backCMS Issues IPPS and LTCH Proposed Rule for FY 2027
On Friday, April 10, 2026, CMS issued its annual Hospital Inpatient Prospective Payment System (IPPS) and Long-Term Care Hospital (LTCH) Prospective Payment System (PPS) Proposed Rule for Fiscal Year (FY) 2027 (the Proposed Rule).
CMS proposes to, among other things, update the IPPS and LTCH PPS payment rates, prohibit the use of Diversity Equity and Inclusion (DEI) practices in Graduate Medical Education (GME) and Nursing and Allied Health Education (NAHE) programs, revise the definition of “new” GME programs, modify the NAHE payment formula, and modify the A&G allocation methodology for purchased goods and services.
Additionally, CMS proposes substantial changes to regulations affecting organ procurement organizations (OPOs), the organizations focused on procuring, preserving, and transporting organs for transplantation. Specifically, CMS proposes to restrict the range of public education expenses that are reimbursable by Medicare, codify the Provider Reimbursement Manual’s Prudent Buyer Principle, modify the administrative review process for administrative appeals, and to reimburse the acquisition and transportation costs for non-renal organs on the same basis as kidneys.
Comments to the Proposed Rule must be submitted by June 9, 2026. This article provides an overview of the key proposals in the Proposed Rule.
Payment Rates Overview
CMS proposes to increase operating payment rates for general acute care hospitals by 2.4 percent. This reflects a 3.2 percent projected increase in the hospital market basket update with a projected 0.8 percent productivity adjustment reduction. For comparison, in FY 2026 CMS increased the rates by 2.6%, which reflected a market basket increase of 3.3 percent and a productivity adjustment of -0.7 percent.
CMS is also proposing to continue using the national labor-related share of 66 percent set in the FY 2026 Final Rule for the national standardized amounts for all IPPS hospitals that have a wage index value that is greater than 1.0000. The Proposed Rule states that CMS expects that these proposed changes will increase hospital payments under the IPPS by $1.9 billion.
Additionally, CMS is proposing to increase the LTCH standard payment rate by 2.4 percent and that LTCH PPS payments for discharges paid to the LTCH standard payment rate are to increase by approximately 2.3 percent or $55 million.
Proposal to Prohibit DEI in GME and NAHE Programs
In the Proposed Rule, CMS proposes to modify the regulations governing payment for graduate medical education programs and nursing and allied health education programs to specify that such programs must not discriminate or promote or encourage discrimination on the basis of race, color, national origin, sex, age disability or religion. This prohibition applies to selection for employment, program participation, resource allocation, or similar activities, opportunities, or benefits. The effective date of this change would be October 1, 2026.
The agency explains that this modification is intended to align Medicare policy with the administration’s policy reflected in the Attorney General's Guidance for Recipients of Federal Funding Regarding Unlawful Discrimination, published July 29, 2025. That guidance, which is expressly directed at diversity, equity and inclusion initiatives, says that entities receiving federal funds must ensure that their federally funded activities “do not discriminate on the basis of race, color, national origin, sex, religion or other protected characteristic—no matter the program’s labels, objectives, or intentions.”
Proposal to Modify the Criteria for Identifying “New” GME Programs
Medicare limits the number of residents that hospitals can claim for GME reimbursement. This limit is known as the FTE cap. Certain qualifying hospitals can receive an adjustment to their FTE caps by participating in “new” GME programs. Under current CMS rules, a program is regarded as “new” if the teaching staff, the program director and the students are “new” (not coming from existing programs in the same specialty).
CMS proposes to modify the definition of “new” program in several respects. First, CMS proposes to eliminate the requirement that the program director be new (i.e., not previously employed by another program in the same specialty). The agency acknowledged that this restriction is potentially harmful to the development of new residency programs. Second, CMS proposes to lower the threshold for “new” residents (i.e., residents who do not have previous training experience in another program in the same specialty) from 100 percent to 90 percent. Residents who previously trained in a different specialty would count as new. This restriction would apply to individual residents—not FTEs. The denominator would include all residents who train during the five-year cap building period. The denominator would exclude residents rotating from displaced programs and residents admitted via binding matching programs (e.g., the National Resident Matching Program). This change, if finalized, would take effect for programs starting on or after October 1, 2026.
