Rule2025-14781
Medicare Program; FY 2026 Inpatient Psychiatric Facilities Prospective Payment System-Rate Update
Primary source
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Published
August 5, 2025
Effective
October 1, 2025
Issuing agencies
Health and Human Services DepartmentCenters for Medicare & Medicaid Services
Abstract
This final rule updates the prospective payment rates, the outlier threshold, and the wage index for Medicare inpatient hospital services provided by Inpatient Psychiatric Facilities (IPFs), which include psychiatric hospitals and excluded psychiatric units of an acute care hospital or critical access hospital. This final rule also revises the payment adjustment factors for teaching status and for IPFs located in rural areas. These changes will be effective for IPF discharges occurring during the fiscal year beginning October 1, 2025, through September 30, 2026. We are finalizing changes to measures used in the Inpatient Psychiatric Facilities Quality Reporting (IPFQR) Program, updating and codifying the Extraordinary Circumstances Exception policy, and summarizing comments received through requests for information regarding future changes to the IPFQR Program.
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[Federal Register Volume 90, Number 148 (Tuesday, August 5, 2025)]
[Rules and Regulations]
[Pages 37628-37676]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2025-14781]
[[Page 37627]]
Vol. 90
Tuesday,
No. 148
August 5, 2025
Part II
Department of Health and Human Services
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Centers for Medicare & Medicaid Services
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42 CFR Part 412
Medicare Program; FY 2026 Inpatient Psychiatric Facilities Prospective
Payment System--Rate Update; Final Rule
Federal Register / Vol. 90, No. 148 / Tuesday, August 5, 2025 / Rules
and Regulations
[[Page 37628]]
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DEPARTMENT OF HEALTH AND HUMAN SERVICES
Centers for Medicare & Medicaid Services
42 CFR Part 412
[CMS-1831-F]
RIN 0938-AV46
Medicare Program; FY 2026 Inpatient Psychiatric Facilities
Prospective Payment System--Rate Update
AGENCY: Centers for Medicare & Medicaid Services (CMS), Department of
Health and Human Services (HHS).
ACTION: Final rule.
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SUMMARY: This final rule updates the prospective payment rates, the
outlier threshold, and the wage index for Medicare inpatient hospital
services provided by Inpatient Psychiatric Facilities (IPFs), which
include psychiatric hospitals and excluded psychiatric units of an
acute care hospital or critical access hospital. This final rule also
revises the payment adjustment factors for teaching status and for IPFs
located in rural areas. These changes will be effective for IPF
discharges occurring during the fiscal year beginning October 1, 2025,
through September 30, 2026. We are finalizing changes to measures used
in the Inpatient Psychiatric Facilities Quality Reporting (IPFQR)
Program, updating and codifying the Extraordinary Circumstances
Exception policy, and summarizing comments received through requests
for information regarding future changes to the IPFQR Program.
DATES: These regulations are effective October 1, 2025.
FOR FURTHER INFORMATION CONTACT:
The IPF Payment Policy mailbox at <a href="/cdn-cgi/l/email-protection#d990899f89b8a0b4bcb7ad89b6b5b0baa099bab4aaf7b1b1aaf7beb6af"><span class="__cf_email__" data-cfemail="b9f0e9ffe9d8c0d4dcd7cde9d6d5d0dac0f9dad4ca97d1d1ca97ded6cf">[email protected]</span></a> for
general information. Nick Brock, (410) 786-5148, for information
regarding the inpatient psychiatric facilities prospective payment
system (IPF PPS) and regulatory impact analysis. Kaleigh Emerson,
<a href="/cdn-cgi/l/email-protection#bdd6dcd1d8d4dad593d8d0d8cfced2d38cfdded0ce93d5d5ce93dad2cb"><span class="__cf_email__" data-cfemail="caa1aba6afa3ada2e4afa7afb8b9a5a4fb8aa9a7b9e4a2a2b9e4ada5bc">[email protected]</span></a>, for information regarding the Inpatient
Psychiatric Facilities Quality Reporting (IPFQR) Program.
SUPPLEMENTARY INFORMATION:
Availability of Certain Tables Exclusively Through the Internet on the
CMS Website
Addendum A to this final rule summarizes the fiscal year (FY) 2026
IPF PPS payment rates, outlier threshold, cost of living adjustment
factors (COLA) for Alaska and Hawaii, national and upper limit cost-to-
charge ratios, and adjustment factors. In addition, Addendum B to this
final rule shows the complete listing of ICD-10 Clinical Modification
(CM) and Procedure Coding System (PCS) codes, the FY 2026 IPF PPS
comorbidity adjustment, and electroconvulsive therapy (ECT) procedure
codes. Addenda A and B to this final rule are available on the CMS
website at <a href="https://www.cms.gov/medicare/payment/prospective-payment-systems/inpatient-psychiatric-facility/tools-and-worksheets">https://www.cms.gov/medicare/payment/prospective-payment-systems/inpatient-psychiatric-facility/tools-and-worksheets</a>.
Tables setting forth the FY 2026 Wage Index for Urban Areas Based
on Core Based Statistical Area (CBSA) Labor Market Areas, the FY 2026
Wage Index Based on CBSA Labor Market Areas for Rural Areas, and the FY
2026 CBSA Labor Market Areas are available exclusively through the
internet, on the CMS website at <a href="https://www.cms.gov/medicare/payment/prospective-payment-systems/inpatient-psychiatric-facility/wage-index">https://www.cms.gov/medicare/payment/prospective-payment-systems/inpatient-psychiatric-facility/wage-index</a>.
I. Executive Summary
A. Purpose
This final rule updates the prospective payment rates, the outlier
threshold, and the wage index for Medicare inpatient hospital services
provided by Inpatient Psychiatric Facilities (IPFs) for discharges
occurring during fiscal year (FY) 2026, (beginning October 1, 2025,
through September 30, 2026). This rule also revises the payment
adjustment factors for teaching status and for IPFs located in rural
areas. Lastly, this final rule modifies a quality measure, removes four
quality measures, and updates and codifies the Extraordinary
Circumstances Exception (ECE) policy under the Inpatient Psychiatric
Facilities Quality Reporting (IPFQR) Program.
B. Summary of the Major Provisions
1. Inpatient Psychiatric Facilities Prospective Payment System (IPF
PPS)
For the IPF PPS, we are finalizing our proposals to:
<bullet> Revise the facility-level IPF PPS adjustment factors for
teaching status and for IPFs located in rural areas.
<bullet> Make technical rate setting updates: The IPF PPS payment
rates will be adjusted annually for input price inflation, as well as
statutory and other policy factors.
This rule updates:
++ The IPF PPS Federal per diem base rate from $876.53 to $892.87.
++ The IPF PPS Federal per diem base rate for providers who failed
to report quality data to $875.44.
++ The electroconvulsive therapy (ECT) payment per treatment from
$661.52 to $673.85.
++ The ECT payment per treatment for providers who failed to report
quality data to $660.70.
++ The labor-related share from 78.8 percent to 79.0 percent.
++ The wage index budget neutrality factor to 1.0011. This final
rule applies a refinement standardization factor of 0.9927.
++ The fixed dollar loss threshold amount from $38,110 to $39,360,
to maintain estimated outlier payments at 2 percent of total estimated
aggregate IPF PPS payments.
2. Inpatient Psychiatric Facilities Quality Reporting (IPFQR) Program
For the Inpatient Psychiatric Facilities Quality Reporting (IPFQR)
Program, we are finalizing our proposals to modify the reporting period
of the 30-Day Risk-Standardized All Cause Emergency Department (ED)
Visit Following an IPF Discharge measure, remove the Facility
Commitment to Health Equity measure, remove the COVID-19 Vaccination
Coverage Among Healthcare Personnel (HCP) measure, remove the Screening
for Social Drivers of Health and Screen Positive Rate for Social
Drivers of Health measures, and update and codify changes to the
Extraordinary Circumstances Exception (ECE) policy. In addition, we are
summarizing comments received on three topics through requests for
information on a potential future star rating system for IPFs, future
measure concepts for the IPFQR Program, and on using the Fast
Healthcare Interoperability Resources[supreg] (FHIR[supreg]) standard
for electronic exchange of healthcare information for patient
assessment reporting.
C. Summary of Impacts
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Total transfers & cost
Provision description reductions
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FY 2026 IPF PPS payment update......... The overall economic impact of
this final rule is an
estimated $70 million in
increased payments to IPFs
during FY 2026.
[[Page 37629]]
IPFQR Program update, including measure We estimate a cost reduction of
removals. $1,746,474 ($1,731,712 in CY
2026 and a further $14,761 in
CY 2027) for facilities and
patients due to the policies
we are finalizing for the
IPFQR Program.
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II. Background
A. Overview of the Legislative Requirements of the IPF PPS
Section 124 of the Medicare, Medicaid, and State Children's Health
Insurance Program Balanced Budget Refinement Act of 1999 (BBRA) (Pub.
L. 106-113) required the establishment and implementation of an IPF PPS
in a budget neutral manner. Specifically, section 124 of the BBRA
mandated that the Secretary of Health and Human Services (the
Secretary) develop a per diem prospective payment system (PPS) for
inpatient hospital services furnished in psychiatric hospitals and
excluded psychiatric units including an adequate patient classification
system that reflects the differences in patient resource use and costs
among psychiatric hospitals and excluded psychiatric units. ``Excluded
psychiatric unit'' means a psychiatric unit of an acute care hospital
or of a Critical Access Hospital (CAH), which is excluded from payment
under the Inpatient Prospective Payment System (IPPS) or CAH payment
system, respectively. These excluded psychiatric units will be paid
under the IPF PPS.
Section 405(g)(2) of the Medicare Prescription Drug, Improvement,
and Modernization Act of 2003 (MMA) (Pub. L. 108-173) extended the IPF
PPS to psychiatric distinct part units of CAHs.
Sections 3401(f) and 10322 of the Patient Protection and Affordable
Care Act (Pub. L. 111-148) as amended by section 10319(e) of that Act
and by section 1105(d) of the Health Care and Education Reconciliation
Act of 2010 (Pub. L. 111-152) (hereafter referred to jointly as ``the
Affordable Care Act'') added subsection (s) to section 1886 of the
Social Security Act (the Act).
Section 1886(s)(1) of the Act titled ``Reference to Establishment
and Implementation of System,'' refers to section 124 of the BBRA,
which relates to the establishment of the IPF PPS.
Section 1886(s)(2)(A)(i) of the Act requires the application of the
productivity adjustment described in section 1886(b)(3)(B)(xi)(II) of
the Act to the IPF PPS for the rate year (RY) beginning in 2012 (that
is, a RY that coincides with a FY) and each subsequent RY.
