On August 1, 2025, CMS issued its fiscal year (FY) 2026 prospective payment system (PPS) final rules for inpatient rehabilitation facilities (IRFs) and inpatient psychiatric facilities (IPFs). The changes are complex and multifaceted, and the impacted organizations will need to carefully model them to understand their impact on operating budgets and patient care. Below is a summary of key provisions in both rules.
Payment Updates for Inpatient Rehabilitation Facilities
CMS estimates payments to IRFs will increase by $340 million (compared to $295 million proposed) in FY 2026 as a result of all changes in the final rule, which include:
- IRF Market Basket Update (MBU) & Standard Payment Amount: The net FY 2026 IRF MBU is 2.6% (same as proposed). The net MBU results from a 3.3% MBU increase reduced by the 0.7% productivity adjustment. After applying budget neutrality adjustments, CMS finalizes a standard payment amount for IRFs of $19,371, which is approximately 2.5% greater than in the FY 2025 IRF final rule ($18,907).
- Case Mix Group (CMG) Updates: CMS updates the CMG weights using FY 2024 IRF claims and FY 2023 cost report data. CMS projects 99% of CMGs will experience less than a 5% change in relative value as a result of the update. The updated weights are listed in Table 2 (pg. 16) in the final rule, and the payment amounts are listed in Table 6 (pg. 48).
- Fixed Loss Outlier Threshold: Based on updated data, CMS finalizes an IRF fixed loss outlier threshold of $10,062 (down from $11,971 as proposed). This is a decrease from the FY 2025 threshold of $12,043, which will result in increased outlier payments. The further decrease in fixed loss outlier threshold accounts for some of the increase in IRF payments from the proposed rule to the final rule.
- Wage Index: CMS continues the three-year budget-neutral phaseout of the rural adjustment for FY 2024 IRFs transitioning from rural to urban status in FY 2026 under the revised core-based statistical area (CBSA) delineations. Affected IRFs will receive the full FY 2026 wage index along with one-third of the FY 2024 rural adjustment. This step is part of a gradual reduction of the 14.9% rural adjustment over FYs 2025, 2026, and 2027. This policy does not apply to urban IRFs transitioning to rural status, as they will receive the full rural adjustment.
- CMS will continue using CBSAs for labor market area definitions, and the FY 2026 pre-reclassification and pre-floor hospital wage index is based on data submitted for FY 2022 acute hospital cost reports.
- CMS finalizes an IRF labor-related share of 74.4% for FY 2026. This is the same as the 2025 IRF labor-related share.
- Quality Reporting Program (IRF QRP): CMS removes two measures from the IRF QRP:
- COVID-19 Vaccination Coverage Among Healthcare Personnel (HCP): CMS finalizes, effective for FY 2026, removal of the HCP measure.
- COVID-19 Vaccine: Percent of Patients/Residents Who Are Up to Date: CMS finalizes removing this measure for the FY 2028 IRF QRP. Beginning with patients discharged on or after October 1, 2025, IRFs would not be required to collect and submit the Patient/Resident COVID-19 Vaccine measure data to CMS, and IRFs who do not report this data for Q4 2025 will not be penalized for the FY 2027 Annual Increase Factor Determination.
- IRF Patient Assessment Instrument (PAI) Changes: CMS removes four standardized patient assessment data elements finalized in the social determinants of health category in the FY 2025 rule. The items removed include Living Situation (R0310), Food (R0320A and R0320B), and Utilities (R0330). CMS removes these items from the IRF-PAI with the FY 2028 IRF QRP, beginning with patients admitted on or after October 1, 2026.
In addition to the updates in the IRF PPS final rule, IRFs should pay attention to provisions in the Inpatient Prospective Payment System (IPPS) rule related to the Transforming Episode Accountability Model (TEAM). This mandatory bundled payment model will begin on January 1, 2026 for more than 700 selected hospitals and will have a significant impact on IRFs and other post-acute care providers. To prepare for the model, IRFs should create a current state assessment based on claims data for the five high-volume surgical procedures included.
