Medicare DSH payments for a fiscal year) to determine Factor 3.

In the FY 2023 IPPS/LTCH PPS final rule (87 FR 49033 through 49047), we also modified our policy regarding cost reports that start in one fiscal year and span the entirety of the following fiscal year. Specifically, in the rare cases when we use a cost report that starts in one fiscal year and spans the entirety of the subsequent fiscal year to determine uncompensated care costs for the subsequent fiscal year, we would not use the same cost report to determine the hospital's uncompensated care costs for the earlier fiscal year. We explained that using the same cost report to determine uncompensated care costs for both fiscal years would not be consistent with our intent to smooth year-to-year variation in uncompensated care costs. As an alternative, we finalized our proposal to use the hospital's most recent prior cost report, if that cost report spans the applicable period.\156\

\156\ For example, in determining Factor 3 for FY 2023, we did not use the same cost report to determine a hospital's uncompensated care costs for both FY 2018 and FY 2019. Rather, we used the cost report that spanned the entirety of FY 2019 to determine uncompensated care costs for FY 2019 and used the hospital's most recent prior cost report to determine its uncompensated care costs for FY 2018, provided that cost report spanned some portion of FY 2018.

(1) Scaling Factor

In the FY 2025 IPPS/LTCH PPS final rule (89 FR 69323), we continued the policy finalized in the FY 2023 IPPS/LTCH PPS final rule (87 FR 49042) to address the effects of calculating Factor 3 using data from multiple fiscal years, in which we apply a scaling factor to the Factor 3 values calculated for all DSH-eligible hospitals so that total uncompensated care payments to hospitals that are projected to be DSH- eligible for a fiscal year will be consistent with the estimated amount available to make uncompensated care payments for that fiscal year. Pursuant to that policy, we divide 1 (the expected sum of all DSH- eligible hospitals' Factor

3 values) by the actual sum of all DSH-eligible hospitals' Factor 3 values and then multiply the quotient by the uncompensated care payment determined for each DSH-eligible hospital to obtain a scaled uncompensated care payment amount for each hospital. This process is designed to ensure that the sum of the scaled uncompensated care payments for all hospitals that are projected to be DSH-eligible is consistent with the estimate of the total amount available to make uncompensated care payments for the applicable fiscal year. (2) New Hospital Policy for Purposes of Factor 3

In the FY 2025 IPPS/LTCH PPS final rule (89 FR 69323), we continued our new hospital policy that was modified in the FY 2023 IPPS/LTCH PPS final rule (87 FR 49042) and initially adopted in the FY 2020 IPPS/LTCH PPS final rule (84 FR 42370 through 42371) to determine Factor 3 for new hospitals. Consistent with our policy of using multiple years of cost reports to determine Factor 3, we defined new hospitals as hospitals that do not have cost report data for the most recent year of data being used in the Factor 3 calculation. Under this definition, the cut-off date for the new hospital policy is the beginning of the fiscal year after the most recent year for which audits of the Worksheet S-10 data have been conducted. For FY 2026, the FY 2022 cost reports are the most recent year of cost reports for which audits of Worksheet S-10 data have been conducted. Thus, hospitals with CMS Certification Numbers (CCNs) established on or after October 1, 2022, would be subject to the new hospital policy for FY 2026.

Under our modified new hospital policy, if a new hospital has a preliminary projection of being DSH-eligible based on its most recent available disproportionate patient percentage, it may receive interim empirically justified DSH payments. However, new hospitals will not receive interim uncompensated care payments because we would have no uncompensated care data on which to determine what those interim payments should be. The MAC will make a final determination concerning whether the hospital is eligible to receive Medicare DSH payments at cost report settlement. In FY 2025, while we continued to determine the numerator of the Factor 3 calculation using the new hospital's uncompensated care costs reported on Worksheet S-10 of the hospital's cost report for the current fiscal year, we determined Factor 3 for new hospitals using a denominator based solely on uncompensated care costs from cost reports for the most recent fiscal year for which audits have been conducted. In addition, we applied a scaling factor to the Factor 3 calculation for a new hospital.\157\

\157\ In the FY 2023 IPPS/LTCH PPS final rule (87 FR 49042), we explained our belief that applying the scaling factor is appropriate for purposes of calculating Factor 3 for all hospitals, including new hospitals and hospitals that are treated as new hospitals, to improve consistency and predictability across all hospitals.

(3) Newly Merged Hospital Policy

In the FY 2025 IPPS/LTCH PPS final rule (89 FR 690323 through 690324), we continued our policy of treating hospitals that merge after the development of the final rule for the applicable fiscal year similar to new hospitals. As explained in the FY 2015 IPPS/LTCH PPS final rule (79 FR 50021), for these newly merged hospitals, we do not have data currently available to calculate a Factor 3 amount that accounts for the merged hospital's uncompensated care burden. In the FY 2015 IPPS/LTCH PPS final rule (79 FR 50021 and 50022), we finalized a policy under which Factor 3 for hospitals that we do not identify as undergoing a merger until after the public comment period and additional review period following the publication of the final rule or that undergo a merger during the fiscal year will be recalculated similar to new hospitals.

Consistent with the policy adopted in the FY 2015 IPPS/LTCH PPS final rule, in the FY 2025 IPPS/LTCH PPS final rule (89 FR 690323 through 690324), we stated that we would continue to treat newly merged hospitals in a similar manner to new hospitals, such that the newly merged hospital's final uncompensated care payment will be determined at cost report settlement where the numerator of the newly merged hospital's Factor 3 will be based on the cost report of only the surviving hospital (that is, the newly merged hospital's cost report) for the current fiscal year. However, if the hospital's cost reporting period includes less than 12 months of data, the data from the newly merged hospital's cost report will be annualized for purposes of the Factor 3 calculation. Consistent with the methodology used to determine Factor 3 for new hospitals described in section IV.E.3. of the preamble of this final rule, we continued our policy for determining Factor 3 for newly merged hospitals using a denominator that is the sum of the uncompensated care costs for all DSH-eligible hospitals, as reported on Worksheet S-10 of their cost reports for the most recent fiscal year for which audits have been conducted. In addition, we apply a scaling factor, as discussed in section IV.E.3. of the preamble of this final rule, to the Factor 3 calculation for a newly merged hospital. In the FY 2025 IPPS/LTCH PPS final rule, we explained that consistent with past policy, interim uncompensated care payments for the newly merged hospital would be based only on the data for the surviving hospital's CCN available at the time of the development of the final rule.

