Health Headlines – August 3, 2026

Texas Federal Court Strikes Down Rule Barring Hospitals from Claiming Section 1115 Days for Medicare DSH, Again 

On July 27, 2026, Judge Mark Pittman of the United States District Court for the Northern District of Texas issued a decision setting aside and vacating a CMS rule, adopted in late 2023, that barred hospitals from claiming Section 1115 uncompensated care pool days for Medicare Disproportionate Share Hospital (DSH) payment. Covenant Medical Center v. Kennedy, -- F.Supp.3d --, 2026 WL 2149486 (July 27, 2026, N.D. Texas). The Court found that CMS’s rule “contradicts the statute’s plain text.” King & Spalding represented the plaintiff. This marks the second time in two years that Judge Pittman struck down and vacated this same rule.

Background

Whether a hospital qualifies for Medicare DSH and the amount of DSH money it will receive depends in part on the “Medicaid fraction,” which is the percentage of the hospital’s total patient days in which patients are eligible for Medicaid and not entitled to Medicare. The more such days a hospital has, the higher its Medicaid fraction will be, the more likely it will qualify for DSH, and, if eligible, the more DSH money it will receive. The size of a hospital’s Medicaid fraction can also influence its eligibility to participate in the 340B Drug Pricing Program.

For purposes of tallying the Medicaid fraction, a person is eligible for Medicaid if they are receiving benefits under a State plan approved under title XIX, or, relevant here, under a waiver approved by CMS under Section 1115 of the Social Security Act.

CMS has approved for a handful of states—including Florida, Texas, and Tennessee—Section 1115 waivers that establish uncompensated care (UC) pools to reimburse hospitals for treating the uninsured and underinsured. When hospitals in those states initially attempted to include in their Medicaid fractions the days of patients who had received partial coverage under a Section 1115 UC pool, CMS instructed its Medicare contractors to exclude those days. But both the D.C. and the Fifth Circuits overruled the agency, holding that the DSH statute and the agency’s prior regulation require CMS to count Section 1115 UC pool days in the Medicaid fraction. Bethesda Health, Inc. v. Azar, 980 F.3d 121 (D.C. Cir. 2020); Forrest General Hospital v. Azar, 926 F.3d 221 (5th Cir. 2019). King & Spalding represented the plaintiffs in Bethesda.

Undeterred, CMS believed that Bethesda and Forrest General left the door open for the agency to simply change the DSH regulation to achieve its desired policy. Thus, in the inpatient prospective payment system (IPPS) final rule for fiscal year (FY) 2024, CMS modified the DSH regulation to specify that patients whose care is covered by a Section 1115 UC pool “are not regarded as eligible for Medicaid,” and their days cannot be included in the Medicaid fraction.

Round I: Baylor All Saints Medical Center v. Becerra

CMS’s rule sparked two rounds of litigation, with the first beginning immediately after the rule was published. Affected hospitals promptly filed appeals with the Provider Reimbursement Review Board (PRRB) directly from the FY 2024 IPPS final rule. The PRRB found that those appeals were premature and dismissed them, holding that hospitals cannot challenge Medicare DSH policies at the time they are adopted in the Federal Register, but must instead wait until those policies are applied in a cost report.

The hospitals appealed the PRRB’s dismissal to the Northern District of Texas, and their case was assigned to Judge Pittman. In that first round, Judge Pittman found that the plaintiffs’ appeals were not premature and overturned the PRRB’s dismissal. Addressing the merits, Judge Pittman ruled that both the Medicare statute and a recent “spotted dog decision” of the Fifth Circuit—Forrest General—foreclosed CMS’s rule. Baylor All Saints Medical Center, et al. v. Becerra, No. 24-00432 (N.D. Tex. 2024).

On appeal, without addressing the merits, the Fifth Circuit overturned the lower court, endorsing the PRRB’s view that hospitals cannot appeal Medicare DSH policies until they are applied to a cost report, and finding that Judge Pittman lacked jurisdiction to hear the case.

Round II: Covenant Medical Center v. Kennedy

By the time the Fifth Circuit issued its decision in Baylor All Saints, many hospitals had already filed cost reports in which they were forced to abide by CMS’s new rule. One of those hospitals filed an appeal with the PRRB challenging the application of the new rule to its cost report. The PRRB found that it had jurisdiction over the appeal and permitted the hospital to proceed directly to Federal court through a process known as expedited judicial review.

The plaintiff brought its case in the Northern District of Texas, and Judge Pittman was once again assigned to weigh in on the rule. In his July 27, 2026, decision, Judge Pittman again declared CMS’s rule conflicts with both the plain text of the Medicare statute and the Fifth Circuit’s decision in Forrest General. Concluding that the rule is unlawful, the court held that vacatur was the appropriate remedy. The effect of vacatur is that the rule ceases to have legal force. This means that there is no longer any regulation in place that precludes hospitals from claiming Section 1115 UC pool days in the Medicaid fraction.

The government has until September 25, 2026, to appeal Judge Pittman’s decision to the United States Court of Appeals for the Fifth Circuit.

