backCMS Publishes IPPS and LTCH Final Rule for FY 2026
On Thursday, July 31, 2025, CMS issued its annual Hospital Inpatient Prospective Payment System (IPPS) and Long-Term Care Hospital (LTCH) Prospective Payment System Final Rule for Fiscal Year (FY) 2026 (the Final Rule). In the Final Rule, CMS has updated the IPPS and LTCH payment rates, modified the hospital wage index, recalculated the labor-related share, and updated the uncompensated care payment factors. The agency also decided against finalizing changes it had proposed making to the payment formula for nursing and allied health programs. The agency estimates that the changes contained in the rule will increase aggregate IPPS payments by $5 billion in FY 2026 relative to FY 2025. Payments to LTCHs are projected to increase by $83 million in FY 2026 over the previous year.
Payment Rates Overview
In the Final Rule, CMS increased the operating payment rates for acute care hospitals by 2.6%, which reflects a market basket increase of 3.3% and a productivity adjustment of -0.7%. By comparison, in the proposed rule, CMS instead proposed an update of 2.4% reflecting a market basket of 3.2% and a productivity adjustment of -0.8%.
Commenters to the proposed rule said that the proposed market basket update vastly understated the actual growth in hospital costs. Many commenters blamed this discrepancy on CMS’s reliance on the Employment Cost Index (ECI), published by the U.S. Bureau of Labor Statistics, to measure changes in labor costs. By design, the ECI controls for changes in the composition of the labor pool, such as shifts from employee to contract labor. Given the increased utilization of contract labor among hospitals in recent years, the American Hospital Association and other commenters questioned whether the ECI adequately captures recent changes in hospital labor costs. The agency shrugged off these concerns, responding that the market basket update should not reflect changes in the labor pool.
CMS also finalized FY 2026 market basket percentage increase for the LTCH PPS, using the 2022-based LTCH market basket, for an increase of 3.4% that would result in an estimated increase in payments in FY 2026 of approximately $83 million.
The Wage Index
In the Final Rule, CMS officially finalized its decision to terminate the low wage index policy for FY 2026 and onward. Under this policy, which the agency first adopted in FY 2020 and continued through FY 2024, the agency made upward adjustments to the wage index values of hospitals below the 25th percentile nationwide, and reduced the standardized amount for all hospitals to budget neutralize the financial impact.
In 2024, the Court of Appeals for the District of Columbia ruled that the low wage index policy was unlawful. Bridgeport Hosp. v. Becerra, 108 F.4th 882 (D.C. Cir. 2024). In response to that decision, CMS issued an interim final rule (IFC) on October 4, 2024, updating the FY 2025 wage index to remove the low wage index hospital policy.
In the FY 2026 Final Rule, CMS announced that it is discontinuing the low wage index policy for FY 2026 and future years. Some commenters urged CMS to continue the policy, or to explore alternative policies to help low wage hospitals increase their wage index values. The agency responded that a solution would probably require changes to the Medicare statute.
To mitigate the impact of the discontinuation of the low wage index policy, CMS has finalized a transition policy for affected hospitals. Under this policy, in FY 2026, all hospitals will receive the greater of their FY 2026 wage index or 90.25% of their FY 2024 wage index. CMS has applied a -0.03% adjustment to the standardized amount to budget neutralize the financial impact of this transition policy.
Labor-related Share
In the Final Rule, CMS reduced the labor-related share for hospitals with a wage index of 1.0 or higher from 67.6% to 66.0%. The labor-related share is the portion of the standardized amount that is adjusted by the wage index. By statute, the maximum labor-related share for hospitals with a wage index below 1.0 is 62%. For all other hospitals, CMS determines the labor-related share every four years upon rebasing the standardized amount.
In the FY 2022 final rule, CMS rebased the rates based on the FY 2018 data and calculated a labor-related share of 67.6%, which remained in effect through FY 2025. In the FY 2026 Final Rule, CMS has rebased the rates using FY 2023 data and calculated a labor-related share of 66.0%, which should be in effect through FY 2029.
The agency explained that the labor-related share had declined because even though hospital compensation costs increased by 4% annually between FY 2018 and 2023, non-compensation costs had increased at a faster rate of 6% annually. Another factor driving the decline was CMS’s decision to exclude 41% of professional fee service costs—representing the agency’s estimate of professional services hospitals purchased from vendors outside of their labor market area.