We received comments on the newly merged hospital policy.

Comment: A few commenters expressed support for the new hospital and newly merged hospital policies currently in place.

Response: We appreciate the continued support of our policies for new and newly merged hospitals. (4) CCR Trim Methodology

The calculation of a hospital's total uncompensated care costs on Worksheet S-10 requires the use of the hospital's cost to charge ratio (CCR). In the FY 2025 IPPS/LTCH PPS final rule (89 FR 69324), we continued the policy of trimming CCRs, which we adopted in the FY 2023 IPPS/LTCH PPS final rule (87 FR 49043), for FY 2025. Under this policy, we apply the following steps to determine the applicable CCR separately for each fiscal year that is included as part of the multi-year average used to determine Factor 3:

Step 1: Remove Maryland hospitals. In addition, we will remove all- inclusive rate providers because their CCRs are not comparable to the CCRs calculated for other IPPS hospitals.

Step 2: Calculate a CCR “ceiling” for the applicable fiscal year with the following data: for each IPPS hospital that was not removed in Step 1 (including hospitals that are not DSH-eligible), we use cost report data to calculate a CCR by dividing the total costs on Worksheet C, Part I, Line 202, Column 3 by the charges reported on Worksheet C, Part I, Line 202, Column 8. (Combining data from multiple cost reports from the same fiscal year is not necessary, as the longer cost report will be selected.) The ceiling is calculated as 3 standard deviations above the national geometric mean CCR for the applicable fiscal year. This approach is consistent with the methodology for calculating the CCR ceiling used for high-cost outliers. Remove all hospitals that exceed the ceiling so that these aberrant CCRs do not skew the calculation of the statewide average CCR.

Step 3: Using the CCRs for the remaining hospitals in Step 2,

determine the urban and rural statewide average CCRs for the applicable fiscal year for hospitals within each State (including hospitals that are not DSH-eligible), weighted by the sum of total hospital discharges from Worksheet S-3, Part I, Line 14, Column 15.

Step 4: Assign the appropriate statewide average CCR (urban or rural) calculated in Step 3 to all hospitals, excluding all-inclusive rate providers, with a CCR for the applicable fiscal year greater than 3 standard deviations above the national geometric mean for that fiscal year (that is, the CCR “ceiling”).

Step 5: For hospitals that did not report a CCR on Worksheet S-10, Line 1, we assign them the statewide average CCR for the applicable fiscal year as determined in step 3.

After completing these steps, we re-calculate the hospital's uncompensated care costs (Line 30) for the applicable fiscal year using the trimmed CCR (the statewide average CCR (urban or rural, as applicable)). (5) Uncompensated Care Data Trim Methodology

After applying the CCR trim methodology, there are rare situations where a hospital has potentially aberrant uncompensated care data for a fiscal year that are unrelated to its CCR. Therefore, under the trim methodology for potentially aberrant uncompensated care costs (UCC) that was included as part of the methodology for purposes of determining Factor 3 in the FY 2021 IPPS/LTCH PPS final rule (85 FR 58832), if the hospital's uncompensated care costs for any fiscal year that is included as a part of the multi-year average are an extremely high ratio (greater than 50 percent) of its total operating costs in the applicable fiscal year, we will determine the ratio of uncompensated care costs to the hospital's total operating costs from another available cost report, and apply that ratio to the total operating expenses for the potentially aberrant fiscal year to determine an adjusted amount of uncompensated care costs for the applicable fiscal year.\158\

\158\ For example, if a hospital's FY 2018 cost report is determined to include potentially aberrant data, data from its FY 2019 cost report would be used for the ratio calculation.

However, we note that we have audited the Worksheet S-10 data that will be used in the Factor 3 calculation for a number of hospitals. Because the UCC data for these hospitals have been subject to audit, we believe that there is increased confidence that if high uncompensated care costs are reported by these audited hospitals, the information is accurate. Therefore, as we explained in the FY 2021 IPPS/LTCH PPS final rule (85 FR 58832), we determined it is unnecessary to apply the UCC trim methodology for a fiscal year for which a hospital's UCC data have been audited.

In rare cases, hospitals that are not currently projected to be DSH-eligible and that do not have audited Worksheet S-10 data may have a potentially aberrant amount of insured patients' charity care costs (line 23 column 2). In the FY 2025 IPPS/LTCH PPS final rule (89 FR 69324 through 69325), we stated that in addition to the UCC trim methodology, we will continue to apply an alternative trim specific to certain hospitals that do not have audited Worksheet S-10 data for one or more of the fiscal years that are used in the Factor 3 calculation. For FY 2023 and subsequent fiscal years, in the rare case that a hospital's insured patients' charity care costs for a fiscal year are greater than $7 million and the ratio of the hospital's cost of insured patient charity care (line 23 column 2) to total uncompensated care costs (line 30) is greater than 60 percent, we will not calculate a Factor 3 for the hospital at the time of proposed or final rulemaking. This trim will only impact hospitals that are not currently projected to be DSH-eligible; and therefore, are not part of the calculation of the denominator of Factor 3, which includes only uncompensated care costs for hospitals projected to be DSH-eligible. Consistent with the approach adopted in the FY 2022 IPPS/LTCH PPS final rule, if a hospital would be trimmed under both the UCC trim methodology and this alternative trim, we will apply this trim in place of the existing UCC trim methodology. We continue to believe this alternative trim more appropriately addresses potentially aberrant insured patient charity care costs compared to the UCC trim methodology, because the UCC trim is based solely on the ratio of total uncompensated care costs to total operating costs and does not consider the level of insured patients' charity care costs.

