On July 31, 2026, CMS issued its fiscal year (FY) 2027 Inpatient Prospective Payment System (IPPS) final rule. CMS estimates acute care hospitals will experience an aggregate payment increase of approximately $2.9 billion in FY 2027, including IPPS payment rate and policy changes, outlier and uncompensated care payment changes, capital payments, new technology add-on payments, and the scheduled expiration of the temporary low-volume hospital and Medicare dependent hospital policies on January 1, 2027.
CMS also finalized the mandatory, national Comprehensive Care for Joint Replacement Expanded (CJR-X) Model, which begins January 1, 2028. CMS estimates the model will save Medicare $725 million across five performance years.
Below we explore these updates and other key takeaways from the final rule.
Acute IPPS Hospital Market Basket Update
CMS finalized a 2.3% increase in IPPS operating payment rates for hospitals that meet Hospital Inpatient Quality Reporting (IQR) and Medicare Promoting Interoperability requirements, as well as a capital payment update of 3.4%. The base operating and capital rates are available on page 2,538 of the final rule display copy. The update reflects a projected 3.2% hospital market basket increase, reduced by a 0.9% productivity adjustment. Hospitals that fail to meet quality reporting or electronic health record (EHR) meaningful use requirements remain subject to lower updates under the statutory payment update framework.
CJR-X: National Mandatory Lower Extremity Joint Replacement Model
CMS finalized the CJR-X Model, a mandatory, nationwide episode-based payment model, to start January 1, 2028. Acute care hospitals eligible to be paid under both IPPS and the Outpatient Prospective Payment System (OPPS) will be required to participate, excluding hospitals located in Maryland and hospitals participating in the Transforming Episode Accountability Model (TEAM) until that model’s scheduled end date (December 31, 2030). Participating hospitals will be accountable for spending and quality for lower extremity joint replacement (LEJR) episodes beginning with an inpatient stay or hospital outpatient procedure and extending 90 days after discharge.
Further details on the finalized CJR-X Model are available here, including episode definitions, eligible beneficiaries, quality measures, pricing methodology, financial arrangements, and waivers.
Uncompensated Care (UC) & Disproportionate Share Hospital (DSH) Payment Update
CMS finalized a net increase in Medicare DSH and UC payments relative to FY 2026, rather than the previously proposed decrease. CMS estimates FY 2027 Medicare DSH and UC payments will increase by approximately $228 million compared to FY 2026. The agency directs hospitals to the FY 2027 Medicare DSH supplemental data file and Table 18 for final Factor 3 and hospital-level UC payment information.
While CMS projects higher national UC payments for FY 2027, the impact on individual hospitals will vary based on their Worksheet S-10 data and corresponding Factor 3 calculation. As a result, some hospitals may experience payment decreases despite the overall increase in available UC funding.
Factor 1
CMS finalized the FY 2027 Factor 1 calculation at $11.825 billion. This increase from $11.477 billion in the proposed rule was a result of CMS increasing its projections related to Medicare fee-for-service (FFS) discharges and the “other” factor, which includes Medicaid. Because the final payment impact changed direction from the proposed rule, hospitals should use the final CMS DSH supplemental file and Table 18 for final FY 2027 impact modeling.
Factor 2
In the final rule, CMS certified a calendar year (CY) 2026 uninsured rate of 9.2% and a CY 2027 uninsured rate of 9.5%, producing a weighted FY 2027 uninsured rate of 9.4%. This is higher than the proposed rule assumptions of 9.0% for CY 2026 and 9.1% for CY 2027. CMS finalized Factor 2 at 67.14%, and combined with the finalized Factor 1 of $11.825 billion, this results in approximately $7.94 billion available for distribution to Medicare DSH hospitals for UC payments in FY 2027. This is an increase from the proposed rule estimate of approximately $7.46 billion.
