FY 2026 IPPS Final Rule: A Strategic Guide for Hospitals Navigating Medicare Payment and Compliance Changes

Introduction: Why the FY 2026 IPPS Final Rule Matters More Than Ever

The Centers for Medicare & Medicaid Services (CMS) has finalized the FY 2026 Inpatient Prospective Payment System (IPPS) rule, effective October 1, 2025, introducing important updates to hospital reimbursement, quality reporting requirements, wage index policies, bundled payment models, and health IT standards.

While the headline update is a 2.6% payment increase for qualifying acute care hospitals, the broader rule reflects CMS’s continued shift toward value-based care, accountability, interoperability, and cost efficiency. For hospitals, the financial impact of the rule depends heavily on compliance with quality programs, adoption of electronic health record (EHR) standards, and performance under value-based initiatives.

Understanding these changes is critical for hospital leadership, finance teams, and revenue cycle professionals seeking to optimize reimbursement and maintain regulatory compliance.

Medicare Payment Updates and Standardized Amount Changes

2.6% Payment Update — With Conditions

For FY 2026, CMS finalized a 2.6% reimbursement increase for hospitals that:

• Submit required quality reporting data
• Demonstrate meaningful use of certified EHR technology

This represents a slight decline from the FY 2025 update and reflects CMS’s continued use of productivity adjustments and market basket recalibrations.

The payment update consists of:

• 3.3% market basket increase
• –0.7% productivity adjustment
• Additional penalties for noncompliance with reporting programs

Hospitals that fail to meet CMS reporting requirements may see significantly reduced or negative payment adjustments.

Net Payment Impact by Compliance Status

This structure reinforces CMS’s policy direction: financial incentives are increasingly tied to quality and technology adoption rather than volume alone.

Updated Standardized Amount (Base Payment Rate)

The standardized amount — the base payment used to calculate MS-DRG reimbursement — increased for FY 2026.

The standardized amount represents:

• The combined labor and non-labor share
• Adjusted by geographic wage index
• Multiplied by MS-DRG weights to determine final payment

FY 2026 Standardized Amounts

Although the standardized amount increased, actual reimbursement depends heavily on case mix, wage index adjustments, and hospital performance metrics.

Outlier Payment Policy Changes

CMS finalized an outlier threshold of $40,397, representing a significant decrease from the prior year.

Why the Threshold Changed

• Actual FY 2024 outlier payments exceeded CMS’s target.
• CMS aims to maintain outlier payments at approximately 5.1% of total DRG payments.
• No retroactive reconciliation occurs under IPPS, so adjustments are applied prospectively.

Operational Impact

• Lower thresholds increase the likelihood of outlier qualification.
• Hospitals treating high-cost cases may receive greater protection.
• Documentation accuracy and cost reporting remain critical for appropriate outlier reimbursement.

CMS also finalized:

• Operating outlier adjustment factor: 0.949
• Capital rate adjustment factor: 0.957704

Wage Index Updates and Policy Changes

End of the Low Wage Index Policy (With Transition Protection)

CMS finalized the termination of the low wage index hospital policy originally introduced in FY 2020 to reduce wage disparities between regions. Courts ruled CMS lacked authority to implement certain aspects of the policy, prompting its discontinuation.

Transitional Relief for Impacted Hospitals

For FY 2026, CMS will provide a transitional payment exception if:

• A hospital’s wage index drops more than 9.75% compared to FY 2024
• Payments will be calculated as if the FY 2026 wage index equals 90.25% of the FY 2024 wage index

This policy helps mitigate sudden reimbursement declines for heavily impacted facilities.

Wage Index Calculation Updates

The FY 2026 wage index is based on FY 2022 cost report data.

• National average hourly wage: $57.92
• Occupational mix adjusted wage: $57.86

Hospitals should monitor occupational mix survey reporting and cost report accuracy to ensure appropriate wage index calculations.

Health IT and Interoperability Enhancements (HTI-4 Rule)

CMS and the Office of the National Coordinator for Health Information Technology finalized Health Data, Technology, and Interoperability (HTI-4) requirements, aimed at improving digital workflows and reducing administrative burden.

Key Technology Requirements

Updated E-Prescribing Standards

• New RxNorm minimum code set requirement
• Updated National Council for Prescription Drug Programs (NCPDP) SCRIPT standards
• Improved data transmission accuracy across systems

Mandatory Electronic Prior Authorization

Previously optional transactions are now required, helping:

• Reduce treatment delays
• Improve payer-provider coordination
• Streamline medication approval workflows

Real-Time Prescription Benefit Checks

Hospitals must enable systems that provide:

• Patient-specific cost information
• Coverage details
• Alternative medication options

These changes aim to enhance transparency while reducing manual administrative tasks.

Quality Reporting Program Changes

CMS continues efforts to reduce reporting burden while maintaining performance accountability.