Proposed Clarifications Concerning Calculation of DGME and IME payments Following Hospital Mergers
CMS proposes to clarify how DGME and IME payments are calculated when two or more teaching hospitals merge into one. With respect to DGME payments, CMS explains that in the event that the merger occurs during the surviving hospital’s cost reporting period, the Medicare contractor would perform an off-the-cost report calculation to treat the pre and post-merger periods as if they were two short cost reporting periods. The pre-merger calculation would be based on the surviving hospital’s DGME characteristics (FTEs and FTE cap and the per-resident amount, and the post-merger would take into account the combined facilities’ characteristics. In the subsequent two cost reporting periods, the three-year rolling average would reflect the combined FTE count of the merged facilities.
The approach would be similar for IME payments. The Medicare contractor would calculate separate IME payments for before and after the merger based on the rate, resident count, IBR cap, rolling average and bed count of the surviving hospital and the other facilities.
Proposal to Modify Nursing and Allied Health Payment Formula
CMS is proposing to change how hospitals report the tuition and student fees associated with their NAHE programs in the Medicare cost report. This proposed change, if finalized, should increase payments to hospitals for their NAHE programs.
The Medicare program reimburses hospitals for the “net cost” incurred operating NAHE programs in recognition of the value that these programs bring to the healthcare workforce and Medicare beneficiaries. These payments are made on a pass-through basis, meaning they are paid outside of the prospective payment systems.
CMS has adopted a regulation for calculating the reimbursable net cost of a NAHE program. The starting point of that calculation is “total costs” that are “directly related to” the program, which consists of the direct costs of the program, such as trainee stipends and teacher salaries, and indirect program costs, including the additional overhead costs associated with operating a NAH program. Total costs are offset by tuition the hospital collects from students enrolled in the program. The remainder, if any, is the net cost of the program, which is the basis for Medicare payment. Thus, the regulatory formula for calculating the net costs of NAH programs can be expressed as follows:
Total (direct + indirect) costs – tuition = net costs
Despite the language in the regulation, the current design of the Medicare cost report changes the order of operations so that tuition is deducted from direct costs before indirect costs are calculated. When addition and subtraction are involved, changing the order of operations typically does not affect the result. But Medicare is different. The amount of indirect costs a NAHE program has incurred is determined in part by its direct costs. Under Medicare’s cost-finding principles, NAHE programs are apportioned administrative and general (A&G) costs based on the program’s proportionate share of direct costs relative to the other departments in the hospital. By offsetting the direct costs of NAHE programs by tuition, the current version of the cost report puts NAHE programs at a disadvantage in the cost-finding process, because it reduces their proportionate share of direct costs relative to the other departments in the hospital, resulting in a smaller share of A&G costs.
In Mercy Health-St. Vincent Medical Center LLC v. Becerra, 717 F. Supp. 3d 33, 35 (D.D.C. 2024) (St. Vincent), affected hospitals filed suit because the cost report did not calculate their NAHE payments in the manner required by the regulation. The court ruled that the text of the regulation says that CMS cannot deduct tuition until after determining a hospital’s total (direct and indirect) costs. “This order of operations comes straight from the regulation—one [CMS] devised, and one [CMS] must follow.” King & Spalding represented the plaintiffs in St. Vincent.
In the FY 2026 proposed rule, CMS proposed to modify the regulatory formula to match how NAHE payments are calculated in the cost report (i.e., by deducting tuition from direct costs). But CMS declined to finalize that proposal after commenters pointed out that CMS’s proposal was predicated on the assumption there is a relationship between tuition received and A&G costs incurred, which the St. Vincent court expressly rejected. King & Spalding submitted comments on behalf of the St. Vincent plaintiffs.
In the 2027 proposed rule, CMS again proposes to modify the regulatory formula to specify that tuition must be deducted from direct costs. However, to ensure that this approach “does not understate the [A&G] costs allocated to the NAH cost centers,” CMS proposes to allow hospitals to “utilize the reconciliation column on Worksheet B-1 to adjust the accumulated cost statistic by the total amount of NAHE revenue” offset on Worksheet A. In other words, tuition would continue to be deducted from direct costs but would not skew the allocation of A&G costs in the stepdown process. This proposal, if finalized, would take effect for cost reporting periods beginning on or after October 1, 2026.
