CMS Releases Fiscal Year 2027 IPPS and LTCH Proposed Rule

The Centers for Medicare & Medicaid Services (CMS) on April 10, 2026, released its fiscal year (FY) 2027 proposed rule for the Hospital Inpatient Prospective Payment System (IPPS) and Long-Term Care Hospital (LTCH) Prospective Payment System. The proposed rule would update Medicare payment rates and policies for inpatient hospital services, revise graduate medical education (GME) policies, update quality program requirements, and introduce a range of additional policy changes affecting hospital reimbursement, value-based care models and program integrity.

The proposed rule includes several significant policy changes, including:

• an expansion of the Comprehensive Care for Joint Replacement (CJR) Model into a mandatory, nationwide bundled payment model (CJR-X)
• refinements to the reimbursement methodology for CAR-T therapies, including updates to MS-DRG 018
• a proposal to repeal the alternative pathway for New Technology Add-on Payments (NTAP) and OPPS device pass-through applications
• the codification of policies governing organ acquisition cost reconciliation and clarifying allowable costs under Medicare's reasonable cost principles for organ procurement organizations (OPOs) and histocompatibility laboratories

Stakeholder comments on the IPPS proposed rule are due on June 9, 2026.

• Proposed Rule
• Press Release
• Fact Sheet

Key Aspects of the FY 27 IPPS Proposed Rule

IPPS Payment Update

CMS proposes a 2.4 percent increase in operating payment rates for acute care hospitals that successfully report quality data and are meaningful users of electronic health records (EHRs). This update reflects a projected 3.2 percent market basket increase, reduced by a 0.8 percentage point productivity adjustment, as required under the Affordable Care Act. Hospitals that fail to meet quality reporting or EHR requirements would receive lower updates, ranging from plus 1.6 percent to minus 0.8 percent, depending on compliance. Overall, CMS estimates that total IPPS payments will increase by approximately $1.9 billion in FY 2027.

LTCH Payment Update

CMS proposes a 2.4 percent increase to LTCH payment rates for FY 2027, consistent with the IPPS update methodology. LTCHs that fail to meet quality reporting requirements will receive a reduced update of 0.4 percent.

Recalibration of the FY 2027 Medicare Severity Diagnosis Related Group (MS-DRG) Relative Weights

CMS proposes to recalibrate the MS-DRG relative weights for FY 2027 using FY 2025 Medicare Provider Analysis and Review claims data (approximately 6.9 million discharges) and FY 2024 Medicare cost report data. The agency will continue to apply its long-standing cost-based methodology, relying on cost center cost-to-charge ratios to standardize hospital charges and convert them into estimated costs.

Consistent with prior policy, CMS excludes Medicare Advantage claims, critical access hospitals, rural emergency hospitals and other non-IPPS providers and applies routine data cleaning and trimming steps, including the removal of statistical outliers and invalid claims. CMS also maintains its policy of resetting Present on Admission indicators to "Y" for purposes of weight setting to avoid distortions associated with hospital-acquired condition payment policies and preserve budget neutrality.

CMS proposes several technical refinements, including adjustments for transplant acquisition costs, continued efforts to address non-monotonicity across MS-DRG severity levels and application of the permanent 10 percent cap on reductions in MS-DRG relative weights. The agency also retains its normalization process to ensure that recalibration does not alter overall aggregate payments.

Also, for FY 2027, CMS proposes to continue its refined methodology for MS-DRG 018 to ensure that its relative weight reflects the true cost of CAR T-cell and related immunotherapies. A central issue is the treatment of clinical trials, which often have artificially low recorded costs because the therapy may be provided at reduced or no cost. To avoid downward bias in the MS-DRG's average cost, CMS excludes the MS-DRG 018 cost calculation cases identified as clinical trial or expanded access use. Additionally, CMS applies an adjustment factor – the ratio of average clinical trial case costs to nonclinical trial case costs (estimated at 0.17 for FY 2027). This factor is used to scale clinical trial case counts when computing the national average cost per case, as well as for budget neutrality and outlier modeling.

