FFY 2026 IPPS Proposed Rule: Provider Rates

I. FY26 IPPS Proposed Rule Summary

II. ”Unleashing Prosperity through Deregulation of the Medicare Program”

III. National Medicare IPPS Estimates

IV. Provider Rates

V. Uncompensated Care DSH

VI. Wage Index

VII. Graduate Medical Education

VIII. Reminder: Outlier Reconciliation Changes

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CMS proposes a net market basket increase of 2.4% (before budget neutrality adjustments) to the operating rates for hospitals that comply with the CMS quality reporting program (QRP) and that are Meaningful Electronic Health Record (EHR) users. CMS reduces payments to hospitals that do not meet Hospital Inpatient Quality (IQR) or meaningful EHR requirements.

CMS is also proposing to change the allocation of labor to 66% (from 67.6%) and non-labor to 34% (from 32.4%) for hospitals with a wage index factor (WIF) of 1.0000 or greater. CMS proposed change is based on a study of wage and wage related costs⁵ from FFY23 Medicare cost report data.

Table 2 below compares Proposed FFY26 operating rates vs. Final FFY25 for providers receiving the full update, and providers receiving the reduced update for QRP and EHR reporting.

Table 2 - Proposed FY26 IPPS Base Rates

DRG Weights

CMS updated FFY26 MS-DRG weights using FFY24 MEDPAR claims⁶ and cost report data from FFY23 Healthcare Cost Report Information (HCRIS) data. There are 31 MS-DRGs that are capped at the 10% reduction threshold from FFY25⁷. There are 27 MS-DRGs that increased by 10% or more from FFY25.

Low Volume Adjustment (LVA)

Unless otherwise extended by law⁸, providers will qualify and be reimbursed for the LVA under CMS’s original criteria under 42 CFR 412.101 (more than 25 miles from another subsection (d) hospital, less than 200 total discharges, and 25% payment adjustment). Hospitals have until September 1, 2025 to request the LVA to be effective October 1, 2025 (FFY26). This is an annual election and not carried forward automatically from the prior fiscal year.

For more information, please contact Scott Besler at scott.besler@toyonassociates.com.

Medicare Dependent Hospital (MDH) Status

Like LVA and unless extended by law, the MDH status is set to expire September, 30, 2025⁹. CMS encourages affected providers to evaluate qualification for Sole Community Hospital (SCH) status.

For more information, please contact Scott Besler at scott.besler@toyonassociates.com.

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³Providers can see the actual change in operating rates by comparing the amounts published in Tables 1A-1E of the respective year’s proposed and final IPPS rules.

⁴The budget neutrality factor that changes the most from proposed to final relates to Medicare geographic wage index reclassifications.

⁵Wages and Salaries, Employee Benefits, Labor related professional Fees, Administrative and Facilities Support Services, Installation, Maintenance and Repair Services, and All Other.

⁶Medicare Provider Analysis and Review (MEDPAR): Data on Medicare beneficiaries using hospital inpatient services at https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/MedicareFeeforSvcPartsAB/MEDPAR.

⁷Toyon calculates 31 DRGs are hold harmless in FFY26. Toyon is investigating why the hold harmless percentages do not reconcile to -10% (the variance is -11%) when comparing Proposed FFY26 DRG weights to Final FFY25 DRG weights (with Correction Notice).

⁸Over the past several years, the LVA and MDH programs were temporality extended by enacting legislation. Public Law 119 - 4 - Full-Year Continuing Appropriations and Extensions Act, 2025 last extended the MDH program through September 30, 2025.

⁹Change Request R13035OTN.