The Centers for Medicare & Medicaid Services (“CMS”) recently published its proposed payment rules for general acute care hospital inpatient services and long-term care hospital (“LTACH”) inpatient services for federal fiscal year (“FY 2027”) (the “Proposed Rule“). Comments must be submitted by June 9, 2026.
The FY 2027 Proposed Rule provides a 2.4% payment rate increase for both general acute care hospitals and long-term care hospitals (“LTCHs”), while introducing a significant new mandatory episode-based payment model (CJR-X) that will hold hospitals accountable for post-discharge spending and quality for certain surgical procedures. The Proposed Rule also tightens pathways for new technology add-on payments (NTAPs), imposes new conditions on graduate medical education reimbursement, and codifies cost reporting rules for organ acquisition costs and other types of providers. Two key rural hospital payment programs — the Medicare Dependent Hospital program and the low-volume hospital adjustment — are set to expire on December 31, 2026 absent Congressional action, creating particular urgency for small and rural hospitals.
Of most significant interest to hospital administrators, compliance teams, and counsel:
1. Modest Payment Rate Increases for Most Hospitals
CMS proposes a 2.4% payment rate increase for IPPS hospitals (3.2% market basket update minus 0.8 percentage point productivity adjustment), estimating approximately $1.4 billion in increased payments nationwide. Hospitals must participate in the Hospital Inpatient Quality Reporting (“IQR”) program and be meaningful EHR users to receive the full payment update. For LTCHs, CMS proposes the same 2.4% update to the standard payment rate, expecting approximately $55 million in increased payments for standard-rate discharges. LTCHs that fail to submit quality reporting data would receive only a 0.4% update.
2. A Critical Deadline for Congress: Expiring Payments to Support Rural Hospitals
Without Congressional action, two long-standing Medicare payment programs supporting small, rural hospitals will expire on December 31, 2026. The MDH program provides additional reimbursement to small rural hospitals with fewer than 100 beds and a high percentage of Medicare discharges (not less than 60%). Beginning January 1, 2027, absent a change in law, MDH-qualifying hospitals will revert to the standard federal IPPS rate. Similarly, the low-volume hospital adjustment — a sliding scale increase for hospitals with fewer than 3,800 total discharges located more than 15 road miles from another hospital — will revert to more restrictive permanent criteria (fewer than 200 discharges, more than 25 road miles). CMS estimates extending both programs through FY 2027 would result in approximately $0.4 billion in additional payments. Rural hospitals relying on these designations should actively monitor Congressional action.
3. Nationwide Expansion of Mandatory Episode-Based Payment Models: CJR-X and TEAM
CMS proposes to expand the Comprehensive Care for Joint Replacement (“CJR”) Model under the name “CJR-X,” making it mandatory for all eligible acute care hospitals nationwide beginning October 1, 2027. CJR-X covers lower extremity joint replacement (“LEJR”) surgeries (hip, knee, and ankle) in inpatient and hospital outpatient settings. Critical access hospitals, psychiatric hospitals, certain cancer hospitals, hospitals in Maryland, and other non-IPPS/OPPS hospitals would be exempt.
CJR-X would hold hospitals accountable for LEJR episode spending and quality during the inpatient or outpatient procedure and for 90 days post-discharge, using regional risk-adjusted target prices. CMS proposes a 2% discount factor in calculating target prices, reduced for participants achieving “excellent” or “good” composite quality scores. Participants whose actual spending is less than the risk-adjusted and quality-adjusted target price would receive reconciliation payments; those exceeding the target must repay the difference to CMS. The Proposed Rule also addresses mandatory beneficiary notice and freedom-of-choice protections, financial sharing arrangements between providers and suppliers in accordance with published safe harbors to the federal Anti-Kickback Statute for “CMS-sponsored model arrangements,” limited beneficiary incentives (including technology provided to beneficiaries), waivers of certain Medicare program requirements (e.g., to permit post-discharge home visits and certain telehealth visits), data sharing, quality measure reporting and a methodology for determining quality measure performance and calculating a quality composite score, among other things. CMS estimates that CJR-X would save Medicare $725 million across five performance years.
Hospitals currently participating in the mandatory Transforming Episode Accountability Model (“TEAM”) would be exempt from CJR-X until TEAM ends. TEAM, which began January 1, 2026, covers five surgical episodes — including LEJR, Coronary Artery Bypass Graft, Major Bowel Procedure, Surgical Hip/Femur Fracture Treatment, and Spinal Fusion — but tests only 30-day (rather than 90-day) episodes. CMS proposes updates to TEAM, including adding MS-DRGs for Spinal Fusion anchor hospitalizations, clarifying quality measure performance periods, and modifying episode attribution rules to address CJR-X overlap. CMS also seeks comment on extending TEAM to ambulatory surgery centers and voluntary participation by physician-owned hospitals.