A copy of Judge Pittman’s decision in Covenant Medical Center v. Kennedy is available here.

Reporter, Alek Pivec, Washington, D.C., +1 202-626-2914, apivec@kslaw.com.

CMS Issues IPPS and LTCH Final Rule for FY 2027

On Friday, July 31, 2026, CMS issued its Hospital Inpatient Prospective Payment System (IPPS) and Long-Term Care Hospital (LTCH) Prospective Payment System (PPS) Final Rule for Fiscal Year (FY) 2027 (the Final Rule).

CMS finalized its proposals to, among other things, update the IPPS and LTCH 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 administrative and general (A&G) allocation methodology for purchased goods and services. Additionally, CMS finalized substantial changes to regulations affecting organ procurement organizations (OPOs), which are responsible for procuring, preserving, and transporting organs for transplantation. The changes include restricting the range of reimbursable public education expenses, codifying the prudent buyer principle, modifying the administrative review process for administrative appeals, and reimbursing the acquisition and transplantation costs for non-renal organs on the same basis as kidneys.

This article provides an overview of the key proposals finalized in the Final Rule.

Payment Rates Overview

CMS increased operating payment rates for general acute hospitals by 2.3 percent, which is down from its proposal of 2.4 percent.  This reflects a 3.2 percent increase in the hospital market basket with a 0.9 percent productivity adjustment reduction.  For comparison, in FY 2026 CMS increased the rates by 2.6 percent, which reflected a market basket increase of 3.3 percent and a productivity adjustment of -0.7 percent.

CMS finalized its proposal 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.

Additionally, CMS increased the LTCH standard payment rate by 2.3 percent, which is down from its proposal of 2.4 percent.  CMS expects LTCH PPS payments for discharges paid to the LTCH standard payment rates to increase by approximately 2.2 percent or $54 million, down from its estimate of 2.3 percent or $55 million in the Proposed Rule.

Prohibition of DEI in GME and NAHE Programs

CMS finalized its proposal, without modification, barring approved graduate medical education (GME) and nursing and allied health education (NAHE) programs from discriminating, or promoting or encouraging discrimination, on the basis of race, color, national origin, sex, age, disability, or religion. The bar reaches use of those characteristics, or intentional proxies for them, as a selection criterion for employment, program participation, resource allocation, or similar activities, opportunities, or benefits. The effective date is October 1, 2026.

This is the second step in a two-step sequence. In the CY 2026 OPPS/ASC final rule, CMS barred GME accrediting organizations from using discriminatory accreditation criteria. The FY 2027 Final Rule now reaches the programs themselves, which CMS said is necessary to ensure that “even in the absence of discriminatory accreditation standards, individual programs do not implement policies that constitute unlawful discrimination under Federal law.”

Where CMS placed the requirement in the regulatory scheme is also significant.  The agency did not create a freestanding compliance obligation enforced through civil rights channels. Instead, it consolidated the requirements at new 42 CFR § 413.84 and wrote that section into the definitions that control payment eligibility, i.e., “approved medical residency program” at §§ 412.105(f)(1)(i), 413.75(b), and 415.152, and “approved educational activities” for NAHE at § 413.85. Each of those definitions is now expressly “subject to the requirements in § 413.84.” Because direct GME and IME payments turn on residents training in an approved program, and NAHE pass-through payments turn on approved educational activities, a program’s antidiscrimination compliance is now bound up with its eligibility for those payments.

Commenters largely supported the antidiscrimination goal but pressed CMS to provide more clarity on implementation, such as how compliance would be evaluated, what counts as an “intentional proxy,” who would enforce the requirement, and what due process would apply before payment is affected. Absent administrable standards, they warned, the Final Rule would create compliance risk and payment uncertainty, and some asked for a delay. CMS gave little ground, responding that the prohibition would not “impose a significant administrative burden or create compliance risk or payment uncertainty for hospitals” and directing hospitals to the Attorney General’s Guidance for Recipients of Federal Funding Regarding Unlawful Discrimination (available here) for examples of prohibited proxies. CMS declined to delay the effective date, and it did not answer the commenters’ questions about enforcement responsibility or due process.

CMS also rejected comments defending the consideration of identity-based characteristics in resident selection, restating its view that “race-conscious elements of diversity, equity and inclusion policies are generally impermissible under Federal law, as strongly suggested by the Supreme Court’s ruling” in Students for Fair Admissions v. President and Fellows of Harvard College (2023). The agency directed GME and NAHE programs to review their selection criteria to ensure they do not rely on protected characteristics or intentional proxies for them. With no transition period and no stated compliance process, that review is the practical takeaway for teaching hospitals ahead of October 1.

