In this episode, Bob McDowell, Senior Reimbursement Consultant with BESLER, provides us with a glimpse into BESLER’s upcoming free Webinar, FY 2026 IPPS Final Rule Summary, hosted live on Wednesday, September 10, at 1 PM ET.
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Learn how to listen to The Hospital Finance Podcast® on your mobile device.Highlights of this episode include:
- The hospital payment rates in the final rule.
- Major changes related to CMS’s wage index policies.
- Significant changes in the final rule affecting rural and smaller hospital facilities.
- Changes in disproportionate share and uncompensated care programs.
- CMS’s new alternative payment model TEAM.
Kelly Wisness: Hi, this is Kelly Wisness. Welcome back to the award-winning Hospital Finance Podcast. We’re pleased to welcome back Bob McDowell, Senior Reimbursement Consultant with BESLER. In this episode, Bob will provide us with a glimpse into BESLER’s upcoming free webinar, FY 2026 IPPS Final Rule Summary that we’re hosting live on Wednesday, September 10th, at 1 PM Eastern Time. Welcome back and thank you for joining us, Bob.
Bob McDowell: Thank you, Kelly, and thank you for the opportunity to visit with you.
Kelly: Of course. Well, let’s go ahead and jump in today. So, CMS annually updates the hospital payment rates in the final rule. Can you give us a quick overview as to what’s going to happen in fiscal year 2026?
Bob: Absolutely. This year, there are favorable increases in the hospital federal rates for both short-term and long-term acute care facilities. For short-term acute care facilities, there is an increase to the federal rate of 2.6%. This increase comes from the annual market basket increase of 3.3%, and is reduced by a productivity adjustment of 7/10 of a percent. CMS also subjected the federal base rate to budget neutrality factors for such items as the MS-DRG weighting, adjustments to the wage index, rule demonstration program, and a handful of other items. The overall net increase in the federal base rate for fiscal year 2026 is 1.9%. The base federal reimbursement rate may be subject to other favorable and unfavorable adjustments from additional CMS programs, such as Hospital Readmission Reduction Program, Hospital Acquired Condition Reduction Program, Hospital Value-Based Purchasing Program, and the Interoperability Program.
The increase of the federal rate for IPPS hospitals will result in an estimated $5 billion in additional payments for fiscal year 2026. This $5 billion in additional hospital revenues includes an increase in Medicare disproportionate share hospital uncompensated care payments of $2 billion. The increase to the federal rate for IPPS hospitals will result in an estimated $5 billion in additional payments for fiscal year 2026. This $5 billion in additional hospital revenues includes an increase in Medicare disproportionate share uncompensated care payments of $2 billion, an increase in new technology add-on payments of $192 million, and includes decreases for Medicare dependent hospital designation and low volume add-on payments of a cumulative $500 million. For long-term acute care hospitals, also known as LTACHs, are expected to receive a favorable increase of 2.7%, reflected by a market basket increase of 3.4%, reduced by the same productivity adjustment of 7/10 of a percent.
CMS expects an increase of $72 million in additional payments, primarily due to the annual update and an increase in outlier payments.
Kelly: Wow, thank you for that overview, Bob. So, there have been major changes related to CMS’s wage index policies recently. Can you give us some insight into how these changes affected hospital payments in the fiscal year 2026 final rule?
Bob: Sure. In fiscal year 2020, CMS made a budget neutral policy to increase the wage index for facilities with a wage index value below the 25th percentile wage index. Basically, any hospital whose wage index was not equal to or above the hospital at the 25th percentile line would receive relief by increasing their wage index halfway between its congressional value and a 25th percentile line value. The reallocated amount would be absorbed by hospitals above the 25th percentile line. This reallocation of wage index values resulted in a $245 million shift in hospital payments. This policy was challenged in court, and on July 23rd of 2024, the Court of Appeals for the DC Circuit held that the Secretary lacked authority to establish this policy and ordered the adjustment to be vacated.
On October 3rd of 2024, CMS issued an interim final rule with comment period establishing the fix for the vacated policy. CMS reestablished the congressional wage indexes for all hospitals. In federal fiscal year 2025, all hospitals in a lower quartile who were affected by the vacated policy were limited to a 5% cap and their wage index decrease when compared to the increased value for fiscal year 2024. For 2026, the cap increased to 9.75% when comparing the hospital increased wage index for fiscal year 2024 with their decreased values for fiscal year 2026. In the fiscal year 2026 final rule, we also see the wage index rebased to the fiscal year 2023 market basket and a change in the MS-DRG labor percentage for hospitals with a wage index value above 1.0 from 67.6% to 66%.
Kelly: Well, I know that wage index is pretty complex, and we actually just covered this on the Reimbursement Symposium a few weeks ago that Cody did. So, there’s some additional information there about the Wage Index. Congress has been accommodating rural and smaller hospital facilities. Have there been any significant changes in the final rule affecting these types of facilities?