Section 1886(s)(2)(A)(ii) of the Act required the application of an
``other adjustment'' that reduced any update to an IPF PPS base rate by
a percentage point amount specified in section 1886(s)(3) of the Act
for the RY beginning in 2010 through the RY beginning in 2019. As noted
in the FY 2020 IPF PPS final rule (84 FR 38424), for the RY beginning
in 2019, section 1886(s)(3)(E) of the Act required that the other
adjustment reduction be equal to 0.75 percentage point; that was the
final year the statute required the application of this adjustment.
Because FY 2021 was a RY beginning in 2020, FY 2021 was the first year
that section 1886(s)(2)(A)(ii) of the Act did not apply since its
enactment.
Sections 1886(s)(4)(A) through (D) of the Act require that for RY
2014 and each subsequent RY, IPFs that fail to report required quality
data with respect to such a RY will have their annual update to a
standard Federal rate for discharges reduced by 2.0 percentage points.
This may result in an annual update being less than 0.0 for a RY, and
may result in payment rates for the upcoming RY being less than such
payment rates for the preceding RY. Any reduction for failure to report
required quality data will apply only to the RY involved, and the
Secretary will not consider such reduction in computing the payment
amount for a subsequent RY. Additional information about the specifics
of the current IPFQR Program is available in the FY 2020 IPF PPS final
rule (84 FR 38459 through 38468).
Section 4125 of the Consolidated Appropriations Act, 2023 (CAA,
2023) (Pub. L. 117-328), which amended section 1886(s) of the Act,
requires CMS to revise the Medicare prospective payment system for
psychiatric hospitals and psychiatric units. Specifically, section
4125(a) of the CAA, 2023 added section 1886(s)(5)(A) of the Act to
require the Secretary to collect data and information, as the Secretary
determines appropriate, to revise payments under the IPF PPS. CMS
discussed this data collection in the FY 2024 IPF PPS final rule (88 FR
51054), as CMS was required to begin collecting this data and
information not later than October 1, 2023. As discussed in that rule,
the agency has already been collecting data and information consistent
with the types set forth in the CAA, 2023 as part of our extensive and
years-long analyses and consideration of potential payment system
refinements. We refer readers to the FY 2024 IPF PPS final rule (88 FR
51095 through 51098) where we discussed existing data collection and
requested information to inform future IPF PPS revisions.
In addition, section 1886(s)(5)(D) of the Act, as added by section
4125(a) of the CAA, 2023 required that the Secretary implement
revisions to the methodology for determining the payment rates under
the IPF PPS for psychiatric hospitals and psychiatric units, effective
for RY 2025 (FY 2025). Section 1886(s)(5)(D) of the Act provided that
these revisions may be based on a review of the data and information
collected under section 1886(s)(5)(A) of the Act. For a detailed
discussion on the revisions implemented for FY 2025, we refer readers
to the FY 2025 IPF PPS final rule (89 FR 64590 through 64636).
Section 4125(b) of the CAA, 2023 amended section 1886(s)(4) of the
Act by inserting a new subparagraph (E) and redesignating the existing
subparagraph (E) as subparagraph (F) which requires IPFs participating
in the IPFQR Program to collect and submit to the Secretary
standardized patient assessment data, using a standardized patient
assessment instrument, for RY 2028 (FY 2028) and each subsequent rate
year. IPFs must submit such data with respect to at least the admission
and discharge of an individual, or more frequently as the Secretary
determines appropriate. For IPFs to meet this new data collection and
reporting requirement for RY 2028 and each subsequent rate year, the
Secretary must implement a standardized patient assessment instrument
that collects data with respect to the following categories: functional
status; cognitive function and mental status; special services,
treatments, and interventions; medical conditions and comorbidities;
impairments; and other categories as determined appropriate by the
Secretary. This patient assessment instrument must enable comparison of
such patient assessment data that IPFs submit across all such IPFs to
which such data are applicable.
Section 4125(b) of the CAA, 2023 further amended section 1886(s) of
the Act by adding a new subparagraph (6) that requires the Secretary to
implement revisions to the methodology for determining the payment
rates for
[[Page 37630]]
psychiatric hospitals and psychiatric units (that is, payment rates
under the IPF PPS), effective for RY 2031 (FY 2031), as the Secretary
determines to be appropriate, to take into account the patient
assessment data described in paragraph (4)(E)(ii).
To implement and periodically update the IPF PPS, we have published
various proposed and final rules and notices in the Federal Register.
For more information regarding these documents, we refer readers to the
CMS website at <a href="https://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/InpatientPsychFacilPPS/index.html">https://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/InpatientPsychFacilPPS/index.html</a>?redirect=/
InpatientPsychFacilPPS/.
B. Overview of the IPF PPS
We issued the rate year (RY) 2005 IPF PPS final rule that appeared
in the November 15, 2004 Federal Register (69 FR 66922). The RY 2005
IPF PPS final rule established the IPF PPS, as required by section 124
of the BBRA and codified at 42 CFR part 412, subpart N. The RY 2005 IPF
PPS final rule set forth the Federal per diem base rate for the
implementation year (the 18-month period from January 1, 2005, through
June 30, 2006) and provided payment for the inpatient operating and
capital costs to IPFs for covered psychiatric services they furnish
(that is, routine, ancillary, and capital costs, but not costs of
approved educational activities, bad debts, and other services or items
that are outside the scope of the IPF PPS). Covered psychiatric
services include services for which benefits are provided under the
fee-for-service Part A (Hospital Insurance Program) of the Medicare
program.
The IPF PPS established the Federal per diem base rate for each
patient day in an IPF derived from the national average daily routine
operating, ancillary, and capital costs in IPFs in FY 2002. The average
per diem cost was updated to the midpoint of the first year under the
IPF PPS, standardized to account for the overall positive effects of
the IPF PPS payment adjustments, and adjusted for budget neutrality.
The Federal per diem payment under the IPF PPS is comprised of the
Federal per diem base rate described previously and certain patient-
and facility-level payment adjustments for characteristics that were
found in the regression analysis to be associated with statistically
significant per diem cost differences, with statistical significance
defined as p less than 0.05. A complete discussion of the regression
analysis that established the IPF PPS adjustment factors can be found
in the RY 2005 IPF PPS final rule (69 FR 66933 through 66936).
The patient-level adjustments include age, Diagnosis-Related Group
(DRG) assignment, and comorbidities, as well as adjustments to reflect
higher per diem costs at the beginning of a patient's IPF stay and
lower costs for later days of the stay. Facility-level adjustments
include adjustments for the IPF's wage index, rural location, teaching
status, a cost-of-living adjustment for IPFs located in Alaska and
Hawaii, and an adjustment for the presence of a qualifying emergency
department (ED).
The IPF PPS provides additional payment policies for outlier cases,
interrupted stays, and a per-treatment payment for patients who undergo
ECT. During the IPF PPS mandatory 3-year transition period, stop-loss
payments were also provided; however, since the transition ended as of
January 1, 2008, these payments are no longer available.
C. Annual Requirements for Updating the IPF PPS
Section 124 of the BBRA did not specify an annual rate update
strategy for the IPF PPS and was broadly written to give the Secretary
discretion in establishing an update methodology. Therefore, in the RY
2005 IPF PPS final rule, we implemented the IPF PPS using the following
update strategy:
<bullet> Calculate the final Federal per diem base rate to be
budget neutral for the 18-month period of January 1, 2005, through June
30, 2006.
<bullet> Use a July 1 through June 30 annual update cycle.
<bullet> Allow the IPF PPS first update to be effective for
discharges on or after July 1, 2006, through June 30, 2007.
The RY 2005 final rule (69 FR 66922) implemented the IPF PPS. In
developing the IPF PPS, and to ensure that the IPF PPS can account
adequately for each IPF's case-mix, we performed an extensive
regression analysis of the relationship between the per diem costs and
certain patient and facility characteristics to determine those
characteristics associated with statistically significant cost
differences on a per diem basis. That regression analysis is described
in detail in our RY 2004 IPF proposed rule (68 FR 66923; 66928 through
66933) and our RY 2005 IPF final rule (69 FR 66933 through 66960). For
characteristics with statistically significant cost differences, we
used the regression coefficients of those variables to determine the
size of the corresponding payment adjustments.
In the RY 2005 IPF final rule, we explained the reasons for
delaying an update to the adjustment factors, derived from the
regression analysis, including waiting until we have IPF PPS data that
yields as much information as possible regarding the patient-level
characteristics of the population that each IPF serves. We indicated
that we did not intend to update the regression analysis and the
patient-level and facility-level adjustments until we complete that
analysis. Until that analysis is complete, we stated our intention to
publish a notice in the Federal Register each spring to update the IPF
PPS (69 FR 66966).
We issued a final rule which appeared in the May 6, 2011 Federal
Register titled, ``Inpatient Psychiatric Facilities Prospective Payment
System--Update for Rate Year Beginning July 1, 2011 (RY 2012)'' (76 FR
26432), which changed the payment rate update period to a RY that
coincides with a FY update. Therefore, final rules are now published in
the Federal Register in the summer to be effective on October 1st of
each year. When proposing changes in IPF payment policy, a proposed
rule is issued in the spring, and the final rule in the summer to be
effective on October 1st. For a detailed list of updates to the IPF
PPS, we refer readers to our regulations at 42 CFR 412.428. Beginning
October 1, 2012, we finalized that we would refer to the 12-month
period from October 1 through September 30 as a ``fiscal year'' (FY)
rather than a RY (76 FR 26435). Therefore, in this final rule we refer
to rules that took effect after RY 2012 by the FY, rather than the RY,
in which they took effect.
The most recent IPF PPS annual update, the FY 2025 IPF PPS final
rule (89 FR 64582), appeared in the Federal Register on August 7, 2024.
The FY 2025 IPF PPS final rule updated the patient-level adjustments
and the ED adjustment as well as increased the ECT per treatment
payment amount for FY 2025, in accordance with section 1886(s)(5)(D)(i)
of the Act. That final rule also updated the IPF PPS Federal per diem
base rates that were published in the FY 2024 IPF PPS final rule (88 FR
51054). In revising the IPF PPS patient-level adjustment factors, and
to ensure that the IPF PPS can account adequately for each IPF's case-
mix, we performed an extensive regression analysis of the relationship
between the per diem costs and patient characteristics to determine
those characteristics associated with statistically significant cost
differences on a per diem basis. That regression analysis is described
in detail in our FY 2025 IPF PPS proposed rule (89 FR 23154 through
23161) and our FY 2025 IPF PPS final rule (89 FR 64594 through
[[Page 37631]]
64601). For characteristics with statistically significant cost
differences, we used the regression coefficients of those variables to
determine the size of the corresponding payment adjustments.