Modified Measures in the Hospital Inpatient Quality Reporting (IQR) Program

Changes include:

• Inclusion of Medicare Advantage patients in certain measure populations
• Shortened measurement periods (3 years → 2 years)
• Reduced data submission thresholds
• Greater tolerance for missing laboratory or vital sign data

Modified measures include:

• Complication rates following elective total hip or knee replacement
• Stroke mortality measures
• Hospital-wide readmission measures
• Hospital-wide mortality measures

Measures Removed from IQR

CMS removed several measures to reduce administrative workload:

• Hospital Commitment to Health Equity
• COVID-19 Vaccination Coverage among Healthcare Personnel
• Screening for Social Drivers of Health
• Social Drivers of Health positive screening rate

End of COVID-19 Measure Exclusions

Beginning FY 2027:

• Hospital Value-Based Purchasing (VBP) program
• Hospital Readmissions Reduction Program

will no longer include COVID-19 reporting exceptions, signaling a return to standard performance evaluation.

Transforming Episode Accountability Model (TEAM) Updates

The TEAM bundled payment model continues expanding value-based accountability.

What TEAM Requires

Participating hospitals assume responsibility for:

• Cost and quality of care
• Services provided during hospitalization
• Care coordination for 30 days post-discharge

This includes managing:

• Skilled nursing services
• Rehabilitation
• Laboratory testing
• Follow-up care

FY 2026 TEAM Updates

• CMS introduced a deferment period for newly eligible hospitals.
• Hospitals losing eligibility will exit immediately.
• Indian Health Service and Tribal hospitals are excluded.
• CMS added scaling factors to adjust for MS-DRG and APC changes over time.

These adjustments aim to improve pricing accuracy and reduce financial volatility.

MS-DRG Classification Updates

CMS annually updates Medicare Severity Diagnosis Related Groups using claims and cost data.

FY 2026 MS-DRG Changes

• Total DRGs: 770
• Five new DRGs added
• Six DRGs removed
• Major changes in:
  • Nervous system disorders (MDC 1)
  • Circulatory system disorders (MDC 5)

Newly Added DRGs

• Complex aortic arch procedures
• Endovascular abdominal aorta and iliac procedures
• Percutaneous coronary atherectomy classifications

Deleted DRGs

• Hypertensive encephalopathy classifications
• Deep vein thrombophlebitis DRGs
• Arthroscopy DRG

These changes reflect evolving clinical practice and cost patterns.

New Technology Add-On Payments (NTAP)

CMS approved 54 technologies for NTAP in FY 2026, including:

• 27 carryovers from FY 2025
• 5 approved through traditional review
• 22 approved through alternative pathways

NTAP supports adoption of innovative therapies by providing temporary reimbursement for new technologies not yet reflected in DRG rates.

Hospitals must evaluate:

• Eligibility requirements
• Documentation standards
• Financial impact of technology adoption

Strategic Takeaways for Hospital Leaders

The FY 2026 IPPS rule reinforces several long-term healthcare trends:

Stronger Link Between Payment and Performance

Financial outcomes increasingly depend on quality reporting, technology adoption, and care coordination.

Continued Shift Toward Value-Based Care

Bundled payments and episode accountability models continue expanding.

Emphasis on Interoperability and Automation

Digital workflows and prior authorization automation are becoming mandatory.

Increased Need for Revenue Cycle Optimization

Hospitals must strengthen:

• Coding accuracy
• Documentation practices
• Quality reporting processes
• Cost reporting integrity

Organizations that proactively align operations with CMS policy direction will be better positioned to maintain financial stability.

Navigating FY 2026 IPPS Changes with Confidence

Turn IPPS Changes into Financial Opportunity with Expert Revenue Cycle Support

The FY 2026 IPPS Final Rule reinforces a clear reality for hospitals: financial performance is now inseparable from regulatory compliance, quality reporting, and revenue cycle efficiency. From MS-DRG updates and wage index changes to evolving quality programs and value-based care models, even small compliance gaps can translate into significant revenue loss.

Successfully navigating these changes requires more than awareness — it demands precision in coding, documentation integrity, cost reporting accuracy, and proactive revenue cycle management.

At Bristol, we help hospitals adapt quickly to CMS policy changes while strengthening financial performance across the revenue cycle. Our hospital-focused revenue cycle management solutions help organizations:

• Optimize MS-DRG accuracy and documentation to maximize reimbursement
• Improve quality reporting compliance and performance outcomes
• Reduce claim denials and prevent revenue leakage
• Strengthen cost reporting and wage index accuracy
• Ensure readiness for value-based payment models and bundled care initiatives
• Leverage advanced analytics to identify revenue opportunities and operational risks

With certified coding experts, specialty-focused workflows, and advanced automation tools, our team helps hospitals maintain compliance, improve margins, and stay ahead of regulatory change.

Partner with Bristol to transform complex regulatory updates into measurable financial results.