Proposal to Modify how Indirect Costs of NAHE Programs are Reported in the Cost Report
In the proposed rule, CMS proposes requiring hospitals that claim reimbursement for their NAHE programs to ensure that all overhead costs allocated to NAHE programs provide a benefit to those programs. To that end, the proposal would require hospitals to identify all general service cost centers that (1) are allocated to one or more of the hospital’s NAHE programs, (2) and include costs for services that do not provide a benefit to the NAHE programs. Any cost center fitting that description would have to be split in two: one cost center with costs that support the NAHE programs and another with costs that do not. Only the costs in the former cost center would be allocatable to the NAHE programs. This proposal, if finalized, would take effect for cost reporting periods beginning on or after October 1, 2026
Changes to the A&G Allocation Methodology
CMS is proposing to clarify how providers can allocate their overhead costs, particularly administrative and general (A&G) costs. CMS says that some providers report “the amounts paid for purchased services and products. . . in the accumulated cost statistic on their cost report.” The agency believes that this practice overstates the amount of Medicare reimbursement that providers receive for the goods and services that they purchase. To reduce the improper distribution of overhead expenses, CMS proposes requiring hospitals to use one or both of two different allocation methods: a Negative Adjustment Method, or a Fragmenting (Componentizing) A&G Method.
Under the Negative Adjustment Method, when providers purchase a good or service, the non-purchased portion of the cost center will receive an A&G allocation while the purchased amount will not. Under the Fragmenting A&G Method, providers instead must subscript the A&G cost center into multiple cost centers to “ensure that overhead costs are accurately assigned to departments benefiting from the services provided” and to specifically “track and allocate overhead expenses based on actual resource consumption.” The proposed rule does not specify when these changes would take effect if finalized.
Restrictions to the Permissible Education Activities of OPOs
CMS is also proposing changes to the kinds of public education activity expenditures that OPOs can claim as allowable costs by expanding the definition of what constitutes an impermissible “entertainment” cost. Specifically, CMS is defining “entertainment” to include such activities as “[s]ponsorship of sporting events, teams or athletes,” “[s]ponsorship of floats in national parades[,]” and “[c]oncert, theater, or performing arts events[.]”In place of sponsorships, CMS is directing OPOs to focus their education campaigns around “direct engagement in public outreach and education events. . . where one-on-one activity and conversations can take place[.]”
Codification of the Prudent Buyer Principle for OPO Reimbursement
CMS is also proposing to formally codify the prudent buyer principle in federal regulations. CMS guidance introduced the “prudent buyer principle” to the Provider Reimbursement Manual as far back as 1975 but has yet to formally codify this principle through the notice and comment rulemaking process. This principle calls for providers to “seek to minimize [their] costs and that [their] actual costs will not exceed what a prudent and cost-conscious buyer would pay for a given item or service.”
Changes to the Administrative Review Process for OPO Administrative Appeals
When a party to an OPO administrative appeal is dissatisfied with a Contractor Hearing Officer’s determination, that party has the option of requesting further review by the Administrator. Under the present regulations, this second level of “review is conducted on behalf of the Administrator by a designated CMS reviewing official” who then “issues a decision on behalf of the Administrator.” Under the present regulation, decisions by a CMS reviewing official are “final and binding on each party” and “[n]o further review or appeal of a decision is available.” Now, CMS is proposing to change this by granting the Administrator discretionary authority to review CMS reviewing official decisions.
Changes to the Reimbursement Methodology for Non-Renal Organ Acquisition and Transportation
CMS is also proposing to reimburse OPOs for the acquisition and transplantation of nonrenal organs on the same reasonable cost basis as kidneys starting October 1, 2027. Historically, OPOs bill the non-renal organ acquisition charges to transplant hospitals, which then include those charges in their organ acquisition costs for Medicare reimbursement. According to the Proposed Rule, CMS believes that reimbursing OPOs for nonrenal organs using the same reasonable cost methodology as kidneys will reduce the risk of overbilling. If finalized, Medicare contractors will establish non-renal organ-specific Standard Acquisition Costs (SACs) using the same procedures for establishing kidney SACs and will disseminate the interim rates to transplant hospitals and OPOs.