Uncompensated Care Payment
The Final Rule includes CMS’s calculation of the uncompensated care payment pool for FY 2026. The Affordable Care Act (ACA) modified the Medicare DSH payment formula to reduce DSH payments to hospitals by 75%. Each year, CMS is required to estimate the dollar amount by which the ACA has reduced Medicare DSH payments (Factor 1) and multiply that amount by a factor equal to 1 minus the percent change in the uninsured population since the ACA was implemented in 2013 (Factor 2). The resulting payment pool is distributed to hospitals based on their proportionate share of uncompensated care as reported in Worksheet S-10 of their cost reports.
For FY 2026, CMS calculated a Factor 1 of $12.413 billion which is equal to 75% of the total amount of estimated Medicare DSH payments for FY 2026. By comparison, the Factor 1 CMS finalized in the FY 2025 final rule was $10.509 billion.
For Factor 2, CMS estimated that 8.7% of the population will be uninsured in FY 2026 compared to 14% when the ACA was implemented in 2013. Accordingly, for FY 2026 CMS has finalized a Factor 2 of 62.14% [1 – 0.3786 percent], which is an increase from the Proposed Factor 2 of 60.71% and a substantial increase over the FY 2025 Factor 2, which was 54.29%.
The product of the finalized Factors 1 and 2 for FY 2026 produces an uncompensated care pool of $7.713 billion. By comparison, the final uncompensated care pool for FY 2025 was $5.705 billion.
Changes to Nursing and Allied Health Payment Formula
In the Final Rule, CMS decided not to finalize changes it had proposed to the regulatory formula for calculating pass-through payments for nursing and allied health education (NAHE) programs. Medicare reimburses hospitals for the “net cost” incurred hosting NAHE programs. These payments are made on a pass-through basis, meaning they are paid outside of the prospective payment system.
In the proposed rule, CMS originally proposed to modify the regulatory formula for calculating “net cost.” Under the current formula, net cost is calculated by deducting tuition from the sum of direct and indirect costs (i.e., total costs). CMS originally proposed changing that formula so that tuition would be deducted from direct costs, and the result would be added to indirect costs.
- Current formula: net cost = total (direct + indirect) costs – tuition
- Proposed formula: net cost = (direct costs – tuition) + indirect costs
The difference between these formulae may appear subtle, but the effect of these changes is substantial. Under Medicare’s cost-finding rules, there is a proportional relationship between direct and indirect costs. When the direct costs that a NAHE program incurs increases, the amount of indirect costs that the program is allocated in the cost-finding process increases as well, so the hospital receives more in reimbursement for the program. Thus, the original proposal to deduct tuition from direct costs would have meant less indirect costs being allocated to NAHE programs in cost-finding, resulting in smaller NAHE pass-through payments.
CMS proposed this change in response to an unfavorable court decision. The agency had historically calculated net cost by deducting tuition from direct costs, the very approach it was proposing to codify. However, in a 2024 case where five plaintiff hospitals challenged the calculation of their NAHE pass-through payments, Judge Trevor McFadden of the D.C. District Court held that the current regulatory language requires CMS to deduct tuition from the sum of direct and indirect costs. Mercy Health-St. Vincent Medical Center d/b/a Mercy St. Vincent Medical Center v. Becerra, Case No. 22-cv-3578-TNM (D.D.C. Feb. 9, 2024) (St. Vincent). King & Spalding represented the hospitals in St. Vincent. In the proposed rule, CMS sought to align the regulation with its preferred approach for calculating net costs.
The agency did not stop there. It also proposed limiting the types of indirect costs that are eligible to be included in the net cost calculation. Specifically, CMS proposed to modify the regulatory text to specify that net costs only include those incurred “as a consequence of operating the approved educational activity.” The agency explained that this would exclude indirect costs that “benefit the hospital as a whole,” such as “[a]dmissions” and “[t]elecommunications,” because these are costs that would be “incurred in the absence of the provider’s NAHE program.” This change would have effectively eliminated most if not all indirect costs for NAHE programs.
On behalf of the St. Vincent plaintiffs, King & Spalding submitted a comment letter in opposition to the proposed changes. In the letter, King & Spalding argued that CMS’s proposal cannot be reconciled with the St. Vincent decision, and that stripping indirect costs out of NAHE payment is contrary to the statute.
In the Final Rule, CMS noted that the agency received “many comments in opposition to our proposal,” and that “[d]ue to the number and nature of the comments that we received, and after further consideration of the issue, we have decided not to finalize changes to our existing policy in this final rule.” The agency noted that it might revisit the net cost calculation in future rulemaking.
The Final Rule is available here, and a CMS fact sheet is available here.
Reporters, Kasey Ashford, Washington, D.C., + 1 202 626 2906, kashford@kslaw.com; Alek Pivec, Washington, D.C., +1 202 626 2914, apivec@kslaw.com.
