Guide to CMS Final FY 2027 Medicare Inpatient Prospective Payment Systems (IPPS) Regulations

At a Glance

Hospital CFOs enter fiscal year 2027 facing sustained margin pressure as labor, pharmaceutical, supply, and purchased-service costs continue to rise faster than reimbursement. At the same time, unfavorable payer-mix shifts, higher uncompensated care, claims denials and payment delays, elevated borrowing costs, and uncertainty surrounding government funding and reimbursement policies are increasing financial risk. In this environment, CFOs must balance near-term cost containment and liquidity needs with continued investment in workforce capacity, technology, infrastructure, and strategic growth, making a clear understanding of the FY 2027 reimbursement outlook essential to effective forecasting and capital allocation. 

Medicare reimbursement will be a critical focus for hospital leaders in FY 2027. The Centers for Medicare & Medicaid Services (CMS) final rule updates payment rates and policies under the Inpatient Prospective Payment System (IPPS) and Long-Term Care Hospital Prospective Payment System (LTCH PPS) for discharges occurring during the fiscal year. Issued July 31, 2026, the FY 2027 final rule includes significant changes affecting hospital payment rates, uncompensated care, wage index calculations, quality programs, and other reimbursement provisions. This guide examines the key changes, their potential financial and operational implications, and actions hospitals should consider as they update FY 2027 forecasts and reimbursement strategies.

FY 2027 IPPS & LTCH FINAL RULE HIGHLIGHTS:

• The increase in IPPS operating payments for FY 2027 is 2.3% and is estimated to be $2.1 billion.
• Uncompensated Care (UCC) payments are estimated to increase by $228 million.
• CMS rebased the IPPS operating and capital market baskets to 2023 base year and set the national labor-related share at 66% in FY 2026. In FY 2027 it remains at 66%.
• Under the FY 2027 final rule, the LTCH PPS standard federal payment rate increases by 2.3%, reflecting a 3.2% market-basket update reduced by a 0.9-percentage-point productivity adjustment; CMS estimates that aggregate LTCH PPS payments will increase by $54 million.
• The low-wage index hospital policy is eliminated with a transitional stop loss protection implemented to cushion the impact for affected hospitals.
• Changes to the Transforming Episode Accountability Model (TEAM) include updates to the patient-reported outcome measurement, target price methodology, and broader skilled nursing facility access. 
• In FY 2027, the expansion of the Comprehensive Care for Joint Replacement (CJR) Model incorporates mandatory participation, additional procedures, a 90-day accountability for expenditures after discharge and greater responsibility for care coordination to reduce complications and readmissions.
• Medical education changes in this rule include clarification on how cost reports with shorter or longer than 12 months must calculate full-time equivalent (FTEs) and prorate counts on hospital service days for resident FTE counts and applicable FTE caps.
• The rule implements significant changes and clarifications on Medicare organ acquisition reasonable cost reimbursement. Key provisions include non-renal organ cost reconciliation with cost reports beginning on or after October 1, 2028, interim payment reconciliation, codification of the prudent buyer principle, and more stringent expectations for allocating general and administrative costs to organ acquisition cost centers.

FY 2027 Finalized Rates

The table below summarizes the final rate increases for FY 2027 under four scenarios based on whether the provider submits quality data and is a meaningful user of electronic health records (EHR) according to the Affordable Care Act (ACA). Please note that parentheticals denote negative numbers.

TABLE 1: FY2027 Final Rates

Tables 1A and 1B show the updated National Adjusted Operating Standardized Amounts based on the rate updates per Table 1 For FY 2027. Please note that the full increase for a hospital that reports quality data and is a meaningful EHR user will be 2.9%.

TABLE 1A

National Adjusted Operating Standardized Amounts; Labor/Nonlabor (66.0% Labor Share/34.0% Nonlabor Share If Wage Index Is Greater Than 1)

TABLE 1B

National Adjusted Operating Standardized Amounts; Labor/Nonlabor (62% Labor Share/38% Nonlabor Share If Wage Index Is Less Than or Equal To 1)

Capital Payments

As shown in Table 1C, the capital rate increased to $539.95 from $524.15 for FY 2027, representing a 3.01% increase.

TABLE 1C 

Capital Standard Federal Payment Rate

The overall increase in IPPS payments in FY 2027 will account for approximately $2.9 billion in increased Medicare payments as shown in Table 2. This change is significantly driven by the increase in IPPS rates as shown in Table 1.

TABLE 2

Estimated Aggregate Increase in FY 2027 Acute-Care Hospital Payments

The below summary of the FY 2027 IPPS Medicare rules highlights the changes that will drive the increased rates and additional Medicare payments for FY 2027.