Similar to the approach initially adopted in the FY 2022 IPPS/LTCH PPS final rule (86 FR 45245 and 45246), in the FY 2025 IPPS/LTCH PPS final rule (89 FR 69324), we also stated that we would continue to use a threshold of 3 standard deviations from the mean ratio of insured patients' charity care costs to total uncompensated care costs (line 23 column 2 divided by line 30) and a dollar threshold that is the median total uncompensated care cost reported on most recent audited cost reports for hospitals that are projected to be DSH-eligible. We stated that we continued to believe these thresholds are appropriate to address potentially aberrant data. We also continued to include Worksheet S-10 data from IHS/Tribal hospitals and Puerto Rico hospitals consistent with our policy finalized in the FY 2023 IPPS/LTCH PPS final rule (87 FR 49047 through 49051). In addition, we continued our policy adopted in the FY 2023 IPPS/LTCH PPS final rule (87 FR 49044) of applying the same threshold amounts originally calculated for the FY 2019 reports to identify potentially aberrant data for FY 2025 and subsequent fiscal years to facilitate transparency and predictability. If a hospital subject to this trim is determined to be DSH-eligible at cost report settlement, the MAC will calculate the hospital's Factor 3 using the same methodology used to calculate Factor 3 for new hospitals. c. Methodology for Calculating Factor 3 for FY 2026

For FY 2026, consistent with Sec. 412.106(g)(1)(iii)(C)(11), we are following the same methodology as applied in FY 2024 and described in the previous section of the preamble of this final rule to determine Factor 3 using the most recent 3 years of audited cost reports, from FY 2020, FY 2021, and FY 2022. Consistent with our approach for FY 2025, for FY 2026, we are also applying the scaling factor, new hospital, newly merged hospital, CCR trim methodology, UCC trim, and alternative trim methodology policies discussed in the previous section of the preamble of this final rule. For purposes of the FY 2026 IPPS/LTCH PPS proposed rule, we used reports from the December 2024 HCRIS extract to calculate Factor 3. In the proposed rule, we noted that we intended to use the March 2025 update of HCRIS to calculate the final Factor 3 for the FY 2026 IPPS/LTCH PPS final rule.

Thus, for FY 2026, we will use 3 years of audited Worksheet S-10 Part 1 data to calculate Factor 3 for all eligible hospitals, including IHS and Tribal hospitals and Puerto Rico hospitals that have a cost report for 2013, following steps. We note that we are clarifying in these steps our use of Worksheet S-10, Part I, rather than Worksheet S- 10, Part II, to calculate Factor 3.

Step 1: Select the hospital's longest cost report for each of the most recent 3 years of fiscal year (FY) audited cost reports (FY 2020, FY 2021, and FY 2022). Alternatively, in the rare case when the hospital has no cost report for a particular year because the cost report for the previous fiscal year spanned the

more recent fiscal year, the previous fiscal year cost report will be used in this step. In the rare case that using a previous fiscal year cost report results in a period without a report, we would use the prior year report, if that cost report spanned the applicable period.\159\ In general, we note that, for purposes of the Factor 3 methodology, references to a fiscal year cost report are to the cost report that spans the relevant fiscal year.

\159\ For example, if a hospital does not have a FY 2020 cost report because the hospital's FY 2019 cost report spanned the FY 2020 time period, we will use the FY 2019 cost report that spanned the FY 2020 time period for this step. Using the same example, where the hospital's FY 2019 report is used for the FY 2020 time period, we will use the hospital's FY 2018 report if it spans some of the FY 2019 time period. We will not use the same cost report for both the FY 2020 and the FY 2019 time periods.

Step 2: Annualize the UCC from Worksheet S-10, Part I, Line 30, if a cost report is more than or less than 12 months. (If applicable, use the statewide average CCR (urban or rural) to calculate uncompensated care costs.)

Step 3: Combine adjusted and/or annualized uncompensated care costs for hospitals that merged using the merger policy.

Step 4: Calculate Factor 3 for all DSH-eligible hospitals using annualized uncompensated care costs (Worksheet S-10, Part I, Line 30) based on cost report data from the most recent 3 years of audited cost reports (from Step 1, 2 or 3). New hospitals and other hospitals that are treated as if they are new hospitals for purposes of Factor 3 are excluded from this calculation.

Step 5: Average the Factor 3 values from Step 4; that is, add the Factor 3 values, and divide that amount by the number of cost reporting periods with data to compute an average Factor 3 for the hospital. Multiply by a scaling factor, as discussed in the previous section of the preamble of this final rule.

We received comments regarding the Factor 3 calculation, including Worksheet S-10 cost report audits and uncompensated care cost report instructions.

Comment: Several commenters expressed their support for CMS' proposal to calculate Factor 3 for FY 2026 based on a three-year average of audited FY 2020, FY 2021, and FY 2022 Worksheet S-10 data. Supporters of this proposal specified that the use of a multi-year average of Worksheet S-10 data significantly reduces year-to-year volatility in uncompensated care payments.

Notably, no commenters expressed opposition to using a three-year average of Worksheet S-10 data to calculate uncompensated care payments.

Response: We are grateful to those commenters who expressed their support for our policy of using a three-year average of audited FY 2020, FY 2021, and FY 2022 Worksheet S-10 data to determine each hospital's share of uncompensated care costs in FY 2026. As explained in the FY 2026 IPPS/LTCH PPS proposed rule (90 FR 18002), we believe that using a multi-year average of Worksheet S-10 data will provide assurance that hospitals' uncompensated care payments remain stable and predictable, while mitigating unpredictable swings and anomalies in a hospital's uncompensated care costs.

Comment: A commenter urged CMS to monitor trends in uncompensated care as reported on Worksheet S-10 during the COVID-19 Public Health Emergency (PHE). This commenter encouraged CMS to assess how disruptions in care during the COVID-19 PHE affected Factor 3 calculations and consider steps to dampen the effect of any large reductions in uncompensated care costs attributable to the PHE and ensure that the inclusion of FY 2020-2022 data does not reduce Factor 3 for essential hospitals.

Response: Regarding requests for CMS to monitor and account for the impact of the COVID-19 PHE on Worksheet S-10 cost report data, we will continue to monitor the impact of the PHE and will consider this issue further in future rulemaking, as appropriate. We refer readers to our responses to similar comments in the FY 2025 IPPS/LTCH PPS final rule (89 FR 69325-39326), and we note that we will continue to use the three-year average of the most recently audited cost report data for FY 2026 and subsequent years, consistent with the policy finalized in the FY 2023 IPPS/LTCH PPS final rule (87 FR 48780) and Sec. 412.106(g)(1)(iii)(C)(11).

Comment: A commenter expressed their support for the continued distribution of the uncompensated care payments based on each DSH hospital's share of total uncompensated care.

Response: We appreciate the support for our policies on the distribution of uncompensated care payments.

