If you’ve ever wondered what it looks like when the federal government tries to “keep things simple,” meet the
CMS FY 2026 IPPS Proposed Rule. It’s a document that can move billions of dollars, reshape quality
scorecards, and send hospital finance teams into a controlled sprintusually powered by coffee, spreadsheets, and the
faint hope that “this year will be straightforward.”

Released in April 2025, the proposed rule updates how Medicare pays acute-care hospitals under the
Inpatient Prospective Payment System (IPPS) for FY 2026 (with most policies taking
effect for discharges on or after October 1, 2025). It also reaches beyond pure payment math into
wage index policy, DSH/uncompensated care, new technology add-on payments (NTAP), quality programs, interoperability,
and even a major episode-based payment model (TEAM) that starts in calendar year 2026.

Below is a practical, in-depth tour of the rule’s headline proposalswhat they are, why they matter, and how real
hospitals can translate them into action. (And yes, we’ll keep the jargon to a minimum… by Medicare standards.)

Quick Snapshot: What CMS Is Proposing for FY 2026

• A 2.4% net increase in IPPS operating payment rates for qualifying hospitals (those that submit
  required quality data and meet Promoting Interoperability requirements).
• A market basket update of 3.2%, reduced by a 0.8% productivity adjustment, and a
  proposal to rebase the market basket to a 2023 base year.
• A proposed national labor-related share of 66% (which changes how much of the base rate is wage-indexed).
• CMS estimates overall hospital payments would increase by about $4 billion, including roughly
  $1.5 billion more in Medicare uncompensated care payments to DSH hospitals.
• An estimated $234 million increase in payments tied to new medical technologies
  (driven largely by continuing NTAP for some technologies).
• Major quality program edits: measure removals (including equity and SDOH measures), measure modifications, and updates
  to the Extraordinary Circumstances Exception (ECE) approach.
• A pivotal wage index policy shift: discontinuing the low wage index hospital policy and replacing it with
  a narrow, budget-neutral transitional approach.
• Proposed updates to Promoting Interoperability (cybersecurity and TEFCA bonus concepts) and an RFI
  aimed at moving quality reporting toward digital measurement using FHIR.
• Proposed changes to the Transforming Episode Accountability Model (TEAM), a mandatory episode-based
  model beginning January 1, 2026.

1) Payment Update: The 2.4% Increase (and What It Really Means)

CMS proposes a 2.4% increase in operating payment rates for general acute-care hospitals that:
(1) successfully participate in the Hospital Inpatient Quality Reporting (IQR) Program and
(2) are meaningful EHR users under the Medicare Promoting Interoperability Program.

What drives the 2.4%?

The proposed update reflects a projected 3.2% hospital market basket increase, reduced by a
0.8% productivity adjustment. Translation: CMS acknowledges hospital input costs are rising, but it
also expects “economy-wide productivity” to offset some of that growth. (Hospitals: “Cool. We’ll just ask the ICU to
be more productive.”)

Quality compliance still mattersfinancially

The IQR program is “pay-for-reporting,” and failing the program requirements can trigger a
one-fourth reduction in the Annual Payment Update. In other words, even if the payment update looks
fine on paper, incomplete reporting can quickly turn “raise” into “oops.”

2) Market Basket Rebasing and the 66% Labor-Related Share

CMS proposes to rebase and revise the IPPS operating and capital market baskets to a
2023 base year. That matters because the weights in the market basket influence everything from the
update factor to downstream assumptions about hospital cost structure.

Why the proposed 66% labor share is a big deal

CMS also proposes a national labor-related share of 66%. The labor share is the portion of the
standardized amount that gets adjusted by the wage index. A lower labor share generally reduces how much “extra”
high-wage markets receive through the wage adjustment (and correspondingly changes the distribution effects).

A simple example (hypothetical, but directionally useful)

Imagine a simplified base payment of $10,000 for an average case (not a real standardized amountjust easy math):

• If labor share is 66%, then $6,600 is wage-adjusted and $3,400 is not.
• A high wage index hospital (say 1.30) would wage-adjust $6,600 to $8,580, then add the $3,400 non-labor portion for a
  total of $11,980 (again, simplified).
• If the labor share were higher (e.g., 67.6%), the wage-adjusted portion would be bigger, slightly increasing the
  advantage for higher-wage hospitals.