As required by section 1886(s)(5)(D)(iii) of the Act, revisions to
the IPF PPS payment rates implemented pursuant to section
1886(s)(5)(D)(i) of the Act must be budget neutral. Therefore, we
finalized a refinement standardization factor for the FY 2025 IPF PPS
payment rates to maintain budget neutrality for FY 2025. The
application of the FY 2025 standardization factor is described in
detail in our FY 2025 IPF PPS proposed rule (89 FR 23194) and our FY
2025 IPF PPS final rule (89 FR 64640 and 64641).
III. Analysis of and Responses to the Public Comments
We received 55 public comments that pertain to proposed IPF PPS
payment policies, requests for information, and the proposed updates to
the IPFQR Program. Comments were from inpatient psychiatric facilities,
health systems, national and state level provider and patient advocacy
organizations, health information technology providers, and
individuals. We reviewed each comment and grouped related comments,
after which we placed them in categories based on subject matter or
section(s) of the regulation affected. Summaries of the public comments
received and our responses to those comments are provided in the
appropriate sections in the preamble of this final rule.
In addition, we received a few comments that were out of the scope
of the FY 2026 IPF PPS proposed rule. We appreciate these comments but
note that, because they fall outside the scope of this rulemaking, we
do not address them in this rule. We may consider these comments as we
continue to develop policies for future rulemaking, as applicable.
IV. Provisions of the FY 2026 IPF PPS Final Rule and Responses to
Comments
A. FY 2026 Market Basket Increase and Productivity Adjustment for the
IPF PPS
1. Background
Originally, the input price index used to develop the IPF PPS was
the Excluded Hospital with Capital market basket. This market basket
was based on 1997 Medicare cost reports for Medicare-participating
inpatient rehabilitation facilities (IRFs), IPFs, long-term care
hospitals (LTCHs), cancer hospitals, and children's hospitals. Although
``market basket'' technically describes the mix of goods and services
used in providing health care at a given point in time, this term is
also commonly used to denote the input price index (that is, cost
category weights and price proxies) derived from that market basket.
Accordingly, the term ``market basket,'' as used in this document,
refers to an input price index.
Since the IPF PPS inception, the market basket used to update IPF
PPS payments has been rebased and revised to reflect more recent data
on IPF cost structures. We last rebased and revised the IPF market
basket in the FY 2024 IPF PPS rule, where we adopted a 2021-based IPF
market basket, using Medicare cost report data for both Medicare
participating freestanding psychiatric hospitals and psychiatric units.
We refer readers to the FY 2024 IPF PPS final rule for a detailed
discussion of the 2021-based IPF market basket and its development (88
FR 51057 through 51081). Prior to the 2021-based IPF market basket, we
used the 2016-based IPF market basket that was adopted in the FY 2020
IPF PPS final rule (84 FR 38426 through 38447). References to the
historical market baskets used to update IPF PPS payments prior to the
FY 2020 IPF PPS rule are listed in the FY 2016 IPF PPS final rule (80
FR 46656).
2. FY 2026 IPF Market Basket Update
For FY 2026 (beginning October 1, 2025, and ending September 30,
2026), we proposed to update the IPF PPS payments by a market basket
increase factor, with a productivity adjustment as required by section
1886(s)(2)(A)(i) of the Act. Consistent with historical practice, we
proposed to estimate the market basket update for the IPF PPS based on
the most recent forecast available at the time of rulemaking from IHS
Global Inc. (IGI).\1\ IGI is a nationally recognized economic and
financial forecasting firm with which CMS contracts to forecast the
components of the market baskets and productivity adjustment. For the
proposed rule, based on IGI's fourth quarter 2024 forecast with
historical data through the third quarter of 2024, the proposed 2021-
based IPF market basket increase factor for FY 2026 was 3.2 percent. We
also proposed that if more recent data became available after the
publication of the proposed rule and before the publication of this
final rule (for example, a more recent estimate of the market basket
percentage increase or productivity adjustment), we would use such
data, if appropriate, to determine the FY 2026 IPF market basket update
in this final rule.
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\1\ <a href="https://www.spglobal.com/en">https://www.spglobal.com/en</a>.
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Section 1886(s)(2)(A)(i) of the Act requires that, after
establishing the increase factor for a FY, the Secretary shall reduce
such increase factor for FY 2012 and each subsequent FY, by the
productivity adjustment described in section 1886(b)(3)(B)(xi)(II) of
the Act. Section 1886(b)(3)(B)(xi)(II) of the Act sets forth the
definition of this productivity adjustment. The statute defines the
productivity adjustment to be equal to the 10-year moving average of
changes in annual economy-wide, private nonfarm business multifactor
productivity (MFP) (as projected by the Secretary for the 10-year
period ending with the applicable FY, year, cost reporting period, or
other annual period) (the ``productivity adjustment''). The United
States Department of Labor's Bureau of Labor Statistics (BLS) publishes
the official measures of productivity for the U.S. economy. We note
that previously the productivity measure referenced in section
1886(b)(3)(B)(xi)(II) of the Act was published by BLS as private
nonfarm business MFP. Beginning with the November 18, 2021, release of
productivity data, BLS replaced the term ``multifactor productivity''
with ``total factor productivity'' (TFP). BLS noted that this is a
change in terminology only and will not affect the data or methodology.
As a result of the BLS name change, the productivity measure referenced
in section 1886(b)(3)(B)(xi)(II) of the Act is now published by BLS as
private nonfarm business TFP. However, as mentioned previously, the
data and methods are unchanged. We refer readers to <a href="http://www.bls.gov">www.bls.gov</a> for the
BLS historical published TFP data. A complete description of IGI's TFP
projection methodology is available on the CMS website at <a href="https://www.cms.gov/data-research/statistics-trends-and-reports/medicare-program-rates-statistics/market-basket-research-and-information">https://www.cms.gov/data-research/statistics-trends-and-reports/medicare-program-rates-statistics/market-basket-research-and-information</a>. In
addition, in the FY 2022 IPF PPS final rule (86 FR 42611), we noted
that effective with FY 2022 and forward, CMS changed the name of this
adjustment to refer to it as the productivity adjustment rather than
the MFP adjustment.
Section 1886(s)(2)(A)(i) of the Act requires the application of the
productivity adjustment described in section 1886(b)(3)(B)(xi)(II) of
the Act to the IPF PPS for the RY beginning in 2012 (a RY that
coincides with a FY) and each subsequent RY. For the FY 2026 IPF PPS
proposed rule, based on IGI's fourth quarter 2024 forecast, the
proposed productivity adjustment for
[[Page 37632]]
FY 2026 (the 10-year moving average change of TFP for the period ending
FY 2026) was projected to be 0.8 percentage point. Accordingly, we
proposed to reduce the proposed 3.2 percent IPF market basket increase
by the proposed 0.8 percentage point productivity adjustment, as
mandated by the Act. This resulted in a proposed FY 2026 IPF PPS
payment rate update of 2.4 percent (3.2 percent-0.8 percentage point =
2.4 percent). We also proposed that if more recent data became
available, we would use such data, if appropriate, to determine the FY
2026 IPF market basket increase and productivity adjustment for the
final rule.
We solicited comments on the proposed IPF market basket increase
and productivity adjustment for FY 2026. The following is a summary of
the comments we received and our responses.
Comment: Several commenters expressed appreciation for the FY 2026
IPF payment update; however, some commenters stated that the proposed
payment update is inadequate to address the current cost pressures IPFs
are facing. A commenter highlighted that from 2022 to 2024, general
inflation rose by 14.1 percent while Medicare IPF payment rates
increased only 5.1 percent, effectively creating a payment cut in real
terms. Another commenter provided data showing that hospital employee
compensation grew by 45 percent from 2014 to 2023, while IPF PPS
updates provided only a 23.5 percent increase during the same period.
Commenters explained that this has created an unsustainable financial
environment where Medicare payments have consistently failed to keep
pace with the actual cost of caring for patients.
Commenters stated that workforce shortages and escalating labor
costs represent the most significant challenge facing IPFs, with labor
constituting approximately 80 percent of the IPF PPS market basket
according to CMS data. A commenter reported that advertised salaries
for registered nurses have grown 26.6 percent faster than the rate of
inflation over the past 4 years, while hospitals have been forced to
dramatically increase wages, bonuses, and contract labor rates to
maintain critical staffing. A couple of commenters stated that rural
facilities face particularly acute challenges because their IPFs rely
heavily on traveling clinicians and contract staff due to severe
workforce shortages in underserved areas. This commenter stated that
rural facilities also face higher per-patient infrastructure costs due
to lower patient volumes, limited access to community-based
alternatives that result in longer patient stays, and transportation
barriers that require additional investment in discharge planning and
patient support services. Several commenters stated that IPFs are
facing significant increases in pharmaceutical and supply costs that
further strain their operating budgets, citing a Department of Health
and Human Services report showing that prices for nearly 2,000 drugs
increased an average of 15.2 percent from 2017 through 2023, notably
faster than general inflation. The commenters indicated that drug
shortages have compounded these challenges, with medications commonly
used in psychiatric care--including clonazepam, oxazepam, and
ketamine--experiencing supply disruptions that force facilities to seek
more expensive alternatives and disrupt patient care protocols.
A commenter stated the IPF market basket is flawed due to CMS's use
of the Employment Cost Index (ECI) to measure changes in labor
compensation in the market basket. The commenter stated that the ECI
might not fully capture growth in employment and labor costs, as it
does not account for changes driven by shifts between different
categories of labor such as between staff and contract employees.
Several commenters stated that the inadequate payment update
threatens the long-term sustainability of inpatient psychiatric
services and could force facilities to reduce capacity or close
altogether. A commenter added that Medicare Advantage is having even
further negative impacts on IPFs by reimbursing for IPF services at
rates below cost. The commenter explained that since their patient mix
is close to 50 percent covered by Medicare fee-for-service (FFS) and
Medicare Advantage, they are less able to mitigate losses by increasing
rates on commercial payors to offset those losses. Commenters urged CMS
to adopt a higher market basket update that reflects the true cost of
providing inpatient psychiatric care in the current economic
environment noting that the Medicare Advantage plans have a forecasted
increase for 2026 of about 5 percent. Several organizations
specifically requested that CMS utilize more recent cost data in
developing the final rule.
