5 Key Updates in the Medicare FY26 IPPS and LTCH PPS Final Rule

Every year, the Centers for Medicare & Medicaid Services (CMS) issues a final rule updating Medicare payment policies and rates under the Medicare hospital Inpatient Prospective Payment System (IPPS) and Long-Term Care Hospital Prospective Payment System (LTCH PPS). The FY26 final rule, issued on July 31, 2025, outlines a number of changes intended to align payment rates with the market, modernize reporting quality programs, and improve care delivery and administrative efficiency for qualifying hospitals.

Below, we explore some key updates impacting hospital finances and reporting.

1. IPPS and LTCH PPS Payment Rate Updates
   
   Each year, the CMS updates the payment rates for IPPS hospitals to account for changes in the price of goods and services used when treating Medicare patients. This update is made using an index known as the hospital “market basket.”  The final rule updated both the IPPS operating and capital market baskets to use 2023 instead of 2018 as the new base year for the index. 

   Based on the new market basket, the final rule increases the IPPS operating payment rates by 2.6%. Hospital payments are expected to increase by $5 billion, including a $2 billion increase in Medicare uncompensated care payments to disproportionate share hospitals. Similarly, the LTCH PPS rate will increase by 2.7%, with payments for discharges paid by the LTCH standard payment rate expected to increase by $72 million.

   The calculations based on the new market basket showed that labor costs represented a smaller share of total hospital costs in 2023 than in 2018. As a result, the labor-related share of payments has been reduced from 67.6% to 66%. This change will decrease funding to qualifying hospitals as wage index adjustments will now be applied to a smaller percentage of payments.
   
   

2. Discontinuation of Low Wage Index Hospital Policy

   On July 23, 2024, the Court of Appeals for the D.C. Circuit determined that CMS did not have the authority to adopt the low wage index hospital policy, resulting in its discontinuation in the FY26 final rule. However, the CMS is adopting a budget-neutral narrow transitional exception for FY26, which is intended to provide short-term relief to low-wage index hospitals that are significantly affected by the rule’s discontinuation. This policy applies to hospitals whose wage index for FY26 is decreasing by more than 9.75% from their FY24 wage index and caps changes to the IPPS payment at 90.25% of their FY24 wage index.
   
   

3. Changes to Quality Reporting Program Requirements

   The final rule changes the requirements for several quality reporting programs. These updates are designed to make reporting less burdensome for qualifying hospitals. The specific changes are as follows:

   • Hospital Inpatient Quality Reporting Program (IQR):

     • The final rule modifies the following quality measures:

       • Hospital-Level, Risk-Standardized Complication Rate (RSCR) Following Elective Primary Total Hip Arthroplasty (THA) and/or Total Knee Arthroplasty (TKA)

       • Hospital 30-Day, All-Cause, Risk-Standardized Mortality Rate (RSMR) Following Acute Ischemic Stroke Hospitalization with Claims-Based Risk Adjustment for Stroke Severity 

       • Hybrid Hospital-Wide Readmission (HWR) 

       • Hybrid Hospital-Wide Mortality (HWM)

     • It also removes the following measures, beginning with the CY24 reporting period and the FY26 payment redetermination:

       • Hospital Commitment to Health Equity 

       • COVID-19 Vaccination Coverage among Health Care Personnel 

       • Screening for Social Drivers of Health 

       • Screen Positive Rate for Social Drivers of Health 

     • Finally, the rule extends the length of time to submit an Extraordinary Circumstances Exception (ECE) request from 30 to 60 days.

   • Long-Term Care Hospital Quality Reporting Program (LTCH QRP):

     • The final rule removes four Social Drivers of Health (SDoH)-standardized patient assessment data elements from the LTCH Continuity Assessment Record and Evaluation Data Set beginning in FY28, including one item for Living Situation (R0310), two items related to Food (R0320A and R0320B), and one item for Utilities (R0330). The rule also institutes technical updates to the risk adjustment and reconsideration policies.

   • PPS-Exempt Cancer Hospital Quality Reporting (PCHQR) Program: 

     • The final rule removes the following measures beginning with the CY24 reporting period and the FY26 program year:

       • Hospital Commitment to Health Equity

       • Screening for Social Drivers of Health

       • Screen Positive Rate for Social Drivers of Health

     • The final rule also extends the length of time to submit an ECE request from 30 to 60 days.
       
       

4. Modifications to the Hospital Readmissions Reduction Program (HRRP)

   The final rule modifies the six readmission measures to include Medicare Advantage (MA) data in addition to Medicare fee-for-service (FFS) data. However, the MA data is not included in calculations of aggregate payments for excess readmissions and penalties related to high readmission rates are still solely based on Medicare FFS data.

   The final rule also shortens the performance measurement period from three to two years, removes the COVID-19 exclusions and risk-adjustment covariates from the six readmission measures beginning in the FY27 program year, and extends the length of time to submit an ECE request 30 to 60 days.
   
   

5. Updates to the Transforming Episode Accountability Model (TEAM)

   The Transforming Episode Accountability Model (TEAM) is a five-year, mandatory, episode-based payment model for acute care hospitals, which runs from January 1, 2026, to December 31, 2030. As part of this model, select acute care hospitals will coordinate care for patients with Original Medicare who are undergoing one of five surgical procedures: major bowel procedure, surgical hip femur fracture treatment, spinal fusion, lower extremity joint replacement, and coronary artery bypass graft. These hospitals are responsible for the cost and quality of care from the surgery through the first 30 days after the procedure.

   The final rule institutes several changes to TEAM, including:

   • Capturing quality measure performance using patient-reported outcomes in an outpatient setting without increasing the burden on participating hospitals.

   • Improving the target price construction for episodes.

   • Broadening the three-day Skilled Nursing Facility Rule waiver to allow patients greater access to post-acute care options.