Healthcare organizations are facing an exceptionally challenging financial environment. Economic volatility, high interest rates, and persistent inflation have placed enormous pressure on healthcare margins. The addition of Medicaid funding cuts and program changes in the One Big Beautiful Bill Act makes it even more difficult for healthcare organizations to maintain financial stability. As hospital leaders prepare their financial forecasts and strategic plans for 2026, it’s crucial that they understand what reimbursement will look like for their organization.
One area that is seeing major changes in the year ahead is Medicare reimbursement. Each year, the Centers for Medicare & Medicaid Services (CMS) issues a final rule updating the 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 FY2 2026 final rule, which was issued on July 31, 2025, outlines multiple changes that will have a major impact on qualifying hospitals. In this guide, we’ll explore these changes in detail and offer insights into how hospitals should respond.
Fiscal Year 2026 IPPS & LTCH Final Rule Highlights
- The increase in IPPS operating payments for FY 2026 is 2.6% and is estimated to be $5 billion.
- Uncompensated Care (UCC) and Disproportionate Share Hospital (DSH) payments, as well as other payments, are estimated to increase by over $2 billion.
- CMS rebased the IPPS operating and capital market baskets to 2023 base year and set the national labor-related share at 66%.
- The LTCH standard payment rate will rise by 2.7%, with overall LTCH PPS payments increasing by 3% (an estimated $72 million).
- The low wage index hospital policy is discontinued with a transitional exception for affected hospitals.
- Changes to the Transforming Episode Accountability Model (TEAM) are intended to improve care coordination, target price construction, and post-acute care access for selected surgical episodes.
- Quality Care Incentive changes will affect Medicare payments as follows:
- Quality Reporting has been updated for FY 2026 to remove several quality measures, modify reporting requirements, and extend the Extraordinary Circumstances Exception (ECE) policy request period from 30 to 60 days.
- Readmission measures are updated to include Medicare Advantage data and shorten the performance period.
- COVID-19 exclusions are removed from readmission measures starting in FY 2027, while the hospital Commitment to Health Equity and Social Drivers of Health (SDoH) measures are removed for FY 2026.
- The LTCH Quality Reporting Program (QRP) has been updated to reduce the reporting burden on participating hospitals by removing certain SDoH data elements.
- The public reporting requirements and ECE policy for the PPS-Exempt Cancer Hospital Quality Reporting Program have been updated.