Bottom line: the proposed labor share change is small in percentage terms, but it’s meaningful at scaleespecially
when layered with wage index updates and other policy shifts.

3) Big Picture Impact: $4 Billion More (Plus DSH and NTAP Movement)

CMS estimates that proposed operating and capital rate changes (plus other adjustments) would generally increase
hospital payments by about $4 billion in FY 2026.

Uncompensated care / Medicare DSH

CMS projects a roughly $1.5 billion increase in Medicare uncompensated care payments to
disproportionate share hospitals (DSHs). For safety-net systems, this line item can be the difference between “we can
keep the service line open” and “we can keep the lights on, but barely.”

New Technology Add-On Payments (NTAP)

CMS also estimates that additional payments for inpatient cases involving new technologies would increase by about
$234 million in FY 2026, largely due to continuing NTAP for certain technologies. For hospitals, NTAP
decisions can influence adoption curves, contracting strategies, and even physician alignmentbecause “exciting new
tech” is often “exciting new cost” until payment catches up.

4) Low Wage Index Hospital Policy: Discontinued, with a Transitional Off-Ramp

One of the most consequential proposals is the discontinuation of the low wage index hospital policy
beginning in FY 2026 and beyond. This policy, originally designed to reduce wage index disparities for lower-wage
hospitals (many of them rural), has been subject to litigation. CMS proposes ending it and implementing a
budget-neutral transitional exception for hospitals that would be significantly impacted by the
discontinuation.

What hospitals should do right now

• Check your wage index trajectory across FY 2024 → FY 2026 scenarios.
• Model the effect on service lines that depend heavily on Medicare inpatient volume (think: med-surg,
  ortho, neuro, stroke).
• Coordinate with finance, strategy, and rural health leadership if your organization has rural sites
  and urban hubs (the distribution effects can get complicated fast).

5) MDH and Low-Volume Hospital Payments: Watching the Calendar

CMS notes that, under current law, special payment adjustments for Medicare-Dependent Hospitals (MDHs)
and the temporary changes for low-volume hospitals are scheduled to expire on
September 30, 2025. Historically, Congress has often extended these provisions, but “often” is not the
same thing as “always,” and FY 2026 budget planning tends to hate suspense.

Practical takeaway: rural and smaller hospitals should track legislative movement closely and build financial plans
with at least two scenariosextended and not extended.

6) MS-DRGs, Coding, and Rate-Setting: The Quiet Machinery Behind the Money

While the payment update gets the headlines, the engine room of IPPS is still the
MS-DRG relative weight recalibration. CMS proposes recalibrating MS-DRG relative weights using recent
claims and cost report data (including standardization and a long list of technical steps most humans only read when
forced by circumstance or licensing exams).

Why CDI and coding teams should care

MS-DRG weight shifts can change case revenue even when volume is flat. Hospitals that rely on a handful of
high-weight DRGs (complex ortho, certain neuro/stroke cohorts, advanced cardiac care) should pay attention to:

• Which DRGs are recalibrating up or down (and whether the change matches your internal cost profile).
• How comorbidity capture and documentation quality influences severity assignment.
• Any proposed coding and grouper-related updates that could affect clinical pathways and claim outcomes.

The best time to evaluate documentation practices is before the fiscal year beginsbecause fixing a systemic
documentation gap in Q4 is like trying to install plumbing after the drywall is painted.

7) Quality Programs: Fewer Measures, More MA Data, and a Shift in Focus

CMS proposes significant updates across multiple hospital quality programs. The direction is clear:
reduce certain reporting burdens, remove select equity/SDOH-related measures, and
expand Medicare Advantage (MA) data use in several measure specifications.

Hospital IQR Program: modifications and removals

CMS proposes to modify four measures (including expanding cohorts to include MA patients for certain measures and
shortening some performance periods from three years to two). CMS also proposes removing four measures, including:

• 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

CMS also signals interest in future measures related to well-being and nutrition.
In plain terms: CMS is trying to pivot the measurement portfolio while keeping the “clinical outcomes” throughline.

Hospital VBP: removing the Health Equity Adjustment

CMS proposes removing the Health Equity Adjustment from the Hospital Value-Based Purchasing Program
scoring methodology beginning with the FY 2026 payment determination. Operationally, this can affect how hospitals
prioritize improvement projects and how they communicate “value” initiatives internallyespecially if teams had built
momentum around equity-linked measurement.

