FFY 2027 IPPS and LTCH Final Rule

On August 4, 2026, the Centers for Medicare & Medicaid Services (CMS) published its annual final rule for the federal fiscal year (FFY) 2027 Inpatient Prospective Payment System (IPPS) and long-term care hospital (LTCH) prospective payment system (the LTCH PPS). The rule finalized changes on a wide range of topics, including (A) payment rate updates; (B) graduate medical education (GME) criteria and requirements; (C) provider-based department policies; (D) transitional rules for hospitals impacted by the discontinuation of the low wage index hospital policy; (E) revisions to the rules governing organ acquisition costs; (F) updated calculations for uncompensated care payments to disproportionate share hospitals; (G) expiration of expanded criteria for the low-volume hospital payment adjustment and Medicare-Dependent Hospital (MDH) program; (H) new technology add-on payments updates; (I) updates to the Transforming Episode Accountability Model (TEAM); (J) expansion of the Comprehensive Care for Joint Replacement Expanded (CJR-X) model; (K) modifications to several quality programs, including the Hospital Inpatient Quality Reporting (IQR) Program, Hospital Value-Based Purchasing (VBP) Program, the Hospital Readmissions Reduction Program (HRRP), the Medicare Promoting Interoperability Program, and the PPS-Exempt Cancer Hospital (PCH) Quality Reporting Program; and (L) modifications to the LTCH Quality Reporting Program.

A. Payment Rate Updates

Overall, CMS finalized a 2.3% applicable percentage increase to the national standardized amount for inpatient hospital operating costs for FFY 2027¹, a slight decrease from the proposed rule’s 2.4%.² This increase reflects a 3.2% market basket percentage increase, offset by a 0.9 percentage point productivity downward adjustment.³ Hospitals that fail to submit quality data receive a reduced update of 1.5%; hospitals that are not meaningful EHR users receive an update of -0.1%; and hospitals failing both requirements receive an update of -0.9%.⁴ CMS also finalized a 2.3% increase in the national standardized amount for long-term care hospitals for the next federal fiscal year (3.2% market basket increase less 0.9 percentage point productivity adjustment).⁵ LTCHs that fail to submit quality reporting data will receive an update of only 0.3%, reflecting a 2.0 percentage point reduction.⁶ CMS estimates these changes will result in an overall increase of approximately $2.9 billion in FFY 2027 payments to acute care hospitals (with roughly $2.1 billion attributable to operating payments) and approximately $54 million in FFY 2027 payments to LTCHs.⁷

B. Graduate Medical Education (GME) Residency Programs and Payments

Criteria to determine a “new” medical residency program. Pursuant to its rulemaking authority under Sections 1886(h)(4)(H)(i) and 1886(d)(5)(B)(viii) of the Social Security Act, CMS finalized changes to the criteria for determining when a GME residency program qualifies as “new” for purposes of Medicare direct GME (DGME) and indirect medical education (IME) full-time equivalent (FTE) resident cap adjustments.⁸ Starting October 1, 2026, for medical residency training programs starting to train residents or for programs still in the 5-year cap building period, “in addition to receiving initial accreditation by the appropriate accrediting body, for a residency program to be considered new, at least 90 percent of the individual resident trainees (not FTEs) must not have previous experience training in another program in the same specialty.”⁹ In addition, CMS will “no longer consider the previous employment of the faculty or program director in determining whether a residency program is genuinely new for cap-building purposes.”¹⁰

The amended regulation at 42 C.F.R. § 413.79(l)¹¹ specifies that “at least 90 percent of the individual residents that participate in the program during the 5-year cap building period... must not have previous experience training in another program in the same specialty.”¹² In response to comments about the administrative burdens of calculating the 90 percent threshold, CMS states it recognizes that “reviewing the training history of all residents that enter a program over the course of 5 years can be a significant amount of work for the MAC[,]” and notes that “the hospital is responsible for maintaining and providing the training history of each of those residents[.]”¹³ The calculation of the 90 percent threshold will exclude from the count those entering the program “as a first-year resident through the National Resident Matching Program or another binding third-party resident matching program[,]”¹⁴ as well as those considered “a ‘displaced resident’ under 42 CFR 413.79(h)(1)(iii).”¹⁵ The 90 percent requirement will not apply to programs accredited for 16 or fewer resident positions.¹⁶