Disproportionate Share Hospital and Uncompensated Care Payments

Proposed uncompensated care payment and supplemental payment for FY 2027 totals $7.56 billion, a 3.3 percent decrease from the FY 2026 total of $7.82 billion. This decrease is driven largely by a reduction in Factor 1 of the statutory formula. CMS would continue to calculate hospital-specific uncompensated care payments using its established three-factor methodology.

Wage Index Policy Changes

CMS is not proposing any major changes to wage index policy. CMS proposes to discontinue the low-wage index policy, which has provided temporary support to hospitals in lower-wage areas, while implementing a budget-neutral transitional exception for hospitals significantly impacted by the change. The agency continues to apply other key wage index policies, including the 5 percent cap on year-over-year decreases, the rural floor and Medicare Geographic Classification Review Board reclassifications. These updates reflect CMS' continued effort to balance geographic payment equity with statutory budget neutrality requirements while phasing out temporary support policies.

GME and Program Oversight

CMS is proposing requirements to prohibit unlawful discrimination by GME programs and modify the criteria for identifying new residency programs for purposes of direct GME and indirect medical education payments. CMS proposes that new residency programs established on or after October 1, 2026, ensure that at least 90 percent of residents have not previously completed training in the same specialty. These changes are intended to prevent duplicative training and ensure program integrity, and they may affect how hospitals design and expand residency programs.

NTAP

The NTAP program was established to ensure that the MS-DRG payment system does not create a disincentive for hospitals to provide new, costly technologies and services to Medicare patients. For FY 2027, CMS proposes to continue NTAPs for 41 technologies and discontinue 13, while approving only a limited number of new technologies under the traditional pathway. CMS also proposes to eliminate alternative NTAP pathways beginning in FY 2028, including those tied to Breakthrough Device designation, citing concerns about insufficient evaluation of clinical improvement.

CMS further proposes narrowing its interpretation of commercial availability, limiting the ability of applicants to delay the start of the newness period. These changes may significantly impact on manufacturer launch strategies and reduce future NTAP approvals.

In general, CMS uses the U.S. Food and Drug Administration (FDA) marketing authorization date to determine when a technology becomes available for the purposes of NTAP timing, but there are some cases where CMS recognizes a later date. Citing concerns that applicants' assertions of delays in commercial availability have increasingly occurred and become more complex, CMS proposes that it may consider a documented delay in the beginning of a technology's newness period due to commercial availability only until the NTAP becomes effective for the FY for which the applicant applied for the NTAP. If finalized, for a technology that is not yet available for sale at the time of its NTAP becoming effective, the newness period would begin on September 30 before the technology's NTAP start date.

Applicants Considered for Alternative Pathways for FY 2027 and Proposed Removal of Alternative Pathways Beginning FY 2028

CMS considered and proposed to approve 22 applications under the alternative pathways, all of which received the Breakthrough Device designation. CMS did not consider any applications with Qualified Infectious Disease Product designation or the Limited Population Pathway for Antibacterial and Antifungal Drugs pathway.

As noted above, CMS proposes to repeal these alternative pathways beginning with applications received for FY 2028 and require that these applicants demonstrate they meet all eligibility requirements under either the traditional NTAP pathway or pass-through payment for medical devices requirements. CMS cites concern about the limited evaluation process and value of meeting the substantial clinical improvement criterion as reasons for the removal of the alternative pathways. If the proposal is not finalized, CMS indicates it will continue to review applications under these pathways.

CMS also proposes to eliminate the conditional approval pathway for antimicrobial products that have not received FDA marketing authorization by July 1 prior to the applicable FY, instead requiring all applicants to secure FDA authorization by May 1 of the preceding year. However, technologies currently under review for FY 2027 add-on payments, as well as those previously approved under the alternative pathway, would remain eligible under that pathway.

For OPPS device pass-through payments, CMS proposes that all applications submitted on or after October 1, 2026 – including those in the remainder of the CY 2028 cycle ending March 1, 2027 – demonstrate substantial clinical improvement. Applications submitted on or before September 30, 2026, for FDA-designated Breakthrough Devices with marketing authorization would remain eligible under the alternative pathway, and existing device category codes approved through that pathway would continue for their standard two- to three-year duration.

CMS emphasizes that this proposal would not affect coverage or providers' ability to furnish these technologies to Medicare patients, as technologies that do not receive add-on or pass-through payments remain reimbursable through MS-DRG and Ambulatory Payment Classifications (APC) payment mechanisms, respectively. CMS also notes that the proposal would not alter application or approval timelines for most technologies.