Response: We appreciate the commenters' concern regarding
inflationary pressure facing IPFs and the proposed FY 2026 market
basket update. As stated in the FY 2024 IPF final rule (88 FR 541057)
and FY 2025 IPF final rule (89 FR 64586), the 2021-based IPF market
basket is a fixed-weight, Laspeyres-type index that measures price
changes over time. Since the inception of the IPF PPS, the IPF payment
rates (with the exception of statutorily-mandated updates) have been
updated by a projection of a market basket percentage increase--
consistent with other CMS PPS updates (including IPPS, SNF, and HH).
The market basket is designed to measure price inflation for IPF
providers and would not reflect increases in costs associated with
changes in the volume or intensity of input goods and services (such as
the quantity of labor used).
Additionally, we acknowledge that the market basket updates may
differ from other overall inflation indexes such as the topline CPI;
however, we would reiterate that these topline indexes are not
comparable since they measure different mixes of products, services, or
wages than the IPF market basket. Additionally, the market basket
updates appropriately differ from other payment updates (such as
projected increase in the average per capita payments to Medicare
Advantage organizations) that are not consistent in concept with the
statutory requirement as they would reflect anticipated volume and
intensity of services.
As is our general practice, we proposed in the FY 2026 IPF proposed
rule that if more recent data became available, we would use such data,
if appropriate, to derive the final FY 2026 IPF market basket update
for the final rule. The projection of the 2021-based IPF market basket
is based on the most recent forecast from IGI--a nationally recognized
economic and financial forecasting firm with which we contract to
forecast the price proxies of the market baskets. We also note that
when developing its forecast for labor prices, IGI considers overall
labor market conditions (including rise in contract labor employment
due to tight labor market conditions) as well as trends in contract
labor wages, which both have an impact on wage pressures for workers
employed directly by the hospital.
For this final rule, based on the more recent IGI second quarter
2025 forecast with historical data through the first quarter of 2025,
the projected 2021-based IPF market basket increase factor for FY 2026
is 3.2 percent, which is unchanged from the projected FY 2026 market
basket increase factor in the proposed rule. We note that while there
are multiple offsetting factors contributing to differences in the
forecasts underlying the proposed and final rules, the final FY 2026
productivity-adjusted IPF market basket
[[Page 37633]]
update is slightly higher due to economic uncertainty.
We rebased and revised the IPF market basket in the FY 2024 IPF
final rule (88 FR 51057) and did not receive any comments related to
the use of the ECIs in the IPF market basket. We continue to believe
the ECI is an appropriate index to measure the price changes for
Compensation costs. While the ECI reflects the price changes for
employed staff only, we believe those price changes accurately reflect
the labor price trends for those occupations, regardless of whether
they are employed or contracted staff. Additionally, separating the
compensation category by occupation enables us to capture any cost
weight changes associated with employing versus contracting labor when
the index weights are updated. We will continue to monitor the trends
in the ECI as well as the increased use of contract labor. We welcome
any additional publicly available data that commenters can provide
regarding alternative price indexes.
Comment: Several commenters expressed concerns regarding the
ongoing application of the productivity adjustment to IPFs. The
commenters highlighted that CMS identified a lag in hospital
productivity compared to the BLS estimate of private nonfarm business
productivity growth. Commenters stated that under these circumstances,
expecting an increase in IPF productivity in FY 2026 is unreasonable.
A commenter further expressed concerns with the mandated
productivity adjustment by stating that private nonfarm business TFP
productivity measures are unsuitable for hospitals. They stated that
while TFP outputs in private businesses are based on quantities and
prices of goods/services, hospital outputs, such as visit/procedure
volumes, reflect community disease burdens rather than productivity.
Additionally, the commenter explained that hospitals cannot adjust
their prices like private businesses due to fixed reimbursements and
negotiated rates with insurers. This commenter also stated that TFP
does not account for the unique challenges faced by hospitals,
including unpredictable patient volumes, rising costs, varying acuity
levels, and regulatory burdens unfamiliar to other industries. Finally,
commenters stated that hospital services are labor-intensive, making
sustained productivity gains difficult. Commenters explained that,
similar to education and social assistance sectors, hospitals have
lower productivity rates. Commenters further noted that CMS recognizes
hospitals achieve only one-third of the productivity gains of the
private sector, citing a June 2022 memorandum from CMS. This memo
stated that ``over the period 1990-2019, the average growth rate of
hospital [productivity] using the two methodologies ranges from 0.2
percent to 0.5 percent, compared to the average growth of private
nonfarm business [productivity] of 0.8 percent.'' \2\ The memo also
indicated that an assumed future rate of hospital industry productivity
growth of 0.4 percent per year remained reasonable compared to an
assumed productivity growth rate in the private nonfarm business sector
of 1.0 percent.
---------------------------------------------------------------------------
\2\ Paul Spitalnic, Stephen Heffler, Bridget Dickensheets and
Mollie Knight, ``Hospital Multifactor Productivity: An Update
Presentation of Two Methodologies Using Data through 2019.''
(<a href="http://cms.gov">cms.gov</a>).
---------------------------------------------------------------------------
A commenter questioned the increase of the FY 2026 productivity cut
to 0.8 percent from 0.5 percent in FY 2025 despite being based on a 10-
year moving average, which should smooth out fluctuations. They
mentioned an inability to fully analyze projections due to CMS's lack
of transparency but suggested that excluding a low-TFP growth period in
2016 from the updated 10-year moving average may unjustifiably increase
the productivity adjustment. The commenter also claimed that the
productivity adjustment is only applied if it reduces Medicare
payments, never to increase them. They provided an example from FY
2021, where a -0.1 percent productivity factor forecast would have
raised the hospital market basket by 0.1 percentage point, but CMS set
it at 0, citing a mandate to reduce, not increase, the market basket
percentage increase based on productivity changes. This practice leads
to cumulative yearly reductions and asymmetric treatment of
productivity declines, resulting in underfunding for hospitals.
Several commenters acknowledged the Affordable Care Act's
requirement for the productivity adjustment but requested CMS use its
``special exceptions and adjustments'' authority to eliminate or modify
the productivity adjustment for FY 2026. Some commenters requested that
CMS carefully monitor the impact of these productivity adjustments on
the IPF hospital sector, provide feedback to Congress as appropriate,
and reduce the productivity adjustment.
Response: Section 1886(s)(2)(A)(i) of the Act requires the
application of the productivity adjustment described in section
1886(b)(3)(B)(xi)(II) to the IPF PPS market basket update. As required
by statute, the FY 2026 productivity adjustment is derived based on the
10-year moving average growth in economy-wide private nonfarm business
total factor productivity for the period ending FY 2026. We recognize
the concerns of the commenters regarding the appropriateness of the
productivity adjustment; however, we are required pursuant to section
1886(b)(3)(B)(xi)(II) of the Act to apply the specific productivity
adjustment described here.
We have always made available on the CMS website the general method
for calculating the productivity adjustment. This includes providing a
link to the most recent BLS historical TFP data (<a href="https://www.bls.gov/productivity/">https://www.bls.gov/productivity/</a>), which allows interested parties to obtain historical
TFP annual index levels for 1987 through 2024. We also provided the IGI
projection model (<a href="https://www.cms.gov/research-statistics-data-and-systems/statistics-trends-and-reports/medicareprogramratesstats/downloads/tfp_methodology.pdf">https://www.cms.gov/research-statistics-data-and-systems/statistics-trends-and-reports/medicareprogramratesstats/downloads/tfp_methodology.pdf</a>), which is used to derive annual TFP
growth rates for 2025 and 2026. The annual index level derived from
this method is then interpolated to quarterly levels, and the FY 2026
productivity adjustment is equal to the percent change in the 40-
quarter moving average projected level for the period ending September
30, 2026, relative to the 40-quarter moving average projected level for
the period ending September 30, 2025. We believe our methodology for
the productivity adjustment is consistent with section
1886(b)(3)(B)(xi)(II) of the Act, which states that the productivity
adjustment is equal to the 10-year moving average of changes in annual
economy-wide private nonfarm business multi-factor productivity (as
projected by the Secretary for the 10-year period ending with the
applicable fiscal year, year, cost reporting period, or other annual
period), which is used to derive annual TFP growth rates for 2025 and
2026. The annual index level derived from this method is then
interpolated to quarterly levels, and the FY 2026 productivity
adjustment is equal to the percent change in the 40-quarter moving
average projected level for the period ending September 30, 2026,
relative to the 40-quarter moving average projected level for the
period ending September 30, 2025.
At the time of this final rule, the FY 2026 productivity adjustment
reflects BLS historical TFP data through 2024 (released on March 21,
2025) and IGI's forecasted TFP growth for 2025 and 2026. The average
annual growth rate of historical TFP published by BLS for 2017 through
2024 is currently 0.9 percent and IGI is projecting average
[[Page 37634]]
TFP growth of about 0.0 percent for 2025 and 2026 based on IGI's
second-quarter 2025 forecast. Combining the historical and projected
TFP data over the entire 10-year time period results in a compound
annual growth rate of TFP of 0.7 percent for 2026. The productivity
adjustment (based on the 10-year period ending FY 2026) for this final
rule is 0.1 percentage point lower than in the proposed rule and
primarily reflects the incorporation of a revised outlook from IGI that
has lower projected economic growth over 2025 and 2026. The 0.7
percentage point productivity adjustment in the FY 2026 final rule is
larger than the productivity adjustment in prior final rules for FY
2023 and FY 2024 mainly due to the incorporation of updated BLS
historical data.
In response to commenters' concerns about the productivity
adjustment only being applied if it reduces the payment update, we note
that the productivity adjustment was established under the Affordable
Care Act with a specific policy intent to encourage efficiency
improvements in healthcare delivery by linking Medicare payment updates
to economy-wide productivity gains. The statutory language in section
1886(s)(2)(A) of the Act requires that the Secretary reduce (not
increase) the market basket percentage increase by changes in economy-
wide productivity, therefore, only positive productivity adjustments
are applied.
Comment: Several commenters noted concerns about CMS's estimation
of the IPF market basket updates since the COVID-19 PHE, stating that
it has resulted in several consecutive years of underpayments to IPF
providers, with data showing that market basket updates for fiscal
years 2021 through 2024 have understated the IPF base rate by 4.2 to
5.1 percentage points. The commenters stated that the pattern of
forecast errors stems directly from economic disruption caused by the
COVID-19 PHE, which created inflationary pressures that existing
forecasting models failed to capture, representing a departure from
historically more balanced forecasting performance. Some commenters
stated that these under forecasts are built into the IPF base payment
and because future updates are based on current payment levels, missed
forecasts become permanently established in standard payment rates and
continue to compound over time, creating an ever-widening gap between
actual costs and reimbursement levels that disadvantages IPFs and
inhibits their ability to address behavioral health needs in their
communities. Several commenters urged CMS to take corrective measures
including one-time adjustments ranging from 3.6 to 4.2 percentage
points to account for cumulative forecast errors and requested that CMS
use special exceptions and adjustments authority to eliminate
productivity cuts and implement base rate corrections that would
provide IPFs with stability needed to maintain access to patient care
despite ongoing financial challenges.