The impacts do not include the 2% Medicare sequestration reduction. This reduction began in FY 2013 and would have run through 2028 without legislation to discontinue this reduction or increase the length of time it is in effect. The Coronavirus Aid, Relief, and Economic Security (CARES) Act passed for COVID-19 relief for healthcare providers temporarily halted the sequestration reduction beginning May 1, 2020 - December 31, 2020, thus extending the sequestration period through February 28, 2030, absent any further regulatory changes.

FY 2027 Medicare Severity Diagnosis-Related Groups (MS-DRG) Relative Weights

For FY 2027, CMS calculated Medicare Severity Diagnosis-Related Group (MS-DRG) relative weights using FY 2025 Medicare Provider Analysis and Review (MedPAR) claims data and FY 2024 Medicare cost report data from the Healthcare Cost Report Information System (HCRIS). Consistent with prior years, CMS assigned hospital costs to nineteen national cost-center categories and applied the corresponding national average cost-to-charge ratios (CCRs) to estimate costs by MS-DRG. The FY 2027 final CCRs are presented in Table 3.

TABLE 3

FY 2027 Final 19 Cost-to-Charge Ratios

MS-DRG Outlier Payments

For high-cost cases, additional payments may be made in addition to MS-DRG payments. To qualify, a case’s costs must exceed the total of all applicable payments, including MS-DRG, indirect medical education (IME), DSH UCC, and new technology payments, plus the outlier threshold amount. The outlier threshold will increase to $49,346 for FY 2027, up from $40,397 in FY 2026 , an increase of $8,949. For FY 2027, CMS projects operating outlier payments at 5.14% of total operating DRG payments and applies a 3.60% capital outlier offset to the capital federal rate.

CMS normally sets the outlier baseline at 5.1%. During the reconciliation process when cost reports are settled there is a negative adjustment that hospitals need to pay back. This amount is normally a (0.04%) claw back. Because of this claw back, CMS inflates the 5.1% baseline by 0.04% to ensure that hospitals receive the legally stated amount of 5.1%.  

Empirically Justified Medicare DSH Payments and UCC Payments

Section 3133 of the ACA modified the Medicare DSH Payment methodology beginning in FY 2014. Also, beginning in FY 2014, DSH hospitals began receiving 25% of the amount they previously would have been reimbursed under the traditional Medicare DSH formula. The remaining 75% adjusted for the percentage of uninsured patients will be paid through the Uncompensated Care (UCC) reimbursement methodology outlined below and updated for FY 2027.

Factor 1

Estimate of 75% (100% minus 25%) of Medicare DSH payments that would otherwise be made, in the absence of Section 1886(r) of the Act, for the fiscal year FY 2027:

$15,767,000,000 * 75 = $11,825,250,000 = Uncompensated Care Pool

$15,767,000,000 * 25 = $ 3,941,750,000 = Empirical DSH payments

$15.767 billion is a reduction from the prior year amount of $16.550 billion which in turn lowered the UCC and empirical DSH amounts.

The reasons for this decrease in FY 2027 from FY 2026 are as follows:

1. Medicaid redetermination: After the end of the pandemic-era continuous enrollment requirement, states resumed Medicaid eligibility redeterminations, which is commonly referred to as the unwinding process. This process led to millions of individuals losing Medicaid, leading to a significant decline in inpatient Medicaid days. The reduction shifted the data used by the Office of the Actuary (OACT), creating downward pressure on the estimated baseline.
2. Actuarial Modeling of Volume Projections: This information is updated each year based on hospital cost reports, historical trends, and overall legislative interactions. The updated data indicates utilization has shifted away from inpatient settings to outpatient care and Medicare Advantage plans. The shift has resulted in the decreased projections of the traditional fee-for-service DSH. 

Factor 2

Factor 2 measures changes in the national uninsured rate compared to pre-ACA levels. The increase in the national uninsured rate increases the multiplier, which increases the final UCC pool. The ACA established Factor 2 in the calculation of the UCC payment. Specifically, for FYs 2014, 2015, 2016, and 2017, the ACA defined this factor as 1 minus the percent change in the uninsured rate of individuals under age 65. measured by comparing the uninsured rate in 2013, the last year before coverage expansion under the ACA, with the uninsured rate for the fiscal year being evaluated.

Starting in FY 2018 and going forward, the ACA authorized the use of data sources other than Congressional Budget Office (CBO) estimates to determine the uninsured rate. Specifically, the data from CMS’ Office of the Actuary (OACT) has been authorized as a data source. This data is derived as part of the development of the National Health Expenditure Accounts (NHEA) and represents official estimates of economic activity within healthcare according to CMS. Based on this data, the uninsured rate is estimated at 9.4% for FY 2027 from 8.70% for 2026. 