Comment: We received comments that were outside the scope of previously discussed methodological concepts concerning the blending of historical Worksheet S-10 data to calculate Factor 3. A commenter recommended that CMS distribute current DSH and uncompensated care payments using the Medicare Safety-Net Index (MSNI) framework outlined by the Medicare Payment Advisory Commission (MedPAC) in its 2024 Report to Congress. Another commenter urged CMS to explore additional policy levers to increase DSH and/or uncompensated care payments, such as temporarily directing supplemental funds--beyond empirically justified DSH payments and/or uncompensated care payments--to hospitals that serve the highest proportion of low-income patients.

Response: Regarding the commenters' suggestions unrelated to the previously discussed methodological concepts for the blending of historical Worksheet S-10 data to calculate Factor 3, we consider these public comments to be outside the scope of the proposed rule and are not addressing them in this final rule. However, we appreciate the commenters' input and note that we may consider these suggestions in future rulemaking, as appropriate.

Comment: Commenters reiterated comments from prior years suggesting modifications to the Worksheet S-10 audit process. Specifically, a commenter requested that CMS publicly disseminate comprehensive audit policy and protocols that must be employed by all auditors and MACs and disclose these through notice and comment rulemaking. The same commenter requested that CMS implement a workable appeal or review process to correct errors and inconsistent audit disallowances in a timely manner. Another commenter requested that CMS provide clear guidelines on its audit protocols and ensure Worksheet S-10 reviews impose minimal burden and are uniformly applied across all hospitals. The commenter urged CMS to disclose the criteria it uses to identify hospitals for audits and ensure audits are conducted consistently and equitably. Lastly, a commenter encouraged CMS to continuously take steps to improve Worksheet S-10 data auditing accuracy.

Response: We thank commenters for their feedback on the audits of the Worksheet S-10 data and their recommendations for future audits, which we will take into consideration for future rulemaking. We note that as we have stated in previous rulemakings in response to comments regarding audit protocols (see, for example, 88 FR 58640), audit protocols are provided to MACs in advance of the audit to ensure consistency and timeliness in the audit process.

Regarding the request to make public the audit policies and protocols, as we previously explained most recently in the FY 2024 IPPS/LTCH PPS final rule (88 FR 58640), we do not make our protocols public as CMS desk review and audit protocols are confidential and are for CMS and MAC use only. In addition, there is no requirement under either the Administrative Procedure Act

or the Medicare statute that CMS adopt audit policies or protocols through notice and comment rulemaking. Finally, as noted in the FY 2024 IPPS/LTCH PPS final rule (88 FR 58640), to most efficiently and appropriately utilize our limited audit resources, we do not plan to introduce an audit appeal process at this time.

Comment: Commenters thanked CMS for recent revisions to the Worksheet S-10 audit protocols but expressed concern about recent changes that require more detailed information. A commenter expressed concerns regarding cost report exhibits and the Worksheet S-10 audits, in particular the commenter stated that they should not have to put unnecessary effort into exhibits if the MAC asks for different information during the Worksheet S-10 audits. Another commenter requested clarification on how the exhibits will be utilized. The commenter requested that CMS consider making some fields as optional rather than mandatory to reduce administrative burden.

Response: Regarding commenters' concerns about cost report instructions, we note that to ensure the accuracy and integrity of the cost reports, all hospitals are required to maintain documentation for the Worksheet S-10, such as exhibits and Exhibits 3B and 3C (PRM 15-2, 4012.2) in particular. Regarding commenters' concerns about exhibits, we refer commenters to the “Justification” section of the Paperwork Reduction Act (PRA) revision request and approval of the existing information collection requirement (ICR) for cost reports (OMB control number 0938-0050 with an expiration date September 30, 2025).

Comment: Regarding Worksheet S-10 instructions and guidance, a commenter requested that CMS clarify inconsistent Worksheet S-10 instructions on line 29 so that non-Medicare bad debt is not multiplied by the CCR. The commenter stated that while CMS' revised cost report instructions indicate that non-reimbursed Medicare bad debt is not multiplied by the CCR, CMS' September 2017 transmittal \160\ states that non-Medicare bad debt should be multiplied by the CCR.

\160\ https://www.cms.gov/regulations-and-guidance/guidance/transmittals/2017downloads/r11p240.pdf.

Response: We appreciate the commenter's concern regarding the need for clarification of the Worksheet S-10 instructions and refer the commenter to our response to a substantially similar comment in the FY 2025 IPPS/LTCH PPS final rule (89 FR 69327).

Comment: Some commenters reiterated concerns previously raised in response to the FY 2025 IPPS/LTCH PPS proposed rule (89 FR 35934), proposing technical revisions to how CMS defines and calculates uncompensated care costs on Worksheet S-10. They recommended that CMS include all patient care costs, such as costs related to training medical residents, supporting physician and professional services, and paying provider taxes associated with Medicaid revenue, when converting costs to charges. These commenters suggested specific revisions to Worksheet S-10 to incorporate all patient care costs, such as utilizing the total of worksheet A, column 3, lines 1 through 117 (reduced by the amount on worksheet A-8, line 10) as the cost component and worksheet C, column 8, line 200, as the charge component. Additionally, some of these commenters requested that CMS include Graduate Medical Education (GME) costs when calculating a hospital's CCR.

The same commenters further urged CMS to treat the unreimbursed portion of state or local indigent care programs as charity care and revise Worksheet S-10 such that data on Medicaid shortfalls resembles actual shortfalls incurred by hospitals. Specifically, they requested that hospitals be allowed to reduce their Medicaid revenue reported on Worksheet S-10 by the amount of any contributions to the nonfederal share of Medicaid funding, whether through provider taxes, intergovernmental transfers (IGTs), or certified public expenditures (CPEs).

Response: We appreciate commenters' suggestions for revisions and/ or modifications to Worksheet S-10. We will consider the modifications as necessary to further improve and refine the information that is reported on Worksheet S-10 to support the collection of information regarding uncompensated care costs.

Regarding the request to include costs for teaching and providing physician and other professional services, including GME costs, when calculating the CCR, as stated in past final rules (see, for example, 85 FR 58826, 86 FR 44774, and 89 FR 68986), we continue to believe that it is not appropriate to modify the calculation of the CCR on Line 1 of Worksheet S-10 to include any additional costs in the numerator of the CCR calculation. We refer readers to those prior rules for further discussion on this issue.

With regard to the comments requesting that payment shortfalls from Medicaid and state and local indigent care programs be included in uncompensated care cost calculations, we have consistently explained in past final rules (85 FR 58826, 86 FR 44774, and 89 FR 68986) in response to similar comments that we believe there are compelling arguments for excluding such shortfalls from the definition of uncompensated care. We refer readers to those prior rules for further discussion on this issue.