4. New Conditions for Medicare Payment for Graduate Medical Education
Building on Executive Order 14279, “Reforming Accreditation to Strengthen Higher Education,” CMS last year added a criterion requiring that accreditation organizations for approved medical residency programs not use accreditation criteria that promote discrimination on the basis of race, color, 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.[1] CMS now proposes to extend this non-discrimination criterion to the medical residency programs themselves and to Medicare-reimbursed nursing and allied health programs. CMS also proposes to prohibit accreditation standards that require, provide, or refer for training in the performance of induced abortions.
CMS also proposes to modify its criteria for identifying “new” residency programs for purposes of establishing new FTE caps or FTE cap adjustments for calculating direct GME and indirect medical education (IME) payments. CMS proposes that in addition to receiving initial accreditation by the appropriate accrediting body, at least 90% of residents must not have prior training experience in another program in the same specialty — with narrow exceptions for small programs (16 or fewer positions), displaced residents, and residents admitted via a binding third-party matching program like the National Resident Matching Program. Prior employment of the program director or faculty would no longer be considered in determining whether a program is genuinely new.
5. Codifications and Clarifications for Reimbursement for Organ Acquisition Costs
In response to a 2023 Office of Inspector General report that independent organ procurement organizations (“IOPOs”) and histocompatibility laboratories (“HCLs”) have been inflating their charges for non-renal organs, CMS proposes to codify new regulations for Medicare contractors to review and reconcile the organ acquisition costs for non-renal organs to align with policies for kidneys and to ensure that Medicare does not reimburse transplant hospitals for amounts that exceed the “reasonable and necessary” operational costs of the IOPOs and HCLs. Medicare does not reimburse IOPOs and HCLs directly; rather, transplant hospitals pay IOPOs and HCLs and then include those costs for reimbursement via the transplant hospital’s Medicare cost report. CMS proposes that each Medicare contractor will establish a “standard acquisition charge” for non-renal organs (as is currently required for kidneys) and that each transplant hospital or organ procurement organization that obtains an organ from an IOPO or HLA testing from an HCL will pay for those services using an interim rate established by the Medicare contractor. CMS also proposes to codify the types of costs that can be included in the development of the “standard acquisition charge.”
CMS also proposes to clarify and codify longstanding sub-regulatory guidance on certain categories of allowable costs — including Medicare’s “prudent buyer” concept and limitations on entertainment, education and travel costs. CMS also proposes to codify overhead cost allocation requirements in an effort to prevent “improper” distribution of administrative and general costs, using two correction methods that CMS believes will allow for more granular and accurate allocation and ensure that overhead costs are properly assigned to each department/cost center. The codification of these policies applies to all provider types and services that submit Medicare cost reports and may have a significant impact on any provider that is reimbursed on a “reasonable cost” basis, such as critical access hospitals and certain PPS-exempt cancer hospitals.
6. Changes to Location Requirements for Off-Campus Provider-Based Departments
CMS proposes to revise the “location” requirement for off-campus provider-based departments in order to “eliminate arguably unwarranted payment advantages” by certain PPS-exempt hospitals, such as inpatient rehabilitation facilities and certain cancer hospitals. Under the existing regulations,[2] there are four options to satisfy the “location” requirement for off-campus departments: (1) the facility is located within a 35-mile radius of the campus of the hospital that is the “main provider”; (2) the facility is owned and operated by a public or private non-profit hospital that serves a disproportionate share of low-income and uninsured patients and has a “disproportionate share” adjustment greater than 11.75%; (3) at least 75% of the patients served by the facility reside in the same zip code areas as at least 75% of the patients served by the main provider; or (4) at least 75% of the patients served by the facility who required the type of care furnished by the main provider to have received care from the main provider. CMS proposes to limit option (4) to outpatient departments only and therefore exclude inpatient facilities from this test. CMS states that option (4) was intended to encompass “referral-based” arrangements between the main provider and an outpatient facility, and CMS is concerned that, if option (4) continues to apply to inpatient facilities, certain specialty and PPS-exempt hospitals could obtain significant payment advantages for inpatient services provided at considerable distances from the main provider.
7. Narrowed Pathways for Approval for New Technology Add-On Payments (NTAPs)
CMS proposes to continue new technology add-on payments (NTAPs) for 41 technologies in FY 2027, with an aggregate estimated total impact of more than $836 million in Medicare reimbursement. CMS received 47 new applications for FY 2027 NTAPs (15 traditional and 32 “alternative pathway”), of which 30 remain under consideration. But CMS proposes repealing the alternative pathway for NTAPs and OPPS device pass-through applications for FY 2028 and beyond, requiring all applicants, including FDA-designated Breakthrough Devices and Qualified Infectious Disease Products or drugs approved under FDA’s Limited Population Pathway for Antibacterial and Antifungal Drugs pathway, to demonstrate substantial clinical improvement over existing technologies rather than receiving automatic eligibility under the “alternative pathway.” This represents a tightening of the NTAP application process and could affect manufacturers and hospitals seeking coverage and payment for novel technologies.
FOOTNOTES
[1] 42 C.F.R. 413.75(b).
[2] 42 C.F.R. § 413.65(e)(3).