Finally, CMS finalized a conforming change extending to NAHE programs a longstanding feature of the GME regulations: a program still counts as “approved” if it would be accredited but for the accrediting agency’s reliance on a standard requiring the entity to perform induced abortions, or to require, provide, refer for, or arrange training in performing them. That exception has been part of the definition of an “approved medical residency program” since 1996, when CMS adopted it to implement section 245 of the Public Health Service Act, the Coats-Snowe amendment. CMS explained that because section 245(a)(3) reaches “any other program of training in the health professions” beyond post-graduate physician training, extending the exception to NAHE programs is necessary to comply with the statute. Responding to commenters who sought assurance on the point, CMS stated that the provision protects programs that would otherwise be accredited and should not jeopardize the accreditation status or funding eligibility of existing NAHE programs.

Modifications to Criteria for Identifying “New” GME Programs

Medicare limits the number of residents that hospitals can claim for GME reimbursement via the FTE cap. A qualifying hospital may receive an adjustment to its FTE cap by participating in a “new” GME program. Under CMS’s prior rules, a program was regarded as new if the program director, teaching staff, and the residents were all “new,” i.e. not coming from existing programs in the same specialty. In the Final Rule, CMS finalized its proposal to modify the definition of a “new” program in several respects. 

First and most significantly, CMS adopted without modification its proposal to no longer consider the previous employment of the faculty or program director in determining whether a residency program should be considered new for FTE cap-building purposes. CMS explained that it was persuaded by commenters’ arguments that the previous definition of “new” was overly restrictive and potentially harmful to the development of new residency programs.

Second, CMS finalized without modification its proposal to allow programs to be treated as new if at least 90 percent of its residents were “new,” i.e. residents who do not have previous training experience in another program in the same specialty. CMS declined commenters’ suggestions to lower the threshold even further. Residents who previously trained in a different specialty continue to count as new. This threshold applies to individual residents, not FTEs, and the denominator includes all residents who train during the five-year cap-building period.

The fraction excludes from both numerator and denominator, (1) residents with previous training in the same specialty who enter the new program as first-year residents through the National Resident Matching Program or another binding third-party matching program, and (2) residents who meet the definition of a “displaced resident.” On the latter exclusion, CMS modified its proposal in the Final Rule by removing the qualifier “in the same specialty” from the displaced-resident exclusion, so that any resident admitted into the new program from another program who meets the definition of a “displaced resident,” regardless of specialty, is now excluded from the calculation.

CMS also finalized, without modification, an exception for “small” residency programs, defined as programs accredited for 16 or fewer resident (or fellow) positions, regardless of whether the program is located in an urban or rural area. Small programs remain exempt from the 90 percent new-resident threshold entirely, although they must still obtain initial accreditation from the appropriate accrediting body.

Unlike the proposal, which would have applied the revised criteria only to programs starting on or after October 1, 2026, CMS modified the effective date in the Final Rule in response to commenters who urged broader application to ease the physician shortage pipeline. The revised criteria are now effective for programs that are still within their five-year cap-building period as of October 1, 2026, in addition to programs starting on or after that date.

Clarifications Concerning Calculation of DGME and IME Payments Following Hospital Mergers

In the Final Rule, CMS finalized its proposal to clarify how DGME and IME payments are calculated in the event of a merger between two or more teaching hospitals.

CMS had proposed that if 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 proposed approach was 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.

Commenters roundly supported this proposal and welcomed the transparency and predictability that it offered.  CMS finalized this change as proposed.  The Final Rule does not specify the effective date of the new policy, but it is presumed to apply to cost reporting periods beginning on or after October 1, 2026.

Modifications to Nursing and Allied Health Payment Formula

CMS finalized its proposal to change how hospitals report tuition and student fees received in connection with their nursing and allied health education (NAHE) programs in the Medicare cost report.  This change is expected to 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 NAHE 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 this scenario is different because 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 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 FY 2027 rule, CMS again proposed to modify its 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 also proposed 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.

Commenters generally supported this proposal. The agency finalized it without modification.  The change takes effect for cost reporting periods beginning on or after October 1, 2026.

Changes to How Indirect Costs of NAHE Programs are Reported in the Cost Report

In the proposed rule, CMS proposed to update the regulatory text to require 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, CMS proposed requiring 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 (or “componentized”): 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.

Commenters largely opposed this proposal, arguing that it is predicated on a narrow reading of “benefit,” would introduce subjectivity and uncertainty, with MACs applying inconsistent audit standards, and would impose a significant administrative burden. 

Due to commenters’ concerns about the administrative burden, the agency declined to require hospitals to componentize their overhead cost centers that are allocated to the NAHE programs.   However, CMS finalized its proposed change to the regulatory text requiring hospitals to ensure that all overhead costs allocated to NAHE programs provide a benefit to those programs.  The Final Rule does not specify the effective date of the new policy, but it is presumed to apply to cost reporting periods beginning on or after October 1, 2026.

Changes to the A&G Allocation Methodology

CMS finalized its proposal to clarify how providers can allocate the administrative and general (A&G) cost center.

In the proposed rule, CMS alleged 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 proposed “clarifying” its regulations to require 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.” 

Many commenters opposed this proposal, arguing that CMS’s proposal was actually a new policy as opposed to a clarification, and that the agency was abandoning without justification the decades-old accumulated cost statistic.  Commenters also pointed out the administrative burden associated with identifying the purchased services and supplies contained in each cost center that receives an allocation of A&G costs.  Undeterred by these comments, CMS finalized the change as proposed.  The Final Rule does not specify the effective date of the new policy, but it is presumed to apply to cost reporting periods beginning on or after October 1, 2026.