Anti-discrimination requirements in GME and Nursing and Allied Health (NAH) Programs. Also effective October 1, 2026, CMS finalized its “proposal to consolidate various GME- and NAH-related antidiscrimination requirements under new 42 CFR 413.84.”¹⁷ Specifically, the regulations at 42 CFR § 413.84 now provide that approved medical residency training programs and NAH education programs “must not[,]” and the related accreditation organizations “must not use criteria that[,]” “discriminate, or promote or encourage discrimination, on the basis of race, color, national origin, sex, age, disability, or religion, including the use of those characteristics or intentional proxies for those characteristics as a selection criterion for employment, program participation, resource allocation, or similar activities, opportunities, or benefits.”¹⁸ In response to comments “object[ing] to the proposed prohibition on the use of identity characteristics or intentional proxies for those characteristics as selection criteria for residency programs[,]”¹⁹ among other concerns, CMS responded that the agency “believe[s] that race-conscious elements of diversity, equity and inclusion policies are generally impermissible under Federal law, as strongly suggested by the Supreme Court’s ruling in Students for Fair Admissions v. President Fellows of Harvard College (2023).”²⁰ In response to comments seeking clarification about potential duplication of existing civil rights laws and evaluation standards, CMS directs people to the Attorney General’s Guidance for Recipients of Federal Funding Regarding Unlawful Discrimination for “a non-exhaustive list of unlawful policies and practices that are prohibited under these regulations[.]”²¹

C. Provider-Based Department Policies

CMS finalized its proposal to limit the availability of the “referral-based” test to meet the “same patient population” criterion to outpatient departments only, excluding remote off-campus inpatient departments from using the “referral-based” option to qualify for provider-based status.²² As explained in the Ropes & Gray Hospital and Health Systems Reimbursement Newsletter (June 2026): under the current rules, unless the off-campus facility is within 35 miles of the main provider, or another exception applies, the facility must demonstrate a “high level of integration with the main provider” by meeting either of two options: (A) at least 75% of patients served at the provider-based site reside in the same ZIP code as 75% of those served at the main provider; or (B) at least 75% of patients served by the provider-based site who required the type of care offered by the main provider actually received care from the main provider. 42 C.F.R. § 413.65(e)(3)(iii)(A), (B).

The amended regulation at 42 C.F.R. § 413.65(e)(3)(iii)(B) replaces the phrase “the facility or organization” with “an outpatient facility or organization.”²³ In response to comments, CMS notes that despite “this policy [having] been in place for over 20 years,” the agency “could locate no case that relied on this specific referral test.”²⁴ In addition, CMS refused commenters’ requests for an exception for existing locations because “to the extent these facilities are receiving higher payments[,]” the agency “do[es] not believe... those higher payments are justified or equitable.”²⁵

D. Continued Transition for the Discontinuation of the Low Wage Index Hospital Policy

As explained in the Ropes & Gray summary of the FFY 2027 IPPS and LTCH Proposed Rules, after the D.C. Circuit’s decision in Bridgeport Hospital v. Becerra, CMS “discontinued the low wage index hospital policy and the application of the low wage index budget neutrality factor to the standardized amounts[.]²⁶ In this Final Rule, invoking authority under Section 1886(d)(5)(I)(i) of the Social Security Act, CMS finalized as proposed its plan “to adopt a narrow transitional exception to the calculation of FY 2027 IPPS payments for low wage index hospitals that benefitted from the FY 2024 low wage index hospital policy and are significantly impacted by the discontinuation of the low wage index hospital policy.”²⁷ For FFY 2027, CMS will continue to apply a transitional payment exception for hospitals that (1) “benefitted from the low wage index hospital policy in FY 2024[,]”²⁸ and (2) “whose FY 2027 wage index is decreasing by more than 14.2625 percent from the hospital’s FY 2024 wage index[.]”²⁹ Those eligible hospitals will receive a transitional payment exception “equal to the additional FY 2027 amount the hospital would be paid under the IPPS if its FY 2027 wage index were equal to 85.7375 percent of its FY 2024 wage index.”³⁰

