FY 2026 IPPS/LTCH PPS Proposed Rule: 7 Major Changes Healthcare Leaders Need to Know

The Centers for Medicare & Medicaid Services (CMS) has released a preview for the upcoming Fiscal Year 2026 Inpatient Prospective Payment System (IPPS) and Long-Term Care Hospital Prospective Payment System (LTCH PPS) Proposed Rule. This annual update could introduce several significant changes that will impact hospitals, healthcare administrators, and payers across the country.

1. Transitional Support for Hospitals Impacted by the Low Wage Index Hospital Policy Change

CMS may be proposing a transitional payment exception for some hospitals that were impacted by the discontinuation of the Low Wage Index factor for FY2025 (the discontinuation was a result of a court decision, but the factor continued under OPPS for FY2025, creating a divergence in methodology)

This transitional support will specifically target hospitals that:

• Benefited from the FY 2024 low-wage index hospital policy

• Would otherwise experience a wage index decrease exceeding 9.75% due to this policy change

2. IPPS Labor-Related Share Update

CMS is proposing to rebase and revise the IPPS market basket to reflect a 2023 base year. Importantly, this update includes reducing the labor-related share from 67.6% to 66.0% for all discharges occurring on or after October 1, 2025. This 1.6 percentage point reduction will alter the wage index's impact on overall reimbursement. The Bureau of Labor Statistics provides data on healthcare labor costs that can help hospitals understand these market basket changes.

3. New MS-DRG Classifications for Specialized Procedures

The proposed rule introduces several new Medicare Severity Diagnosis Related Group (MS-DRG) classifications to better align payment with resource utilization:

• New MS-DRG 213: Dedicated to Endovascular Abdominal Aorta and Iliac Branch Procedures

• New MS-DRGs for coronary atherectomy: MS-DRGs 359, 360, and 318 for percutaneous coronary atherectomy procedures

• Reassignment of intracranial neurostimulator implants: Cases involving these implants will move to MS-DRGs 020-022

4. Hospital Quality Reporting Program Streamlining

CMS proposes removing four measures from the Hospital Inpatient Quality Reporting Program beginning with the CY 2024 reporting period:

• Hospital Commitment to Health Equity

• COVID-19 Vaccination Coverage among Healthcare Personnel

• Screening for Social Drivers of Health

• Screen Positive Rate for Social Drivers of Health

5. Hospital Readmissions Reduction Program Expansions

CMS is proposing important refinements to all six readmission measures within the Hospital Readmissions Reduction Program:

• Adding Medicare Advantage patient cohort data to the measures

• Removing the COVID-19 diagnosed patients measure denominator exclusion

These changes will expand the patient population considered in readmission calculations. The National Committee for Quality Assurance (NCQA) offers tools for assessing readmission risk factors in diverse patient populations.

6. Medicare Promoting Interoperability Program Updates

For eligible hospitals and Critical Access Hospitals (CAHs), CMS proposes several changes to the Promoting Interoperability Program:

• Defining the EHR reporting period for CY 2026 and subsequent years as a minimum of any continuous 180-day period

• Modifying the Security Risk Analysis measure requirements

• Updating SAFER Guides requirements

7. Transforming Episode Accountability Model (TEAM) Modifications

The proposed rule includes several important updates to the TEAM model:

• Implementing a limited deferment period for certain hospitals

• Removing health equity plans and health-related social needs data reporting requirements

• Expanding the Skilled Nursing Facility 3-day rule waiver

• Eliminating the Decarbonization and Resilience Initiative

The Center for Medicare and Medicaid Innovation (CMMI) continues to refine value-based care models based on hospital feedback and outcome data.

What's Next?

These proposed changes would take effect on October 1, 2025, for FY 2026, comments may be submitted to CMS during the open comment period through the Federal Register

Stay tuned for updates as CMS reviews public comments and releases the final rule later this year.

Additional Resources

• CMS IPPS/LTCH PPS Official Resources

Disclaimer: This blog post provides a summary of proposed changes. Healthcare organizations should consult the full text of the proposed rule and seek appropriate legal and financial counsel before making decisions based on this information.