CMS invites public comment on the proposal, as well as other ways the agency could more effectively align payment with value for innovative technologies.

Proposed Mandatory Expansion of the Comprehensive Joint Replacement Model

The original CJR Model operated from April 2016 through December 2024 as a mandatory, episode-based bundled payment model for hip and knee replacements in selected geographic markets. Participating hospitals were accountable for the quality and cost of care during the inpatient stay and for 90 days post-discharge.

CMS proposes to nationalize the CJR Model. If finalized, all hospitals that bill Medicare Part A and Part B will be paid through the CJR-X or the Transforming Episode Accountability Model (TEAM) for lower-extremity joint replacement episodes of care for Medicare fee-for-service beneficiaries.

This would represent the first mandatory, nationwide episode-based payment model in Medicare.

Key features of the proposed model include:

• Expanded Scope. CJR-X would cover hip, knee and ankle replacements (adding ankles for the first time) and apply to procedures performed in inpatient and hospital outpatient settings, expanding beyond the inpatient-only focus of the original model.
• Mandatory Participation. Participation would be required for nearly all acute care hospitals paid under IPPS, with limited exceptions for hospitals participating in TEAM and those in Maryland under its all-payer model. Non-IPPS hospitals, such as critical access hospitals and rural emergency hospitals, would also be excluded. TEAM participants would transition to CJR-X beginning in 2031.
• Episode Accountability. Hospitals would remain accountable for quality and total cost of care from the procedure through 90 days post-discharge, with continued emphasis on care coordination and reducing avoidable utilization.
• Improved Risk Adjustment. CMS proposes a significantly more robust methodology, increasing from three risk adjusters under the original model to 29.
• Safety Net Protections. A 5 percent stop-loss would apply to rural and safety-net hospitals to mitigate disproportionate financial risk.

CMS cites the strong performance of the original CJR Model – demonstrating cost savings while maintaining quality – as the primary justification for expansion. The agency also emphasizes that CJR-X would strengthen incentives for care coordination, reduce avoidable utilization and improve communication with post-acute providers, marking a significant step toward broader adoption of value-based payment across Medicare. More information about the CJR-X Model is available online.

Proposed Changes to the TEAM

The TEAM is a mandatory, five-year, episode-based payment model for selected hospitals running from January 1, 2026, through December 31, 2030. It aims to improve care coordination and patient outcomes across five surgical episodes: Coronary Artery Bypass Graft (CABG), Lower Extremity Joint Replacement, Major Bowel Procedure, Surgical Hip/Femur Fracture Treatment and Spinal Fusion.

CMS proposes several targeted refinements. These include adding MS-DRGs to better capture eligible spinal fusion acuity and resource use, modifying episode attribution (including excluding TEAM participants from the proposed CJR-X Model) and clarifying quality measure performance periods, largely aligning them with Hospital Inpatient Quality Reporting (IQR) Program timelines. CMS also proposes adopting a rolling historical Composite Quality Score baseline and align baseline periods with existing hospital reporting programs.

On the payment side, CMS proposes incorporating both APC and MS-DRG update factors into the prospective trend factor used to set target prices, as well as refining the methodology for constructing prospective normalization factors beginning in Performance Year 2. Additional updates would apply risk adjustment coefficients more broadly across baseline period episodes.

CMS also seeks stakeholder input through two requests for information on potential future expansion of TEAM, including the incorporation of ambulatory surgical centers and the voluntary participation of physician-owned hospitals, with appropriate safeguards to address utilization, patient selection and program integrity.

Organ Acquisition and Reasonable Cost Policies

CMS proposes a series of policy changes that would significantly increase oversight and constrain reimbursement under the reasonable cost framework, particularly for independent organ procurement organizations (IOPOs) and histocompatibility laboratories (HCLs).