Factor 3
Factor 3 represents a hospital’s UC amount relative to the UC amount of all DSH-eligible hospitals and ultimately determines each hospital’s share of the approximately $7.94 billion UC payment pool available in FY 2027. For FY 2027, CMS will continue using the same methodology and data sources to calculate Factor 3. Specifically, CMS will use three years of audited Worksheet S-10 data from FY 2021, 2022, and 2023 cost reports to determine each hospital’s relative UC share. As a result, it remains critical for DSH hospitals to accurately identify, document, and report all eligible UC costs on Worksheet S-10.
The Factor 3 methodology continues to create a significant timing mismatch for many safety-net, urban, and high-Medicaid DSH hospitals. Because Factor 3 is based on historical audited cost report data from FYs 2021 through 2023, hospital payment allocations in FY 2027 will not reflect more recent shifts in UC arising from uninsured population increases projected by CMS.
Wage Index Adjustment
The final FY 2027 wage index adjustment is based on cost reporting periods beginning in FY 2023 from cost report data collected on Worksheet S-3, along with Occupational Mix survey data from CY 2022.
Labor-Related Share (LRS)
CMS finalized an LRS of 66.0% in FY 2027 for hospitals with an area wage index value greater than 1.00.
Rural Floor
Based on the calculation of the rural floor including the wage data of hospitals that have reclassified as rural under §412.103, CMS estimates that 549 hospitals will receive the rural floor in FY 2027, up from the proposed rule estimate of 535 hospitals. The increase reflects finalized wage index data and geographic reclassification updates incorporated into the final rule. CMS will apply a rural floor budget neutrality factor of 0.973492 as a result.
Low Wage Index Policy Transition Continues
Following the D.C. Circuit Court’s decision in Bridgeport Hosp. v. Becerra, CMS discontinued the low wage index hospital policy beginning in FY 2026. For FY 2027, CMS finalized, as proposed, a transitional payment exception similar to FY 2026, applying only to hospitals that benefited from the FY 2024 low wage index hospital policy. CMS will compare the hospital’s final FY 2027 wage index to its FY 2024 wage index, and if the FY 2027 value declines by more than 14.2625% due to discontinuation of the low wage index policy, the hospital will receive a transitional payment. This payment will equal the additional amount the hospital would receive if its FY 2027 wage index were set at 85.7375% of its FY 2024 wage index, after applying the existing 5% wage index cap.
CMS also finalized a corresponding budget-neutral transition under the capital IPPS. The operating IPPS budget neutrality adjustment associated with this transition policy is 0.999777. CMS characterized the policy as a limited safeguard for hospitals experiencing the most significant wage index reductions while continuing the overall phaseout of the low wage index policy.
Hospitals should evaluate the combined effects of the wage index, permanent 5% cap policy, rural floor adjustments, and geographic reclassifications to fully understand their FY 2027 payment impact.
Low-Volume Hospital Payment Adjustment
The final rule reflects the Consolidated Appropriations Act, 2026 extension of the temporary low-volume hospital criteria and payment methodology through December 31, 2026. Unless Congress extends the policy again, the program reverts on January 1, 2027 to the statutory requirements in effect prior to the Affordable Care Act (ACA), under which qualifying criteria are significantly more restrictive.
Low-Volume Hospital Qualifying Criteria & Payment Adjustment for FY 2019 & Subsequent Years1
| Fiscal Years | Road Miles | Total Discharges | Payment Adjustment |
|---|---|---|---|
| 2019 through 2026 and the portion of 2027 from 10/1/2026 through 12/31/2026 | >15 | <= 500 | 0.25 |
| > 500 < 3,800 | 0.25 - [0.25/3300] x (number of total discharges - 500) = (95/330) - (number of total discharges/13,200) | ||
| The portion of 2027 beginning on 1/1/2027 and 2028 and subsequent years | >25 | < 200 | 0.25 |
For FY 2027, CMS will continue its established process for hospitals seeking low-volume hospital payment adjustments, requiring written requests submitted to the hospital’s Medicare Administrative Contractor (MAC) with documentation showing the hospital meets applicable mileage and discharge criteria for the relevant period.
- For discharges from October 1 through December 31, 2026, requests must be received by September 1, 2026.
- For discharges from January 1 through September 30, 2027, requests must be received by December 1, 2026.
