In late July 2026, CMS issued its fiscal year (FY) 2027 prospective payment system (PPS) final rules for inpatient rehabilitation facilities (IRFs) and inpatient psychiatric facilities (IPFs). This article highlights key provisions of both rules to help affected organizations model and understand their impact on operating budgets and patient care.
What Are the Key Provisions in the 2027 IRF Final Rule?
CMS estimates the net impact of all provisions in the final rule will be a payment increase of $340 million (2.7%) to IRFs in FY 2027. Specific provisions include:
IRF Market Basket Update (MBU) & Standard Payment Amount
The final net FY 2027 IRF MBU is 2.3%. The net MBU results from a 3.2% MBU increase reduced by the 0.9% productivity adjustment. After applying budget neutrality adjustments, the standard payment amount for IRFs is $19,868 (proposed as $19,881), which is approximately 2.6% greater than in the FY 2026 IRF final rule ($19,371).
Case Mix Group (CMG) Updates
CMS updates the CMG weights using FY 2025 IRF claims and FY 2024 cost report data. CMS projects 99.4% of cases will experience a change of less than 5% in relative value because of the updated CMGs. The updated weights are listed in Table 2 (pg. 16, display copy) of the final rule in the Federal Register, and the unadjusted payment amounts are listed in Table 6 (pg. 51, display copy).
Fixed Loss Outlier Threshold
CMS finalizes an IRF fixed loss outlier threshold of $8,857 (proposed as $8,689). This is a decrease from the FY 2026 final threshold of $10,141, which will result in an estimated $50 million increase in outlier payments. CMS notes this will maintain outlier payments at its targeted 3% level.
Wage Index
CMS completes the three-year budget-neutral phaseout of the rural adjustment for FY 2024 IRFs transitioning from rural to urban status under the revised core-based statistical area (CBSA) delineations. Affected IRFs received one-third of the FY 2024 rural adjustment in FY 2026. In FY 2027, they will receive the full urban wage index with no rural adjustment.
In addition, CMS will continue using the Inpatient Prospective Payment System (IPPS) pre-reclassification, pre-floor hospital wage index (based on 2024 cost report data) as the basis for the IRF PPS wage index for FY 2027. CMS finalizes an IRF labor-related share of 74.3% for FY 2027, a slight decrease from 74.4% in FY 2026.
In a request for information, CMS sought input on alternative wage index data sources, including whether Bureau of Labor Statistics (BLS) wage data or IRF-specific sources could improve geographic accuracy in future years. The agency acknowledges in the final rule that it has received comments, but it does not indicate it is considering a specific change at this time.
Quality Reporting Program (IRF QRP)
The final rule retains the 15 currently adopted IRF QRP measures. However, CMS finalizes changing the data submission deadline to the 15th day of the second month after the end of the calendar quarter (roughly 45 days) beginning with the FY 2029 IRF QRP. The current data submission deadline is four and a half months after the end of each quarter. This applies to both the IRF Patient Assessment Instrument (IRF-PAI) data and Centers for Disease Control and Prevention National Health Safety Network (NHSN) data. This represents a substantial acceleration of reporting timelines and may require IRFs to redesign quality reporting workflows and validation processes.
Other Payment Policy Changes
The 2027 IRF rule finalizes several policy and compliance changes that affect operations:
- “Clarifying” the 36-Hour Rule: CMS finalizes a policy that requires all ordered therapy treatments or therapy evaluations, not just one, to begin within 36 hours from midnight on the day of admission. IRF claims that do not comply with the 36-hour rule will not be considered reasonable and necessary. CMS clarifies that, following the initial 36 hours after midnight of the day of admission, any new therapy treatment and/or therapy evaluations ordered are not part of the 36-hour requirement.
- Interdisciplinary Team Meetings: CMS finalizes a requirement that the initial interdisciplinary team meeting occur on or before the fourth day following admission, with subsequent meetings at least every seven days.
- Documentation of Functional Status: CMS proposed, but did not finalize, requiring documentation of a patient’s current functional status within the preadmission screening. However, the agency indicates that it may revisit this topic in future rulemaking.
What Are the Key Provisions in the 2027 IPF Final Rule?