Statutory Extensions to Payment Rates for Low-Volume Hospitals
The Proposed Rule introduces language codifying the 2026 Consolidated Appropriations Act’s extension of the Medicare low-volume hospital adjustment and Medicare-dependent hospital designation through December 31, 2026. This means that hospitals which are located more than 15 road miles away from the nearest IPPS hospital, and which have fewer than 500 total discharges, will remain eligible for a 25 percent payment adjustment. Hospitals with more than 500 discharges are also eligible for a lesser payment adjustment that decreases based on how many discharges they have. Hospitals with more than 3,800 discharges will not qualify for any adjustment.
Absent any further Congressional action, the criteria to qualify for the 25 percent payment adjustment for low-volume hospitals will become much stricter on January 1, 2027. Then, hospitals will only qualify if they are both more than 25 road miles from the nearest IPPS hospital and have fewer than 200 total discharges.
Proposal to Limit the “Same Patient Population” Location Criterion for Provider-Based Status
Under current regulations, a facility seeking provider-based status with a hospital must generally demonstrate that it is located within a 35-mile radius of the hospital. But there is an exception if the facility can show that it serves the “same patient population” as the hospital. The test is whether 75 percent of the facility’s patients who required the type of care furnished by the hospital received that care from the hospital. CMS proposes modifying this criterion so that it only applies to outpatient facilities. The agency expressed concern that under the current rule, certain specialty and IPPS-excluded hospitals could obtain significant payment advantages for inpatient services provided at considerable distances from the main hospital. The proposed rule does not specify when this change will take effect if finalized.
The Proposed Rule is available here. The Proposed Rule is scheduled to be published in the Federal Register on April 14, 2026. Comments are due by June 9, 2026.
Reporters Alek Pivec, Washington, D.C., +1 202 626 2914, apivec@kslaw.com; Michael L. LaBattaglia, Washington, D.C., +1 202 626 5579, mlabattaglia@kslaw.com; and Gregory Fantin, Washington D.C., +1 202-626-9271, gfantin@kslaw.com
CMS Proposes Sweeping Expansion of Health Care Interoperability and Prior Authorization Requirements.
On April 10, 2026 (and officially published in the Federal Register on April 14, 2026), CMS published a proposed rule that would expand electronic prior authorization requirements, modernize HIPAA transaction standards, and strengthen Open Payments program enforcement. The proposed rule builds on the 2024 CMS Interoperability and Prior Authorization final rule and affects a broad range of regulated entities, including Medicare Advantage (MA) organizations, state Medicaid and Children's Health Insurance Program (CHIP) fee-for-service (FFS) programs, Medicaid and CHIP managed care plans and entities, and qualified health plan (QHP) issuers on the Federally-facilitated Exchanges (FFEs).
CMS’s proposed rule would require health insurers participating in federal programs to make electronic prior authorization available for prescription drugs, require those insurers to make prior authorization decisions within shorter timeframes, and replace existing technology standards with updated standards designed to enable faster processing of prior authorization requests. The following summarizes the major proposals and technical requirements set forth in the proposed rule.
- Electronic Prior Authorization for Drugs. CMS proposes to require impacted payers to support electronic prior authorization for all drugs that require prior authorization, using two separate sets of standards depending on whether the drug is covered under a medical benefit or a pharmacy benefit. For drugs covered under a medical benefit, impacted payers would be required to incorporate coverage and documentation requirements into their existing prior authorization application programming interface (API), which uses Health Level Seven (HL7) Fast Healthcare Interoperability Resources (FHIR) based standards. For drugs covered under a pharmacy benefit, state Medicaid and CHIP FFS programs, Medicaid managed care plans, CHIP managed care entities, and QHP issuers on the FFEs would be required to support the National Council for Prescription Drug Programs (NCPDP) SCRIPT, Formulary & Benefit, and Real-Time Prescription Benefit standards. MA organizations are excluded from the pharmacy benefit drug requirements because Medicare Part D already uses these NCPDP standards. CMS proposes an October 1, 2027 compliance date for both sets of requirements.
