The Centers for Medicare & Medicaid Services (CMS) has recently released its proposed payment rules for Fiscal Year (FY) 2026, which have significant implications for hospitals and health systems. For CFOs, understanding these changes is essential for shaping budgets, forecasting revenue, and preparing strategic responses. Below, we summarize the key reimbursement changes, their impacts on hospitals, and actionable strategies to stay ahead.
Key Highlights of CMS’s 2026 Proposed Payment Rules
The proposed rule for FY 2026 addresses the Inpatient Prospective Payment System (IPPS), Long-Term Care Hospital (LTCH) payments, and updates to quality programs. Major changes include:
- Inpatient Hospital Payment Rates: CMS proposes a 2.4% increase in inpatient hospital payment rates, driven by a 3.2% projected market basket increase, offset by a 0.8% productivity adjustment. This adjustment is expected to increase hospital payments by $4 billion, which includes $1.5 billion in additional Disproportionate Share Hospital (DSH) payments and $234 million for new technology add-on payments.
Source: CMS IPPS Proposed Rule
- Long-Term Care Hospitals (LTCH): LTCHs will receive a 2.6% payment rate update, resulting in a net 2.2% increase, or about $52 million in additional payments.
Source: CMS LTCH PPS Proposed Rule
- Policy Shifts: CMS plans to discontinue the low-wage index hospital policy following a federal court ruling, although transitional exceptions will be made for hospitals significantly affected.
Source: CMS Wage Index Policy Update
- Physician Fee Schedule Changes: For the first time in six years, the Conversion Factor (CF) may increase. CMS proposes a CF of $33.4209 for most physicians (representing a 3.3% increase) and $33.5875 for those in Advanced Alternative Payment Models (APMs), incentivizing participation in value-based care models.
Source: CMS Physician Fee Schedule Proposed Rule
Why These Changes Matter for Hospitals
These updates represent more than just minor adjustments; they reflect a continued shift towards value-based care, efficiency, and cost containment. CFOs should take note of the following:
- Revenue Forecasting Challenges: Although rate increases seem beneficial, efficiency adjustments and changes to practice expense methodology could offset these gains, particularly for facility-based physicians.
Source: CMS Practice Expense Methodology
- Impact on Rural and Low-Wage Hospitals: The elimination of the low-wage index policy could significantly affect hospitals in rural or economically disadvantaged areas, even with transitional relief measures.
Source: CMS Rural Hospital Impact Analysis
- Quality Program Updates: CMS is refining measures under programs such as Hospital Value-Based Purchasing and Readmissions Reduction, which will affect incentive payments and penalties.
Strategies CFOs Should Implement Now
Model Financial Impact Early
Utilize CMS’s impact files and case mix index data to project how these changes will influence your organization’s reimbursement. Consider both the positive updates and any potential offsets from efficiency adjustments.
Evaluate Participation in Advanced APMs
The differences in conversion factors create a clear financial incentive for participating in qualifying APMs. CFOs should collaborate with clinical leadership to assess readiness for these models. Source: CMS Advanced APM Overview
Prepare for Policy-Driven Shifts
With CMS signaling a commitment to reduce provider burden and streamline regulations, further changes in reporting requirements can be expected. Now is the time to invest in compliance automation and analytical tools. Source: CMS Burden Reduction Initiative
Bottom Line
The proposed Medicare payment changes for 2026 underscore CMS’s commitment to aligning reimbursement with efficiency and quality. For CFOs, proactive planning is essential. By modeling impacts, exploring opportunities for APM participation, and remaining engaged in policy discussions, hospitals can mitigate risks and seize opportunities in this evolving landscape.
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