CMS estimates that the net impact of all provisions in the final rule will be a $60 million (2.3%) payment increase to IPFs in FY 2027. Key changes include:
IPF MBU
The final FY 2027 IPF net MBU is 2.3% (3.2% MBU increase reduced by the 0.9% productivity adjustment). After applying the MBU and budget neutrality adjustment, CMS finalizes an IPF per diem of $912.40 (proposed at $912.58), approximately 2.2% more than the final FY 2026 per diem of $892.87. CMS finalizes an electroconvulsive therapy (ECT) payment per treatment of $688.59 (proposed at $688.73) in FY 2027, up from $673.85 in the FY 2026 final rule. For IPFs that did not meet quality reporting requirements, the per diem and ECT payments are $894.56 (proposed at $894.74) and $675.13 (proposed at $675.26), respectively.
Fixed Loss Outlier Threshold
CMS increases the IPF fixed dollar loss threshold amount from $39,360 in the FY 2026 final rule to $40,750 (proposed at $37,820) for FY 2027. The increased threshold will result in a decrease in outlier payments.
In addition, CMS caps total outlier payments at no more than 20% of an individual IPF’s total IPF PPS payments beginning in FY 2028 (delayed from FY 2027 as proposed). In response to comments, CMS limits the policy to IPFs with 50 or more discharges per year in the final rule. The agency says the policy is intended to prevent a small number of high-cost facilities from disproportionately driving outlier spending and inflating the outlier threshold.
In the final rule, CMS projects that 0.8% of IPFs would be subject to the cap with it limited to those with 50 or more discharges per year. CMS estimated the proposed policy, which would have been applied to all IPFs regardless of the number of discharges, would have impacted 3.6% of facilities. The finalized change takes effect for discharges occurring in cost reporting periods beginning on or after October 1, 2027.
Patient-Level Adjustments
For FY 2027, CMS will use the same patient age, patient comorbidity, and variable per diem adjustment factors as previously finalized.
Wage Index
CMS will continue using the concurrent pre-floor, pre-reclassified IPPS hospital wage index as the basis for the IPF wage index. As with IRFs, CMS completes the three-year budget-neutral phaseout of the rural adjustment for FY 2024 IPFs transitioning from rural to urban status under the revised core-based statistical area (CBSA) delineations. Affected IPFs received one-third of the FY 2024 rural adjustment in FY 2026. In FY 2027, they will receive the full urban wage index with no rural adjustment.
For FY 2027, CMS finalizes an IPF labor-related share of 78.9%, a slight decrease from 79.0% in the 2026 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.
In addition, as in the IRF proposed rule, CMS sought input on alternative wage index data sources, including whether BLS wage data or IPF-specific sources could improve geographic accuracy in future years. The agency acknowledges in the final rule that it has received comments, but it does not indicate it is considering a specific change at this time.
Facility-Level Adjustments
Each year, CMS adjusts claims payments for inpatient psychiatric services based on a variety of facility-specific factors. For 2027, CMS will use the same rural location, teaching, and emergency department adjustments finalized in 2026.
The final rule also updates cost-of-living adjusters for Alaska and Hawaii. These values can be found in Table 2 (pg. 50) in the Federal Register display copy. In addition, CMS finalizes the use of the Department of Defense’s Overseas Cost-of-Living Allowance (OCOLA) methodology to update IPF cost-of-living adjustments for Alaska and Hawaii and eliminates the historical 25% cap on cost-of-living adjustment (COLA) factors.
CMS also finalizes a hold-harmless policy for any area that would experience a reduction to its COLA factor under the OCOLA methodology.
IPF QRP
CMS finalizes the following changes related to the IPF QRP:
- IPF-PAI: As required by the Consolidated Appropriations Act, 2023, CMS implements a standardized IPF-PAI, finalizing three quarters of voluntary reporting beginning October 1, 2027, with mandatory reporting beginning July 1, 2028. An IPF is required to submit IPF-PAI assessments on a quarterly basis. Table 8 in the final rule shows data submission deadlines through the FY 2031 payment determination using the finalized reporting period and data submission deadline policies. IPFs must submit fully completed assessments for at least 50% of IPF-PAIs in CY 2028 (Q3 to Q4) and CY 2029, with the threshold increasing to 70% beginning in CY 2030. Facilities that fail to meet the required completion rate will incur a reduction of two percentage points to their annual payment update.
- Measure Removal: The agency removes two chart-abstracted measures to reduce reporting burden: Alcohol Use Brief Intervention (SUB2/2a) and Tobacco Use Treatment at Discharge (TOB3/3a).
How Forvis Mazars Can Help
Our healthcare reimbursement and compliance professionals are committed to helping 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.