- Shortened Prior Authorization Decision Timeframes. CMS proposes to shorten the timeframes within which QHP issuers on the FFEs must make prior authorization decisions. For non-drug items and services, QHP issuers on the FFEs would be required to send notice of their decision for standard prior authorization requests no later than 7 calendar days and for expedited requests no later than 72 hours. These timeframes generally align with those finalized for other impacted payers in the 2024 CMS Interoperability and Prior Authorization final rule. For drugs, CMS proposes to require QHP issuers on the FFEs to provide notice of their prior authorization decision no later than 72 hours for standard requests and no later than 24 hours for expedited requests. CMS also proposes that state CHIP FFS programs must make prior authorization decisions for prescription drugs for which the state receives federal financial participation no later than 24 hours, replacing current requirements that cover both drugs and non-drug items and services. CMS proposes an October 1, 2027 compliance date for these requirements.
- Expansion to Small Group Market QHP Issuers on FF-SHOPs. CMS proposes to extend all existing and newly proposed interoperability and prior authorization requirements to issuers offering small group market QHPs on the Federally-facilitated Small Business Health Options Program (FF-SHOP) Exchanges. Previously, these requirements applied only to individual market QHP issuers on the FFEs. Small group market QHP issuers would be required to implement and maintain the Patient Access, Provider Access, Payer-to-Payer, and Prior Authorization APIs, as well as comply with prior authorization decision timeframe and electronic prior authorization for drugs requirements. CMS proposes compliance dates of October 1, 2027 for requirements that newly apply to both small group and individual market QHP issuers, and compliance dates beginning in 2028 for proposals related to reporting API usage metrics and publicly reporting prior authorization metrics for drugs.
- Reporting of Payer API Endpoints. CMS proposes to require impacted payers to report their API endpoints for each required API to CMS for publication in a centralized directory. An API endpoint is the specific web address through which electronic systems connect and exchange data, and in this context, the digital location where providers can submit prior authorization requests or request patient data from a payer's system. CMS states that a centralized directory would be necessary to unlock the full potential of its electronic data exchange policies and reduce administrative burden. New impacted payers would be required to report this information no later than 60 days before they begin covering patients. Payers must update reported information within one week of any changes and verify it at least once every 12 months. CMS also proposes that impacted payers report associated supporting documentation, such as URLs to authorization and authentication protocols, implementation details, and API registration information.
- Updates to APIs and API Usage Metrics. CMS proposes updates to the Patient Access, Provider Directory, Provider Access, and Payer-to-Payer APIs, including requiring impacted payers to add information about prior authorizations for drugs to the Patient Access and Provider Access APIs, with a proposed compliance date of October 1, 2027. CMS also proposes new prior authorization metrics, including metrics on denials, approvals following extensions, and appeals for both drug and non-drug prior authorizations. Impacted payers would be required to publicly post these metrics beginning in 2028 for data from the 2027 reporting period. Additionally, CMS proposes to adjust Patient Access API usage metrics reporting deadlines: Medicaid managed care plans and CHIP managed care entities would report to the state no later than 90 days after the end of each rating period, and QHP issuers on the FFEs would report to CMS in the form and manner and within the timeframes specified by the Secretary, aligned with the QHP certification process.
- Open Payments Civil Monetary Penalties for Audit Non-Compliance. CMS proposes to create a new definition of “failure to report” under the Open Payments program that includes a reporting entity's failure to provide documents requested by CMS during an audit within 30 calendar days of the date of the audit request. CMS states that this proposal is a direct response to entities refusing to comply with audit requests, which CMS characterizes as thwarting its oversight efforts. Each document requested but not provided within the specified timeframe would constitute a separate violation subject to civil monetary penalties (CMPs). CMS uses the median per-record knowing “failure to report” CMP amount of approximately $77,371 to calculate anticipated penalties for non-compliant entities.
- FHIR Adopted as HIPAA Standard for Prior Authorization. HHS proposes to replace the existing X12N 278 transaction standard with FHIR-based standards for prior authorization-related transactions. This would mark the first time that FHIR standards have been adopted as a HIPAA standard. HHS also proposes to adopt the Da Vinci Clinical Data Exchange (“CDex”) Implementation Guide as the HIPAA standard for attachments to prior authorization transactions. The proposed compliance date is 24 months after the effective date of a final rule for most HIPAA covered entities, and 36 months for small health plans. During the transition period, HHS anticipates that HIPAA covered entities, as agreed to by trading partners, could use either the existing X12N standards or the new FHIR standards, consistent with HHS's previously announced enforcement discretion.
