backCMS Issues CY 2026 Medicare Hospital Outpatient Prospective Payment System and Ambulatory Surgical Center Payment System Final Rule
On November 21, 2025, CMS made available the Hospital Outpatient Prospective Payment System (OPPS) and the Medicare Ambulatory Surgical Center (ASC) payment system final rule for calendar year 2026 (the Final Rule). In the Final Rule, CMS finalized its proposal to expand site neutral payments for drug administration services and expanded site neutral payments in other areas. Additionally, after a decade of packaging payments for skin substitute products with their corresponding procedures, the agency will unpackage skin substitute products from the application services and establish APCs based on product characteristics rather than based on stated prices for provision of these products when they are used during a covered application procedure under the OPPS. CMS has also declined to implement its proposed acceleration of the prospective adjustment to payments for non-drug items and services to offset the increased payments for the same from CYs 2018–2022 as a result of the 340B payment policy. Finally, CMS made changes to the hospital price transparency regulations, the inpatient only list (IPO), and graduate medical education accreditation. This article provides an overview of the policy changes CMS implemented with the Final Rule.
Updates to OPPS and ASC Payment Rates
The Final Rule updates the OPPS payment rates by 2.6%, an increase from the proposed 2.4%, for hospitals that meet applicable quality reporting requirements. This 2.6% update factor is based on the final hospital market basket percentage increase of 3.3%, reduced by a productivity adjustment of 0.7%. CMS estimates that these new payment rates would result in increased total payments to OPPS providers of approximately $101 billion for CY 2026, an increase from the $100 billion projection in the proposed rule.
For CY 2026, using the hospital market basket update, CMS proposes an update factor to the ASC rates of 2.6% as well, again an increase from 2.4% in the proposed rule. The update applies to ASCs meeting relevant quality reporting requirements. This update is based on the final hospital market basket percentage increase of 3.3%, reduced by a productivity adjustment of 0.7%. CMS estimates that these rates will result in approximately $9.2 billion in total payments to ASCs in CY 2026, an increase of approximately $450 million compared to what was estimated for CY 2025.
ASC Market Basket Update
As mentioned above, and as CMS proposed, the Final Rule extends the five-year market basket update that was implemented in CY 2019. In the CY 2019 OPPS/ASC final rule with comment period, CMS finalized a proposal to apply the hospital market basket update to ASC payment system rates for an interim period of five years (CY 2019 through CY 2023) while CMS determined the impact of the higher update factor on the migration of services from the hospital outpatient setting to the ASC setting. In light of the COVID-19 Public Health Emergency (PHE), CMS extended the application of the hospital market basket update an additional two years in the CY 2024 OPPS/ASC final rule with comment period, that is, through CY 2024 and CY 2025 so that CMS could analyze claims data further removed from the effects of the COVID-19 PHE.
In this Final Rule, CMS extends its utilization of the hospital market basket update as the update factor for the ASC payment system one additional year, through CY 2026, while CMS continues to study the migration of outpatient surgical procedures.
CY 2026 Prospective Adjustment to Payments for Non-Drug Items and Services to Offset the Increased Payments for Non-Drug Items and Services Made in CY 2018 Through CY 2022 as a Result of the 340B Payment Policy
The 340B Final Remedy rule finalized changes to the calculation of the OPPS conversion factor applicable to non-drug items starting to CY 2026. That rule codified a 0.5% reduction in the OPPS conversion factor applicable to non-drug items and services that would remain in effect until the estimated aggregate payment reduction reached the $7.8 billion of increased non-drug item and services payments made from CY 2018 through CY 2022, which CMS estimated would occur in CY 2041. This prospective offset aimed to balance the goal of restoring hospitals to their financial position had the original 340B policy never existed, while avoiding burdening them with an immediate single year recovery.
In the CY 2026 OPPS Proposed Rule, CMS proposed a shorter 6-year timeframe for the prospective offset and a revised annual offset percentage for non-drug items and services from 0.5% to 2% effective CY 2026. However, after much pushback from providers, CMS declined to finalize this proposal in the Final Rule. CMS also suggested it would revisit implementing a shorter timeframe for the offset and an increased offset percentage for non-drug items and services beginning in CY 2027.