Restrictions to the Permissible Education Activities of OPOs

CMS finalized its proposal to change 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 finalized its proposal to include as entertainment—and therefore unallowable—activities such as sponsorship of sporting events, teams, or athletes, sponsorship of “large-scale regional and national” parade floats, and concert, theater, or performing arts events.

Most commenters opposed CMS’s proposal, arguing that CMS’s expansive reading of “entertainment” was inconsistent with the statutory test and the Internal Revenue Code’s narrower definition.  They pointed out that sponsorships at high-traffic venues can still deliver targeted, measurable public education, and that an event’s large scale does not diminish its effectiveness.

CMS stayed firm that entertainment and sporting sponsorship of any kind is not an allowable OPO public education costs.  But it clarified that OPO-staffed education conducted at high-traffic venues remains allowable, so long as the OPO is not sponsoring the team, athlete, or venue itself.  CMS finalized a one-year delay in enforcement to allow OPOs time to update their public education programs.

Codification of the Prudent Buyer Principle for OPO Reimbursement

CMS finalized its proposal, without modification, to formally codify the prudent buyer principle in federal regulations.  This principle calls for providers to “economize by not paying more than the going price for an item or service and seeking to minimize their costs, so that their actual costs will not exceed what a prudent and cost-conscious buyer would pay for a given item or service.”

Commenters, including OPOs, supported applying a prudent buyer standard to OPO overhead administrative expenses but requested that CMS further clarify the standards in light of the unique challenges of organ procurement.  CMS clarified that OPOs and Medicare contractors should consider the unique operational challenges of OPOs when applying the prudent buyer principle for OPOs, including but not limited to: time constraints for procurement; geographic availability of alternative vendors or service providers; efforts made to negotiate pricing; clinical rationale for vendor selection; pre-negotiated contracts with perfusion vendors, transport providers, and procurement teams; periodic market analyses to ensure contract rates remain competitive; and documented cost justifications for high-cost procurements.

CMS also acknowledged that there are limitations to both IRS Form 990 data and federal per diem rates as benchmarking tools, and suggested OPOs use a multi-data source approach to benchmarking compensation and costs.

Changes to the Administrative Review Process for OPO Administrative Appeals

CMS finalized its proposal to codify discretionary Administrator review of CMS reviewing official decisions.  Currently, an OPO dissatisfied with a Medicare administrative contractor’s (MAC) determination may request a hearing before a contractor hearing officer.  If a party is dissatisfied with the contractor hearing officer’s determination, it has the option to request further review.  Under the present regulations, this second level of review is conducted on behalf of the Administrator by a designated CMS reviewing official who issues a decision on behalf of the Administrator, which is final and binding on each party and no further review or appeal of a decision is available.  CMS’s finalized proposal allows the Administrator discretionary authority to review CMS reviewing official decisions.

Commenters raised constitutional and fairness concerns, arguing the structure allows the Administrator to review decisions already issued in the Administrator’s name, and subjecting OPOs to two successive CMS-controlled review stages.  Commenters also raised retroactivity and fairness concerns because the proposal was proposed to be effective for pending appeals, and requested defined triggering standards, timelines, and substantive criteria.

CMS declined to impose any triggering criteria for own motion review and rejected the retroactivity argument since the Administrator’s review authority already existed under a pre-existing Standing Order and since procedural rules may generally apply to pending matters.

Changes to the Reimbursement Methodology for Non-Renal Organ Acquisition and Transportation

CMS finalized its proposal to reimburse OPOs for the non-renal organ acquisition and transplantation on the same reasonable cost basis as kidneys.  However, CMS delayed implementation from the proposed date of October 1, 2027 to October 1, 2028. 

Many commenters challenged CMS’s statutory authority to extend reasonable cost reconciliation beyond kidneys, noting that the 1978 statute authorizing such reimbursement was enacted in the ESRD context and referenced kidneys specifically.  CMS rejected the statutory authority challenge, explaining that § 1881(b)(2)(A) broadly covers “procuring organs” without limitation to kidneys and noted that hospital-based OPOs are already reconciled on this basis for non-renal organs.

Commenters also argued that the change was arbitrary and capricious under APA standards because of the decades of OPO reliance on the existing framework.  Commenters also raised concerns about cash-flow burdens and the greater cost variability of non-renal organs.  CMS found its rationale, that reimbursing OPOs for non-renal organs using the same cost methodology as kidneys will reduce the risk of overbilling, sufficient to justify the policy change under the APA.

CMS also modified its proposal for setting the Standard Acquisition Costs (SACs) so that OPOs submit their own documented estimates of non-renal SACs for MAC review and approval, rather than having the MAC establish the rates themselves.