OPA Announces 340B Rebate Model Pilot Program
On July 31, 2025, HRSA’s Office of Pharmacy Affairs (OPA) announced a voluntary 340B Rebate Model Pilot Program (Pilot Program). Currently, under the 340B program, covered entities purchase outpatient drugs at a discounted price from drug manufacturers. Under the Pilot Program, covered entities purchase select drugs at a higher price upfront and then later receive a post-purchase rebate from drug manufacturers. OPA states that the Pilot Program is intended to address, (1) 340B and Maximum Fair Price (MFP) deduplication, which involves duplicate discounts when both the 340B program and the MFP under the Inflation Reduction Act (IRA) offer price reductions on the same drug; (2) 340B Medicaid duplicate discounts, which occurs when there is a duplicate discount for a drug that qualifies for both a 340B discount and a Medicaid rebate; and (3) diversion, which involves unauthorized distribution of drugs obtained through the 340B program.
The voluntary Pilot Program will last for a minimum of one year. The scope of the 340B Rebate Model Pilot Program is limited to the NDC-11s included on the CMS Medicare Drug Price Negotiation Selected Drug List subject to an MFP under the IRA. However, the Pilot Program will apply to the selected NDC-11s regardless of payer. The first call to submit plans for participation in the Pilot Program to OPA is limited to drug manufacturers with Medicare Drug Price Negotiation Program Agreements with CMS. Qualifying manufacturers’ plans are due by September 15, 2025, and OPA will approve plans by October 15, 2025, for an effective date of January 1, 2026. OPA lists several requirements that qualifying manufacturers’ plans must contain, including:
- Assurance that all costs for data submission through an Information Technology (IT) platform be borne by the manufacturer and no additional administrative of running the rebate model shall be passed onto the covered entities;
- Allowance of 60 calendar days’ notice to covered entities and other impacted stakeholders before implementation of a rebate model, with instructions for registering any IT platforms;
- Allowance for covered entities to order the selected drugs under existing distribution mechanisms (e.g., 340B wholesaler accounts with pre-rebate prices loaded) to ensure purchases flow through existing infrastructure;
- Assurance that covered entities are allowed to submit and report data for up to 45 calendar days from date of dispense, with allowances for extenuating circumstances and other exceptions, including adjustments when a 340B status change occurs on a claim;
- Specification if rebates are paid at the package level, or at the unit level;
- Assurance that all rebates are paid to the covered entity (or denied, with documentation in support) within 10 calendar days of data submission; and
- Assurance 340B rebates are not denied based on compliance concerns with diversion or Medicaid duplicate discounts. Drug manufacturers should provide a rationale and specific documentation for reasons claims are denied (e.g., deduplication for MFP or 340B rebate provided to another covered entity on the same claim). If a manufacturer has concern regarding diversion or Medicaid duplicate discounts, the manufacturer should raise those concerns directly with OPA or utilize the 340B statutory mechanisms, such as audits and administrative dispute resolution, for addressing such issues.
OPA is accepting public comment on the Pilot Program until August 30, 2025. OPA is looking for comments specifically addressing:
- Additional flexibilities to maximize efficiency and efficacy for participating manufacturers;
- Additional safeguards to mitigate adverse, unintended impacts for covered entities;
- Additional data or reporting elements that should be required to improve implementation and evaluation of the pilot program; and
- Potential implementation issues not yet sufficiently accounted for in the pilot design (e.g., logistical or administrative burdens).
OPA will assess the Pilot Program using data and reports from manufacturers and other stakeholder feedback. OPA seeks to understand the “merits and shortcomings” of a rebate model through the Pilot Program. OPA may subsequently consider expanding the rebate Pilot Program. OPA’s official announcement, titled “340B Program Notice: Application Process for the 340B Rebate Model Pilot Program,” can be found here.
Reporter, Priya Sinha, Atlanta, +1 404 572 3548, psinha@kslaw.com
OIG Issues Series of Reports on Patient Harm in Hospitals and Gaps in Reporting
On July 24, 2025, the OIG released reports evaluating the prevalence of patient harm in hospitals and the extent to which hospitals detect and report such events. These evaluations follow up on OIG’s 2022 report and provide additional detail on internal patient harm incident tracking and external reporting practices among hospitals serving Medicare beneficiaries.