Late requests may still qualify but will be applied prospectively within 30 days of MAC approval. Hospitals may submit a single request covering both periods or separate requests for each period. Hospitals that qualified for low-volume hospital status in FY 2026 may continue in FY 2027 without reapplying if they meet revised criteria and provide timely written verification.
Medicare Dependent Hospital (MDH) Status
The final rule reflects the Consolidated Appropriations Act, 2026 extension of MDH status through December 31, 2026. Absent another statutory extension, beginning January 1, 2027, hospitals that previously qualified will no longer have MDH status and will be paid based on the IPPS federal rate. CMS also finalized sole community hospital (SCH)-related policies that allow qualifying MDHs to seek SCH status in advance of MDH expiration. For many rural hospitals, loss of MDH status could result in materially lower Medicare reimbursement beginning January 1, 2027 if Congress does not enact another extension.
Outlier Threshold
For FY 2027, CMS finalized a fixed loss acute outlier threshold of $49,346, which is substantially higher than the FY 2026 final rule threshold of $40,397 but lower than the proposed $51,704 threshold. CMS finalized the threshold at a level intended to maintain total outlier payments at approximately 5.1% of aggregate IPPS operating diagnosis-related group (DRG) payments, consistent with statutory requirements.
Hospitals should evaluate the impact on service lines with high-cost cases, including complex cardiac, transplant, trauma, oncology, and neonatal services, as more case costs will need to be absorbed before outlier payments are triggered.
TEAM Episodic Payment Model Updates
TEAM is a five-year mandatory model for selected hospitals that started on January 1, 2026 and will end on December 31, 2030. In the FY 2027 IPPS final rule, CMS finalized several TEAM updates, including:
- Adding three MS-DRGs that initiate a spinal fusion anchor hospitalization
- Clarifying certain quality measure performance periods
- Using a rolling concurrent composite quality score (CQS) baseline period for certain measures
- Adding Ambulatory Payment Classification (APC) and MS-DRG update factors to target prices
- Using the full baseline period to construct the prospective normalization factor
Hospitals participating in TEAM should evaluate the impact of the new spinal fusion episodes and target price methodology updates on future reconciliation performance.
Graduate Medical Education (GME)
The rule finalizes nondiscrimination requirements for approved medical residency programs and modifies the criteria for identifying new residency programs for cap-building purposes. CMS finalized that, in addition to receiving initial accreditation, at least 90% of residents generally must not have prior training in another program in the same specialty, subject to exceptions for small programs, displaced residents, and residents admitted through a binding third-party matching program.
CMS will determine whether a hospital meets the 90% threshold by counting residents entering a new program during the applicable five-year cap-building period. Residents who previously trained in the same specialty and matched into the program, as well as displaced residents, would be excluded from the calculation. The 90% new resident requirement would not apply to small residency programs with 16 or fewer approved positions.
Both the nondiscrimination requirement and new residency program criteria for cap building are effective October 1, 2026.
Nursing & Allied Health (NAH) Education Programs
The final rule extends similar nondiscrimination requirements to approved NAH education programs and accreditors. CMS also finalized clarifications related to allowable NAH education costs and pass-through policies, including the principle that allowable costs must be directly attributable to operating approved NAH programs, excluding usual patient care and related party costs.
Organ Acquisition & Reasonable Cost Payment Policies
CMS finalized organ acquisition and reasonable cost payment policies with a modification delaying implementation of nonrenal organ acquisition cost reconciliation for independent organ procurement organizations (IOPOs) and histocompatibility laboratories (HCLs) until cost reporting periods beginning on or after October 1, 2028. CMS also finalized clarifications and codifications of reasonable cost, overhead allocation, and discretionary administrator review policies for IOPO and HCL appeals.
The delay reduces near-term administrative and financial disruption, and the codified policies provide clearer guidance on allowable costs, cost allocation methodologies, and CMS review authority for reimbursement appeals.