Using this information, the calculation of Factor 2 for FY 2027 is as follows:

1-((0.14-0.094)/0.14)) = 1-0.32857 = 0.67143

This resulted in a Factor 2 amount of 67.143% for FY 2027. This is a significant increase from FY 2026 of 62.14%.

The increase in Factor 2 was the sole driver of the $228 million increase in total payments. The reasons for this significant increase in factor 2 include:

1. The Medicaid unwinding is fully incorporated into the actuarial data used in the FY 2027 calculation. 
2. With the loss of Medicaid eligibility, millions became uninsured which significantly increased the national uninsured rate. 

Factor 3

Factor 3 is a hospital-specific value that identifies the share of the estimated UCC amount for each hospital receiving Medicare DSH payments. 

The hospital’s cost of UCC is from the Medicare cost report, WS S-10 Line 30, and is comprised of the following elements:

• Cost of charity care (Line 23)
• Non-Medicare and non-reimbursable Medicare bad debt (Line 29)

CMS will use FY 2021, 2022, and 2023 Medicare cost report data for FY 2027, as these represent the most recent audited data available. The methodology will average these three years for Factor 3 to determine the UCC costs.

Overall, the increase in UCC funding has increased by $228,000,000. Although there was a decrease in the baseline empirical DSH amount, the national uninsured rate has significantly increased. The increase in the uninsured rate completely offsets the reduction in Factor 1 amount.

FY 2027 Wage Index

The labor portion of the IPPS payments are adjusted for differences in a hospital’s cost of labor, which is known as the wage index adjustment. In updating prospective payments to hospitals, the standardized amounts need to be adjusted for differences in wage levels in a geographic area when compared to the national average hospital wage level. 

In FY 2027, CMS set the hospital IPPS national labor share at 66%, which is the same as in 2026. The decrease in 2026 was due to the rebasing of the market basket, leveraging more current data from the 2023-based market basket. This change reflects a trend of non-labor cost growth outpacing labor costs. 

For FY 2027, CMS calculated the hospital wage index using wage data from cost-reporting periods 

beginning on or after October 1, 2022, and before October 1, 2023 — generally FY 2023 Medicare cost reports. CMS applied occupational-mix adjustments using data from the CY 2022 Occupational Mix Survey, the latest survey available for the FY 2027 wage index.

Discontinuation of the Low-Wage Index Hospital Policy

CMS discontinued the low-wage-index hospital policy after the U.S. Court of Appeals for the D.C. Circuit held in Bridgeport Hospital v. Becerra that the policy was unlawful and vacated it on July 23, 2024. The policy had increased the wage indexes of hospitals in the lowest quartile and funded those increases through a budget-neutral adjustment to IPPS standardized amounts.

For FY 2027, CMS continues a budget-neutral, narrow transitional payment exception for hospitals 

that benefited from the low-wage-index policy in FY 2024 and remain significantly affected by its discontinuation. A hospital qualifies if its FY 2027 wage index is more than 14.2625% below its FY 2024 wage index. Eligible hospitals will receive an additional IPPS payment equal to the amount it would have received if its FY 2027 wage index were 85.7375% of its FY 2024 wage index.

Medical Education

Graduate Medical Education (GME)

Medicare direct graduate medical education (DGME) payments are calculated using the hospital-specific per resident amount, the weighted number of full-time equivalent (FTE) residents, and the hospital’s Medicare share of total inpatient days during the cost-reporting period.

For FY 2027, CMS finalized a technical revision to the treatment of resident FTE counts when a hospital’s Medicare cost-reporting period is shorter or longer than 12 months. The policy aligns the FTE calculation with the actual number of hospital service days in the cost-reporting period so that nonstandard reporting periods do not overstate or understate resident counts used for Medicare GME payment.

CMS also finalized conforming changes requiring applicable resident FTE caps and the FTE amounts used in the three-year rolling average to be prorated for the length of the cost-reporting period. These revisions are intended to produce consistent DGME and indirect medical education calculations when hospitals experience short or extended cost-reporting periods, such as those resulting from a change in fiscal year-end or other provider transactions.

Indirect Medial Education (IME) Payment Adjustment Factor

Teaching hospitals receive an add-on payment to their DRG payment to reimburse hospitals for the increased cost of treatment compared to non-teaching hospitals. For FY 2027, CMS did not change the statutory IME formula or the 1.35 multiplier. CMS finalized technical revisions requiring resident FTE counts, applicable FTE caps, and rolling-average amounts to be prorated when a hospital has a cost-reporting period shorter or longer than 12 months. These revisions may affect the resident-to-bed ratio used in calculating IME payments, but do not change the underlying IME methodology. 

