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August 10, 2026
On July 31, 2026, CMS released the Fiscal Year 2027 Hospital Inpatient Prospective Payment System (IPPS) and Long-Term Care Hospital Prospective Payment System (LTCH PPS) Final Rule (CMS-1849-F), which will become effective on October 1, 2026. This is a mandatory annual CMS regulatory update, the purpose of which is to provide notice of adjustments to Medicare payment policies and rates for both inpatient and long-term care hospitals. For the purpose of this Bulletin, we have focused on the most relevant and impactful Inpatient Prospective Payment System updates. For information regarding the LTCH updates, we encourage providers to refer to the CMS.
On par with previous years, CMS increased the Medicare inpatient prospective payment system rates by 3.2%, which was adjusted by a 0.9% productivity adjustment for hospitals participating in the Hospital Inpatient Quality Reporting program (IQR) and using Electronic Health Records, equating to an overall net 2.3% increase for fiscal year 2027. These adjustments are expected to increase IPPS hospital payments by approximately $2.1 billion with an additional $779 million estimated for “New Technology Add-On Payments” (NTAPs).
Comprehensive Care of Joint Replacement Model (CJR-X) Nationwide Expansion
This IPPS Final Rule signals continued support for alternative payment pathways rather than wholesale fee-for-service expansion, with CMS steering hospitals toward episode accountability, quality-linked reimbursement, improved post-acute care management, cost predictability across care settings, and data exchange/interoperability.
The most impactful strategic takeaway is CMS reinforcing bundled and episode-based accountability, especially around orthopedic procedures, while the Agency is tightening quality and data expectations that directly affect performance-based reimbursement. CMS has finalized their proposal to expand the bundled payment approach through an enhanced Comprehensive Care of Joint Replacement Model (CJR-X), including hip, knee, and ankle procedures in both inpatient and outpatient settings. CMS adjusted their initial proposal effective date for this expansion from October 1, 2027, to January 1, 2028, and with limited exception, all IPPS hospitals providing lower extremity joint replacements will be mandated to participate in the CJR-X Model. CMS also offers guidance to hospitals participating in the Transforming Episode Accountability Model (TEAM) in the Frequently Asked Questions section of the CMS CJR-X Model webpage, addressing several common concerns and offering guidance to hospitals participating, who the Agency advised would be excluded from CJR-X. When TEAM ends, eligible hospitals would be required to participate in CJR-X.
The CJR-X model is an expansion of the Comprehensive Care for Joint Replacement (CJR) model, which was an episode-based alternative payment model launched by the Centers for Medicare and Medicaid Innovation (CMMI) from early 2016 through December 2024. CMS held participating hospitals responsible for the Medicare spending of joint replacement surgery, hospital stay, and the first 90-days of recovery, including follow up visits and post-discharge physical therapy. One of the main goals of this model was to vastly improve the coordination of care for joint replacement patients, many of whom experienced complications or prolonged recovery periods due to lack of coordinated care efforts before or after lower extremity joint replacement surgery.
Given the most recent Model data evaluation showing the CJR Model produced an estimated $112.7 million in net savings (from 2021 to 2023), CMS Administrator, Dr. Mehmet Oz, has expressed his belief that nationwide expansion of the CJR-X Model will continue to improve the health outcomes of join replacement patients and provide better aligned financial incentives to hospitals providing these services.
A CJR-X episode is defined by CMS as the admission of an eligible Medicare Fee-for-Service beneficiary to a hospital paid under the IPPS or Outpatient Prospective Payment System (OPPS) that eventually results in a discharge or claim paid under the following codes:
This nationwide expansion signals a continued movement toward mandatory/semi-mandatory episode accountability, which will ultimately affect care coordination and post-acute referral patterns.
This Final Rule continues to align inpatient payment policy with quality, interoperability and outcomes measurements, reinforcing the Agency’s transition away from pure fee-for-service and toward accountable payment structures. Hospitals participating in ACOs, bundled arrangements or specialty value programs should expect stronger incentives tied to quality reporting and utilization management.
In alignment with this goal, the FY 2027 IPPS Final Rule announced a new quality reporting measure for hospitals participating in TEAM. This five-year mandatory episode-based alternative payment model launched in January 2026 and tests five surgical episode categories: coronary artery bypass graft (CABG) procedures, lower extremity joint replacements, major bowel procedures, surgical hip femur fracture procedures, and spinal fusions. Over 720 hospitals are currently mandatory participants in the Model, with CMS Innovation Center evaluating whether holding hospitals financially accountable for costs and quality can reduce Medicare expenditures while improving patient recovery.
CMS has indicated it intends to use quality reporting data, combined with TEAM participant reconciliation amounts to establish a new “Composite Quality Score” (CQS). This score will become a baseline for TEAM participants across all quality measures, with the baseline period adjusted to reflect improvements in care delivery.
While the Agency’s efforts to maximize the greater impact of value-based models is intended to ultimately improve the cost and quality of healthcare, the mandated participation intrinsic to most of these models has been a point of concern for hospitals that lack the resources to invest in the necessary infrastructure.
Underscoring the emphasis on value-based reimbursement models, CMS has made several updates across hospital quality programs and interoperability requirements, including new or revised digital measures, and reporting requirements. From a strategic perspective, these updates will be impactful because quality performance increasingly impacts benchmarking and shared savings potential.
CMS also finalized updates to the NTAP program, which was implemented to provide hospitals additional payments on top of the standard bundled reimbursement rates, to help cover the cost of innovative and often costly new medical devices, drugs, and diagnostics. The most notable change is the elimination of the “Fast Track” alternative pathway. This repeal removes the option for the alternative NTAP pathway that allows FDA-designated Breakthrough Devices to receive add-on payments without first demonstrating substantial clinical improvement over existing technologies. Effective FY 2028, all NTAP applicants – regardless of their FDA designation – would also be required to meet the same traditional criteria, including the cost criterion and newness criterion, in addition to evidence of substantial clinical improvement. The FY 2027 IPPS Rule also finalizes the proposed narrowing of the definition of newness, limiting the ability of applicants to delay the start of their technology’s newness period. This change restricts claims of delayed commercial availability so that if a technology is not available for sale when the technology’s NTAP goes into effect, the “newness period” will begin the preceding September.
For more information regarding this Final Rule, CMS has developed a Fact Sheet for the FY 2027 Hospital Inpatient Prospective Payment System (IPPS) and Long-Term Care Hospital Prospective Payment System (LTCH PPS) Final Rule, highlighting the updates and offering additional insight into Agency intent.