Response: We appreciate the concerns of commenters; however, we did
not propose and are not finalizing a forecast error adjustment for the
IPF PPS for FY 2026. The IPF market basket updates are set
prospectively, which means that the update relies on a mix of both
historical data for part of the period for which the update is
calculated and forecasted data for the remainder. For instance, the FY
2026 market basket update in this final rule reflects historical data
through the first quarter of CY 2025 and forecasted data through the
third quarter of CY 2026.
While there is no precedent to adjust for market basket forecast
error in the IPF payment update, a forecast error can be calculated by
comparing the actual market basket increase for a given year less than
the forecasted market basket increase. Due to the uncertainty regarding
future price trends, forecast errors can be both positive and negative.
The forecast error has been both positive and negative during past
years, and over longer periods of time the cumulative forecast has not
deviated significantly from the historical measures. Only considering
the forecast error for years when the IPF market basket update was
lower than the actual market basket update does not consider the full
experience and impact of forecast error.
Final Decision: After consideration of the comments received, we
are finalizing our proposal to update IPF PPS payment rates using the
latest available productivity-adjusted market basket increase factor.
Based on IGI's second quarter 2025 forecast, the 2021-based IPF market
basket percentage increase for FY 2026 is 3.2 percent and the projected
FY 2026 productivity adjustment is 0.7 percentage point. Therefore, the
final FY 2026 IPF market basket update is equal to 2.5 percent (3.2
percent market basket percentage increase reduced by the 0.7 percentage
point productivity adjustment).
3. FY 2026 IPF Labor-Related Share
Due to variations in geographic wage levels and other labor-related
costs, we believe that payment rates under the IPF PPS should continue
to be adjusted by a geographic wage index, which will apply to the
labor-related portion of the Federal per diem base rate (hereafter
referred to as the ``labor-related share''). The labor-related share is
determined by identifying the national average proportion of total
costs that are related to, influenced by, or vary with the local labor
market. We proposed to continue to classify a cost category as labor-
related if the costs are labor-intensive and vary with the local labor
market.
Based on our definition of the labor-related share and the cost
categories in the 2021-based IPF market basket, we proposed to continue
to include in the labor-related share the sum of the relative
importance of Wages and Salaries; Employee Benefits; Professional Fees:
Labor-Related; Administrative and Facilities Support Services;
Installation, Maintenance, and Repair Services; All Other: Labor-
Related Services; and a portion of the Capital-Related relative
importance from the 2021-based IPF market basket. For more details
regarding the methodology for determining specific cost categories for
inclusion in the labor-related share based on the 2021-based IPF market
basket, we refer readers to the FY 2024 IPF PPS final rule (88 FR 51078
through 51081).
The relative importance reflects the different rates of price
change for these cost categories between the base year (FY 2021) and FY
2026. Based on IGI's fourth quarter 2024 forecast of the 2021-based IPF
market basket, the sum of the FY 2026 relative importance moving
average of Wages and Salaries; Employee Benefits; Professional Fees:
Labor-Related; Administrative and Facilities Support Services;
Installation, Maintenance, and Repair Services; All Other: Labor-
Related Services is 75.8 percent. We proposed, consistent with prior
rulemaking, that the portion of Capital-Related costs that are
influenced by the local labor market is 46 percent. Since the relative
importance for Capital-Related costs is 6.7 percent of the 2021-based
IPF market basket for FY 2026, we proposed to take 46 percent of 6.7
percent to determine a labor-related share of Capital-Related costs for
FY 2026 of 3.1 percent. Therefore, we proposed a total labor-related
share for FY 2026 of 78.9 percent (the sum of 75.8 percent for the
labor-related share of operating costs and 3.1 percent for the labor-
related share of Capital-Related costs). We also proposed that if more
recent data became available, we would use such data, if appropriate,
to determine the FY 2026 labor-related share for the final rule. For
more information on the labor-related share and its calculation, we
refer readers to the FY 2024 IPF PPS final rule (88 FR 51078 through
51081).
[[Page 37635]]
We solicited comments on the proposed labor-related share for FY
2026. The following is a summary of the comments we received and our
responses.
Comment: A commenter expressed support for the proposed increase in
the labor-related share for FY 2026. They also stated that CMS should
consider a shorter period than 5 years for the next rebasing and
revising of the IPF market basket and revision to the standard payment
conversion factor labor share since the current labor share is based on
FY 2021 cost reports and may not fully reflect the increase weight of
labor in the overall index that hospitals experienced due to the COVID-
19 PHE and labor shortages.
Response: We appreciate the commenter's support for the FY 2026 IPF
labor-related share. We proposed to use the FY 2026 relative importance
values for the labor-related cost categories from the 2021-based IPF
market basket because it accounts for more recent data regarding price
pressures and cost structure of IPFs. This methodology is consistent
with the determination of the labor-related share since the
implementation of the IPF PPS. As stated in the FY 2026 IPF proposed
rule, we also proposed that if more recent data became available, we
would use such data, if appropriate, to determine the FY 2026 labor-
related share for the final rule. Based on IGI's second quarter 2025
forecast with historical data through the first quarter of 2025, the FY
2026 labor-related share for the final rule is 79.0 percent, which is
0.1 percentage point higher than the proposed rule.
We appreciate the commenter's request for us to consider a shorter
period than 5 years for the next rebasing. We generally rebase the IPF
market basket every 5 years, in part because the cost weights obtained
from the Medicare cost reports did not indicate much of a change in the
weights over shorter intervals. However, we recognize the commenter's
concern and the potential impact of the PHE on the cost weights.
Therefore, we have been regularly monitoring the Medicare cost report
data to assess whether a rebasing is technically appropriate, and we
will continue to do so in the future. As done historically, a rebasing
of the IPF market basket would be proposed in rulemaking and subject to
public comments.
Final Decision: After consideration of the comments, we are
finalizing a FY 2026 labor-related share based on the latest available
data. Based on IGI's second quarter 2025 forecast of the 2021-based IPF
market basket, the sum of the FY 2026 relative importance moving
average of Wages and Salaries; Employee Benefits; Professional Fees:
Labor-Related; Administrative and Facilities Support Services;
Installation, Maintenance, and Repair Services; All Other: Labor-
Related Services is 75.9 percent. Since the relative importance for
Capital-Related costs is 6.7 percent of the 2021-based IPF market
basket for FY 2026, we take 46 percent of 6.7 percent to determine a
labor-related share of Capital-Related costs for FY 2026 of 3.1
percent. Therefore, the total labor-related share for FY 2026 is 79.0
percent (the sum of 75.9 percent for the labor-related share of
operating costs and 3.1 percent for the labor-related share of Capital-
Related costs).
Table 1 shows the final FY 2026 labor-related share and the final
FY 2025 labor-related share using the 2021-based IPF market basket
relative importance.
Table 1--FY 2026 Final IPF Labor-Related Share and FY 2025 IPF Labor-Related Share
----------------------------------------------------------------------------------------------------------------
Relative importance, Relative importance,
labor-related share labor-related share
FY 2025 \1\ FY 2026 \2\
----------------------------------------------------------------------------------------------------------------
Wages and Salaries................................................ 53.6 53.7
Employee Benefits................................................. 14.1 14.2
Professional Fees: Labor-Related.................................. 4.7 4.7
Administrative and Facilities Support Services.................... 0.6 0.6
Installation, Maintenance and Repair Services..................... 1.2 1.2
All Other Labor-Related Services.................................. 1.5 1.5
---------------------------------------------
Subtotal...................................................... 75.7 75.9
---------------------------------------------
Labor-related portion of Capital-Related (.46).................... 3.1 3.1
---------------------------------------------
Total Labor-Related Share................................. 78.8 79.0
----------------------------------------------------------------------------------------------------------------
\1\ Based on the 2nd quarter 2024 IGI forecast of the 2021-based IPF market basket.
\2\ Based on the 2nd quarter 2025 IGI forecast of the 2021-based IPF market basket.
B. Updates to the IPF PPS Rates for FY Beginning October 1, 2025
The IPF PPS is based on a standardized Federal per diem base rate
calculated from the IPF average per diem costs and adjusted for budget
neutrality in the implementation year. The Federal per diem base rate
is used as the standard payment per day under the IPF PPS and is
adjusted by the patient-level and facility-level adjustments that are
applicable to the IPF stay. A detailed explanation of how we calculated
the average per diem cost appears in the RY 2005 IPF PPS final rule (69
FR 66926).
1. Determining the Standardized Budget Neutral Federal Per Diem Base
Rate
Section 124(a)(1) and (c) of the BBRA requires that we implement
the IPF PPS in a budget neutral manner. In other words, the amount of
total payments under the IPF PPS, including any payment adjustments,
must be projected to be equal to the amount of total payments that
would have been made if the IPF PPS were not implemented. Therefore, we
calculated the budget neutrality factor by setting the total estimated
IPF PPS payments to be equal to the total estimated payments that would
have been made under the Tax Equity and Fiscal Responsibility Act of
1982 (TEFRA) (Pub. L. 97-248) methodology had the IPF PPS not been
implemented. A step-by-step description of the methodology used to
estimate payments under the TEFRA payment system appears in the RY 2005
IPF PPS final rule (69 FR 66926).
Under the IPF PPS methodology, we calculated the final Federal per
diem base rate to be budget neutral during the IPF PPS implementation
period (that is, the 18-month period from January 1,
[[Page 37636]]
2005, through June 30, 2006) using a July 1 update cycle. We updated
the average cost per day to the midpoint of the IPF PPS implementation
period (October 1, 2005), and this amount was used in the payment model
to establish the budget neutrality adjustment.
Next, we standardized the IPF PPS Federal per diem base rate to
account for the overall positive effects of the IPF PPS payment
adjustment factors by dividing total estimated payments under the TEFRA
payment system by estimated payments under the IPF PPS. The information
concerning this standardization can be found in the RY 2005 IPF PPS
final rule (69 FR 66932) and the RY 2006 IPF PPS final rule (71 FR
27045). We then reduced the standardized Federal per diem base rate to
account for the outlier policy, the stop loss provision, and
anticipated behavioral changes. A complete discussion of how we
calculated each component of the budget neutrality adjustment appears
in the RY 2005 IPF PPS final rule (69 FR 66932 and 66933) and in the RY
2007 IPF PPS final rule (71 FR 27044 through 27046). The final
standardized budget neutral Federal per diem base rate established for
cost reporting periods beginning on or after January 1, 2005 was
calculated to be $575.95.