Skin Substitutes
In the CY 2014 OPPS/ASC Final Rule, CMS packaged skin substitute products and finalized a method to divide skin substitutes into a high-cost group and a low-cost group.
CMS is now departing from that methodology. In the CY 2026 OPPS/ASC Final Rule, CMS finalized its proposal to unpackage the skin substitute products from the application services and establish APCs based on product characteristics rather than based on stated prices for provision of these products when they are used during a covered application procedure under the OPPS (CPT codes 15271-15278).
CMS also finalized its proposal to group skin substitutes that are not drugs or biologicals into three FDA regulatory categories, stating that the policy of grouping and paying for skin substitute products based on their relevant product characteristics recognizes the clinical and resource differences in product types and would incentivize competition to create more innovative products.
For CY 2026, CMS is also finalizing its proposal to use a single payment rate for the three categories of skin substitute products, an initial payment rate of $127.14/cm2, an increase from the proposed $125.38/cm2 based on more recent utilization data. CMS intends to propose payment rates that differentiate between the three FDA categories in future years.
Inpatient Only (IPO) List
CMS also finalized its proposal to phase out the IPO list over a three-year period, starting with removing 285 mostly musculoskeletal procedures, to allow for services to be paid by Medicare in a hospital outpatient setting when clinically appropriate. CMS states that this transition will serve the policy of giving physicians greater flexibility in determining the most appropriate site of service.
Site Neutrality Proposals – Drug Administration Services
The Final Rule expands the site neutral payment policy for drug administration services. Specifically, CMS finalized its proposal to pay for drug administration services furnished in grandfathered off-campus hospital outpatient departments at a site-neutral rate of 40% of the OPPS rate.
Market-Based MS-DRG Relative Weight Data Collection and Methodology Proposal
The Final Rule requires hospitals to report certain market-based payment rate information on their Medicare cost report. CMS finalized its proposal to collect from hospitals the median payer-specific charges that they have negotiated with Medicare Advantage organizations and disclosed under CMS’s hospital price transparency rules and then use the data to help determine relative Medicare payment rates for inpatient hospital services. CMS will continue to consider ways for market-based approaches such as this one to be utilized to improve other Medicare FFS payment systems.
Graduate Medical Education (GME) Accreditation
The Final Rule holds that accrediting organizations may not use accreditation criteria that promote or encourage discrimination on the basis of race, color, national origin, sex, age, disability, or religion, including the use of those characteristics or intentional proxies for those characteristics as a selection criterion for employment, program participation, resource allocation, or similar activities, opportunities, or benefits. CMS states that the purpose of this Final Rule is to ensure that accreditation for approved medical residency programs complies with applicable laws prohibiting race-based and other unlawful discrimination and to improve the accreditation process.
Hospital Price Transparency (HPT)
Standard Charges – Allowed Amounts
Under the hospital price transparency regulations, a hospital must make public its standard charges, and when the standard charge is based on a percentage or algorithm, the hospital must encode the “estimated allowed amount” in dollars for that item or service in the machine-readable file. The estimated allowed amount is the “average dollar amount that the hospital has historically received from a third-third-party payer for an item or service.” 45 C.F.R. § 180.20. CMS finalized the proposal to replace the requirement to encode the estimated allowed amount with the following three new data elements:
- “Median allowed amount’’ defined as the median of the total allowed amounts the hospital has historically received from a third-party payer for an item or service for a time period no longer than the 12 months prior to posting the machine-readable file. Should the calculated median fall between two observed allowed amounts, the median allowed amount is the next highest observed value.
- ‘‘Tenth (10th) percentile allowed amount’’ defined as the 10th percentile of the total allowed amounts the hospital has historically received from a third-party payer for an item or service for a time period no longer than the 12 months prior to posting the machine-readable file. Should the calculated percentile fall between two observed allowed amounts, the 10th percentile allowed amount is the next highest observed value.
- ‘‘Ninetieth (90th) percentile allowed amount’’ defined as the 90th percentile of total allowed amounts the hospital has historically received from a third-party payer for an item or service for a time period no longer than the 12 months prior to posting the machine-readable file. Should the calculated percentile fall between two observed allowed amounts, the 90th percentile allowed amount is the next highest observed value.