Currently, IOPOs and HCLs are reimbursed for non-renal organ acquisition on a reasonable cost basis without a formal reconciliation process. Citing findings from Medicare contractors and the Office of Inspector General (OIG) that reported charges may exceed reasonable costs, CMS proposes – beginning in FY 2028 – to implement a reconciliation framework aligned with kidney acquisition policies. Under this approach, Medicare administrative contractors would review reported costs and reconcile them against payments made by transplant hospitals and other OPOs, while also establishing and publishing standard acquisition charges and HCL testing rates. These changes would introduce a new layer of contractor discretion and rate-setting that could materially reduce reimbursement and limit flexibility in covering the full scope of organ acquisition activities.

CMS also proposes to codify the administrator's discretionary authority under 42 C.F.R. § 413.420(g) to review appeals decisions, both at the request of IOPOs and HCLs and on the administrator's own initiative. This proposal may further centralize decision-making and introduce additional uncertainty into the reimbursement appeals process.

More broadly, CMS proposes formalizing and expanding reasonable cost payment policies across provider types, including critical access hospitals, rural health clinics, OPOs and HCLs. These changes – prompted by OIG findings regarding unallowable costs – would codify interpretations of the prudent buyer principle, narrow the scope of allowable expenses (including scrutiny of outreach and education activities) and formalize overhead cost allocation requirements currently addressed through subregulatory guidance. Collectively, these updates are likely to increase compliance burden and constrain providers' ability to allocate costs in a manner reflective of operational realities.

Though CMS projects significant federal savings – $100 million in FY 2028, $500 million over five years and $1.28 billion over 10 years – these savings are expected to come largely through reduced reimbursement to IOPOs and HCLs and increased administrative requirements. As a result, the proposals raise concerns regarding financial sustainability, operational burden and potential downstream impacts on organ acquisition and transplantation infrastructure if implemented as proposed.

Hospital Readmissions Reduction Program (HRRP)

In the HRRP, CMS applies a payment reduction of up to 3 percent to hospitals based on their performance on six procedure-specific readmission measures. CMS is proposing to adopt the Hospital 30-Day, All-Cause, Risk-Standardized Readmission Rate Following Sepsis Hospitalization measure for the FY 2029 program year. 

Hospital Value-Based Purchasing (VBP) Program

CMS proposes updates to the Hospital VBP Program, which remains budget-neutral by withholding 2 percent of base operating MS-DRG payments and redistributing those funds as incentive payments. The agency proposes to incorporate five 30-day mortality measures (acute myocardial infarction (AMI), heart failure (HF), pneumonia, chronic obstructive pulmonary disease (COPD) and CABG), with updates to include Medicare Advantage beneficiaries and shorten the performance period from three years to two years.

CMS also seeks input on potential future measures, including the Emergency Care Access and Timelines Electronic Clinical Quality Measures (eCQM) for inpatient use and the Adult Community-Onset Sepsis standardized mortality ratio measure.

Hospital IQR Program

The Hospital IQR Program is a pay-for-reporting program designed to improve healthcare quality, with hospitals subject to reductions in their IPPS Annual Payment Update if requirements are not met. CMS is proposing to adopt three new measures:

• Excess Days in Acute Care after Hospitalization for Diabetes measure (claims-based; performance period between July 1, 2025, and June 30, 2027/FY 2029 payment determination)
• Advance Care Planning (ACP) eCQM (EHR-based; calendar year (CY) 2028 reporting/FY 2030 payment)
• Hospital Harm – Postoperative Venous Thromboembolism (VTE) eCQM (EHR-based; CY 2028 reporting/FY 2030 payment)
• Five modified 30-day mortality measures (AMI, HF, pneumonia, COPD, CABG) (claims-based; beginning FY 2028 in IQR with transition to Hospital VBP)

CMS is also proposing to modify five existing mortality measures, modify three claims-based measures, remove three eCQMs, and update data reporting and submission requirements for eCQMs and structural measures.

PPS-Exempt Cancer Hospital Quality Reporting (PCHQR) Program

The PCHQR Program is a quality-reporting program for the 11 cancer hospitals that are exempt from the IPPS. CMS proposes adding two electronic clinical eCQMs – ACP and the Malnutrition Care Score – beginning in CY 2028. CMS also introduces new administrative requirements for eCQM reporting, including use of certified health information technology, standardized Quality Reporting Document Architecture file formats, submission deadlines aligned with other CMS programs, and policies for zero-denominator reporting and case threshold exemptions. CMS also proposes to remove the COVID-19 Vaccination Coverage Among Healthcare Personnel measure beginning with the FY 2028 program year and establish reporting and submission requirements for eCQMs in the PCH setting to align with the Hospital IQR Program.