Nursing Allied Health

Hospitals operating approved provider-based nursing and allied health education programs remain eligible for Medicare pass-through reimbursement based on Medicare’s share of reasonable net program costs. The FY 2027 IPPS final rule updates the methodology and cost-reporting treatment for additional Medicare Advantage nursing and allied health education payments, while retaining the $60 million annual national payment pool funded through a 2.33% offset to Medicare Advantage direct GME payments. The rule does not replace the existing reasonable-cost reimbursement methodology for qualifying programs.

Medicare Dependent Hospitals (MDH)

The Medicare-Dependent Hospital (MDH) program provides additional IPPS payments to qualifying small rural hospitals with 100 or fewer beds and a high proportion of Medicare inpatient utilization that are not classified as Sole Community Hospitals. An eligible MDH receives the federal IPPS payment plus 75% of the amount by which its hospital-specific payment rate exceeds the federal payment rate. The Consolidated Appropriations Act of 2026 extended the MDH program through December 31, 2026. Unless Congress enacts another extension, MDH status and associated payments will terminate for discharges occurring on or after January 1, 2027. CMS estimates that the scheduled expiration will materially reduce payments to affected hospitals during FY 2027. The combined expiration of the MDH and Low Volume payments will be reduced by an estimated $300 million beginning in January 2027.

Low Volume Hospitals (LVH)

Hospitals that meet the criteria for low volume status receive an additional 25% payment adjustment based on the total per discharge payments. This includes Capital, DSH, IME, and outlier payments for hospitals with 500 or fewer discharges that are 15 miles from the nearest hospital. The payment is reduced on a linear sliding scale for hospitals with more discharges, ending in a complete elimination of this payment for hospitals with more than 3,800 discharges in a fiscal year.

It is important to note that these criteria were updated for FYs 2019-2022. Previously, a hospital had to have less than 200 total discharges and be located more than 25 road miles from the nearest hospital. The updated criteria and additional payments continued for FY 2023 through the Further Continuing Appropriations and Extensions Act of 2023. The Consolidated Appropriations Act of 2026 continued the extension through December 31, 2026.

Transforming Episode Accountability Model (TEAM)

TEAM is a mandatory hospital-based episode payment model operating for five performance years from January 1, 2026, through December 31, 2030, where acute care hospitals in certain geographic regions are responsible for the cost of care for Medicare patients both during specified surgical procedures and for the duration of their post-procedure care. TEAM offers episode-based payments covering five expensive procedures:

• Lower Extremity Joint Replacement
• Surgical Hip Femur Fracture Treatment
• Spinal Fusion
• Coronary Artery Bypass Graft
• Major Bowel Procedure

TEAM is intended to reduce expenditures, enhance the quality of care, and incentivize coordination among healthcare providers for surgery and services for 30 days after the procedures. It is estimated that TEAM will save the Medicare program $368 million over five years.

The FY 2027 rule makes three important updates to TEAM, including:

• Patient-reported outcomes collected in an outpatient setting count toward TEAM quality performance. This requirement aligns quality measurement across inpatient and outpatient surgical procedures.
• Revised target-price methodology which will improve payment accuracy and predictability, and hospitals remain accountable for the spending 30 days following the hospital discharge.
• The Skilled Nursing Facility (SNF) access is broadened by CMS allowing TEAM beneficiaries to be eligible for SNF or swing bed services without the traditional three-day inpatient stay. This rule expansion provides increased flexibility in patient post-acute care placement.

Comprehensive Care Joint Replacement (CJR-X) Value Based Care Model

The FY 2027 IPPS final rule expands the Comprehensive Care for Joint Replacement Model into the CJR Expanded Model (CJR-X). Beginning January 1, 2028, CJR-X will require most eligible acute-care hospitals nationwide to participate, making it Medicare’s first mandatory nationwide test of an episode-based payment model. The model covers hip, knee, and ankle replacements performed in inpatient and hospital outpatient settings and holds participating hospitals accountable for the quality and cost of Medicare Part A and Part B services from the qualifying procedure through the first 90 days after hospital discharge. Hospitals may receive reconciliation payments or owe repayments based on their performance against quality-adjusted episode target prices. CJR-X is intended to strengthen coordination among hospitals, surgeons, and post-acute providers; reduce avoidable complications, emergency visits, readmissions, and unnecessary services; and preserve beneficiaries’ freedom to choose their providers.