CMS states that the transitional payment exception would be applied “after the application of the 5-percent cap on wage index decreases policy.”³¹ The 5% cap policy refers to CMS’s existing policy, which ensures that “[a] hospital’s wage index will not be less than 95 percent of its final wage index for the prior FY.”³² Although CMS decided against budget neutralization of the interim transition policy for FFY 2025, “given the timing of the Bridgeport Hospital v. Becerra decision[,]” the payment transition for FFY 2026 was finalized with a budget neutrality adjustment.³³ For FFY 2027, CMS has again opted “to do so in a budget neutral manner through an adjustment applied to the standardized amount for all hospitals.”³⁴ In addition, CMS will “make a budget neutral equivalent exception under the capital IPPS.”³⁵

E. Reasonable Cost Payment Policies and Reimbursement Appeals for Independent Organ Procurement Organizations (IOPOs) and Histocompatibility Laboratories (HCLs)

Prompted by recent Office of Inspector General findings of unallowable costs on Medicare cost reports, CMS finalized policies on Medicare reasonable cost reimbursement policies under 42 C.F.R. Part 413, and section 1861(v) of the Act.³⁶ CMS expanded the reasonable cost reimbursement and reconciliation framework, previously limited to kidney acquisition, to include nonrenal organ acquisition costs (heart, liver, lung, pancreas) for IOPOs and HCLs, effective for cost reporting periods beginning on or after October 1, 2028, a year longer than originally proposed.³⁷ The final rule also revises 42 C.F.R. § 413.420, distinguishing between kidney-specific and new nonrenal organ-specific provisions, and requires Medicare contractors to review, approve, adjust (no more than quarterly), and publish nonrenal organ-specific standard acquisition charges and interim rates.³⁸ CMS also codified longstanding policies on allowable costs, including the prudent-buyer standard, limits on OPO public education costs, prohibitions on entertainment costs, and rules governing education and travel expenses, as well as overhead cost allocation requirements preventing improper distribution of A&G costs.³⁹ Finally, CMS finalized its proposal to assert the CMS Administrator’s purported discretionary authority to review decisions in IOPO and HCL cost report reimbursement appeals.⁴⁰ Some commenters argued that CMS’s use of United States v. Arthrex, Inc., 594 U.S. 1 (2021), to justify the codification was self-serving and inaccurate, noting that the current IOPO/HCL review process already meets the Appointments Clause since a principal officer can review the decisions in question. CMS responded that, although no statute requires it, it codified the Administrator’s discretionary authority to review and reverse decisions by inferior officers to promote accountability and consistency, consistent with Arthrex’s principle that principal officers should supervise subordinates’ decisions.⁴¹

F. Medicare Disproportionate Share Hospitals and Uncompensated Care Payments

Pursuant to Section 1886(r)(2) of the Social Security Act, CMS finalized its updated “estimates of the 3 factors used to determine uncompensated care payments for FY 2027.”⁴² For Factor 1, CMS adopted the calculation methodology as proposed for FFY 2027,⁴³ and incorporates the June 2026 Office of the Actuary (OACT) estimate for Medicare DSH payments for FFY 2027, resulting in the final Factor 1 amount of $11,825,250,000 for FFY 2027.⁴⁴ For Factor 2, CMS updates the calculation for FFY 2027 “to incorporate the most recent [National Health Expenditure Accounts] data”⁴⁵ which the agency “believe[s] that it is the most appropriate measure of changes in the rate of uninsurance.”⁴⁶ As a result, Factor 2 for FFY 2027 is 67.14%,⁴⁷ an increase from the proposed 65.00%.⁴⁸ Finally, CMS will continue to calculate Factor 3 using the “multiyear averaging methodology” it has used since FFY 2023.⁴⁹ Total uncompensated care payments and supplemental payments in FFY 2027 will be approximately $8.049 billion.⁵⁰