Statutory Extensions to Payment Rates for Low-Volume Hospitals

CMS finalized regulatory text to codify the 2026 Consolidated Appropriations Act’s extension of the Medicare low-volume hospital adjustment and Medicare-dependent hospital designation through December 31, 2026.  Under this extension, a hospital qualifies as low volume if it is more than 15 road miles away from another IPPS hospital and has fewer than 3,800 total discharges, with a sliding-scale adjustment ranging from 25 percent for hospitals with 500 or fewer discharges down to zero percent for hospitals with more than 3,800 discharges.

Commenters supported the legislative extension and urged CMS to work with Congress to make the temporary criteria permanent.  Absent any further Congressional action, the criteria to qualify for the 25 percent payment adjustment for low-volume hospitals will revert to the stricter pre-2011 standard, where a hospital must be both more than 25 road miles from the nearest IPPS hospital and have fewer than 200 total discharges.

Limitations on the “Same Patient Population” Location Criterion for Provider-Based Status

CMS finalized its proposal to limit the referral-based same patient population test to outpatient facilities or organizations, meaning an inpatient facility seeking provider-based status may no longer rely on this test to satisfy the location requirement outside of the 35-mile radius.

Commenters opposed the proposal, arguing that it contradicted CMS’s own longstanding policy of applying the referral-based test to both inpatient and outpatient facilities and could harm patient access in rural and underserved communities that rely on remote specialty inpatient locations routinely referring patients to a better-equipped tertiary hospital.  Some commenters requested that, at a minimum, CMS grandfather existing provider-based facilities.

CMS acknowledged the concerns, but said its own review found no case in which a facility had relied on the referral-based test to qualify as provider-based.  As a result, CMS declined to provide a grandfather exception for existing facilities.  The Final Rule does not specify an effective date for this change, but it is presumed to apply to cost reporting periods beginning on or after October 1, 2026.

The Final Rule is available here.  The Final Rule is scheduled to be published in the Federal Register on August 4, 2026.

Reporters: Alek Pivec, Washington, D.C., +1 202-626-2914, apivec@kslaw.com; Ahsin Azim, Washington, D.C., +1 202-626-5516, aazim@kslaw.com; Robert Stenzel, Washington, D.C., +1 202-626-2643, rstenzel@kslaw.com; Marcia Foti, Washington, D.C., +1 202-626-9543, mfoti@kslaw.com.

CMS Finalizes Its FY 2027 Inpatient Psychiatric Facilities Final Rule 

On July 31, 2026, CMS published its 2027 final rule (the Final Rule) updating the prospective payment system (PPS) rates for Medicare-covered inpatient hospital services furnished by Inpatient Psychiatric Facilities (IPFs), including psychiatric hospitals and certain psychiatric units. Features of the Final Rule includes updates to the per diem base rates, wage index, and outlier payments, as well as quality reporting program changes. The Final Rule will be in effect for IPF discharges that occur on or after October 1, 2026.

The Final Rule establishes the following updates:

• Prospective Payment System: CMS is implementing a 2.3% net payment rate update for fiscal year (FY) 2027. Specifically, the IPF per diem base rate will increase from $892.87 to $912.40, and the electroconvulsive therapy (ECT) payment per treatment will increase from $673.85 to $688.59. IPFs that fail to report required data under the IPF Quality Reporting Program will only receive a 0.3% update, yielding a base rate of $894.56 and an ECT payment of $675.13.
• Wage Index and Labor-Related Share: The labor-related share, which applies the wage index to the labor portion of the base rate, will decrease from 79.0% to 78.9% for FY 2027. CMS applied a wage index budget neutrality factor of 0.9989, calculated by comparing simulated FY 2026 and FY 2027 payments under the respective wage index values and labor-related shares. The Final Rule continues to apply a 5% cap on any year-over-year decreases in a provider's wage index.
• Outlier Policy: CMS is implementing an increase to the outlier fixed dollar loss threshold from $39,360 to $40,750, which is intended to maintain outlier payments at approximately 2% of total estimated aggregate IPF PPS payments. Separately, a new facility-level cap will limit outlier payments to no more than 20% of an IPF's total PPS payments in a year, with an exemption for facilities with fewer than 50 stays per year. In response to public comments, CMS deferred the effective date of the 20% cap from FY 2027 to FY 2028.
• Quality Reporting Program Changes:  For the IPF Quality Reporting Program, CMS is implementing a standardized IPF patient assessment instrument, as mandated by section 4125(b)(1) of the Consolidated Appropriations Act, 2023. CMS is also removing two measures from the program: Alcohol Use Brief Intervention Provided or Offered and Alcohol Use Brief Intervention (SUB-2/2a), and Tobacco Use Treatment Provided or Offered at Discharge (TOB-3/3a).

CMS estimates the Final Rule will result in a net increase of $60 million in payments to IPFs, driven entirely by the payment rate update, with no aggregate impact from the outlier threshold change. By facility type, estimated Medicare payments for inpatient services are projected to increase by 2.2% for urban IPFs and 2.7% for rural IPFs, with the largest increase estimated at 4.0% for non-profit rural IPF hospitals and the largest decrease estimated at 1.1% for IPFs with 25 to 49 beds.