LTCH Quality Reporting Program (QRP)

The LTCH QRP is a pay-for-reporting program under which LTCHs that fail to meet reporting requirements are subject to a two-percentage point reduction in their annual payment update. CMS proposes removing two COVID-19 vaccination measures: the Healthcare Personnel COVID-19 Vaccination Measure and the Patient/Resident "Up to Date" measure beginning in FY 2028. Additionally, CMS proposes operational changes to improve the usefulness of publicly reported data, including revisions to data submission timelines and eventual removal of public reporting for the COVID-19 vaccination measures. CMS seeks a request for information for input on future measure development, particularly around ACP.

Hospital-Acquired Condition Reduction Program (HACRP)

The HACRP penalizes hospitals that rank in the bottom quartile nationally on six quality measures related to hospital-acquired conditions. CMS is not proposing any updates to this program for FY 2027.

Medicare Promoting Interoperability (PI) Program

The Medicare PI Program encourages hospitals to adopt and demonstrate meaningful use of Certified Electronic Health Record Technology (CEHRT). CMS proposes updates to the Medicare PI Program, including eliminating and revising criteria related to patient data, interoperability standards and public health reporting.

Specifically, CMS proposes to:

• adopt the Hospital Harm-Postoperative VTE eCQM beginning with the FY 2030 payment determination
• remove three eCQMs beginning with the FY 2030 payment determination to align with the Hospital IQR Program (VTE Prophylaxis – VTE-1, Intensive Care Unit VTE Prophylaxis – VTE-2 and Discharged on Antithrombotic Therapy – STK-02– eCQMs)
• remove Office of the National Coordinator for Health Information Technology (ONC) Direct Review and ONC-Authorized Certification Body surveillance attestations, as neither attestation requires any specific action; this proposal follows CMS' recognition of the need to reduce administrative burdens
• modify the electronic prior authorization measure. CMS proposes to clarify the measure description to align with updated regulations, including ONC's HTI-4, HTI-5 and the newly proposed Prior Authorization for Drugs proposed rule, as well as make this measure a bonus measure for CY 2027 and require the measure beginning with the EHR Reporting Period in CY 2028; additionally, CMS issues a request for information on a future performance-based measure of electronic prior authorization
• adopt unique device identifiers (UDI) for implantable medical devices measure in the public health and clinical data exchange objective, as CMS believes this measure will further surveillance benefits; additionally, CMS issues a request for information on potential future directions of this measure and additional options for utilizing UDI

Additionally, CMS offers several proposals to align with proposals in the ONC HTI-5 proposed rule:

• update the definition of CEHRT based on proposals from ONC, including the removal of references to "family health history," "patient health information capture," "automated number recording" and "automated measure calculation"
• remove the support electronic referral loops by sending health information and support electronic referral loops by receiving and reconciling health information measures in the health information exchange objective

Proposed Revision of Provider-Based Location Criteria Regulations Applicable to Off-Campus Facilities or Organizations

Current law identifies the types of facilities that qualify as "providers of services" but does not explicitly define the term "provider-based." In practice, CMS distinguishes between freestanding facilities and those operating as part of a "main provider," where multiple locations are treated as a single entity for Medicare payment and coverage purposes. CMS has established criteria at 42 C.F.R. § 413.65 to determine eligibility for provider-based status.

To qualify, a facility must satisfy the "same patient population" requirement by demonstrating that either 1) at least 75 percent of its patients reside in the same ZIP codes as at least 75 percent of the main provider's patients or 2) at least 75 percent of its patients who require services furnished by the main provider receive those services from that provider. These criteria must be met over the preceding 12 months and on an ongoing basis.

Citing concerns that certain inpatient facilities may receive unintended payment advantages, CMS proposes to limit use of the second pathway (42 C.F.R. § 413.65(e)(3)(iii)(B)) to outpatient departments only. Under the proposal, inpatient facilities would still be able to qualify using the geographic overlap test (ZIP code-based), while outpatient facilities could continue using either pathway. This change would narrow eligibility and could restrict the ability of some inpatient facilities to qualify for provider-based status.

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