G. Low-Volume Hospital and MDH Program Changes

Section 1886(d)(12)(C)(i) of the Act, as amended by the Consolidated Appropriations Act of 2026, provides that for FFYs 2019 through 2026 and for the portion of FFY 2027 from October 1, 2026 through December 31, 2026, hospitals qualify as “low-volume” if they have fewer than 3,800 discharges and are located more than 15 road miles from another subsection (d) hospital.⁵¹ Beginning January 1, 2027 and ending September 30, 2027, the definition reverts to its permanent statutory requirements: fewer than 200 discharges and more than 25 road miles from another subsection (d) hospital.⁵² Such reversion to the original text of § 1886(d)(12) of the Act, requires the Secretary to develop an empirically justifiable adjustment. Such an adjustment consists of an applicable percentage increase for low-volume hospitals based on an empirical relationship between the standardized cost-per-case for such hospital and the total number of discharges of such hospitals and the amount of the additional incremental costs (if any) associated with the number of such charges.⁵³ In the final rule, CMS finalized an empirically justifiable payment adjustment of 25%.⁵⁴ Additionally, the final rule outlines how the MDH program will expire after December 31, 2026, under Section 6202 of the Consolidated Appropriations Act of 2026. Under current law, all hospitals that previously qualified for MDH status will be paid solely based on the federal rate beginning January 1, 2027.⁵⁵

H. New Technology Add-On Payments

a. Continuation of Previously Approved Technologies

CMS is continuing new technology add-on payments (NTAP) for 41 technologies in FY 2027, determining that each technology remains “new” under the agency’s framework.⁵⁶ CMS’s longstanding practice was to treat a technology as “new” for purposes of NTAP eligibility for two to three years after data become available reflecting the inpatient hospital code assigned to the new technology.⁵⁷ For technologies first approved before FY 2025, CMS uses the midpoint of the upcoming fiscal year (April 1) to determine whether the technology’s newness period has expired.⁵⁸ For technologies first approved in FY 2025 or later, CMS extends NTAP eligibility for an additional year when the three-year anniversary of the product’s U.S. market entry falls on or after October 1 of that fiscal year.⁵⁹ CMS estimates the aggregate FY 2027 impact of continued NTAP for the 41 technologies at approximately $840.5 million.⁶⁰ CMS is discontinuing NTAP for a group of 13 technologies that no longer qualify as “new” for FY 2027 because their three-year anniversary of market entry occurs before April 1, 2027 (or, for one technology first approved in FY 2026, before October 1, 2026).⁶¹

b. FY 2027 New Applications Approved

CMS is approving 19 new NTAP applications for FY 2027. Of those, CMS is approving three technologies under the traditional pathway.⁶² CMS estimates the aggregate FY 2027 impact of traditional pathway approvals at approximately $481.5 million.⁶³ CMS is approving the remaining 16 new technologies under the alternative pathway, all of which qualified based on FDA Breakthrough Device designation. CMS estimates the aggregate FY 2027 impact of alternative pathway approvals at approximately $417.7 million.⁶⁴ In total, CMS estimates the aggregate FY 2027 NTAP impact across all continued and newly approved technologies (traditional and alternative pathways combined) at approximately $1.74 billion.⁶⁵

c. Repeal of the Alternative NTAP Pathway

Since FY 2021, medical devices designated by FDA as Breakthrough Devices (and, since FY 2021/2022, drugs with Qualified Infectious Disease Product designation or Limited Population Pathway for Antibacterial and Antifungal Drugs approval, respectively) have been eligible for NTAP under an “alternative pathway” that did not require applicants to demonstrate substantial clinical improvement over existing technologies, as required under the standard pathway.⁶⁶ CMS is finalizing the repeal of this alternative pathway beginning with applications received for NTAP for FY 2028 and subsequent fiscal years.⁶⁷ Under this change, all future NTAP applicants must demonstrate that the technology meets all standard eligibility requirements, including substantial clinical improvement, unless eligible for a limited grandfathering transition.⁶⁸ Technologies already approved under the alternative pathway, including the 16 technologies approved in this final rule, remain eligible for continued NTAP under the alternative pathway for as long as they otherwise satisfy continuation requirements.⁶⁹