Bob: Surprisingly, without any additional legislation, once again, the Medicare dependent hospital provision is scheduled to expire on September 30th, 2025, which means these facilities become IPPS hospitals. And the criteria for hospital facilities who are receiving a low volume add-on payment revert to the original qualifying criteria of less than 200 total discharges. That is both Medicare and non-Medicare discharges. And the facility must be more than 25 miles from the next closest Section D hospital facility. Now, Congress has extended these provisions multiple times over the past couple of years, and it would not be surprising to see them extended again.
Kelly: Thank you for sharing that about the rural and smaller hospital facilities. Other programs that typically have changes that can considerably affect hospital payments are the disproportionate share and uncompensated care programs. Are there any substantial changes or updates to these for fiscal year 2026?
Bob: There are no changes or updates to the methodology other than fiscal year 2022– or 2022 data was used for the estimated distributable. Unlike last year, there is an increase in the disproportionate share hospital and uncompensated care pools. In the final rule, CMS calculated the empirical dish amount to be $16.55 billion. That’s an increase of $2.6 billion from prior year. That was calculated to be $13. 94 billion. The factor one amount to be distributed is estimated to be $4.1 billion up from fiscal year ’25 amount of $3.5 billion. The factor 2 amount is estimated to be $7.7 billion up from $5.7 billion in the prior year. And the factor 3 amount is estimated to be $4.7 billion, which is a slight decrease from the $4.8 billion in the prior year. Factor 3 is adjusted by a scaling factor, cost-of-charge ratio trim methodology, uncompensated care trim methodology, and an alternative trim methodology, which are items we will discuss a little more in the webinar.
Kelly: Looking forward to that. I know there have been some substantial changes there. So, in the fiscal year 2025 final rule, CMS established a new alternative payment model called TEAM. Since the first performance year begins in fiscal year 2026, can you tell us a little bit more about the TEAM model?
Bob: The alternative payment model Transforming Episode Accountability Model or TEAM is a mandatory alternative payment model. The intent of TEAM is to improve beneficiary care through financial accountability for episode categories that begin with five specific procedures. Those procedures are coronary artery bypass graft surgery, lower extremity joint replacement, major bowel procedure, surgical hip femur fracture treatment, and spinal infusion. TEAM is being used to test whether financial accountability for these episode categories reduces Medicare expenditure while preserving or enhancing the quality of care for Medicare beneficiaries. The initial model performance period is scheduled to last five years. The first performance year begins on January 1st of 2026. And the final performance year or period year five concludes on December 31st of 2030. The TEAM model sets target prices for the procedures which are reconciled to each facility’s actual cost of the procedure. Upon reconciliation, a facility can earn additional upside payments for the procedures or take a downside cut in payments for the procedures. Those chosen to participate in the model can choose between three different payment quality levels called Tracks. And Track 1 is an option that is open to all participating hospitals for performance year 1. Safety net hospitals can choose to remain in this track for performance years 1 through 3.
Now, Track 1 only has upside risk, meaning you can earn up to a 10% stop gain limit in payments relating to the facility’s composite quality score that can earn up to a 10% positive adjustment for positive reconciliation amounts. Track 2, this track is open for performance years two through five. It is only an option for safety net hospitals, rural hospitals, Medicare dependent hospitals, sole community hospitals, and essential access community hospitals. Now Track 2, this track is open for performance years two through five. It is only an option for safety net hospitals, rural hospitals, Medicare dependent hospitals, sole community hospitals, and essential access community hospitals. Track 2 has upside and downsize risk of a 5% stop gain, stop loss limits to payments, and a 10% up risk side to composite quality scores, and a 15% downside risk to composite quality scores.
And finally, Track 3 is open for performance years one through five and is available to all participating hospitals, which means that hospitals can choose to skip over Track 1 and go directly to Track 3. Now Track 3 has an upside and downsize risk of 20% to payments and a 10% upside and downsize risk to composite quality scores. Now, if you’re a hospital facility who operates efficiently and typically scores well in quality programs, you may want to consider choosing to opt into Track 3 at the beginning of the program to take advantage of the enhanced payments.
Kelly: Wow, thank you for sharing so much about the TEAM model with us, Bob. And thank you so much for joining us and for sharing this sneak peek in the BESLER’s upcoming webinar, FY 2026 IPPS Final Rule Summary that we’re presenting live on Wednesday, September 10, at 1 PM Eastern Time. And as a bonus, you can earn one CPE. Thanks again, Bob.
Bob: Thank you, Kelly.
Kelly: And thank you all for joining us for this episode of The Hospital Finance Podcast. Until next time…
[music] This concludes today’s episode of The Hospital Finance Podcast. For show notes and additional resources to help you protect and enhance revenue at your hospital, visit besler.com/podcasts. The Hospital Finance Podcast is a production of BESLER | SMART ABOUT REVENUE, TENACIOUS ABOUT RESULTS.
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