Background
As a Condition for Participation in the Medicare program, hospitals must establish and maintain a Quality Assessment and Performance Improvement (QAPI) program. To meet QAPI requirements under 42 CFR § 482.21, hospitals must “track medical errors and adverse patient events, analyze their causes, and implement preventive actions and mechanisms that include feedback and learning throughout the hospital.” Under OIG’s definition of “patient harm,” patient harm includes “as any undesirable clinical outcome. . . that was the result of medical care or that occurred in a health care setting” and not a result of the underlying disease.
May 2022 Report: A Quarter of Medicare Patients Experienced Harm in October 2018
In its previous May 2022 report (OEI-06-18-00400), the OIG found that 25% of Medicare patients experienced harm during acute-care hospital stays in October 2018. Of these, 12% experienced adverse events causing longer stays, life-sustaining interventions, or permanent harm, and 13% experienced temporary harm requiring intervention. Physician reviewers determined that 43% of all harm events were preventable, often due to substandard care or inadequate monitoring.
Only a small fraction of the identified harm events appeared on CMS’s hospital-acquired conditions (HAC) lists, which are used in payment and quality incentive programs: 5% were listed in the HAC Reduction Program and 2% were listed under the Deficit Reduction Act’s requirements.
July 2025 Report: Hospitals Did Not Capture Half of Patient Harm Events
In a follow-up July 2025 report (OEI-06-18-00401), OIG found that hospitals failed to capture in their incident reporting systems 49% of harm events that occurred among hospitalized Medicare patients. For this report, the OIG assessed whether hospitals had captured the harm events identified in the 2022 study described above through internal systems and evaluated whether hospitals externally reported captured events as required by CMS and state authorities. Specifically, OIG traced the 299 harm events identified in the previous 2022 report and administered a survey to the hospitals at which the harm events occurred. OIG received responses for 266 of the 299 harm events. In total, hospitals captured only 94 of 266 harm events, and a much smaller subset was reported externally. Of the 15 events identified as reportable under federal or state requirements, hospitals reported only 5.
In many cases, staff did not recognize the events as reportable or did not consider reporting to be standard practice. For the harm events that were captured, hospitals rarely conducted investigations or implemented corrective actions to improve patient safety and reduce the risk of future harm.
The OIG recommended that CMS and the Agency for Healthcare Research and Quality align harm event definitions, strengthen oversight of QAPI requirements, and direct Quality Improvement Organizations to help hospitals identify gaps in their incident reporting and surveillance systems.
The May 2022 report regarding Adverse Events in Hospitals is available here, the July 2025 report regarding uncaptured patient harm events is available here, and the companion memo to the July 2025 report is available here.
Reporter, Dennis Mkrtchian, Los Angeles, + 1 213 218 4046, dmkrtchian@kslaw.com.
Upcoming Events
Healthcare and the Supreme Court – Recent Key Decisions and Implications
August 6, 2025, 12:30 P.M. – 1:30 P.M. ET
The Supreme Court’s October 2024 Term produced several decisions that have significant implications for the healthcare industry, ranging from the calculation of Medicare reimbursement adjustments to the scope of relief available in litigation. King & Spalding’s experienced panel will review five key decisions and discuss their implications for healthcare providers. Topics for discussion will include:
- Advocate Christ Medical Center v. Kennedy and the Medicare DSH adjustment
- Medina v. Planned Parenthood South Atlantic and States’ compliance with Medicaid federal funding conditions
- United States v. Skrmetti and State regulation of transgender healthcare
- Kennedy v. Braidwood Management, Inc., the Preventive Services Task Force, and the Appointments Clause of the Constitution
- Trump v. CASA, Inc., the end of universal injunctions, and strategic litigation options for broad relief
To register, click here. You do not have to be a client to attend, and there is no charge. For questions, contact Sydney Forte.
Health Law & Policy Forum West
Join our distinguished faculty and industry leaders for our annual Health Law & Policy Forum West in Marina del Rey. As the healthcare industry continues to evolve in response to economic pressures, patient needs and accelerating technological advances, this full-day program will cover the trending topics that lawyers, executives, managers and investors need to know as they adapt to changes associated with the new administration and more.
A keynote session featuring Chad Golder, general counsel of the American Hospital Association, and Rob Hur, former special counsel and U.S. attorney, and current King & Spalding partner, will discuss key issues facing the healthcare industry. Additionally, our partner Rob DeConti, former chief counsel to the Department of Health and Human Services (HHS OIG), will provide his insights into the OIG’s enforcement priorities and share his thoughts on the emerging enforcement trends and compliance issues.
Attendees will also enjoy multiple networking opportunities, including a reception following the sessions.
The registration fee for the full program is $95.
For questions or to request an invitation, contact the K&S Events Team.