Proposed Spending for 2025 and 2026

WHAT’S PROPOSED for the 2026 payment year for Medicare Parts A and B? And, what other issues will impact the rest of 2025 and extending into 2026? 

The Centers for Medicare and Medicaid Services (CMS) operates on two different schedules: a fiscal year for inpatient facilities that begins Oct. 1 and a calendar year for ambulatory care and outpatient facilities that begins Jan. 1. The proposed payment rules are published well in advance to allow 60 days to seek input, comments or testimony from the healthcare community. Comments submitted are reviewed, with some changes accepted and incorporated into the final rules published in the Federal Register (www.federalregister.gov/public-inspection/current). This process is currently underway for fiscal year (FY) 2026 inpatient rule sets that begin Oct. 1, 2025. CMS releases a fact sheet for each rule set that summarizes highlights. In some cases, CMS seeks feedback on changes under consideration and publishes a request for information (RFI). Following are highlights of upcoming changes. 

Inpatient Prospective Payment System and Long-Term Care Hospital Prospective Payment System 

CMS is required to update payment rates for inpatient hospitals annually to account for changes in the prices of goods and services used to treat Medicare patients, among other factors.1 The FY 2026 Inpatient Prospective Payment System and Long-Term Care Hospital Prospective Payment System proposed rule would also update CMS quality measurements and promote interoperability programs that focus on updating the regulatory framework to prioritize safety and outcomes while empowering patients and holding the healthcare system accountable.¹ 

Although the proposed rule increases inpatient payment by about 2.4 percent, comments from hospital groups have indicated this is not sufficient to meet increasing costs. CMS is also proposing modifications to the Transforming Episode Accountability Model that addresses patient care and Medicare spending. The five-year, mandatory payment model for select surgeries becomes effective Jan. 1, 2026. CMS is proposing to modify four current measures of the Hospital Inpatient Quality Reporting program, including the removal of certain measures tied to health equity, social determinants of health and COVID-19 vaccinations. Additionally it proposes removing measures related to decarbonization.² 

Inpatient Psychiatry Facilities 

CMS proposes annual updates to the prospective payment rates, the outlier threshold, the wage index and associated impact analysis. In addition, the rule includes a proposal to update the facility-level adjustment factors, with increases to payments for teaching status and rural location.3

Inpatient Rehabilitation 

CMS proposes to update the inpatient rehabilitation facility prospective payment system (IRF PPS) payment rates by 2.6 percent.4 The IRF quality reporting program is proposing to remove two quality measures, four social determinants of health standardized patient assessment data elements and to amend the reconsideration policy and process. CMS is seeking feedback with four RFIs on future measures.⁴ 

Skilled Nursing Facilities 

CMS proposes updating skilled nursing facilities (SNFs) PPS rates by 2.8 percent. In addition, CMS is proposing changes to the Patient-Driven Payment Model International Classification of Diseases, 10th Revision, code mappings to allow providers to give more accurate, consistent and appropriate primary diagnoses that meet certain criteria. CMS is also proposing updates to the SNF value-based purchasing program and quality reporting program.⁵ 

Hospice 

To seek feedback on current adoption of health information technology and standards, including Fast Healthcare Interoperability Resources, CMS is seeking feedback on two RFIs: 1) future measure on the topics of interoperability, nutrition and well-being; and 2) advancing digital quality measurement.⁶ Further information is on the hospice web page at www.cms.gov/Center/ Provider-Type/Hospice-Center.html. 

Executive Order Action Items 

As the April 15, 2025, executive order, “Lowering Drug Prices By Once Again Putting Americans First,” moves toward implementation, its long-term effects on hospital operations, patient access and drug affordability remain uncertain — and are likely to continue fueling debate among hospital leaders. In summary, here are the sections impacting medications.⁷ 

• By June 2025: 

– Ensure community health centers provide insulin and epinephrine at discounted prices to certain low-income individuals. 

– Reevaluate middlemen/pharmacy benefit managers (PBMs); promote a competitive and transparent pharmaceutical value chain. 

– Streamline and increase drug importation program from Canada and potentially additional countries. 

• By September 2025: 

– Survey and adjust Medicare payments to match hospital acquisition costs. 

– Ensure Medicare payments do not shift drug administration to more expensive settings (pay the same rate for the same service). 

– Expand Medicare drug price negotiations to align small-molecule drugs with biological products. 

– Ensure accurate Medicaid drug rebates, promote innovation and link payments to value. 

– Accelerate generic drug competition, speed up the approval of generics and reclassify some drugs as over the counter. 

– Improve PBM fee transparency for employers. 

– Combat anticompetitive behavior. 

• By April 2026: 

– Implement a new payment model for high-cost drug prices for seniors. 

Potential Impact of Tariffs 

On April 1, the U.S. Department of Commerce launched an investigation into the effects of pharmaceutical imports on national security. It will lay the foundation for tariffs on pharmaceutical products and ingredients. The probe covers pharmaceuticals, active pharmaceutical ingredients, key starting materials and derivative products, and focuses on current and projected U.S. demand for pharmaceuticals and pharmaceutical ingredients; whether domestic production can meet that demand; foreign supply chains’ role in meeting U.S. demand; and supplier concentration. Several companies have vowed to increase production in the United States.⁸ 

Drug Shortages 

The Government Accountability Office has called on the U.S. Department of Health and Human Services to implement a mechanism for coordinating with other federal agencies on drug shortages. In its report, it noted three major root causes contributing to drug shortages: lack of incentives to produce less profitable drugs; lack of recognition and reward for manufacturers with mature quality management systems; and logistical and regulatory challenges related to complex and fragmented supply chains. This is based on its investigation of the need for finalization of the delayed Food and Drug Administration’s Quality Management Maturity program and manufacturers’ use of the agency’s mandated risk management plans meant to mitigate drug shortages.