Editor's note: This story has been updated with reactions and commentary from hospital industry groups.
The Trump administration is floating a 2.4% pay raise for inpatient hospital’s payments for fiscal year 2026, alongside adjustments to quality reporting programs and a call for public suggestions on deregulation and promoting wellness.
The bump reflects a projected hospital market basket update of 3.2%, which is reduced by a 0.8 percentage point productivity adjustment, the Centers for Medicare & Medicaid Services' (CMS') explained in a Friday fact sheet on the proposed Inpatient Prospective Payment Systems (IPPS) and Long-Term Care Hospital Prospective Payment System (LTCH PPS).
CMS said it’s proposed hospital pay raise also reflects its plan to shift the IPPS operating market basket and IPPS capital market basket to reflect 2023 as the base year, upon which the agency is also outlining a proposed national labor-related share of 66%.
All told, CMS said it expects the proposed updates will raise hospitals’ total payments by $4 billion. That count includes a $1.5 billion projected increase in Medicare uncompensated care payments to disproportionate share hospitals, and $234 million of additional payments for inpatient cases involving new medical technologies due to add-on payment continuations.
The 2.4% effective pay increase would be below both the 2.6% rate CMS proposed last year and the 2.9% final rate it later landed on. Both were characterized by the hospital industry as inadequate in light of rising expenses. Independent advisors have suggested Congress should act to authorize CMS to issue a higher rate increase than what is permitted under current law.
CMS also noted that to comply with a summer court order, it will be discontinuing the low wage index hospital policy, which since FY 2020 has provided extra funds to hospitals whose workers earn lower wages to encourage higher pay. At the same time, it’s floating a budget-neutral “narrow transitional exception” for those that would be significantly impacted by the discontinuation, similar to tweaks to the current year’s hospital payment the agency made in a last-minute update last fall.
As for long-term care hospitals also covered under the release, CMS is proposing a 2.6% annual pay update, reflecting a market basket percentage increase of 3.4% cut by a 0.8 percentage point productivity adjustment. With a projected 0.3% decrease in high-cost outlier payments, the agency expects payments to long-term care hospitals will see a $52 million raise in total payments during fiscal year 2026.
So far the proposed hospital pay increase has earned criticism from hospital groups. American Hospital Association (AHA) Senior Vice President for Public Policy Analysis and Development Ashley Thompson described the proposed update as "inadequate" and shared "particular concern" over the 0.8% proposed productivity cut.
"We are very concerned that this update will hurt our ability to care for our communities. Indeed, many hospitals across the country, especially those in rural and underserved communities, already operate under unsustainable financial situations, including negative margins," Thompson said.
The Federation of American Hospitals, which represents for-profit health systems, said the low rate is another reason why Congress mustn't cut hospital funding elsewhere.
“While CMS’ proposed update reflects the inflation formulas established by law, the reality is that patient care still faces the twin problems of hangover cost increases from hyperinflation and the cumulative effect of inadequate payment over time from Medicare and Medicaid," the lobbying group said in a statement. "This is why it’s mission critical Congress protects Medicaid coverage by avoiding funding cuts as well as extends the enhanced tax credits to protect individual coverage, a lifeline for millions of Americans.”
Provider group purchasing network Premier, Inc. said it was "deeply concerned" that the "insufficient" payments could threaten hospital resiliency and patient care.
"Premier urges the CMS to ensure that Medicare payments adequately support the needs of both providers and the patients they serve, while continuing to double-down on testing value-based care models such as [the Transforming Episode Accountability Model (TEAM)]," Premier Senior Vice President of Government Affairs Soumi Saha said in a statement. "Our healthcare system—and the health of millions of Americans—depends on it."
Quality program and TEAM tweaks, with calls for deregulation and MAHA suggestions
As usual, the annual hospital payment rule serves as a vehicle for CMS to implement policy changes for Medicare-participating hospitals and seek input on other future updates.
This time around the extras center on reducing regulatory burden, updating quality measurement, incentivizing interoperability and hearing pitches on “on enhancing nutrition and physical activity to promote better wellness through quality measurement and other initiatives,” according to an accompanying release.
For the former, which seeks to carry out President Donald Trump’s “Unleashing Prosperity Through Deregulation” executive order, CMS has opened a request for information on how it could “streamline regulations and reduce burdens on those participating in the Medicare program,” the agency said.
The webpage for that request cites Medicare’s Conditions of Participation and Conditions of Coverage as potential targets, as well as reporting documentation requirements for quality, value-based purchasing programs and payment policies.
“These requirements can divert resources from patient care, contribute to inefficiencies, and can create financial strain on providers,” the agency said.
Elsewhere in the proposed rule, CMS said it wants to hear from the public about potential changes to the Hospital Inpatient Quality Reporting (IQR) Program, which reduces payments to hospitals should they fall short of its requirements, “related to measure concepts focusing on well-being and nutrition for consideration in future years”—reflecting Health and Human Services Secretary Robert F. Kennedy Jr.’s broader Make America Healthy Again agenda.
Also within the IQR Program there are four current quality measures to which CMS is proposing modifications and four it’d like to cut, with the latter including those related to health equity, healthcare worker COVID-19 vaccination and social drivers of health screening. Further, the agency is proposing an update to the program’s Extraordinary Circumstances Exception (ECE) policy “to clarify that it has the discretion to grant an extension rather than only a full exception.”
Other potential program updates outlined in a CMS fact sheet include modifications to the Hospital Readmissions Reduction Program for fiscal year 2027, an update to the Hospital-Acquired Condition Reduction Program’s ECE policy similarly permitting extensions, modifications to the Hospital Value-Based Purchasing Program that include the removal of a Health Equity Adjustment from its scoring methodology.
Proposed changes to CMS’ TEAM, a five-year mandatory model for some acute care hospitals providing one of five surgical procedures set to begin Jan. 1, “would capture quality measure performance using patient-reported outcomes in the outpatient setting without increasing participant burden, improve target price construction, and expand the three-day Skilled Nursing Facility Rule waiver, giving patients a wider choice of and access to post-acute care,” CMS said in a fact sheet.
On hospitals’ data exchange, Friday’s proposed rule outlines doesn’t bring any changes to the Medicare Promoting Interoperability Program’s previously finalized performance-based scoring threshold.
However, it does propose to modify program measures for hospitals to share whether they have conducted security risk management alongside risk analysis, completed an annual self-assessment under 2025 SAFER Guides. The agency also said it will be seeking information on the program’s objectives and measures moving toward performance-based report, and on potential improvements to the quality and completeness of health information hospitals are sharing across their systems.
On the policy changes, AHA's Thompson said the group appreciated CMS' interest in refining the TEAM payment model—while resuming calls for it to be changed into a voluntary model—and CMS' streamlining of burdensome regulatory requirements.
"We particularly welcome the agency’s focus on ways to streamline and focus quality measurement efforts, including by proposing to eliminate the outdated reporting related to staff vaccination rates," she said. "We look forward to sharing our ideas and working closely with CMS to further cut down on excessive administrative red tape."
The proposed payment rule has a 60-day comment period and can be found on the Federal Register.