The Federal per diem base rate has been updated in accordance with
applicable statutory requirements and 42 CFR 412.428 through
publication of annual notices or proposed and final rules. A detailed
discussion on the standardized budget neutral Federal per diem base
rate and the ECT payment per treatment appears in the FY 2014 IPF PPS
update notice (78 FR 46738 through 46740). These documents are
available on the CMS website at <a href="https://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/InpatientPsychFacilPPS/index.html">https://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/InpatientPsychFacilPPS/index.html</a>.
As discussed in sections IV.D.5. and IV.D.6. of this final rule, we
proposed to revise the facility-level adjustment factors for FY 2026
pursuant to section 1886(s)(5)(D)(i) of the Act. Section
1886(s)(5)(D)(iii) of the Act requires that revisions to IPF payment
rates implemented pursuant to section 1886(s)(5)(D)(i) of the Act must
be made budget-neutrally. Therefore, as discussed in section IV.D.9. of
this final rule, we proposed to apply a standardization factor to the
FY 2026 base rate that takes these refinements of facility-level
adjustments into account to keep total IPF PPS payments budget neutral.
2. Determining the Electroconvulsive Therapy (ECT) Payment per
Treatment
In the RY 2005 IPF PPS final rule (69 FR 66951), we analyzed the
costs of IPF stays that included ECT treatment using the FY 2002
Medicare Provider and Analysis Review (MedPAR) data based on comments
we received on the RY 2005 IPF PPS proposed rule. Consistent with the
comments we received about ECT, our analysis and review indicated that
cases with ECT treatment are substantially more costly than cases
without ECT treatment. Based on this analysis, in that final rule we
finalized an additional payment for each ECT treatment furnished during
the IPF stay. This ECT payment per treatment is made in addition to the
per diem and outlier payments under the IPF PPS. To receive the payment
per ECT treatment, IPFs must indicate on their claims the revenue code
and procedure code for ECT (Rev Code 901; procedure code 90870) and the
number of units of ECT, that is, the number of ECT treatments the
patient received during the IPF stay.
To establish the ECT per treatment payment, we used the pre-scaled
and pre-adjusted median cost for procedure code 90870 developed for the
Hospital Outpatient Prospective Payment System (OPPS), based on
hospital claims data. We explained in the RY 2005 IPF PPS final rule
that we used OPPS data because after careful review and analysis of IPF
claims, we were unable to separate out the cost of a single ECT
treatment (69 FR 66922). We used the unadjusted hospital claims data
under the OPPS because we did not want the ECT payment under the IPF
PPS to be affected by factors that are relevant to OPPS, but not
specifically applicable to IPFs. The median cost was then standardized
and adjusted for budget neutrality. We also adjusted the ECT rate for
wage differences in the same manner that we adjust the per diem rate.
Since the ECT payment rate was established in the RY 2005 IPF PPS
rule, it has been updated annually by application of each year's market
basket, productivity adjustment, and wage index budget neutrality
factor to the previous year's ECT payment rate (referred to as our
``standard methodology'' in this section).
We last updated the ECT payment amount per treatment for FY 2025.
As we explained in the FY 2025 IPF PPS proposed rule (89 FR 23146), we
analyzed recent data from both the IPF PPS and the OPPS. Findings
revealed that costs for IPF stays involving ECT were significantly more
costly than stays without ECT, with cost driven primarily by longer
stays and higher ancillary expenses. These IPF stays with ECT
treatment, which accounted for only 1.7 percent of all IPF stays in
2022 (down from 6.0 percent in 2002), were approximately three times
more costly than IPF stays without ECT treatment. We noted that on
average, IPF stays with ECT cost $44,687.50 compared to $15,432.30 for
IPF stays without ECT treatment in 2022, with notable increases in per-
day costs and ancillary expenses. While our standard payment update
methodologies would have resulted in only minor adjustments, the
analysis indicated that the updates to the ECT payment rates since 2005
had not kept pace with rising costs.
To address this, we finalized a new ECT payment calculation based
on the pre-scaled and pre-adjusted CY 2024 OPPS geometric mean cost,
adjusted by the market basket update and wage index budget neutrality
factor. We stated that the change to the ECT per treatment amount
aligned payments more closely with the actual cost of providing ECT. We
noted that the increase to the ECT per treatment amount would be
associated with a minor decrease to the IPF per diem base rate as a
result of the refinement standardization factor, and it would increase
payments to facilities providing ECT. A complete discussion of the
final FY 2025 ECT payment per treatment can be found in the FY 2025 IPF
PPS final rule (89 FR 64591 through 64593).
3. Update of the Federal per Diem Base Rate and Electroconvulsive
Therapy Payment per Treatment
The current (FY 2025) Federal per diem base rate is $876.53 and the
ECT payment per treatment is $661.52. For the final FY 2026 Federal per
diem base rate, we applied the final IPF market basket update of 2.5
percent (that is, the final 2021-based IPF market basket percentage
increase for FY 2026 of 3.2 percent reduced by the final productivity
adjustment of 0.7 percentage point), the final wage index budget
neutrality factor of 1.0011 (as discussed in section IV.D.4.c. of this
final rule), and the final refinement standardization factor of 0.9927
(as discussed in section IV.D.9. of this final rule) to the FY 2025
Federal per diem base rate of $876.53, yielding a final Federal per
diem base rate of $892.87 for FY 2026. We applied the final IPF market
basket update of 2.5 percent, the final wage index budget neutrality
factor of 1.0011, and the final refinement standardization factor of
0.9927 to the final FY 2025 ECT payment per treatment of $661.52,
yielding a final ECT payment per treatment of $673.85 for FY 2026.
[[Page 37637]]
Section 1886(s)(4)(A)(i) of the Act requires that for RY 2014 and
each subsequent RY, in the case of an IPF that fails to report required
quality data with respect to such RY, the Secretary will reduce any
annual update to a standard Federal rate for discharges during the RY
by 2.0 percentage points. Therefore, we applied a 2.0 percentage point
reduction to the final annual update to the Federal per diem base rate
and the final ECT payment per treatment as follows:
<bullet> For IPFs that fail to report required data under the IPFQR
Program, we will apply a 0.5 percent payment rate update--that is, the
final IPF market basket increase for FY 2026 of 3.2 percent reduced by
the final productivity adjustment of 0.7 percentage point for an update
of 2.5 percent, and further reduced by 2.0 percentage points in
accordance with section 1886(s)(4)(A)(i) of the Act. We will also apply
the refinement standardization factor of 0.9927 and the wage index
budget neutrality factor of 1.0011 to the FY 2025 Federal per diem base
rate of $876.53, yielding a Federal per diem base rate of $875.44 for
FY 2026.
<bullet> For IPFs that fail to report required data under the IPFQR
Program, we will apply a 0.5 percent payment rate update, the 0.9927
refinement standardization factor, and the 1.0011 wage index budget
neutrality factor to the FY 2025 ECT payment per treatment of $661.52,
yielding an ECT payment per treatment of $660.70 for FY 2026.
C. Updates to the IPF PPS Patient-Level Adjustment Factors
1. Overview of the IPF PPS Adjustment Factors
The IPF PPS payment adjustment factors were originally derived from
a regression analysis of 100 percent of the FY 2002 MedPAR data file,
which contained 483,038 cases. For a more detailed description of the
data file used for this regression analysis, we refer readers to the RY
2005 IPF PPS final rule (69 FR 66935 and 66936).
In FY 2025, we implemented revisions to the methodology for
determining payment rates under the IPF PPS, as required by section
1886(s)(5)(D) of the Act. We developed the current (FY 2025) adjustment
factors based on a regression analysis of IPF cost and claims data. The
primary sources of this analysis were CY 2019 through 2021 MedPAR files
and Medicare cost report data (CMS Form 2552-10, OMB No. 0938-0050)
from the FY 2019 through 2021 Hospital Cost Report Information System
(HCRIS). For a more detailed description of the data files used for
this regression analysis, we refer readers to the FY 2025 IPF PPS final
rule (89 FR 64593 through 64601).
For FY 2026, we proposed to use the existing regression-derived
patient-level adjustment factors established for FY 2025. We did not
propose any changes to the patient-level adjustment factors for FY
2026; however, we used more recent claims data to simulate payments, to
finalize the outlier fixed dollar loss threshold amount, and to assess
the impact of the IPF PPS updates.
2. IPF PPS Patient-Level Adjustments
The IPF PPS includes payment adjustments for the following patient-
level characteristics: Medicare Severity Diagnosis Related Groups (MS-
DRGs) assignment of the patient's principal diagnosis, selected
comorbidities, patient age, and the variable per diem adjustments.
a. Update to MS-DRG Assignment
We believe it is important to maintain for IPFs the same diagnostic
coding and DRG classification used under the IPPS for providing
psychiatric care. For this reason, when the IPF PPS was implemented for
cost reporting periods beginning on or after January 1, 2005, we
adopted the same diagnostic code set (ICD-9 Clinical Modification (CM))
and DRG patient classification system (MS-DRGs) that were utilized at
the time under the IPPS. In the RY 2009 IPF PPS notice (73 FR 25709),
we discussed CMS's effort to better recognize resource use and the
severity of illness among patients. CMS adopted the new MS-DRGs for the
IPPS in the FY 2008 IPPS final rule with comment period (72 FR 47130).
In the RY 2009 IPF PPS notice (73 FR 25716), we provided a crosswalk to
reflect changes that were made under the IPF PPS to adopt the new MS-
DRGs. For a detailed description of the mapping changes from the
original DRG adjustment categories to the current MS-DRG adjustment
categories, we refer readers to the RY 2009 IPF PPS notice (73 FR
25714).
The IPF PPS includes payment adjustments for designated psychiatric
DRGs assigned to the claim based on the patient's principal diagnosis.
The DRG adjustment factors were expressed relative to the most
frequently reported psychiatric DRG in FY 2002, that is, DRG 430
(psychoses). The coefficient values and adjustment factors were derived
from the regression analysis discussed in detail in the RY 2004 IPF
proposed rule (68 FR 66923; 66928 through 66933) and the RY 2005 IPF
final rule (69 FR 66933 through 66960). Mapping the DRGs to the MS-DRGs
resulted in 17 IPF MS-DRGs, instead of the original 15 DRGs, for which
the IPF PPS provides an adjustment.