The “total allowed amount” figure used in each of these definitions would be derived from the gross charge minus contractual adjustments and consist of the portion billed to a payer for a particular plan and the portion, if any, billed to the patient. The amount should reflect the total amount the hospital was reimbursed for the item or service (or service package). CMS will require that hospitals determine the ‘‘total allowed amount’’ from EDI 835 ERA transaction data from no longer than 12 months prior to posting the machine-readable file.
Other Machine-Readable File Updates
Current hospital price transparency regulations require each hospital to affirm in its machine-readable file that the hospital, to the best of its knowledge and belief, has included all applicable standard charge information in accordance with the requirements of 45 C.F.R. Part 180 and that the information displayed is true, accurate, and complete as of the date indicated in the file. The Final Rule supplants the existing affirmation statement as follows:
- Beginning January 1, 2026, hospitals are required to include in their machine-readable files the following attestation: “The hospital has included all applicable standard charge information in accordance with the requirements of § 180.50, and the information encoded is true, accurate, and complete as of the date in the file. The hospital has included all payer-specific negotiated charges in dollars that can be expressed as a dollar amount. For payer-specific negotiated charges that cannot be expressed as a dollar amount in the MRF or not knowable in advance, the hospital attests that the payer-specific negotiated charge is based on a contractual algorithm, percentage or formula that precludes the provision of a dollar amount and has provided all necessary information available to the hospital for the public to be able to derive the dollar amount, including, but not limited to, the specific fee schedule or components referenced in such percentage, algorithm or formula.”
- Beginning January 1, 2026, hospitals must encode the name of the hospital chief executive officer, president, or senior official designated to oversee the encoding of true, accurate, and complete data as directed in § 180.50(a)(3)(iii).
- Separately, beginning January 1, 2026, hospitals must report a unique identifier, specifically their NPI(s), in the machine-readable file.
Enforcement Updates
Under current hospital price transparency regulations, hospitals can appeal a civil monetary penalty (CMP) within 30 days of issuance of the notice of a CMP. As CMS proposed, the Final Rule explains that a CMP would be reduced by 35 percent should a hospital submit to CMS a written notice requesting to waive its right to a hearing under § 180.100 within 30 calendar days of the date of the notice of imposition of the CMP. The Final Rule also requires that if a hospital waives its right to appeal a CMP and receives a 35 percent reduction, the hospital:
- Will not be eligible to receive a 35 percent reduction on any CMPs issued that result from the same instance(s) of noncompliance (i.e., continuing violations); and
- Will waive its right to appeal CMPs for any such continuing violations.
The Final Rule also implements CMS’s proposal that the agency decline to make available to hospitals the opportunity to have a CMP amount reduced in certain situations. These include:
- When a hospital has not affirmatively waived its right to a hearing in accordance with the procedures specified at proposed § 180.90(c)(4); and
- When CMS imposes upon a hospital a CMP for noncompliance going to the core of the hospital price transparency requirements—for example, failing to make public either a machine-readable file 45 C.F.R. § 180.40(a) or any shoppable services in a consumer-friendly format (either in the form of a shoppable services file or an internet price estimator tool) as required in 45 C.F.R. § 180.40(b)—the hospital will be ineligible to avail itself of such an opportunity.
The Final Rule can be found here and the CMS fact sheet is available here.
Reporters, Ahsin Azim, Washington, D.C., +1 202 626 5516, Robert Stenzel, Washington, D.C., +1 202 626 9253, rstenzel@kslaw.com and Catherine Behnke, Chicago, IL, +1 312 706 8047, cbehnke@kslaw.com.
CMS Issues Preliminary Guidance on Provider Taxes Under Sections 71115 and 71117 of the Working Families Tax Cuts Act
On November 14, 2025, CMS issued a press release and accompanying letter providing preliminary guidance to states on the implementation of new federal requirements governing health-care-related (i.e., provider) taxes under the Working Families Tax Cuts Act (P.L. 119-21), enacted as part of the larger One Big Beautiful Bill Act (OBBA) passed earlier this year. The guidance addresses how CMS interprets Sections 71115 and 71117 of the Act, including the standards for grandfathering existing provider taxes and the transition timelines for phasing out certain tax structures.