HRRP: Medicare Advantage data enters the chat

CMS proposes modifications to the Hospital Readmissions Reduction Program (HRRP), including adding MA data to the
readmission measures and shortening the applicable period from three years to two years. CMS also proposes removing
certain COVID-19 exclusions and covariates. Notably, some of these proposed HRRP changes would begin with the
FY 2027 program year.

Strategy implication: hospitals with a large MA footprint should start comparing MA vs. FFS readmission patterns now.
If the populations differ meaningfully, adding MA data could change performance scoreseven if clinical performance
doesn’t change.

HAC Reduction Program: ECE updates and baseline refresh

CMS proposes updates to the Extraordinary Circumstances Exception approach and provides notice related to updating
CDC NHSN healthcare-associated infection measures with a newer baseline. This is one of those areas where “technical”
changes can still have real dollars attached (because HAC penalties are still penalties).

8) Promoting Interoperability: More Cybersecurity Muscle, Plus TEFCA Signals

In the Medicare Promoting Interoperability Program, CMS proposes changes that push hospitals to strengthen
cybersecurity governance and modernize exchange expectations.

Key proposed changes

• Define the EHR reporting period in CY 2026+ as any continuous 180-day period (instead of shorter periods).
• Update the Security Risk Analysis measure so hospitals attest to having conducted
  security risk management in addition to analysis.
• Update the SAFER Guides measure: attest to completing an annual self-assessment using all
  eight updated SAFER Guides.
• Add an optional bonus measure under Public Health and Clinical Data Exchange for exchange with a public health
  agency using TEFCA.

If your security team has been asking for budget, this is the part of the proposed rule they’ll highlight with a
neon marker. (If your security team hasn’t been asking for budget, please check on them. They might be trapped under
an audit.)

9) Digital Quality Measurement (dQM): A FHIR-Forward Request for Information

CMS includes a request for information on transitioning quality reporting toward a more
digital quality measurement landscape, including the potential use of
HL7 FHIR standards for electronic clinical quality measures (eCQMs) and other reporting constructs.

This matters because even if the FY 2026 proposed rule doesn’t force a full digital transition immediately, it
signals where CMS wants to go. Hospitals that invest early in data quality, interoperability, and consistent
clinical documentation (in the EHR, not just in a binder labeled “Quality Stuff”) are more likely to thrive as
reporting becomes more automated and less forgiving.

10) TEAM Model: Episode-Based Payment Moves Closer to the Operating Room

The proposed rule also discusses changes to the Transforming Episode Accountability Model (TEAM), a
five-year, mandatory episode-based payment model scheduled to run from January 1, 2026, through
December 31, 2030. TEAM focuses on selected hospitals and covers the cost and quality of care from a
hospital-based surgery through 30 days post-procedure.

Why TEAM matters even if you’re not selected

• It’s a signal that CMS still believes episodes are a lever for cost and qualityespecially for high-volume surgical
  categories.
• It can influence physician alignment, post-acute partnerships, discharge planning, and readmission reduction
  strategies.
• It strengthens the business case for standardizing care pathways and improving handoffsbecause a “leaky” care
  transition becomes a financial problem, not just a clinical one.

CMS proposes adjustments intended to capture quality performance without increasing burden, improve target price
construction, and expand waivers that can increase post-acute care flexibility. Operationally, TEAM pushes hospitals
to treat care coordination like a core competency, not an optional side quest.

How Hospitals Can Respond: A Practical Action Plan

1) Run the numbers early

Use the proposed rule impact tools and your internal claims data to model FY 2026 under multiple scenarios:
wage index changes, labor share shifts, service line volumes, and potential quality program impacts.

2) Build a cross-functional “rule read” team

The smartest organizations don’t leave this to one department. A solid IPPS proposed rule team includes:
finance/reimbursement, CDI/coding, quality, IT/security, case management, and a clinical leader who can translate
“policy change” into “what this does to actual care.”

3) Track quality measure changes as workflow changes

If measures are removed, don’t just celebrate and delete the dashboard. Confirm what replaces them, what remains,
and whether internal improvement work should continue for patient outcomeseven if the external scorecard changed.