In the FY 2015 IPF PPS final rule (79 FR 45945 through 45947), we
finalized conversions of the ICD-9-CM-based MS-DRGs to ICD-10-CM/
Procedure Coding System (PCS)-based MS-DRGs, which were implemented on
October 1, 2015. Further information on the ICD-10-CM/PCS MS-DRG
conversion project can be found on the CMS ICD-10-CM website at <a href="https://www.cms.gov/medicare/coding-billing/icd-10-codes/icd-10-ms-drg-conversion-project">https://www.cms.gov/medicare/coding-billing/icd-10-codes/icd-10-ms-drg-conversion-project</a>.
In the FY 2025 IPF PPS final rule (89 FR 64602 through 64606), we
revised the payment adjustments for designated psychiatric DRGs
assigned to the claim based on the patient's principal diagnosis,
following our longstanding policy of using the ICD-10-CM/PCS-based MS-
DRG system. In that final rule, we identified 19 DRGs for which the IPF
PPS adjusts payment. In addition, we implemented a sub-regulatory
process to adopt routine coding updates that incorporate new or revised
codes with an April 1 effective date (89 FR 64602 and 64603).
For FY 2026, we proposed to continue making the existing payment
adjustments for psychiatric diagnoses that group to one of the existing
19 IPF MS-DRGs listed in Addendum A. We did not receive any comments on
this proposal, and we are finalizing it as proposed. Addendum A is
available on our website at <a href="https://www.cms.gov/Medicare/Medicare-Fee-forService-Payment/InpatientPsychFacilPPS/tools.html">https://www.cms.gov/Medicare/Medicare-Fee-forService-Payment/InpatientPsychFacilPPS/tools.html</a>. Psychiatric
principal diagnoses that do not group to one of the 19 designated MS-
DRGs will still receive the Federal per diem base rate and all other
applicable adjustments, but the payment will not include an MS-DRG
adjustment.
The diagnoses for each IPF MS-DRG will be updated as of October 1,
2025, using the final IPPS FY 2026 ICD-10-CM/PCS code sets. The FY 2026
IPPS/LTCH PPS final rule will include tables of the changes to the ICD-
10-CM/PCS code sets that underlie the final FY 2026 IPF MS-DRGs. Both
the FY 2026 IPPS/LTCH PPS final rule and the tables of final changes to
the ICD-10-CM/PCS code sets, which underlie the FY 2026 MS-DRGs, will
be available on the CMS IPPS website at <a href="https://www.cms.gov/medicare/payment/prospective-payment-systems/acute-inpatient-pps">https://www.cms.gov/medicare/payment/prospective-payment-systems/acute-inpatient-pps</a>.
Additionally, as discussed in the ICD-10-CM Official Guidelines for
Coding and Reporting, certain conditions have both an underlying
etiology and multiple body system manifestations
[[Page 37638]]
due to the underlying etiology. For such conditions, the ICD-10-CM has
a coding convention that requires the underlying condition be sequenced
first, followed by the manifestation. Wherever such a combination
exists, there is a ``use additional code'' note at the etiology code,
and a ``code first'' note at the manifestation code. These
instructional notes indicate the proper sequencing order of the codes
(etiology followed by manifestation). In accordance with the ICD-10-CM
Official Guidelines for Coding and Reporting, when a primary
(psychiatric) diagnosis code has a code first note, the provider will
follow the instructions in the ICD-10-CM Tabular List. The submitted
claim goes through the CMS processing system, which will identify the
principal diagnosis code as non-psychiatric and search the secondary
codes for a psychiatric code to assign a DRG code for adjustment. The
system will continue to search the secondary codes for those that are
appropriate for comorbidity adjustment. For more information on the
code first policy, we refer readers to the RY 2005 IPF PPS final rule
(69 FR 66945). We also refer readers to sections I.A.13 and I.B.7 of
the FY 2020 ICD-10-CM Coding Guidelines, which is available at <a href="https://www.cdc.gov/nchs/data/icd/10cmguidelinesFY2020_final.pdf">https://www.cdc.gov/nchs/data/icd/10cmguidelinesFY2020_final.pdf</a>. In the FY
2015 IPF PPS final rule, we provided a code first table for reference
that highlights the same or similar manifestation codes where the code
first instructions apply in ICD-10-CM that were present in ICD-10-CM
(79 FR 46009).
As discussed in the FY 2025 IPF PPS final rule (89 FR 64602 and
64603), we adopted a sub-regulatory approach to handle the coding
updates, rather than discussing coding updates in the Federal Register
during regulatory updates prior to implementation. This approach
mirrors the approach taken by the IPPS, allows for flexibility in the
ICD-10 code update process for the IPF PPS, and reduces the lead time
for making routine coding updates to the IPF PPS code first list,
comorbidities, and ECT coding categories.
In the FY 2026 IPF PPS proposed rule, we did not describe any code
first changes effective for April 1, 2025, and we did not receive any
comments about coding updates for the IPF PPS code first list. For this
FY 2026 IPF PPS final rule, we are removing one ICD-10-CM diagnosis
code and adding eight ICD-10-CM diagnosis codes to the IPF PPS code
first list effective for October 1, 2025. The final FY 2026 Code First
table is shown in Addendum B on the CMS website at <a href="https://www.cms.gov/Medicare/Medicare-Fee-forServicePayment/InpatientPsychFacilPPS/tools.html">https://www.cms.gov/Medicare/Medicare-Fee-forServicePayment/InpatientPsychFacilPPS/tools.html</a>.
b. Payment for Comorbid Conditions
The intent of the comorbidity adjustments is to recognize the
increased costs associated with active comorbid conditions by providing
additional payments for certain existing medical or psychiatric
conditions that are expensive to treat.
Comorbidities are specific patient conditions that are secondary to
the patient's principal diagnosis and that require active treatment
during the stay. Diagnoses that relate to an earlier episode of care
and have no bearing on the current hospital stay are excluded and must
not be reported on IPF claims. Comorbid conditions must exist at the
time of admission or develop subsequently, and affect the treatment
received, length of stay (LOS), or both treatment and LOS.
For each claim, an IPF may receive only one comorbidity adjustment
within a comorbidity category, but it may receive an adjustment for
more than one comorbidity category. Current billing instructions for
discharge claims, on or after October 1, 2015, require IPFs to enter
the complete ICD-10-CM codes for up to 24 additional diagnoses if they
co-exist at the time of admission, or develop subsequently and impact
the treatment provided.
The IPF PPS comorbidity adjustments were originally determined
based on the regression analysis using the diagnoses reported by IPFs
in FY 2002. The principal diagnoses were used to establish the DRG
adjustments and were not accounted for in establishing the comorbidity
category adjustments, except where ICD-9-CM code first instructions
applied. In a code first situation, the submitted claim goes through
the CMS processing system, which identifies the principal diagnosis
code as non-psychiatric and searches the secondary codes for a
psychiatric code to assign an MS-DRG code for adjustment. The system
continues to search the secondary codes for those that are appropriate
for a comorbidity adjustment.
In FY 2025, we revised the comorbidity adjustment factors based on
the results of the 2019 through 2021 regression analysis described in
the FY 2025 IPF PPS final rule (89 FR 64606 through 64612). In
addition, we made additions and changes to the comorbidity categories
for which we adjust payment based on our analysis of ICD-10-CM codes
currently included in each category as well as public comments received
in response to the FY 2022 and FY 2023 IPF PPS proposed rules.
Specifically, we removed 3 existing comorbidity categories, revised 2
existing comorbidity categories, and added 1 new comorbidity category.
We finalized 15 comorbidity categories for FY 2025.
We did not propose any changes to the comorbidity adjustment
factors, and we are retaining the existing comorbidity adjustment
factors for FY 2026. The final FY 2026 comorbidity adjustment factors
are found in Addendum A, available on the CMS website at <a href="https://www.cms.gov/Medicare/Medicare-Fee-for-ServicePayment/InpatientPsychFacilPPS/tools.html">https://www.cms.gov/Medicare/Medicare-Fee-for-ServicePayment/InpatientPsychFacilPPS/tools.html</a>.
As noted previously, it is our policy to maintain the same
diagnostic coding set for IPFs that is used under the IPPS for
providing the same psychiatric care. In the FY 2015 IPF PPS final rule
(79 FR 45947 through 45955), the comorbidity categories formerly
defined using ICD-9-CM codes were converted to ICD-10-CM/PCS. The goal
for converting the comorbidity categories is referred to as
replication, meaning that the payment adjustment for a given patient
encounter is the same after ICD-10-CM implementation as it would be if
the same record had been coded in ICD-9-CM and submitted prior to ICD-
10-CM/PCS implementation on October 1, 2015. All conversion efforts
were made with the intent of achieving this goal.
As discussed in section IV.C.2.a of this final rule, in the FY 2025
IPF PPS final rule (89 FR 64602 and 64603) we adopted an April 1
implementation date for ICD-10-CM diagnosis and ICD-10-PCS procedure
code updates, in addition to the annual October 1 update, beginning
with April 1, 2025 for the IPF PPS. Coding updates related to the IPF
PPS comorbidity categories are adopted following a sub-regulatory
process as finalized in the FY 2025 IPF PPS final rule (89 FR 64602 and
64603). In the FY 2026 IPF PPS proposed rule, we explained that for
April 1, 2025, we added two ICD-10-PCS procedure codes to the Oncology
Treatment Procedures list. We did not receive any comments on the April
1, 2025, coding changes.
For this FY 2026 IPF PPS final rule, we are adding 12 ICD-10-CM
diagnosis codes to the Poisoning code list, removing 4 ICD-10-PCS
procedure codes to the Oncology Treatment Procedure code list, and
adding 2 ICD-10-CM diagnosis codes to the Oncology Treatment Diagnosis
code list. The final FY 2026 comorbidity codes are shown in Addenda B,
available on the CMS website at https://www.cms.gov/Medicare/Medicare-
Fee-for-
[[Page 37639]]
ServicePayment/InpatientPsychFacilPPS/tools.html.
c. Patient Age Adjustments
As explained in the RY 2005 IPF PPS final rule (69 FR 66922), we
analyzed the impact of age on per diem cost by examining the age
variable (range of ages) for payment adjustments. In general, we found
that the cost per day increases with age. The older age groups are
costlier than the under 45 age group, the differences in per diem cost
increase for each successive age group, and the differences are
statistically significant. In FY 2025, we adopted revised patient age
adjustments derived from the regression model using a blended set of
2019 through 2021 data (89 FR 64612 and 64613). For FY 2026, we
proposed to use the patient age adjustments currently in effect for FY
2025.