Organ Acquisition Changes and Corresponding Cost Report Revisions

The FY 2027 IPPS final rule includes changes, clarifications, and codifications governing Medicare organ-acquisition reasonable-cost reimbursement and related cost reporting. For cost-reporting periods beginning on or after October 1, 2028, CMS will reconcile Medicare payments and allowable acquisition costs for non-renal organs, including hearts, livers, lungs, pancreas, and intestines using a process similar to the existing kidney reconciliation methodology. The designated Medicare contractor will establish approved standard acquisition charges and histocompatibility laboratory testing rates, with interim payments reconciled to allowable costs reported on the Medicare cost report. CMS also codified the prudent-buyer principle making organ-procurement organizations and transplant hospitals demonstrate acquisition expenses are necessary, reasonably related to organ procurement, and obtained economically. Documentation enhancements and allocation requirements for organ-acquisition and administrative costs are intended to prevent the improper distribution of overhead expenses to transplant cost centers through more accurate fragmentation and componentization of A&G cost centers. The rule clarified expenses that are nonallowable by providing additional guidance on non-reimbursable organ acquisition cost to reduce ambiguity in cost report preparation and audit review.

LTCH Prospective Payment System (PPS) Payment Rates

Under the FY 2027 LTCH PPS, discharges that meet the statutory exclusion from site-neutral payment are paid under the LTCH PPS standard federal payment rate. Discharges that do not meet the exclusion are paid at the lower site-neutral payment rate. To qualify for the standard federal rate, a discharge must satisfy the MS-LTC-DRG criterion and either the intensive-care-unit criterion or the ventilator criterion:

• MS-LTC-DRG criterion: The LTCH discharge is assigned to an MS-LTC-DRG that is not primarily psychiatric or rehabilitation.
• Intensive-care-unit criterion: The LTCH admission follows an acute-care hospital discharge that included at least three days in an intensive care unit.
• Ventilator criterion: The LTCH admission follows an acute-care hospital discharge, and the LTCH case includes at least 96 hours of ventilator services.

An LTCH discharge is paid under the standard federal rate when it meets the MS-LTC-DRG criterion and either the intensive-care-unit criterion or the ventilator criterion; otherwise, the discharge is paid under the site-neutral methodology.

For FY 2027, the LTCH PPS standard federal payment-rate update is 2.3%, reflecting a 3.2% LTCH market-basket increase reduced by a 0.9-percentage-point productivity adjustment. An LTCH that does not satisfy the LTCH Quality Reporting Program requirements is subject to a 2-percentage-point reduction to the annual payment update.

CMS updated the LTCH PPS high-cost-outlier fixed-loss amount in FY 2027 to maintain estimated outlier payments at 7.975% of aggregate LTCH PPS standard federal-rate payments. Site-neutral discharges use the FY 2027 acute-care IPPS fixed-loss threshold of $49,346 when determining eligibility for an additional outlier payment.

CMS estimates that aggregate FY 2027 LTCH PPS payments will increase by approximately 2.2%, or $54 million, compared with FY 2026. The estimate reflects the annual payment-rate update and other changes affecting standard federal-rate and site-neutral cases.

Looking Ahead

In summary, the FY 2027 IPPS and LTCH PPS final rule provides a modest increase in Medicare payment rates, but the benefit will vary significantly by hospital. Operating and capital rate updates, higher uncompensated care funding, new-technology payments, and the LTCH payment increase create opportunities for additional reimbursement; however, higher outlier thresholds, wage-index changes, sequestration, and the potential expiration of the Medicare-Dependent Hospital and enhanced low-volume hospital provisions may offset those gains for many organizations.

The rule also reinforces CMS’s continued movement toward greater accountability for cost, quality, and data integrity. Changes to TEAM and the future CJR-X Model expand episode-based financial risk, while revisions affecting GME, Nursing and Allied Health, organ-acquisition costs, and wage-index calculations increase the importance of accurate cost reporting, documentation, and performance measurement. Hospitals should evaluate these provisions at the facility and service-line levels rather than relying solely on national payment estimates.

For hospital leaders, the central FY 2027 priority is disciplined execution: translate the final rule into hospital-specific forecasts, protect eligibility for quality and EHR-related updates, validate wage-index and cost-report data, strengthen uncompensated care and organ-acquisition documentation, and prepare care-management capabilities for expanded episode accountability. Organizations that integrate reimbursement modeling, operational performance, and regulatory compliance into a coordinated strategy will be better positioned to preserve liquidity, manage downside risk, and identify opportunities for sustainable financial improvement.

Have questions about the FY27 IPPS rules? Reach out to our team today.