As we explained previously in this section, for FY 2026, we are also applying the scaling factor, new hospital, newly merged hospital, CCR trim methodology, UCC trim, and alternative trim methodology policies discussed in the previous section of the preamble of this final rule. For a hospital that is subject to either of the trims for potentially aberrant data (the UCC trim and alternative trim methodology explained in the previous section of the preamble of this final rule) and is ultimately determined to be DSH-eligible at cost report settlement, its uncompensated care payment will be calculated only after the hospital's reporting of insured charity care costs on its FY 2026 Worksheet S-10 has been reviewed. Accordingly, the MAC will calculate a Factor 3 for the hospital only after reviewing the uncompensated care information reported on Worksheet S-10 of the hospital's FY 2026 cost report. Then we will calculate Factor 3 for the hospital using the same methodology used to determine Factor 3 for new hospitals. Specifically, the numerator will reflect the uncompensated care costs reported on the hospital's FY 2026 cost report, while the denominator will reflect the sum of the uncompensated care costs reported on Worksheet S-10 of the FY 2022 cost reports of all DSH- eligible hospitals. In addition, we will apply a scaling factor, as discussed previously, to the Factor 3 calculation for the hospital.

Under the CCR trim methodology, for purposes of the FY 2026 IPPS/ LTCH proposed rule and this final rule, the statewide average CCR was applied to 8 hospitals' FY 2020 reports, of which 2 hospitals had FY 2020 Worksheet S-10 data. The statewide average CCR was applied to 10 hospitals' FY 2021 reports, of which 4 hospitals had FY 2021 Worksheet S-10 data. The statewide average CCR was applied to 8 hospitals' FY 2022 reports, of which 2 hospitals had FY 2022 Worksheet S-10 data.

We received comments on the trim methodology.

Comment: A commenter expressed their support for CMS' CCR trim and UCC methodologies to address unusual and atypical data.

Response: We appreciate the support for our policies on the CCR trim

methodology and the UCC trim methodology.

For purposes of this FY 2026 IPPS/LTCH PPS final rule, consistent with our Factor 3 methodology since the FY 2014 IPPS/LTCH PPS final rule (78 FR 50642), we intend to use data from the March 2025 HCRIS extract for this calculation, which would be the latest quarterly HCRIS extract that is publicly available at the time of the development of this FY 2026 IPPS/LTCH PPS final rule.

Regarding requests from providers to amend and/or reopen previously audited Worksheet S-10 data for the most recent 3 cost reporting years that are used in the methodology for calculating Factor 3, in the proposed rule, we noted that MACs follow normal timelines and procedures. For purposes of the Factor 3 calculation for the FY 2026 IPPS/LTCH PPS final rule, any amended reports and/or reopened reports would need to have completed the amended report and/or reopened report submission processes by the end of March 2025. In other words, if the amended report and/or reopened report is not available for the March HCRIS extract, then that amended and/or reopened report data would not be part of the FY 2026 IPPS/LTCH PPS final rule's Factor 3 calculation. We also noted in the proposed rule that the March HCRIS data extract would be available during the comment period for the proposed rule if providers wanted to verify that their amended and/or reopened data is reflected in the March HCRIS extract. d. Per-Discharge Amount of Interim Uncompensated Care Payments for FY 2026

Since FY 2014, we have made interim uncompensated care payments during the fiscal year on a per-discharge basis. Typically, we use a 3- year average of the number of discharges for a hospital to produce an estimate of the amount of the hospital's uncompensated care payment per discharge. Specifically, the hospital's total uncompensated care payment amount for the applicable fiscal year is divided by the hospital's historical 3-year average of discharges computed using the most recent available data to determine the uncompensated care payment per discharge for that fiscal year.

As discussed in the FY 2025 IPPS/LTCH PPS final rule (89 FR 69328- 69329), we finalized a policy to use a 3-year average of the most recent years of available historical discharge data to calculate a per- discharge payment amount that would be used to make interim uncompensated care payments to each projected DSH-eligible hospital during FY 2026 and subsequent fiscal years, codified at 42 CFR 412.106(i)(1). We are applying this policy for FY 2026. Interim uncompensated care payments made to a hospital during the fiscal year are reconciled following the end of the year to ensure that the final payment amount is consistent with the hospital's prospectively determined uncompensated care payment for the fiscal year.

We received comments on the proposed per discharge payment amount used to make interim uncompensated care payments.

Comment: A commenter raised their concern that CMS has understated the per-discharge amount of interim uncompensated care payments in the FY 2026 proposed rule, given the overestimation of discharges from past data years. This commenter also expressed opposition to using a three- year average for determining the discharge volume and requested that CMS project a reasonable estimation of discharges.

Response: We thank the commenter for their feedback. As discussed in the FY 2025 IPPS/LTCH PPS final rule (89 FR 68986), we believe using an average of the most recent three-years of available historical discharge data will appropriately reflect year-to-year variations in discharge volumes in FY 2026 and subsequent fiscal years, and this approach is consistent with 42 CFR 412.106(i)(1). We refer the commenter to that final rule for additional discussion on this subject. We also refer the commenter to our response in that rulemaking (89 FR 69329) to similar comments stating that CMS overestimated discharge volume in recent years. Consistent with 42 CFR 412.106(i)(1), we are finalizing our proposal as is and will calculate the per-discharge amount of uncompensated care payments based on a three-year average of discharge data.

As we explained in the FY 2025 IPPS/LTCH PPS final rule (89 FR 69329 through 69330), we also finalized a voluntary process in the FY 2021 IPPS/LTCH PPS final rule (85 FR 58833 and 58834), through which a hospital may submit a request to its MAC for a lower per-discharge interim uncompensated care payment amount, including a reduction to zero, once before the beginning of the fiscal year and/or once during the fiscal year. In conjunction with this request, the hospital must provide supporting documentation demonstrating that there would likely be a significant recoupment at cost report settlement if the per- discharge amount is not lowered (for example, recoupment of 10 percent or more of the hospital's total uncompensated care payment, or at least $100,000). For example, a hospital might submit documentation showing a large projected increase in discharges during the fiscal year to support reduction of its per-discharge uncompensated care payment amount. As another example, a hospital might request that its per- discharge uncompensated care payment amount be reduced to zero midyear if the hospital's interim uncompensated care payments during the year have already surpassed the total uncompensated care payment calculated for the hospital.

