2026 IPPS Expands MS-DRGs, Updates Quality Programs 

When the 2026 Inpatient Prospective Payment System (IPPS) and Long-Term Care Hospital Prospective Payment System (LTCH PPS) Final Rule takes effect on Oct. 1, coders, providers, and finance and administration leaders alike will need to adjust to several key changes, including new MS-DRGs and broad policy changes.

The Final Rule, issued by the Centers for Medicare & Medicaid Services (CMS) on Aug. 1, also brings moderate pay increases to hospitals and long-term care facilities. 

The updates to Medicare payment policies and rates for the 2026 fiscal year (FY) are part of the CMS annual rulemaking that addresses reimbursement, policy, and quality reporting changes affecting inpatient and long-term care hospitals serving Medicare fee-for-service patients. 

Payment Rate Updates 

For acute-care hospitals, the FY 2026 IPPS increases operating payment rates by 2.6 percent. This calculation reflects a 3.3-percent hospital market-basket increase, minus a 0.7-percent productivity adjustment. 

CMS projects that these updates and related adjustments will increase overall hospital payments by approximately $5 billion in FY 2026. An expansion of New Technology Add-On Payment (NTAP) status is expected to contribute an additional $192 million. 

For long-term care facilities, the standard payment rate will increase by 2.7 percent, reflecting a 3.4-percent LTCH market basket increase minus the same 0.7-percent productivity cut. 

MSDRG Updates and NTAPS 

The Final Rule adds new MS-DRGs to improve how high-complexity cases are classified. These include: 

• MSDRG 209: complex aortic arch procedures; 
• MSDRG 213: endovascular abdominal aorta & iliac branch procedures; 
• MSDRGs 359 & 360: percutaneous coronary atherectomy (with and without intraluminal device); 
• MSDRG 318: percutaneous coronary atherectomy without device; and 
• MSDRGs 403 & 404: hip/knee procedures with principal diagnosis of periprosthetic joint infection. 

It also eliminates MS-DRGs 077–079 for hypertensive encephalopathy and MS-DRGs 294-295 for deep vein thrombophlebitis.  

Finally, CMS is continuing NTAP status for 26 existing technologies. Forty-three new applications are under review, many via alternative pathways like breakthrough devices or QIDPs (Qualified Infectious Disease Products). 

Rural Hospital Relief 

Medicare Dependent Hospital (MDH) and Low-Volume Hospital (LVH) adjustments currently run through Sept. 30, and require congressional extension to continue. No extension would mean that hospitals that qualified under MDH or LVH would be paid at standard federal IPPS rates as of Oct. 1. 

Quality Reporting & Performance Programs  

CMS made updates across several interconnected quality and performance-based programs: the Hospital Readmissions Reduction Program (HRRP); Hospital Value-Based Purchasing (HVBP); Hospital-Acquired Condition (HAC) Reduction Program; and Inpatient Quality Reporting (IQR) Program. 

Key changes include phasing out quality measures related to COVID-19 and integrating Medicare Advantage (MA) data where applicable. Also, health equity and social determinants of health (SDoH) quality measures will be removed. 

TEAM & Hospital Participation 

The Transforming Episode Accountability Model, or TEAM, is a mandatory five-year bundled payment model that begins on Jan. 1, 2026. The basic structure of the model remains intact, but several adjustments will be made that seek to improve fairness and facilitate smoother participation. 

Under the 2026 IPPS, CMS is implementing limited deferment options for certain hospitals and neutral quality scoring for low-data hospitals. Also, the payment methodology and risk adjustment will be refined, and the skilled nursing facility (SNF) three-day rule waiver will be expanded.  

LTCH PPS-Specific Updates 

Alongside the IPPS updates, the CMS fact sheet includes key LTCH PPS developments, such as a 3-percent payment rate increase and policy and rate adjustments tailored to the LTCH environment. Additionally, many of the quality, wage index, and structural changes echo the IPPS policy proposals, adapted for LTCH providers and their operational context. 

Stakeholders – especially hospitals, health systems, and trade organizations – are encouraged to review the entire rule and make sure they are aware of the updates surrounding MS-DRG changes, NTAP applications, and quality program modifications. Also, review the specific impact the changes on MDH and LVH status can have on rural hospital relief. 

Implications for Hospitals and Providers 

The 2.6-percent IPPS payment growth, combined with 2.7-percent LTCH increases and enhanced uncompensated care funding, offer modest revenue growth for hospitals, and those that are quality-compliant will see the most significant impacts. New MS-DRGs and expanded NTAPs may generate additional reimbursement for advanced procedures and breakthrough technologies. Meanwhile, hospitals losing MDH/LVH status could face financial strain if congressional relief or smoother implementation mechanisms are not established. 

On the compliance and reporting front, CMS continues to push for meaningful electronic health record (EHR) use and quality reporting compliance; failure to meet those standards could jeopardize rate updates and other incentives. Additionally, removal of equity-focused quality metrics and SDoH measures signals a programmatic shift that may force providers to pivot performance tracking and resource allocation accordingly. 

Finally, in terms of strategic and operational considerations, hospitals must evaluate participation in TEAM, given its impending January 2026 start date, and understand deferred scoring, SNF waiver access, and risk adjustment rules. Also, because many proposals like DRG reassignments require operational readiness, facilities should begin planning for coding, billing, staffing, and training changes. 

Conclusion 

The FY 2026 IPPS and LTCH PPS Final Rule signals a pivotal shift in Medicare payment policy: moderate rate increases paired with sweeping reforms across DRGs, NTAPs, quality metrics, and rural hospital support.  

When coupled with the CMS broader deregulatory agenda under Executive Order 14192, Unleashing Prosperity Through Deregulation – as signaled by its inclusion in the proposed rule of a request for input on reducing regulatory burden in Medicare – the Final Rule reflects a growing emphasis on operational efficiency, data-driven oversight, and strategic financial alignment.  

For hospital administrators, health policy professionals, and industry stakeholders, adapting to these changes is essential to maintaining compliance, optimizing reimbursement, and supporting sustainable care delivery.