Provider-Based Location Criteria Tightened
CMS finalized its proposal to limit the referral-based “same patient population” test to outpatient facilities and organizations only. As a result, off-campus inpatient facilities may no longer rely on the referral-based 75% test to demonstrate patient population overlap with the main provider and instead must satisfy the geographic ZIP-code-based patient population test. CMS stated this change is intended to preserve the original purpose of the referral exception while reducing potential payment advantages for certain inpatient facilities.
Hospitals seeking or maintaining provider-based status for off-campus inpatient facilities may face additional compliance challenges and should evaluate whether affected locations can continue to meet provider-based requirements under the ZIP code methodology. The policy narrows the pathways available for inpatient facilities to qualify for provider-based status and may affect future organizational and facility structuring decisions. Organizations planning hospital-at-home, behavioral health, rehabilitation, or specialty inpatient expansions should carefully evaluate the provider-based implications.
Long-Term Care Hospital (LTCH) Payment Update
CMS finalized a 2.3% payment rate update for LTCHs that successfully meet quality reporting requirements, reflecting a 3.2% LTCH market basket update reduced by a 0.9% ACA productivity adjustment. Based on all finalized policy changes, CMS estimates that aggregate LTCH payments will increase by approximately $54 million in FY 2027 relative to FY 2026.
CMS also finalized an FY 2027 LTCH standard federal payment rate of $52,132.76, an increase from the FY 2026 rate of $50,824.51. The increase reflects the final market basket and productivity adjustment updates adopted in the rule. CMS finalized maintaining the LTCH fixed loss outlier threshold at $78,936, unchanged from FY 2026.
Acute Hospital Inpatient Quality Reporting (IQR)/Value Based Purchasing (VBP) Programs
CMS finalized several changes to the Hospital IQR, VBP, and related quality programs:
New IQR Measures
CMS finalized the following new measures in the IQR:
- Excess Days in Acute Care After Hospitalization for Diabetes (FY 2029 payment determination)
- Hospital Harm-Postoperative Venous Thromboembolism (eCQM) (FY 2030 payment determination)
- Advance Care Planning eCQM (FY 2030 payment determination)
Modified Measures
CMS finalized modifications to eight existing claims-based measures by including Medicare Advantage patients in their calculation and reducing the performance period from three years to two, beginning with the FY 2028 payment determination. These modifications apply to:
- Hospital 30-Day, All-Cause, Risk-Standardized Mortality Rate measures following AMI, heart failure, pneumonia, COPD, and CABG hospitalizations. CMS will use the modified versions of these measures in the Hospital VBP beginning with the FY 2032 program year.
- Excess Days in Acute Care After Hospitalization for AMI, heart failure, and pneumonia.
Removed Measures
CMS finalized removal of the following measures beginning with the FY 2030 payment determination:
- Venous Thromboembolism Prophylaxis (VTE-1) eCQM
- Intensive Care Unit Venous Thromboembolism Prophylaxis (VTE-2) eCQM
- Discharged on Antithrombotic Therapy (STK-02) eCQM
CMS estimates the VBP program will redistribute approximately $1.9 billion in FY 2027.
Hospital Readmissions Reduction Program (HRRP)
CMS finalized adoption of the Hospital 30-Day, All-Cause, Risk-Standardized Readmission Rate Following Sepsis Hospitalization measure, with modifications. Hospitals will receive two years of confidential early-look reports for FY 2028 and FY 2029 program years, including estimated HRRP payment adjustments with the sepsis readmission measure added. The measure will be used in payment reduction calculations beginning with the FY 2030 program year.
How Forvis Mazars Can Help
While the FY 2027 IPPS final rule includes a modest overall payment increase, hospital-specific impacts will vary considerably based on wage index changes, UC payment allocations, rural payment provisions, and participation in mandatory alternative payment models.
Our professionals at Forvis Mazars are committed to helping healthcare organizations achieve regulatory excellence by understanding and adapting to the impact of evolving Medicare payment policies. If you have questions about how changes in the FY 2027 IPPS final rule may affect your organization, please reach out to a professional on our team.
- 1TABLE V.D.-01, FY 2027 IPPS Final Rule, Display Version, pg. 751.