Under the policy we finalized in the FY 2021 IPPS/LTCH PPS final rule (85 FR 58833 through 58834), the hospital's MAC will evaluate these requests and the supporting documentation before the beginning of the fiscal year and/or with midyear requests when the historical average number of discharges is lower than the hospital's projected discharges for the current fiscal year. If, following review of the request and the supporting documentation, the MAC agrees that there likely would be significant recoupment of the hospital's interim Medicare uncompensated care payments at cost report settlement, the only change that will be made is to lower the per-discharge amount either to the amount requested by the hospital or another amount determined by the MAC to be appropriate to reduce the likelihood of a substantial recoupment at cost report settlement. If the MAC determines it would be appropriate to reduce the interim Medicare uncompensated care payment per-discharge amount, that updated amount will be used for purposes of the outlier payment calculation for the remainder of the fiscal year. We are continuing to apply this policy for FY 2026. We refer readers to the Addendum in the FY 2023 IPPS/LTCH final rule for a more detailed discussion of the steps for determining the operating and capital Federal payment rate and the outlier payment calculation (87 FR 49431 through 49432). No change would be made to the total uncompensated care payment amount determined for the hospital on the basis of its Factor 3. In other words, any change to the per-discharge uncompensated care payment amount will not change how the total uncompensated care payment amount will be reconciled at cost report settlement.

We received comments related to the uncompensated care payment reconciliation process.

Comment: Some commenters reiterated their recommendation that

CMS use the traditional payment reconciliation process to calculate final payments for uncompensated care costs pursuant to section 1886(r)(2) of the Act. These commenters did not object to CMS using prospective estimates, derived from the best data available, to calculate interim payments for uncompensated care costs. However, the commenters stated that interim payments should be subject to later reconciliation based on estimates derived from actual data from the federal fiscal year. The commenters also stated that CMS' current IPPS/ LTCH PPS rulemaking process is flawed because CMS may use data and calculations in final rules that were not included in the relevant proposed rules without providing advance notice to hospitals. The commenters claim that this limits the hospitals' ability to provide informed comments. These same commenters stated that CMS fails to provide meaningful explanations of its uncompensated care payment calculations and is in violation of the Administrative Procedure Act. These commenters recommended that CMS satisfy its legal obligation by providing hospitals with the opportunity to review and comment on the more recent data used to calculate Factors 1, 2, and 3 in each final rulemaking before the agency publishes the final rule.

Response: Consistent with the position that we have taken in past rulemaking, we continue to believe that applying our best estimates of the three factors used in the calculation of uncompensated care payments to determine payments prospectively is most conducive to administrative efficiency, finality, and predictability in payments (83 FR 41144; 84 FR 42044; 85 FR 58432; 86 FR 44774; 87 FR 48780; 88 FR 58640; and 89 FR 68986). We continue to believe that, in affording the Secretary the discretion of estimating the three factors used to determine uncompensated care payments and by including a prohibition against administrative and judicial review of those estimates in section 1886(r)(3) of the Act, Congress recognized the importance of finality and predictability under a prospective payment system.

As a result, we do not agree with the commenter's suggestion that we should establish a process for reconciling our estimates of uncompensated care payments, which would be contrary to the notion of prospectivity in a payment system. Furthermore, we note that this rulemaking has been conducted consistent with the requirements of the Administrative Procedure Act and Title XVIII of the Act. Under the Administrative Procedure Act, a proposed rule is required to include either the terms or substance of the proposed rule, or a description of the subjects and issues involved. In this case, the FY 2026 IPPS/LTCH PPS proposed rule (90 FR 18002) included a detailed discussion of our proposed methodology for calculating Factors 1-3 and the data that would be used. We made public the best data available at the time of the proposed rule to allow hospitals to understand the anticipated impact of the proposed methodology and submit comments, and we have considered those comments in determining our final policies for FY 2026. e. Process for Notifying CMS of Merger Updates and To Report Upload Issues

As we have done for every proposed and final rule beginning in FY 2014, in conjunction with this final rule, we will publish on the CMS website a table listing Factor 3 for hospitals that we estimate will receive empirically justified Medicare DSH payments in FY 2026 (that is, those hospitals that will receive interim uncompensated care payments during the fiscal year), and for the remaining subsection (d) hospitals and subsection (d) Puerto Rico hospitals that have the potential of receiving an uncompensated care payment in the event that they receive an empirically justified Medicare DSH payment for the fiscal year as determined at cost report settlement. However, we note that a Factor 3 will not be published for new hospitals and hospitals that are subject to the alternative trim for hospitals with potentially aberrant data that are not projected to be DSH-eligible.

We will also publish a supplemental data file containing a list of the mergers that we are aware of and the computed uncompensated care payment for each merged hospital. In the DSH uncompensated care supplemental data file, we list new hospitals and the 7 hospitals that would be subject to the alternative trim for hospitals with potentially aberrant data that are not projected to be DSH-eligible, with a N/A in the Factor 3 column.

Hospitals had 60 days from the date of public display of the FY 2026 IPPS/LTCH PPS proposed rule in the Federal Register to review the table and supplemental data file published on the CMS website in conjunction with the proposed rule and to notify CMS in writing of issues related to mergers and/or to report potential upload discrepancies due to MAC mishandling of Worksheet S-10 data during the report submission process.\161\ In the proposed rule, we stated that comments raising issues or concerns that are specific to the information included in the table and supplemental data file should be submitted by email to the CMS inbox at [email protected]. We indicated that we would address comments related to mergers and/or reporting upload discrepancies submitted to the CMS DSH inbox as appropriate in the table and the supplemental data file that we publish on the CMS website in conjunction with the publication of the FY 2026 IPPS/LTCH PPS final rule. We also stated that all other comments submitted in response to our proposals for FY 2026 must be submitted in one of the three ways found in the ADDRESSES section of the proposed rule before the close of the comment period in order to be assured consideration. In addition, we noted that the CMS DSH inbox is not intended for Worksheet S-10 audit process related emails, which should be directed to the MACs.

\161\ For example, if the report does not reflect audit results due to MAC mishandling, or the most recent report differs from a previously accepted, amended report due to MAC mishandling.

