Important News: FY 2026 IPPS Proposed Rule: CMS Proposes Strategic Overhaul of Key Hospital Quality Programs

The Centers for Medicare & Medicaid Services (CMS) has released the FY 2026 Inpatient Prospective Payment System (IPPS) Proposed Rule, outlining significant changes to three of Medicare’s major hospital quality programs: the Hospital-Acquired Condition (HAC) Reduction Program, the Hospital Readmissions Reduction Program (HRRP), and the Hospital Value-Based Purchasing (VBP) Program.

These proposals reflect ongoing efforts by CMS to enhance accountability, expand data inclusivity, and ensure quality measures evolve alongside the healthcare landscape.

With an increasing emphasis on value-based care and health equity, CMS aims to align these programs with real-world performance and patient demographics. Below is an in-depth review of the proposed changes and their potential implications for hospitals and health systems.

Hospital Readmissions Reduction Program (HRRP)

Reengineering for Inclusion and Relevance

The HRRP, first implemented under the Affordable Care Act, imposes financial penalties on hospitals with excessive readmissions for select conditions. The FY 2026 proposed rule brings sweeping changes to this program, with CMS seeking to modernize its applicability and fairness.

Key Proposed Changes

1. Inclusion of Medicare Advantage (MA) Beneficiaries:
   For the first time, all six HRRP condition-specific readmission measures will incorporate data from MA beneficiaries. This inclusion responds to the significant and growing share of the Medicare population enrolled in MA plans, over 50 percent as of 2024. By reflecting this population, the program becomes more representative of total Medicare hospital utilization.
2. Removal of COVID-19 Exclusions:
   CMS proposes eliminating the exclusion of patients diagnosed with COVID-19 from all six measures’ denominators, signaling a transition away from pandemic-era policies and normalizing performance measurement.
3. Reduced Measurement Period:
   The applicable performance period will be shortened from three years to two. This adjustment aims to provide more timely insights and improve hospitals’ ability to act on recent performance data.
4. Refined Payment Adjustment Formula:
   To reflect the inclusion of MA data, CMS will revise the excess readmission ratio and base DRG payment calculations, ensuring financial penalties (or relief) more accurately represent the total patient population served.
5. Codification of the Extraordinary Circumstances Exception (ECE) Policy:
   CMS formally proposes regulatory language that codifies its discretion to grant deadline extensions for data submission when hospitals are impacted by extraordinary events, offering administrative flexibility in times of crisis.

Operational Implications

Hospitals will need to adjust their internal data systems to ensure capture and reporting of MA beneficiary data, which may require coordination with MA plans. The shortened measurement period also creates a tighter feedback loop for quality improvement teams.

Hospital-Acquired Condition (HAC) Reduction Program

Technical and Administrative Modernization

The HAC Reduction Program, which reduces Medicare payments to the bottom quartile of hospitals based on HAC rates, will see more modest but meaningful updates in FY 2026.

Key Proposed Changes

• Baseline Updates to HAI Measures:
  CMS will apply technical baseline updates to the five NHSN Healthcare-Associated Infection (HAI) measures, improving data accuracy and consistency across reporting years.
• ECE Policy Codification:
  Similar to the HRRP, CMS will formalize the ECE process for the HAC program, allowing for deadline extensions in the face of public health emergencies or natural disasters.

Financial Impact

CMS estimates no financial impact from these updates for FY 2027 and subsequent program years, indicating these are operational refinements rather than structural redesigns.

Hospital Takeaway

While not as sweeping as HRRP or VBP changes, the updated baselines signal the importance of accurate and timely infection reporting. Infection prevention programs must ensure alignment with the latest NHSN specifications.

Hospital Value-Based Purchasing (VBP) Program

Realigning Value Incentives with Modern Measures

As the CMS flagship pay-for-performance initiative, the VBP Program adjusts hospital payments based on performance in clinical outcomes, patient experience, safety, and efficiency domains.

Key Proposed Changes

1. THA/TKA Complication Measure Update:
   The Total Hip and Knee Arthroplasty Complication measure will be modified starting in the FY 2033 program year, aligning it with evolving surgical and post-acute care standards.
2. Removal of COVID-19 Exclusions:
   Starting in FY 2027, CMS will remove COVID-19 exclusions from six Clinical Outcomes domain measures, emphasizing return to standard performance evaluation.
3. Updates to NHSN HAI Measures:
   Beginning in FY 2028, technical updates will apply to the five NHSN HAI measures, similar to changes in the HAC program.
4. Elimination of Health Equity Adjustment:
   CMS proposes removing the health equity adjustment component from the VBP Program. The rationale appears to be reevaluating how equity is best incentivized and measured, potentially paving the way for broader structural equity-focused reforms in future rules.
5. Performance Standards Set Through FY 2031:
   CMS is proposing new and updated performance standards for program years FY 2028 through FY 2031, giving hospitals a roadmap for strategic planning.
6. ECE Policy Codification:
   As with the other programs, CMS will codify the ECE policy here, reinforcing procedural uniformity across programs.

Strategic Considerations

Hospitals should begin analyzing their performance trajectory in light of the newly proposed standards and prepare for recalibrated VBP scoring over the next several years. The removal of the health equity adjustment may prompt internal reevaluation of how social drivers of health are documented and addressed, especially if equity measures are reincorporated in future iterations.

Final Thoughts: Driving Toward a More Inclusive, Responsive Quality Framework

The CMS proposed changes reflect a matured approach to hospital quality improvement: one that integrates more patient populations, adapts to a post-pandemic healthcare landscape, and codifies flexibility for hospitals navigating extraordinary circumstances. While the financial impact of these updates may be neutral or minimal in the near term, the operational, analytic, and strategic ramifications are considerable.

Hospitals are encouraged to undertake the following:

• Assess current reporting processes for integration of Medicare Advantage data;
• Review internal timelines and workflows to align with the proposed two-year measurement period;
• Ensure infection prevention data aligns with the updated NHSN technical specifications; and
• Engage in the CMS public comment process by June 10, 2025, to help shape the final rule.

As CMS continues to refine its value-based programs, providers must remain agile, balancing data accuracy, clinical performance, and strategic foresight to thrive under evolving expectations.

Programming note: Listen live every Tuesday morning when Angela Comfort cohosts Talk Ten Tuesday with Chuck Buck at 10 Eastern.