4) If you’re affected by wage index transitions, prepare a comment strategy

Wage index policy changes can create winners and losers. If your hospital is heavily impacted, consider submitting
a focused comment letter with data, specific operational consequences, and clear alternatives.

5) Treat Promoting Interoperability as a security + governance project

The proposed cybersecurity and SAFER Guide expectations are not “just IT.” They intersect with governance, risk
management, vendor strategy, and clinical operations. Align leadership early.

Conclusion: The FY 2026 IPPS Proposed Rule in One Sentence

CMS proposes a modest net payment update, major wage index housekeeping, a reshaped quality portfolio (with more MA
data and fewer equity/SDOH measures), stronger interoperability expectations, and an episode-payment model that nudges
hospitals toward tighter care coordinationwhether they asked for that nudge or not.

Experiences From the Field: What This Proposed Rule Feels Like Inside a Hospital (500+ Words)

The FY 2026 IPPS proposed rule isn’t just a policy documentit’s a season. And in many hospitals, “reg season” has a
familiar rhythm that looks less like a tidy academic review and more like a coordinated relay race where everyone is
carrying a different kind of baton (spreadsheet, measure spec, security checklist, or a pager that only goes off when
you try to eat lunch).

One common experience: the finance and reimbursement team starts with optimism. The first pass is
quick“2.4% update, okay, that’s manageable.” Then the second pass arrives, and it has friends: labor share changes,
wage index transitions, DSH projections, outlier assumptions, and quality program interactions. The mood shifts from
“manageable” to “we need three versions of this forecast and we needed them yesterday.” The best teams build a
baseline scenario and then immediately create “stress test” versions: what happens if wage index moves against us,
if the transitional policy doesn’t fully buffer the drop, or if a major service line sees volume changes. In many
organizations, this is where leadership realizes Medicare planning isn’t “one number”it’s a matrix.

Meanwhile, coding and CDI teams often experience proposed IPPS changes as a signal to check the
hospital’s documentation “plumbing.” Even when MS-DRG recalibration is technical, it can amplify existing
documentation gaps. Teams commonly respond by pulling a targeted list of DRGs that drive margin and volume, auditing
documentation patterns, and running physician education that focuses on clinical truth (not “coding for payment”).
The most effective CDI efforts feel practical: “Here’s what we need documented for accuracy, here’s why it matters,
and here’s how it impacts patient care and continuity”not a vague lecture about “compliance.”

Quality teams often have a different emotional curve. Measure removals can be both relief and
disruption. Relief because fewer measures can reduce reporting burden; disruption because some hospitals have spent
years building programs around certain measuresdashboards, committees, workflows, even hiring decisions. When CMS
proposes to remove measures like health equity and SDOH screening measures from certain programs, quality leaders
frequently face a hard question: do we stop because the measure is gone, or do we continue because the work still
matters locally? Many organizations choose a hybrid: maintain internal monitoring for community benefit and
performance improvement, but redesign external reporting workflows to match what CMS will actually score.

IT and security teams experience Promoting Interoperability proposals as both validation and
pressure. Validation because “security risk management” and SAFER Guides align with what they’ve been warning about.
Pressure because the proposals can force organizations to operationalize good security habitsdocument them, repeat
them, prove themwhile still keeping clinical operations stable. The hospitals that do this best treat security as a
shared responsibility: IT leads the technical work, but governance ensures accountability, and clinical leadership
supports workflow decisions that reduce risk.

Finally, the care management and post-acute teams feel the gravitational pull of TEAM (and episode
thinking more broadly). Even hospitals not selected often watch closely because episodes influence partner behavior:
SNFs want stronger relationships, home health agencies want cleaner handoffs, and surgeons want predictable pathways.
Hospitals commonly respond by tightening discharge planning protocols, standardizing post-op follow-up, and improving
the “handoff narrative” so patients don’t fall through cracks between settings.

If there’s one universal experience across departments, it’s this: the proposed rule becomes a forcing function for
alignment. It makes teams talk to each other. Sometimes that alignment is graceful. Sometimes it’s a calendar invite
titled “IPPS IMPACTURGENT” that appears out of nowhere. Either way, organizations that treat the rule as a
multidisciplinary planning eventnot a finance-only projecttend to turn the proposed rule from an annual disruption
into a strategic advantage.

The post CMS FY 2026 IPPS Proposed Rule Key Policy and Payment Changes appeared first on Blobhope Family.