Existing regulations at 42 CFR 412.4(a) define discharges under the IPPS as situations in which a patient is formally released from an acute care hospital or dies in the hospital. Section 412.4(b) defines acute care transfers, and Sec. 412.4(c) defines postacute care transfers. Our policy set forth in Sec. 412.4(f) provides that when a patient is transferred and his or her length of stay is less than the geometric mean length of stay for the MS-DRG to which the case is assigned, the transferring hospital is generally paid based on a graduated per diem rate for each day of stay, not to exceed the full MS-DRG payment that would have been made if the patient had been discharged without being transferred.

The per diem rate paid to a transferring hospital is calculated by dividing the full MS-DRG payment by the geometric mean length of stay for the MS-DRG. Based on an analysis that showed that the first day of hospitalization is the most expensive (60 FR 45804), our policy generally provides for payment that is twice the per diem amount for the first day, with

each subsequent day paid at the per diem amount up to the full MS-DRG payment (Sec. 412.4(f)(1)). Transfer cases also are eligible for outlier payments. In general, the outlier threshold for transfer cases, as described in Sec. 412.80(b), is equal to (Fixed-Loss Outlier threshold for Nontransfer Cases adjusted for geographic variations in costs/Geometric Mean Length of Stay for the MS-DRG) *(Length of Stay for the Case plus 1 day).

We established the criteria set forth in Sec. 412.4(d) for determining which DRGs qualify for postacute care transfer payments in the FY 2006 IPPS final rule (70 FR 47419 through 47420). The determination of whether a DRG is subject to the postacute care transfer policy was initially based on the Medicare Version 23.0 GROUPER (FY 2006) and data from the FY 2004 MedPAR file. However, if a DRG did not exist in Version 23.0 or a DRG included in Version 23.0 is revised, we use the current version of the Medicare GROUPER and the most recent complete year of MedPAR data to determine if the DRG is subject to the postacute care transfer policy. Specifically, if the MS- DRG's total number of discharges to postacute care equals or exceeds the 55th percentile for all MS-DRGs and the proportion of short-stay discharges to postacute care to total discharges in the MS-DRG exceeds the 55th percentile for all MS-DRGs, CMS will apply the postacute care transfer policy to that MS-DRG and to any other MS-DRG that shares the same base MS-DRG. The statute at subparagraph 1886(d)(5)(J) of the Act directs CMS to identify MS-DRGs based on a high volume of discharges to postacute care facilities and a disproportionate use of postacute care services. As discussed in the FY 2006 IPPS final rule (70 FR 47416), we determined that the 55th percentile is an appropriate level at which to establish these thresholds. In that same final rule (70 FR 47419), we stated that we will not revise the list of DRGs subject to the postacute care transfer policy annually unless we are making a change to a specific MS-DRG.

To account for MS-DRGs subject to the postacute care policy that exhibit exceptionally higher shares of costs very early in the hospital stay, Sec. 412.4(f) also includes a special payment methodology. For these MS-DRGs, hospitals receive 50 percent of the full MS-DRG payment, plus the single per diem payment, for the first day of the stay, as well as a per diem payment for subsequent days (up to the full MS-DRG payment (Sec. 412.4(f)(6))). For an MS-DRG to qualify for the special payment methodology, the geometric mean length of stay must be greater than 4 days, and the average charges of 1-day discharge cases in the MS-DRG must be at least 50 percent of the average charges for all cases within the MS-DRG. MS-DRGs that are part of an MS-DRG severity level group will qualify under the MS-DRG special payment methodology policy if any one of the MS-DRGs that share that same base MS-DRG qualifies (Sec. 412.4(f)(6)).

Prior to the enactment of the Bipartisan Budget Act of 2018 (Pub. L. 115-123), under section 1886(d)(5)(J) of the Act, a discharge was deemed a “qualified discharge” if the individual was discharged to one of the following postacute care settings:

A hospital or hospital unit that is not a subsection (d) hospital.

A skilled nursing facility.

Related home health services provided by a home health agency provided within a timeframe established by the Secretary (beginning within 3 days after the date of discharge).

Section 53109 of the Bipartisan Budget Act of 2018 amended section 1886(d)(5)(J)(ii) of the Act to also include discharges to hospice care provided by a hospice program as a qualified discharge, effective for discharges occurring on or after October 1, 2018. In the FY 2019 IPPS/ LTCH PPS final rule (83 FR 41394), we made conforming amendments to Sec. 412.4(c) of the regulation to include discharges to hospice care occurring on or after October 1, 2018, as qualified discharges. We specified that hospital bills with a Patient Discharge Status code of 50 (Discharged/Transferred to Hospice--Routine or Continuous Home Care) or 51 (Discharged/Transferred to Hospice, General Inpatient Care or Inpatient Respite) are subject to the postacute care transfer policy in accordance with this statutory amendment. 2. Changes for FY 2026

As discussed in the proposed rule and section II.C. of the preamble of this final rule, based on our analysis of FY 2024 MedPAR claims data, CMS proposed to make changes to a number of MS-DRGs, effective for FY 2026. Specifically, we proposed the following changes:

Adding ICD-10-PCS codes describing restriction and replacement of the thoracic aorta, and bypass and occlusion of the subclavian and carotid arteries, to proposed new MS-DRG 209 (Complex Aortic Arch Procedures).

Adding ICD-10-PCS codes describing restriction of the abdominal aorta and restriction of the iliac artery to proposed new MS- DRG 213 (Endovascular Abdominal Aorta with Iliac Branch Procedures).

Reassigning ICD-10-PCS codes describing extirpation of matter from coronary arteries to proposed new MS-DRG 318 (Percutaneous Coronary Atherectomy without Intraluminal Device).

Reassigning ICD-10-PCS codes describing extirpation of matter from coronary arteries and adding ICD-10-PCS codes describing dilation of coronary arteries and insertion of an intraluminal or other device to proposed new MS-DRGs 359 and 360 (Percutaneous Coronary Atherectomy with Intraluminal Device with MCC and without MCC, respectively).

Adding ICD-10-CM diagnosis codes describing periprosthetic joint infection and ICD-10-PCS procedure codes describing hip or knee procedures to proposed new MS-DRGs 403 and 404 (Hip or Knee Procedures with Principal Diagnosis of Periprosthetic Joint Infection with MCC and without MCC, respectively).