The Final Rule is available here.

Reporter, Jenna Anderson, Palo Alto, +1 650-422-6719, janderson@kslaw.com.

CMS Issues FY 2027 Final Rule for Skilled Nursing Facility Prospective Payment System 

On July 29, 2026, CMS issued a final rule (the Final Rule) that finalizes Medicare payment rates and reporting policies for fiscal year (FY) 2027 under the Skilled Nursing Facility (SNF) Prospective Payment System (PPS). The Final Rule makes an aggregate 2.4% increase to SNF payments, with a Market Basket percentage increase of 3.3% and a negative productivity adjustment of 0.9%.

The Final Rule also finalizes Quality Reporting Program (QRP) updates, including a shorter timeframe for SNF quarterly data submission, expanded data reporting requirements covering all SNF residents regardless of payor, and the removal of COVID-19 vaccination reporting requirements. The Final Rule takes effect October 1, 2026.

FY 2027 SNF PPS Payment Rate Update

For FY 2027, the Final Rule finalizes an increase to SNF PPS rates of 2.4%. CMS finalized a SNF Market Basket percentage increase of 3.3%, up from the 3.2% increase set out in the April Proposed Rule, and a negative productivity adjustment of 0.9%, rather than the 0.8% adjustment in the Proposed Rule. CMS did not apply a Forecast Error adjustment, because the 0.2 percentage point difference between the forecasted and actual FY 2025 Market Basket increase remained below the 0.5% threshold required to trigger such an adjustment.

CMS estimates that these rate adjustments will result in an increase of approximately $882.74 million in aggregate FY 2027 payments to SNFs.

SNF QRP Data Submission Deadline & Scope Adjustment

The Final Rule shortens the SNF QRP data submission deadline – for both Minimum Data Set (MDS) assessment data and CDC National Healthcare Safety Network data – from 4.5 months after each quarterly data collection period to no later than the 15th day of the second month following the end of the quarter. This will apply, beginning with the FY 2029 SNF QRP, with the shortened deadline first applying to data collected beginning January 1, 2027 (CY 2027 data).

The Final Rule also finalizes the expansion of SNF QRP data submission requirements to all SNF residents admitted or readmitted for covered skilled care, regardless of payor, beginning with the FY 2031 SNF QRP (effective for residents admitted on or after October 1, 2029).

SNF QRP COVID Vaccine Guidance

The Final Rule finalizes the removal of two measures from the SNF QRP, beginning with the FY 2028 SNF QRP: the COVID-19 Vaccination Coverage Among Healthcare Personnel measure and the COVID-19 Vaccine: Percent of Patients/Residents Who Are Up to Date measure. CMS determined that these measures no longer align with current clinical guidance on COVID-19 vaccination.

SNF Value-Based Payment Program Standards

The Final Rule adopts finalized performance standard metrics under the SNF Value-Based Purchasing Program for FY 2029 and FY 2030, including Total Nurse Staffing Hours per Resident Day, Total Nursing Staff Turnover, Falls with Major Injury (Long-Stay), Long Stay Hospitalization, Discharge Function Score, and Healthcare-Associated Infections Requiring Hospitalization.

The Final Rule is available here.

Reporter, William Mavity, Los Angeles, +1 213 218 4043, wmavity@kslaw.com.

CMS Finalizes FY 2027 Hospice Wage Index and Payment Rate Update: Rate Increases, Mandatory Election Statement Addendum, and Quality Reporting Changes

On July 30, 2026, CMS issued a final rule updating Medicare hospice payment rates, the wage index, and the aggregate cap amount for fiscal year 2027, effective October 1, 2026 (the Final Rule). The Final Rule finalizes a 2.3 percent payment update ($755 million in estimated increased payments), makes the hospice election statement addendum mandatory for all beneficiaries, introduces a new service and spending variation index (SSVI), and adds a visible icon to the Medicare.gov Care Compare tool for hospices failing to meet quality reporting requirements.

Background

Hospice care is a comprehensive approach that shifts focus from curative to palliative care for terminally ill individuals. Medicare provides per diem payments across four categories: Routine Home Care (RHC), Continuous Home Care (CHC), Inpatient Respite Care (IRC), and General Inpatient Care (GIP). In 2024, more than 1.8 million Medicare beneficiaries received hospice services from approximately 6,700 providers, totaling $28.3 billion in expenditures. CMS is required by statute to update hospice payment rates annually, with a 5 percent cap on year-over-year decreases.

The Hospice Quality Reporting Program (HQRP) requires hospices to submit quality data through the Hospice Outcomes and Patient Evaluation (HOPE) tool; non-compliant hospices face a 4 percentage point reduction to their annual payment update. Despite the penalty’s doubling in FY 2024, approximately 20 to 23 percent of hospices remain non-compliant. See Rule at 113.