In its letter, CMS states that it is providing preliminary guidance on the meaning of the phrase “has enacted a tax and imposes such tax” as used in Section 71115. As background, Section 71115 establishes new indirect hold harmless thresholds for provider taxes beginning October 1, 2026. According to the letter, these thresholds apply only to tax revenue derived from taxes that were “enacted and imposed as of July 4, 2025.” CMS defines “enacted” to mean the state completed its legislative process authorizing the tax in the form in effect on July 4, 2025, and “imposed” to mean the state was actively collecting revenue under that tax structure on that date. The letter further explains that, where a tax requires a waiver of the broad-based or uniform tax requirements, that waiver must also have been approved by July 4, 2025, for the tax to qualify under the statute’s grandfathering clause.
The letter also outlines CMS’s implementation of Section 71117, which amends § 1903(w) of the Social Security Act to clarify that a health-care-related tax is not considered “generally redistributive” — and therefore cannot qualify for a waiver — if the tax rate or classification results in lower-Medicaid-volume providers paying proportionally lower tax rates than higher-volume providers, or if it produces the same effect. CMS establishes transition periods for states to unwind affected tax structures:
- For taxes on managed care organizations (MCOs): through the end of the state fiscal year ending in 2026.
- For all other permissible tax classes: through the end of the state fiscal year ending in 2028, but no later than October 1, 2028.
CMS’s press release for the above guidance also reiterates that CMS will generally prohibit new provider taxes or increases to existing taxes after July 4, 2025. CMS characterizes the guidance as preliminary and indicates that it intends to issue additional rulemaking to implement Sections 71115 and 711117.
There are two aspects of the guidance that warrant particular attention:
- Statutory phrasing vs. guidance phrasing: Section 71115 of the Act uses the phrase “enacted and imposes,” while the CMS letter refers to taxes “enacted and imposed.” This distinction affects the grandfathering status of the provider tax, as CMS’s definition requires that a tax must not only have been authorized but also actively collected by July 4, 2025, unless any delayed schedule for collection is part of “routine collection or billing practice.” Certain states may have enacted a provider tax before the legislation was passed and had not yet begun collecting and may therefore be affected by CMS’s interpretation.
- Transition period differences under Section 71117: CMS grants a shorter transition period for MCO-related taxes (through FY 2026), with a longer period for other classes (through FY 2028). The statute gives the Secretary authority to grant waivers “as the Secretary determines appropriate,” a standard courts typically view as committed to agency discretion. This earlier transition deadline is likely to significantly affect states that rely on MCO taxes, such as California.
A copy of the guidance is available here, and a copy of CMS’s press release is available here.
Reporter, Dennis Mkrtchian, Los Angeles, + 1 213 218 4046, dmkrtchian@kslaw.com.
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CMS Finalizes CY 2026 End-Stage Renal Disease Prospective Payment System Final Rule
On November 20, 2025, CMS released the Calendar Year (CY) 2026 End-Stage Renal Disease (ESRD) Prospective Payment System (PPS) Final Rule (the Final Rule), which updates Medicare payment policies and rates for renal dialysis services furnished to beneficiaries with ESRD and acute kidney injury (AKI). For CY 2026, CMS finalized an ESRD PPS base rate of $281.71, reflecting a 2.2% increase in aggregate Medicare payments to ESRD facilities compared to 2025. The Final Rule also updates the ESRD PPS wage index using the latest Bureau of Labor Statistics data and core-based statistical area delineations, and revises the outlier policy and payment thresholds based on the most current claims data. CMS is implementing a new payment adjustment for ESRD facilities in certain non-contiguous states and territories to address higher non-labor costs and is modifying the eligibility timeframe for the transitional drug add-on payment adjustment (TDAPA). The Final Rule continues the inclusion of oral-only drugs in the ESRD PPS bundled payment and maintains the transitional pediatric ESRD add-on payment adjustment (TPEAPA) through 2026. In addition, CMS is finalizing updates to the ESRD Quality Incentive Program (QIP), including the removal and modification of certain reporting measures, and is finalizing the proposed termination of the ESRD Treatment Choices (ETC) Model at the end of 2025. CMS projects that these changes will result in an estimated $180 million increase in Medicare payments to ESRD facilities in 2026. The CMS Fact Sheet is available here. The Final Rule is available here.