I. TEAM Updates

The Transforming Episode Accountability Model (TEAM) is a five-year mandatory episode-based alternative payment model, running from January 1, 2026 through December 31, 2030.⁷⁰ TEAM tests five surgical episode categories: Coronary Artery Bypass Graft, Lower Extremity Joint Replacement, Major Bowel Procedure, Surgical Hip/Femur Fracture Treatment, and Spinal Fusion, to see whether an episode-based pricing methodology linked with quality measure performance for select acute care hospitals reduces Medicare program expenditures while preserving or improving the quality of care for Medicare beneficiaries receiving services within the foregoing surgical episode categories.⁷¹

CMS finalized three new MS-DRGs (523, 524, and 525) to better classify beneficiary acuity and resource utilization for certain spinal fusion procedures.⁷² Also, CMS is finalizing a rule providing that if a beneficiary in a CJR-X episode undergoes a procedure at a TEAM participant hospital that would otherwise initiate a TEAM episode during the CJR-X 90-day post-discharge period, the associated spending is included in the CJR-X episode, and the procedure will not initiate a TEAM episode or be attributed to the TEAM participant.⁷³ Finally, CMS is finalizing measurement performance periods for three measures: (i) Hospital Harm—Falls with Injury, (ii) Hospital Harm—Postoperative Respiratory Failure measures (calendar-year, one-year performance periods), and (iii) Thirty-Day Risk—Standardized Death Rate among Surgical Inpatients with Complications measure (two-year rolling periods).⁷⁴

J. Expansion of CJR-X Model

CMS finalized the nationwide expansion of the CJR Model under § 1115A(c) of the Social Security Act, based on evaluation results showing the CJR Model achieved $112.7 million in net savings to Medicare across Performance Years 6 and 7 while maintaining quality of care.⁷⁵ The Secretary has determined that expansion would reduce spending without reducing quality, and the CMS Chief Actuary has certified that the nationwide expansion would produce Medicare savings.⁷⁶ CJR-X is characterized as a Phase II model expansion rather than a new Phase I model test.⁷⁷ CMS originally proposed an October 1, 2027 start date but, in response to numerous commenters requesting additional preparation time, CMS finalized a start date of January 1, 2028, with performance years aligned to calendar years.⁷⁸ Participation will be mandatory for all eligible acute care hospitals in the 50 States, District of Columbia, and U.S. Territories that initiate lower extremity joint replacements (LEJR) episodes and eligible to be paid under both the IPPS and Outpatient Prospective Payment System, except for hospitals participating in TEAM and hospitals located in Maryland.⁷⁹ CJR-X participants will be subject to two-sided financial risk where participants can either receive reconciliation payment amounts from CMS or have to pay CMS a repayment amount based on their spending and quality performance.⁸⁰ CMS projects CJR-X will generate approximately $736 million in net Medicare savings over five years, with projected savings of $129 million in Performance Year 1 increasing to $171 million in Performance Year 5.⁸¹ CMS projects it will pay $1.463 billion to participants while participants will repay $1.855 billion to CMS.⁸² CMS solicited comment on the quality measure set, alternative start dates, performance year definitions, and pricing methodology, and indicated it will continue to consider stakeholder feedback and may make adjustments through future notice-and-comment rulemaking.⁸³

