CMS Proposes Strategic Updates to HAC Reduction, Readmissions, and Value-Based Purchasing Programs for FY 2026

EDITOR’S NOTE:

To view the full proposed rule or submit a comment, visit https://www.regulations.gov and search for CMS-1833-P.

The fiscal year (FY) 2026 Inpatient Prospective Payment System (IPPS) Proposed Rule outlines several updates to the Centers for Medicare & Medicaid Services (CMS) hospital quality programs including the Hospital-Acquired Condition (HAC) Reduction Program, Hospital Readmissions Reduction Program (HRRP), and Hospital Value-Based Purchasing (VBP) Program.

These proposed modifications, set to take effect as early as FY 2026 and in some cases extending through FY 2033, signal continued efforts by CMS to modernize quality measurement, reflect post-pandemic realities, and ensure programs evolve alongside changes in healthcare delivery.

Below is a summary of the most critical changes across the three programs.

Hospital-Acquired Condition (HAC) Reduction Program

The HAC Reduction Program, which adjusts payments for the worst-performing quartile of hospitals on hospital-acquired conditions, will undergo technical updates in FY 2026.

Key proposed changes include the following:

• Baseline Refresh for NHSN Measures: CMS proposes technical updates to the baseline periods for the five CDC National Healthcare Safety Network (NHSN) healthcare-associated infection (HAI) measures. These include central line-associated bloodstream infections, catheter-associated urinary tract infections, and surgical site infections, among others.
• Codification of Extraordinary Circumstances Exception (ECE): CMS proposes to formally codify the ECE policy across all major quality programs, including HAC. This change ensures consistent processes when hospitals experience disruptions due to events like natural disasters or public health emergencies.

Financial Impact: CMS estimates no fiscal impact from these HAC program changes for FY 2027 or beyond, as the updates are primarily technical.

Hospital Readmissions Reduction Program (HRRP)

HRRP aims to reduce preventable hospital readmissions by penalizing hospitals with excess readmissions for select conditions. The proposed rule outlines five notable updates:

1. Inclusion of Medicare Advantage (MA) Data: CMS proposes to include MA beneficiaries in all six condition-specific readmission measures. This marks a major shift, expanding the program’s applicability beyond traditional fee-for-service Medicare.
2. Removal of COVID-19 Exclusions: Beginning in FY 2026, CMS proposes to eliminate the exclusion of COVID-19 patients from the denominator of all six readmission measures.
3. Reduction in Performance Period Duration: The applicable period for measuring excess readmissions will be reduced from three years to two years, improving data relevancy and responsiveness.
4. Adjustment to Payment Methodology: DRG payment ratios used to calculate readmissions penalties will be modified to account for Medicare Advantage data.
5. ECE Policy Codification: CMS proposes regulatory language to formalize ECE requests in this program.

Financial Impact: CMS anticipates no net financial impact as a result of these changes but recognizes operational and reporting adjustments will be required.

Hospital Value-Based Purchasing (VBP) Program

The VBP Program links a portion of hospital reimbursement to performance across four domains: clinical outcomes, safety, patient experience, and efficiency.

Key proposals include the following:

• Modification to THA/TKA Complications Measure: CMS proposes refining the Total Hip Arthroplasty/Total Knee Arthroplasty (THA/TKA) complications measure, beginning with the FY 2033 program year.
• Removal of COVID-19 Exclusions: The six clinical outcome measures currently exclude COVID-19 patients. CMS plans to remove these exclusions starting in FY 2027.
• Technical Updates to HAI Measures: CMS will apply similar NHSN measure baseline updates in the VBP program, effective in FY 2028.
• Elimination of Health Equity Adjustment: CMS proposes to remove the Health Equity Adjustment from the VBP Program, signaling a potential shift in how social risk and equity will be addressed going forward.
• New Performance Standards: CMS has established and updated performance benchmarks for FYs 2028 through 2031.
• ECE Codification: As with the other programs, CMS proposes to formally codify ECE policy in the VBP framework.

Financial Impact: The VBP Program is budget-neutral by statute. For FY 2026, CMS expects to redistribute approximately $1.7 billion in value-based incentive payments.

Looking Ahead

While these proposed changes are largely administrative or technical in nature, they are significant in terms of data collection, analytics, and quality reporting infrastructure. The inclusion of Medicare Advantage data in HRRP, the removal of COVID-19 exclusions across programs, and the sunset of the Health Equity Adjustment in VBP all reflect the CMS pivot back to pre-pandemic measurement systems while still allowing for flexibility in times of crisis via the codified ECE policy.

Hospitals and health systems are encouraged to undertake the following:

• Evaluate their quality program performance under the new MA-inclusive metrics
• Prepare to update their internal benchmarking tools for new baseline years
• Submit public comments to CMS by June 10, 2025, referencing file code CMS-1833-P

Conclusion

The FY 2026 IPPS Proposed Rule reinforces CMS’s broader goals of aligning quality, cost, and outcomes under a unified data-driven framework.

As CMS moves to finalize these updates, hospital leaders, quality teams, and clinical documentation professionals should take a close look at their performance in each of these programs and prepare to respond.

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