2026 IPPS and LTCH PPS Final Rule: What Hospitals Need to Know

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The Centers for Medicare & Medicaid Services (CMS) released the Fiscal Year (FY) 2026 Inpatient Prospective Payment System (IPPS) and Long-Term Care Hospital Prospective Payment System (LTCH PPS) Final Rule on August 1. Taking effect October 1, 2025, the rule carries significant implications for providers, coders, administrators, and financial leaders. From new MS-DRGs and quality reporting changes to bundled payment initiatives and rural hospital relief, the updates reflect CMS’s continued push toward modernization, efficiency, and accountability.

Below is a breakdown of the most impactful updates.

Payment Rate Adjustments: Modest but Meaningful

Acute-Care Hospitals: The FY 2026 IPPS increases operating payment rates by 2.6%. This stems from a 3.3% hospital market basket update, offset by a 0.7% productivity cut. CMS estimates overall hospital payments will increase by $5 billion compared to FY 2025.

New Technology Add-On Payments (NTAPs): CMS projects $192 million in additional funding through expanded NTAP eligibility, providing financial relief for hospitals adopting breakthrough treatments.

LTCH PPS: Standard payment rates rise by 2.7% (3.4% market basket minus the 0.7% productivity cut), amounting to a $3 billion net increase for long-term care providers.

For both hospital types, these increases may not fully offset inflationary pressures, but they create opportunities for hospitals that strategically align coding, documentation, and compliance efforts.

MS-DRG Updates: Expanded Precision in Case Classification

The Final Rule refines case grouping by adding and eliminating certain Medicare Severity Diagnosis-Related Groups (MS-DRGs):

Newly Added MS-DRGs

• 209: Complex aortic arch procedures
• 213: Endovascular abdominal aorta and iliac branch procedures
• 359 & 360: Percutaneous coronary atherectomy (with/without intraluminal device)
• 318: Percutaneous coronary atherectomy without device
• 403 & 404: Hip/knee procedures with principal diagnosis of periprosthetic joint infection

Retired MS-DRGs

• 077–079: Hypertensive encephalopathy
• 294–295: Deep vein thrombophlebitis

These changes improve reimbursement accuracy for high-acuity cases, but hospitals must update coding workflows and staff training promptly to avoid claim rejections and revenue delays.

NTAPs: Expanding Access to Innovation

CMS continues NTAP status for 26 technologies and is reviewing 43 new applications, many through alternative approval pathways like Breakthrough Device designation or Qualified Infectious Disease Products (QIDPs). Hospitals adopting these innovations should evaluate the revenue potential of NTAP reimbursement, but must also ensure documentation meets CMS standards for eligibility.

Rural Hospital Relief: A Pending Question

Two critical payment adjustments—Medicare Dependent Hospital (MDH) and Low-Volume Hospital (LVH)—are set to expire September 30, 2025, unless extended by Congress. If no extension occurs, affected hospitals will revert to standard federal IPPS rates, potentially straining already vulnerable rural providers. Advocacy and financial modeling are key as rural leaders prepare for possible funding disruptions.

Quality Reporting & Performance Programs

CMS continues to refine its major quality initiatives, including the Hospital Readmissions Reduction Program (HRRP), Hospital Value-Based Purchasing (HVBP), Hospital-Acquired Condition (HAC) Reduction Program, and the Inpatient Quality Reporting (IQR) Program.

Key adjustments for FY 2026 include:

• Sunsetting COVID-19-specific measures to streamline reporting.
• Integrating Medicare Advantage (MA) data where feasible to improve accuracy and comparability.
• Removing health equity and social determinants of health (SDoH) measures, signaling a shift in how equity-focused initiatives will be evaluated going forward.

Hospitals that fail to meet reporting and compliance requirements risk penalties that could offset payment increases.

TEAM Model: Preparing for Bundled Payment

The Transforming Episode Accountability Model (TEAM) begins January 1, 2026, marking CMS’s latest move into mandatory bundled payment arrangements. The five-year program includes:

• Neutral quality scoring for low-data hospitals
• Deferred participation options for select facilities
• Expanded SNF three-day rule waivers
• Adjusted risk methodology for more accurate benchmarking

Hospitals must evaluate readiness now, as TEAM participation will directly affect reimbursement, care coordination, and downstream provider relationships.

LTCH PPS Updates

For long-term care hospitals, CMS finalized:

• 3% rate increase for standard LTCH payments
• Policy adjustments aligning wage index, quality reporting, and structural requirements with IPPS reforms
• Emphasis on NTAP adoption and compliance with evolving reporting standards

These changes reflect CMS’s aim to create consistency across hospital payment systems while recognizing LTCH-specific operational challenges.

What It Means for Hospitals and Health Systems

Revenue Opportunities: New MS-DRGs and NTAPs may unlock reimbursement for high-cost, high-complexity cases, but only if coding and documentation are precise.

Compliance Imperatives: Failure to meet quality reporting standards or prepare for TEAM bundled payment participation could result in revenue loss.

Rural Vulnerability: Hospitals losing MDH/LVH adjustments face significant financial risk if congressional relief is not secured.

Operational Readiness: Coding staff, finance teams, and administrators must align quickly to adapt to new policies, ensure accurate DRG assignment, and prepare for bundled payment workflows.

Conclusion: Strategic Adaptation Required

The FY 2026 IPPS and LTCH PPS Final Rule represents a pivotal moment in Medicare payment reform. While payment updates are modest, the broader implications—new DRGs, NTAP expansion, bundled payment requirements, and evolving quality measures—signal a continued shift toward value, innovation, and accountability.

Hospitals that take a proactive approach—strengthening coding accuracy, updating compliance processes, and planning strategically for TEAM—will be best positioned to maximize reimbursement and maintain financial sustainability.

How We Can Help You Navigate the 2026 IPPS and LTCH PPS Changes

Adapting to the 2026 Final Rule requires more than just understanding the new policies—it demands operational alignment, coding precision, and compliance oversight. With new MS-DRGs, NTAP updates, and bundled payment programs like TEAM on the horizon, hospitals and providers must be prepared to adjust quickly to avoid compliance pitfalls and revenue leakage.

This is where our expertise comes in. At Bristol Healthcare Services, we specialize in:

• Comprehensive medical coding services to ensure accurate MS-DRG assignment and maximize reimbursement under the new rules.
• Billing and claims management tailored to IPPS and LTCH PPS requirements, reducing denials and accelerating payment.
• Compliance and quality reporting support to help hospitals stay aligned with evolving CMS programs and avoid costly penalties.
• Revenue cycle optimization strategies designed to uncover missed opportunities and improve overall financial health.

By partnering with us, your organization can confidently navigate the FY 2026 IPPS and LTCH PPS landscape, ensuring regulatory compliance, stronger cash flow, and long-term sustainability.