K. Quality Program Updates

CMS finalized updates to several quality programs, including the Hospital Inpatient Quality Reporting (IQR) Program, Hospital Value Based Purchasing (VBP), Medicare Promoting Interoperability, PPS-Exempt Cancer Hospital (PCH) programs, and Hospital Readmission Reduction Program (HRRP).⁸⁴ For hospitals reporting quality data under the Hospital IQR Program, CMS finalized the adoption of three new measures: (1) the Excess Days in Acute Care After Hospitalization for Diabetes measure beginning with the FY 2029 payment determination; (2) the Advance Care Planning electronic clinical quality measure (eCQM) beginning with the FY 2030 payment determination; and (3) the Hospital Harm—Postoperative Venous Thromboembolism eCQM beginning with the FY 2030 payment determination.⁸⁵ These new measures expand the scope of mandatory quality reporting. Hospitals that fail to report face a 2.0 percentage point reduction to their annual payment update.⁸⁶ CMS also finalized the adoption of five modified mortality measures in the Hospital IQR Program beginning with the FY 2028 payment determination as a step toward subsequently modifying them in the Hospital VBP Program beginning with the FY 2032 program year: the Hospital 30-Day, All-Cause, Risk-Standardized Mortality Rate Following AMI Hospitalization; Heart Failure Hospitalization; Pneumonia Hospitalization; COPD Hospitalization; and CABG Surgery measures.⁸⁷ These modified measures expand the cohort to include Medicare Advantage beneficiaries and shorten the performance period from three to two years.⁸⁸

For the Medicare Promoting Interoperability Program, CMS finalizes revisions to the definition of certified electronic health record technology (CEHRT) based on the Office of the National Coordinator for Health Information Technology (ONC) proposals to update the ONC Health IT Certification Program, removing references to four certification criteria effective January 1, 2027.⁸⁹ CMS also finalized: removal of the ONC Direct Review and ONC-Authorized Certification Body (ACB) Surveillance attestations beginning with the Electronic Health Record (EHR) reporting period in CY 2026; removal of the Support Electronic Referral Loops by Sending Health Information and Support Electronic Referral Loops by Receiving and Reconciling Health Information measures beginning with the EHR reporting period in CY 2029; modification of the Electronic Prior Authorization measure (making it an optional bonus measure for CY 2027 and required beginning in CY 2028); adoption of the Unique Device Identifiers for Implantable Medical Devices measure beginning with the EHR reporting period in CY 2027; and adoption of two new eCQMs and removal of three eCQMs in alignment with the Hospital IQR Program.⁹⁰ For the PCH Quality Reporting Program, CMS finalized the adoption of two new eCQMs with modifications—the Advance Care Planning eCQM and the Malnutrition Care Score eCQM—beginning with the FY 2030 program year, as well as the removal of the COVID-19 Vaccination Coverage Among Healthcare Personnel measure beginning with the FY 2028 program year.⁹¹ CMS also finalized reporting and submission requirements for eCQMs in the PCH setting.⁹²

Lastly, for the HRRP, CMS finalized the adoption of the Hospital 30-Day, All-Cause, Risk-Standardized Readmission Rate Following Sepsis Hospitalization measure, with early looks beginning with the FY 2028 program year and a payment adjustment beginning with the FY 2030 program year.⁹³

L. LTCH Quality Reporting Program

Pursuant to Section 1886(m)(5) of the Act, which mandates the establishment of quality reporting requirements for long-term care hospitals, CMS finalized several changes to the LTCH Quality Reporting Program (LTCH QRP).⁹⁴ CMS finalized its proposal that LTCHs failing to submit required quality data will have their annual update reduced by 2.0 percentage points, resulting in an update of only 0.3% for FFY 2027.⁹⁵ Further, beginning with the FFY 2028 Long-Term Care Hospital Quality Reporting Program, CMS will remove the COVID-19 Vaccination Coverage among health care personnel measure and the COVID-19 Vaccine: Percent of Patients/Residents Who Are Up to Date measure.⁹⁶ Finally, to reduce the lag between data collection and public reporting, beginning with the FFY 2029 LTCH QRP, CMS finalized a revision of the data submission deadlines, requiring LTCHs to submit LCDS assessment data and CDC NHSN data by the 15th day of the second month after the end of each calendar quarter, replacing the previous 4.5-month submission window.⁹⁷