Deleting MS-DRGs 294 and 295 (Deep Vein Thrombophlebitis with CC/MCC and without CC/MCC, respectively) and reassigning the ICD- 10-CM codes to MS-DRGs 299, 300, and 301 (Peripheral Vascular Disorders with MCC, with CC, and without CC/MCC, respectively).

Deleting MS-DRG 509 (Arthroscopy) and reassigning the ICD- 10-PCS codes describing inspection of various anatomic sites to their respective clinically appropriate MS-DRGs.

Adding ICD-10-CM diagnosis codes describing the insertion of a radioactive element into the brain to MS-DRG 023 (Craniotomy with Major Device Implant or Acute Complex CNS Principal Diagnosis with MCC or Chemotherapy Implant or Epilepsy with Neurostimulator).

When proposing changes to MS-DRGs that involve adding, deleting, and reassigning procedure or diagnosis codes between proposed new and revised MS-DRGs, we stated in the proposed rule that we continue to believe it is necessary to evaluate the affected MS-DRGs to determine whether they should be subject to the postacute care transfer policy. Considering the proposed changes to the MS-DRGs for FY 2026, according to the regulations under Sec. 412.4(d), we evaluated the proposed new MS-DRGs using the general postacute care transfer policy criteria and data from the FY 2024 MedPAR file. We continue to believe it is appropriate to assess new MS-DRGs and reassess revised MS-DRGs when proposing reassignment of procedure codes or diagnosis codes that would result in material changes to an

MS DRG. We evaluated any current MS-DRGs if we estimate that more than 5 percent of the current cases would shift from the current assigned MS-DRGs to proposed new MS-DRGs, or to a current MS-DRG from a proposed revised or deleted MS-DRG.

For existing MS-DRGs 321 and 322 (Percutaneous Cardiovascular Procedures with Intraluminal Device with MCC or 4+ arteries/ intraluminal devices, and without MCC, respectively), we determined that more than 5 percent of the current cases would shift from the current assigned MS-DRGs to proposed new MS-DRGs 359 and 360. We also determined that for MS-DRGs 463, 464, and 465 (Wound Debridement and Skin Graft Except Hand for Musculoskeletal and Connective Tissue Disorders with MCC, with CC, and without MCC/CC, respectively), more than 5 percent of the current cases would shift from the current assigned MS-DRGs to proposed new MS-DRGs 403 and 404. We noted that for all other proposed changes, the relative volume of cases shifting to or from current MS-DRGs did not exceed the 5 percent threshold.

If an MS-DRG qualified for the postacute care transfer policy, we also evaluated that MS-DRG under the special payment methodology criteria according to regulations at Sec. 412.4(f)(6).

In the proposed rule, we noted that proposed new MS-DRGs 403 and 404 would qualify to be included on the list of MS-DRGs that are subject to the postacute care transfer policy (90 FR 18264). We therefore proposed to add new MS-DRGs 403 and 404 to the list of MS- DRGs that are subject to the postacute care transfer policy.

We also noted that MS-DRGs 463, 464 and 465 are currently subject to the postacute care transfer policy. As a result of our review, these revised MS-DRGs would continue to qualify to be included on the list of MS-DRGs that are subject to the postacute care transfer policy.

As discussed in section II.C. of the preamble of this final rule, we are finalizing these proposed changes to the MS-DRGs, with exception of the proposal to create new MS-DRGs 403 and 404 (Hip or Knee Procedures with Principal Diagnosis of Periprosthetic Joint Infection with MCC and without MCC, respectively) for FY 2026. We have therefore removed MS-DRGs 403 and 404 from further analysis. We are also removing MS-DRGs 463, 464, and 465 (Wound Debridement and Skin Graft Except Hand for Musculoskeletal and Connective Tissue Disorders with MCC, with CC, and without MCC/CC, respectively) from further analysis for purposes of this final rule as we included them in our initial review due to our determination that more than 5 percent of the current cases would shift from these MS-DRGs to proposed new MS-DRGs 403 and 404 (which are not being finalized).

Using the March 2025 update of the FY 2024 MedPAR file, we have developed the following table which sets forth the most recent analysis of the postacute care transfer policy criteria completed for this final rule with respect to each of these finalized new or revised MS-DRGs. BILLING CODE 4120-01-P

[GRAPHIC] [TIFF OMITTED] TR04AU25.240

BILLING CODE 4120-01-C

During our annual review of proposed new or revised MS-DRGs and analysis of the December 2024 update of the FY 2024 MedPAR file, we reviewed the list of proposed revised or new MS-DRGs that qualify to be included on the list of MS-DRGs subject to the postacute care transfer policy for FY 2026 to determine if any of these MS-DRGs would also be subject to the special payment methodology policy for FY 2026 (90 FR 18265).

Based on our analysis of the proposed changes to the MS-DRGs included in the proposed rule, we determined that proposed new and revised MS-DRGs 404 and 464 met the criteria for the MS-DRG special payment methodology. As described in the regulations at Sec. 412.4(f)(6)(iv), MS-DRGs that share the same base MS-DRG will all qualify under the MS-DRG special payment policy if any one of the MS- DRGs that

share that same base MS-DRG qualifies. Therefore, we proposed that MS- DRGs 403, 404, 463, 464, and 465 would be subject to the MS-DRG special payment methodology, effective for FY 2026. As new MS-DRGs 403 and 404 are not being finalized, MS-DRGs 403 and 404 have been removed from further analysis. As discussed previously, MS-DRGs 463, 464, and 465 were also removed from further analysis for purposes of this final rule as their inclusion in our review of postacute care transfer policy status was due to an expected shift in cases to the proposed new MS- DRGS 403 and 404, which are not being finalized. As a result, there are no remaining MS-DRGs to evaluate for special payment policy for FY 2026.

Comment: We received a comment requesting CMS to not apply the post-acute transfer policy to proposed new MS-DRGs 403 and 404 for FY 2026 in order to avoid disincentivizing proper care for patients with complex joint infections.

Response: As discussed previously, the proposed new MS-DRGs 403 and 404 are not being finalized for FY 2026.

Based on the finalized changes to the MS-DRGs for FY 2026 and the updated analysis, we are not finalizing to add MS-DRGs to the postacute care transfer or the special payment policies for FY 2026. We note that MS-DRGs 463, 464 and 465 will continue to be subject to the postacute care transfer policy.

The postacute care transfer and special payment policy status of all MS-DRGs is reflected in Table 5 associated with this final rule, which is listed in section VI. of the Addendum to this final rule and available on the CMS website.