CMS Proposes IPPS Payment Rate Updates: What Hospitals Need to Know

The Centers for Medicare & Medicaid Services (CMS) has released the Inpatient Prospective Payment System (IPPS) Proposed Rule for the 2026 fiscal year (FY).

Among the broad policy and quality program changes included in the Rule, a major focus is the update to IPPS payment rates for acute-care hospitals.

The FY 2026 proposal outlines several important adjustments that will directly affect hospital reimbursement, ranging from increases in operating and capital payments to technical revisions in market basket methodology and wage index calculations. These updates reflect CMS’s continued effort to align hospital payments with current cost structures and healthcare delivery realities.

Projected Financial Impact: A $4 Billion Increase for Hospitals

According to CMS estimates, the proposed changes will result in an overall increase of approximately $4 billion in Medicare payments to acute-care hospitals in FY 2026. This increase accounts for:

• Updates to operating payment rates;
• Adjustments for capital payments;
• Additional uncompensated care payments; and
• Expiration of temporary adjustments under the Medicare-Dependent Hospital (MDH) and low-volume hospital programs.

Market Basket Update and Labor-Related Share Changes

CMS also proposes to rebase and revise the IPPS market basket, using a 2023 base year. This update reflects more recent data on hospital operating costs and includes adjustments to cost weights across categories like wages, benefits, and contracted labor.

As a result, the proposed labor-related share, the portion of payments adjusted by geographic wage index, will decrease from 67.6 percent to 66.0 percent. This change will be applied to discharges on or after Oct. 1, 2025.

A key takeaway here: the shift in labor-related share may impact hospitals differently, depending on location, labor costs, and wage index values.

Wage Index and Low Wage Index Policy Discontinuation

A major change in the FY 2026 proposal is the discontinuation of the Low Wage Index Hospital Policy, which had been in place since FY 2020. This policy increased the wage index for hospitals with otherwise low wage values to reduce geographic disparities. However, following a Washington, D.C. Circuit Court ruling that CMS lacked authority to implement the policy, CMS proposes to permanently eliminate the low wage index adjustment and associated budget neutrality factors, beginning in FY 2026.

To mitigate disruption, CMS is proposing a narrow, one-year transitional exception: hospitals that would experience more than a 9.75-percent decrease in their wage index between FY 2024 and FY 2026 may receive a partial payment adjustment, based on 90.25 percent of their FY 2024 wage index.

Capital-Related Payments

Under the IPPS capital payment system, CMS is also proposing routine updates to rates and policies. The capital payment updates include adjustments for indirect medical education (IME) and Disproportionate Share Hospital (DSH) payments, outlier thresholds, and wage index changes, consistent with those applied to operating payments.

DSH and Uncompensated Care Payments

DSH payments will continue to be split between the empirically justified amount (25 percent) and uncompensated care payments (75 percent). CMS proposes to use the same methodology for calculating Factor 3 in FY 2026 as was used in FY 2025, with hospital-specific uncompensated care amounts based on the most recent three years of discharge data.

Policy Expirations: Low-Volume Hospital and MDH Programs

The rule reflects the scheduled expiration of the MDH and low-volume hospital programs on Sept. 30, 2025. CMS has proposed conforming amendments to reflect these expirations unless new legislation extends them.

Hospitals currently benefitting from these policies should plan for reimbursement changes starting Oct. 1, 2025.

Conclusion

The FY 2026 IPPS Proposed Rule outlines several pivotal updates to hospital payment policy, with financial implications across rural, urban, low-wage, and high-volume hospitals. The proposed $4 billion increase in payments provides some relief amid rising costs, but the removal of the low wage index adjustment and expiration of support programs will require proactive financial planning.

Stakeholders are encouraged to review the Proposed Rule and submit public comments by June 10, 2025, to ensure their perspectives are considered before final rulemaking.

To access the full Proposed Rule or submit comments, visit https://www.regulations.gov and refer to file code CMS-1833-P.

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