- ONC Standards Updates. On behalf of HHS, the Office of the National Coordinator for Health Information Technology (ONC) proposes to adopt updated versions of certain health IT standards and specifications, including updated versions of FHIR Implementation Guides supporting the Prior Authorization, Coverage Requirements Discovery, Documentation Templates and Rules, and Clinical Data Exchange functions. ONC also proposes adding expiration dates to currently adopted standard versions to facilitate the transition to updated versions.
The full text of the proposed rule is available here. Interested parties may submit comments on the proposed rule within 60 days of its publication in the Federal Register.
Reporter, Dennis Mkrtchian, Los Angeles, CA + 1 213 218 4046, dmkrtchian@kslaw.com
Acting Attorney General Todd Blanche Announces the Creation of the National Fraud Enforcement Division
On April 7, 2026, Acting Attorney General Todd Blanche published a Memorandum for the Department of Justice announcing the creation of the National Fraud Enforcement Division, a new litigation division established to investigate and prosecute those who fraudulently misuse taxpayer dollars. At present, the Division’s reach appears to primarily encompass the resources of the Criminal Division, leaving civil False Claims Act enforcement within the Civil Frauds Division. However, the Memorandum signals the possibility that non-criminal components may fall within the Division’s purview as, by August 5, 2026, the Office of Legal Policy is instructed to recommend to the Deputy Attorney General “whether non-criminal elements of the Department should be brought within the [Division].”
The Memorandum establishes the National Fraud Enforcement Division (the “Division”), which will work collaboratively with other enforcement agencies to “bring criminal actors to justice.” To accomplish that mission, the Memorandum lays out a targeted work plan to redirect and consolidate resources into the newly established Division.
The Memorandum directs the realignment of existing DOJ resources. First, the Assistant Attorney General for the Division will assume operational control of the Criminal Division’s Tax Section, the Health Care Fraud Unit, and the Market, Government, and Consumer Fraud Unit. Next, the Office of Legal Policy must recommend to the Deputy Attorney General by May 7, 2026, which additional “criminal prosecutorial resources should be realigned into the [Division][,]” while applying a reasonable presumption that criminal units with a similar mission to the Division shall be realigned. Additionally, by April 28, 2026, every U.S. Attorney’s Office must designate an experienced prosecutor to be detailed-in-place to the Division to administer the stated mission in their district.
Beyond the reallocation of resources, the Memorandum also directs the realignment of investigative cases. By April 21, 2026, the Criminal Division and the Executive Office for the United States Attorneys are tasked with reporting to the Division all ongoing investigations into fraud perpetrated against taxpayer-funded programs that have been referred to the DOJ. The report must also identify significant events expected to occur within the next 90 days in those investigations. Going forward, various enforcement agencies are directed to coordinate with the Division to establish and support a National Fraud Detection Center to identify fraud in taxpayer-funded programs.
A copy of the Memorandum is available here.
Reporter, Rebecca Hsu, Atlanta, GA, +1 404 572 3339, rhsu@kslaw.com.
Upcoming Events
Challenging Payor Policies That Violate the CMS Two Midnight Rule
Tuesday, April 21, 2026, 1:00 p.m. – 2:00 p.m ET
Medicare Advantage (MA) plans are required to provide at least the benefits available under traditional Medicare, yet many increasingly rely on their own criteria to deny or underpay hospital claims that Medicare would cover. The Two Midnight Rule is a prime example: Although CMS has defined when an admission qualifies as “inpatient” for both Medicare and MA plans, many MA plans disregard the rule, resulting in hospitals being underpaid by billions of dollars each year.
Join our panel of managed care litigators to learn practical strategies to challenge payor noncompliance with the Two Midnight Rule. We will cover the legal framework requiring MA plan adherence, the use of InterQual and MCG criteria, Aetna’s new “level of severity inpatient payment policy” and its downstream effects, why regulatory fixes are unlikely, and proactive steps providers can take—through contracting, data collection, and litigation or arbitration—to secure proper payment.
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