The Final Rule arrives at a time of heightened scrutiny over hospice program integrity and rising non-hospice spending during hospice elections. Industry groups including LeadingAge (a national association representing 5,300+ nonprofit providers, including hospices, skilled nursing facilities, and affordable housing communities) raised concerns during the comment period that the proposed 2.4 percent payment update (which was ultimately finalized even lower at 2.3 percent) fails to keep pace with the true cost of delivering hospice care, while MedPAC (an independent congressional agency that analyzes Medicare payment policy and issues annual recommendations to Congress) recommended eliminating the FY 2027 update entirely. Despite these tensions, the Final Rule finalizes several significant regulatory changes that will affect the operations and finances of approximately 6,700 hospice providers nationwide.

What Is Changing

Payment Rate Update and Wage Index

CMS is finalizing a 2.3 percent hospice payment update for FY 2027, reflecting a 3.2 percent inpatient hospital market basket increase reduced by a 0.9 percentage point productivity adjustment. This is slightly lower than the 2.4 percent proposed, and CMS estimates total increased payments to hospices of $755 million in FY 2027. CMS projects hospices in urban areas will experience a 2.2 percent increase and rural hospices a 2.9 percent increase. Hospices in the Outlying region (Guam, Puerto Rico, Virgin Islands) will see the largest increase at 3.4 percent, while those in the West South Central region will see the smallest at 1.9 percent. Government-owned hospices will see the largest increases (up to 3.5 percent).

Numerous commenters argued the update is insufficient. See Rule at 23-24. CMS responded that it lacks discretionary authority to deviate from the statutory formula and that no mechanism exists to adjust for market basket forecast error (CMS acknowledges the forecast error, but qualifies it with the fact that errors in prior years have been both positive and negative to providers, see Rule at 29, and so the impacts are net-neutral).

Mandatory Election Statement Addendum

CMS is requiring hospices to provide the election statement addendum titled “Patient Notification of Hospice Non-Covered Items, Services, and Drugs” to all Medicare beneficiaries at hospice election, rather than only upon request, effective October 1, 2026. Hospices must furnish the addendum within 5 days of election and provide updates within 3 days of plan of care changes. If the beneficiary refuses to sign, the hospice must document the refusal and include the addendum in the medical record.

CMS’s rationale for the change centers on a noticeable increase in non-hospice spending: Medicare non-hospice spending for Parts A and B increased 160% from nearly $790 million in FY 2020 to over $2 billion in FY 2024 (a 160 percent increase). See Rule at 40-42. Carrier claims for pressure ulcers (largely associated with skin substitutes) increased by nearly 4,000 percent from FY 2020 to FY 2024. CMS estimates this mandatory addendum will generate $20.8 million in net annualized cost savings in the aggregate to Medicare providers (approximately $20 million in costs to hospice providers and $40 million in savings to non-hospice providers who currently must call hospices to obtain coverage information on unrelated conditions before making treatment decisions and submitting claims). CMS's theory is that the mandatory addendum eliminates or shortens these phone calls because the relevant information will already be documented and available.

Hospice provider groups raised concerns that the addendum is a “highly technical” document that risks overwhelming beneficiaries during a vulnerable time. LeadingAge called it “unnecessary and duplicative” and warned it would “increase administrative burden, confuse families, and divert resources away from direct care.” However, patient advocacy groups and non-hospice providers supported mandatory provision, citing the need for transparency about coverage and beneficiary rights. Rule at 76-77.

Service and Spending Variation Index (SSVI)

CMS is maintaining the SSVI using nine claims-based metrics and a scoring system monitoring hospice utilization and non-hospice spending; higher scores represent potentially concerning utilization patterns. The SSVI complements the existing Hospice Care Index (HCI) and will be published with provider-level data for FYs 2024 and 2025. Publication of provider-level data may signal which providers are at greater risk for targeted oversight.

Hospice Quality Reporting Program – Icon to Identify Deficient Hospices

CMS will add an icon to the Medicare.gov Care Compare tool to identify hospices that fail to meet HOPE reporting requirements (effective no earlier than FY 2028). The icon will be based only on HOPE submissions (admissions, Hospice Update Visits (HUVs), and discharges) and will not include Consumer Assessment of Healthcare Providers and Systems (CAHPS) data compliance.

Why It Matters

Financial Implications

The most immediate impact is the 2.3 percent payment update ($755 million aggregate). But local effects will vary based on wage index changes, facility type, and location, and hospices that fail to meet quality reporting requirements face payment rates reduced by 1.7 percent from FY 2026 levels – a potentially significant revenue impact. A new aggregate cap of $36,174.75 per beneficiary will also be important for hospices with longer average lengths of stay to monitor, meaning that providers should carefully track beneficiary lengths of stay.

However, commenters noted that hospice Medicare per diem payments increased approximately 16.1 percent from 2018 to FY 2027, while the CPI increased approximately 28.3 percent over the same period – underscoring the growing gap between Medicare reimbursement and actual cost inflation facing hospice providers. Rule at 22.

Compliance Obligations

The mandatory addendum imposes new workflow requirements effective October 1, 2026. Hospices must integrate addendum completion into admission, ensuring delivery within 5 days of election and updates within 3 days of plan of care changes; refusals must be documented. CMS estimates average costs of $2,952 per hospice annually for RN time. For quality reporting, hospices must ensure at least 90 percent of HOPE records are submitted within 30 days to avoid the 4 percentage point penalty and Care Compare icon.