Payment Updates for Inpatient Psychiatric Facilities
CMS estimates payments to IPFs will increase by $70 million (2.4%) in FY 2026 as a result of all changes in the final rule, which include:
- IPF Market Basket Update: The FY 2026 IPF net MBU is 2.5% (3.2% MBU increase reduced by the 0.7% productivity adjustment). This is up slightly from the proposed MBU of 2.4%. After applying the MBU and budget neutrality adjustment, CMS finalizes an IPF per diem of $892.87, which is approximately 1.9% greater than the FY 2025 per diem of $876.53. CMS finalizes an electroconvulsive therapy (ECT) payment per treatment of $673.85 in FY 2026, up from $661.52 in the FY 2025 final rule. The per diem/ECT payments for IPFs that did not meet quality reporting requirements are $875.44 and $660.70, respectively.
- Fixed Loss Outlier Threshold: CMS increases the IPF fixed dollar loss threshold amount from $38,110 in the FY 2025 final rule to $39,360. The increased threshold will result in a decrease in outlier payments.
- Patient-Level Adjustments: In FY 2026, CMS will use the same patient age, patient comorbidity, and variable per diem adjustment factors as finalized for FY 2025.
- Wage Index: CMS will continue using the concurrent pre-floor, pre-reclassified IPPS hospital wage index as the basis for the IPF wage index.
- CMS finalizes an IPF labor-related share for FY 2026 of 79%. This is up slightly from 78.8% in the 2025 IPF PPS final rule. As in prior years, CMS will apply the IPF wage index adjustment to the labor-related share of the national IPF PPS base rate and ECT payment per treatment.
- Facility-Level Adjustments: CMS makes adjustments to claims payment for inpatient psychiatric services based on a variety of facility-specific factors. The IPF rule updates cost-of-living adjusters for Alaska and Hawaii and will maintain the emergency department (ED) adjuster at 1.54. In the FY 2025 IPPS proposed rule, CMS solicited feedback on updating the regression analysis for the rural and teaching hospital adjusters. In this year’s rule, CMS finalizes the following changes:
- Rural Location Adjustment: CMS increases the rural location adjustment to 18% in FY 2026. It had been 17% since the inception of the IPF. In addition, in the FY 2025 final rule, CMS implemented a three-year budget-neutral phaseout of the rural adjustment for IPFs located in rural counties that became urban due to the new Office of Management and Budget delineations. In FY 2026, these IPFs will receive one-third of the rural adjustment that was applicable in FY 2024. For FY 2027, these IPFs will not receive a rural adjustment.
- Teaching Adjustment: CMS increases the teaching adjustment from 0.5150 in the FY 2025 final rule to 0.7957 in the FY 2026 rule. For FY 2026, CMS recognizes resident FTE cap increases awarded under Section 4122 of the Consolidated Appropriations Act. These resident FTE cap increases align with current IPF PPS teaching regulations, which allow for increases to IPF resident FTE caps for a new approved graduate medical education program.
- Inpatient Psychiatric Facilities Quality Reporting Program (IPF QRP): CMS modifies the IPF ED visit measure to align it with similar measures and removes four other measures.
- IPF ED Visit Measure: CMS changes the current one-year reporting period for the IPF ED Visit measure to a two-year period that would run from July 1, four years prior to the applicable FY payment determination, to June 30, two years prior to the applicable FY payment determination. CMS modifies the first reporting period for the measure to the third quarter of CY 2025 through the second quarter of CY 2027 for the FY 2029 payment determination. The reporting period for the IPF ED Visit measure aligns with the IPF Unplanned Readmission measure.
- Facility Commitment to Health Equity (FCHE): CMS removes the FCHE measure beginning with the CY 2024 reporting period/FY 2026 payment determination.
- COVID-19 Vaccination Coverage Among Healthcare Personnel (HCP): CMS removes the COVID-19 Vaccination Coverage Among HCP measure beginning with the CY 2024 reporting period/FY 2026 payment determination.
- Social Drivers of Health Screening Measures: CMS removes the Screening for Social Drivers of Health measure (Screening for SDOH) and the Screen Positive Rate for Social Drivers of Health measure from the IPF QRP beginning with the FY 2026 payment determination.
How Forvis Mazars Can Help
Our professionals at Forvis Mazars are committed to helping healthcare organizations across the continuum of care achieve regulatory excellence by understanding and adapting to the impact of evolving Medicare payment policies. If you have questions about how the final IRF and IPF changes may affect your organization, please reach out to a professional on our team.