Operational Considerations

Providers should model the financial impact of the new wage index values on their specific location. The non-hospice spending data published with the Final Rule (including the SSVI scores for FYs 2024 and 2025) may also signal which providers are at greater risk for targeted oversight and audits. CMS has been actively pursuing program integrity efforts, including revoking enrollment of 122 hospices in Arizona, California, Nevada, and Texas. Providers with higher SSVI scores may need to evaluate their utilization patterns and consider proactive compliance review.

The HOPE tool, which replaced the Hospice Item Set (HIS) on October 1, 2025, continues to present implementation challenges for many providers. Hospices should ensure their HOPE submission processes are operational and meeting the 90 percent timeliness threshold. Providers that have not yet stabilized their HOPE reporting workflows face both the 4 percentage point payment penalty and the forthcoming Care Compare icon for non-compliance.

Conclusion

The Final Rule delivers a modest payment increase while expanding CMS’s regulatory footprint through the mandatory election statement addendum, the SSVI, and enhanced quality reporting transparency. The Final Rule reflects CMS’s intensifying focus on non-hospice spending and program integrity – themes that will likely carry forward into future rulemaking cycles. 

The Final Rule is available here.

Reporter, K. Tyler Dysart, Atlanta, GA, +1 404 572 3532, tdysart@kslaw.com.

CMS Publishes FY 2027 Inpatient Rehabilitation Facility Prospective Payment System & IRF Quality Reporting Program Updates 

Last week, CMS published a final rule updating the Inpatient Rehabilitation Facility (IRF) Prospective Payment System (PPS) for federal fiscal year (FY) 2027 as well as providing additional updates to the IRF Quality Reporting Program (the Final Rule).

HHS estimates the overall impact of the Final Rule will lead to a $340 million net increase in payments from the federal government to IRFs during FY 2027. Further, the Final Rule will not result in any costs or savings to IRFs related to the IRF QRP during FY 2027.

Section 1886(j) of the Social Security Act provides for the application of a per-discharge prospective payment system for inpatient rehabilitation hospitals and inpatient rehabilitation units within a hospital. Payments under these systems cover inpatient operating and capital costs and the costs of furnishing covered rehabilitation services, including routine, ancillary, and capital costs.

Section 1886(j)(7) of the Social Security Act authorizes the Inpatient Rehabilitation Facility Quality Reporting Program (IRF QRP) to apply to freestanding IRFs and inpatient rehabilitation units in hospitals or Critical Access Hospitals that Medicare pays under the IRF PPS.

This Final Rule updates the prospective payment rates for inpatient rehabilitation facilities for FY 2027 (discharges that occur on or after October 1, 2026, and on or before September 30, 2027) under Section 1886(j)(3)(C) of the Social Security Act. Importantly, the Final Rule:

• Includes classification and weighting factors for the IRF prospective payment system’s (PPS) case-mix groups and description of methodologies and data used to compute the FY 2027 PPS;
• Finalizes the third and final year of the three-year phaseout of the rural adjustment (which started in 2025);
• Includes a public comment solicitation section regarding alternative data sources for the IRF PPS wage index;
• Requires every therapy treatment and/or therapy evaluation to start no later than 36 hours from midnight on the day of the patient’s admission;
• Finalizes requirements for the initial Interdisciplinary Team meeting to happen on or before 4 days from the date the patient was admitted to the facility and
• Summarizes a request for information on potential future IRF PPS payment reform.

The Final Rule also includes updates to the IRF Quality Reporting Program and changes to the Durable Medical Equipment, Prosthetics, Orthotics, and Supplies (DMEPOS) Competitive Bidding Program. HHS had proposed to revise the IRF QRP data submission deadlines starting with the FY 2029 IRF QRP.

HHS also included summaries of public comments that it received in response to a Request for Information (RFI) for modernizing the IRF PPS, which it would do by leveraging and revising the “primary diagnosis model and comorbidity score model used under the Skilled Nursing Facility Patient Driven Payment Model.”

The regulations are effective October 1, 2026. The Final Rule is available here.

Reporter, John Gilmore, Chicago, +1 312-764-6959, jgilmore@kslaw.com.

Client Alerts

DOJ Announces the First Declination of a Healthcare Provider Under the New Corporate Enforcement Policy

In March 2026, the U.S. Department of Justice (DOJ) issued its first ever Department-wide Corporate Enforcement and Voluntary Self-Disclosure Policy (CEP).  This policy, which created additional incentives for companies to make voluntary disclosures to DOJ promptly after misconduct is discovered, applies to all corporate criminal matters handled by DOJ except antitrust cases.  Such antitrust cases will continue to be governed by the Antitrust Division’s separate and longstanding Corporate Leniency Policy. Read the full Client Alert here.

Editors: Chris Kenny and Ahsin Azim

Issue Editors: Taylor Whitten and Hamilton Craig