We did not propose any changes to the patient age adjustment
factors, and we are retaining the existing patient age adjustment
factors for FY 2026, as shown in Addendum A of this final rule (see
<a href="https://www.cms.gov/Medicare/Medicare-Fee-for-ServicePayment/InpatientPsychFacilPPS/tools.html">https://www.cms.gov/Medicare/Medicare-Fee-for-ServicePayment/InpatientPsychFacilPPS/tools.html</a>).
d. Variable Per Diem Adjustments
We explained in the RY 2005 IPF PPS final rule (69 FR 66946) that
the regression analysis indicated that per diem cost declines as the
LOS increases. The variable per diem adjustments to the Federal per
diem base rate account for ancillary and administrative costs that
occur disproportionately in the first days after admission to an IPF.
As discussed in the RY 2005 IPF PPS final rule, where a complete
discussion of the variable per diem adjustments can be found, we used a
regression analysis to estimate the average differences in per diem
cost among stays of different lengths (69 FR 66947 through 66950). As a
result of this analysis, we established variable per diem adjustments
that begin on day 1 and decline gradually over the course of the
patient's stay. In addition, the adjustment applied to day 1 depends
upon whether the IPF has a qualifying ED. If an IPF has a qualifying
ED, it receives a higher adjustment factor for day 1 of each stay than
it would receive if it did not have a qualifying ED. The ED adjustment
is explained in more detail in section IV.D.8. of this final rule.
In FY 2025, we revised the variable per diem adjustment factors
based on the 2019 through 2021 regression analysis (89 FR 64613 and
64614). For FY 2026, we proposed to use the variable per diem
adjustment factors currently in effect in FY 2025.
We did not propose any changes to the variable per diem adjustment
factors, and we are retaining the existing variable per diem adjustment
factors for FY 2026 as shown in Addendum A of this final rule
(available at <a href="https://www.cms.gov/Medicare/Medicare-Fee-for-ServicePayment/InpatientPsychFacilPPS/tools.html">https://www.cms.gov/Medicare/Medicare-Fee-for-ServicePayment/InpatientPsychFacilPPS/tools.html</a>).
D. Updates to the IPF PPS Facility-Level Adjustments
1. Overview of the IPF PPS Facility-Level Adjustment Factors
The IPF PPS includes facility-level adjustments for the wage index,
IPFs located in rural areas, teaching IPFs, cost of living adjustments
for IPFs located in Alaska and Hawaii, and IPFs with a qualifying ED.
The facility-level adjustment factors currently in place for rural
location and teaching status are the existing regression-derived
factors established in the RY 2005 IPF final rule. As discussed in the
following sections, we proposed annual updates to the FY 2026 IPF PPS
wage index. In addition, we proposed to update the facility-level
adjustment factors for rural location and teaching status for FY 2026
to reflect more recent cost and claims data.
2. History of IPF PPS Cost and Claims Analyses
In the FY 2023 IPF PPS proposed rule (87 FR 19428 and 19429), we
briefly discussed past analyses and areas of interest for future
refinement, about which we previously solicited comments. At the same
time, CMS also released a technical report posted to the CMS website
\3\ accompanying the rule, summarizing these analyses. In that same
proposed rule, we described the results of the agency's latest analysis
of the IPF PPS and solicited comments on certain topics from the
report. We summarized the considerations and findings related to our
analyses of the IPF PPS adjustment factors in the FY 2023 IPF PPS final
rule (46864 through 46865).
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\3\ <a href="https://www.cms.gov/files/document/technical-report-medicare-program-inpatient-psychiatric-facilities-prospective-payment-system.pdf">https://www.cms.gov/files/document/technical-report-medicare-program-inpatient-psychiatric-facilities-prospective-payment-system.pdf</a>.
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In the FY 2024 IPF PPS proposed rule (88 FR 21269 through 21272),
we requested information from the public to inform revisions to the IPF
PPS required by the CAA, 2023. Specifically, we sought information
about which data and information would be most appropriate and useful
for the purposes of refining IPF PPS payments. We requested information
related to the specific types of data and information mentioned in the
CAA, 2023. We also solicited comments on the reporting of ancillary
charges, such as labs and drugs, on IPF claims.
In response to those requests for information in the FY 2024 IPF
PPS proposed rule, commenters offered a number of suggestions for
further analysis, including recommendations to consider adjusting
payment for patients with sleep apnea, violent behavior, and patients
that transfer from an acute care unit.
In the FY 2025 IPF PPS proposed rule, we discussed our latest
regression analysis results and the methodology we used to calculate
proposed revisions to the patient-level adjustment factors (89 FR 23154
through 23161). In that same proposed rule (89 FR 23161 through 23172),
we also discussed the analyses that we conducted and our findings, as
related to patient-level adjustment factors, in response to the
comments we received on the FY 2024 IPF PPS proposed rule.
As we have previously noted in the FY 2025 IPF PPS proposed rule
(89 FR 23154), the primary goal in refining the IPF PPS payment
adjustment factors is to pay each IPF an appropriate amount for the
efficient delivery of care to Medicare beneficiaries. The system must
be able to account adequately for each IPF's case-mix to allow for both
fair distribution of Medicare payments and access to adequate care for
those beneficiaries who require more costly care. As required by
section 1886(s)(5)(D)(iii) of the Act, revisions to the IPF PPS
adjustment factors made pursuant to section 1886(s)(5)(D)(i) of the Act
must be budget neutral. As discussed in section IV.D.9 of this final
rule, we are applying a refinement standardization factor to the final
IPF PPS payment rates to maintain budget neutrality for FY 2026.
3. Development of the Revised Regression for Facility-Level Refinements
In the FY 2026 IPF PPS proposed rule, we explained that we
performed an extensive regression analysis of the relationship between
the per diem costs and certain patient- and facility-level
characteristics to analyze those characteristics associated with
statistically significant cost differences. As discussed in section
IV.C of this final rule, we finalized revisions to the IPF PPS patient-
level adjustments in the FY 2025 IPF PPS final rule (89 FR 64593
through 64614). As a result, we used a constrained regression model for
FY 2026 to hold the patient-level adjustments at the level finalized
for FY 2025. We discuss the results of this constrained regression
analysis in
[[Page 37640]]
section IV.D.3.e of this final rule. We further discuss policies
related to the revisions to the IPF PPS facility-level adjustment
factors based on this regression analysis in sections IV.D.5 and IV.D.6
of this final rule.
For this FY 2026 IPF PPS final rule, we calculated a per diem cost
(including routine and ancillary components) and identified patient and
facility characteristics for each Medicare inpatient psychiatric stay
using information from MedPAR files, Common Working File (CWF)
inpatient claims, Medicare hospital cost reports, and other data
sources for FY 2020 through FY 2022. We refer readers to the FY 2025
IPF PPS final rule for a discussion of the impact of the COVID-19 PHE
and the benefits of using a combined set of data for the accuracy of
the results (89 FR 64594).
We began with a base sample of IPF stays by Medicare FFS
beneficiaries in MedPAR from FY 2020 through FY 2022, which contain a
total of 712,543 stays from 1,650 IPFs. We applied several data
restrictions and exclusions to remove stays with missing and or
aberrant data. The final sample used for the regression analysis
contained 704,472 stays from 1,633 IPFs, which reflects the removal of
17 providers and 8,071 stays.
In preparing the cost regression sample and analysis, we
incorporated more recent input data and refined our data processing
method, as described in this section. We estimated a baseline
regression using the constrained model and conducted sensitivity
analysis to confirm the robustness of our results.
a. Data Sources
For the regression analysis, our primary data sources include the
annual MedPAR files, which provide stay-level summaries of IPF stays,
and Medicare hospital cost reports, which contain provider-level data
on costs, utilization, and other financial information. Additionally,
we used the Common Working File (CWF) claims data, the Provider of
Services (POS) files, and the Provider Specific File (PSF) to identify
provider and patient characteristics and to construct variables in the
regression model.
More specifically, we used the following sources of data:
<bullet> MedPAR Files: The annual MedPAR file compiles final action
claims records for IPF stays discharged during the fiscal year. Each
MedPAR record provides a summary of clinical characteristics, service
utilization, facility billings, and Medicare coverage for an inpatient
hospital stay. We use MedPAR to identify all IPF stays by Medicare FFS
beneficiaries during the fiscal year, along with key variables such as
MS-DRG, principal and secondary diagnosis, length of stay, patient age,
admission source, provider charges by revenue center, and other patient
and provider attributes. For the FY 2026 final rule cost regression, we
used MedPAR files for FY 2020 through FY 2022.
<bullet> Hospital Cost Reports: Medicare hospital cost reports (CMS
Form 2552-10; OMB control number 0938-0050) provide the key inputs for
estimating the per diem cost of IPF stays, specifically the facility's
routine per diem cost and Cost-to-Charge Ratios (CCRs) for detailed
cost centers for each Federal FY. We also use hospital cost reports to
obtain key facility characteristics, including teaching status, bed
counts, and ownership type. For providers whose own fiscal periods
align with the FY, we directly match their FY 2020-FY 2022 hospital
cost reports to the corresponding MedPAR stays. For providers whose own
fiscal periods differ from the FY, we use multiple years of hospital
cost reports data and proportionally allocate and align them to the FY
basis for FY 2020 through FY 2022 before linking them to other data
sources. This allocation and alignment is discussed in greater detail
later in this section of this final rule.
<bullet> Common Working File (CWF) Inpatient Claims Data: We use
detailed claims data from the CWF to supplement MedPAR stay records,
specifically obtaining data on covered charges by detailed revenue
center and utilization of ECT treatments during each IPF stay. To
promote internal consistency, we use the CWF claims data with the same
final action week as the corresponding MedPAR record.
<bullet> Provider of Services (POS) File: The POS file contains
facility characteristics such as name, address, and types of services
provided. For the regression analysis for this FY 2026 IPF PPS final
rule, we primarily use the POS file to identify providers' Federal
Information Processing Series (FIPS) codes, which determine each
provider's designated Core-Based Statistical Area (CBSA). The CBSA is
then used to match providers with the corresponding geographic cost
adjustment factor. Additionally, we use the POS file as a secondary
source for provider ownership type.
<bullet> Provider Specific Data for Public Use Files for the IPF
PPS: We use the Provider Specific File (PSF) to identify providers'
COLA factors and other facility-level characteristics, including
whether a facility has a qualified Emergency Department (ED).
<bullet> IPF Market Baskets: We used the historical IPF market
basket increases and labor-related shares for the FY 2020-FY 2022
period.
<bullet> IPF PPS Wage Index: We use the IPF PPS wage index, along
with COLA and labor-related share, to calculate the geographic cost
adjustment factor, which accounts for regional cost differences among
providers in each year. In this analysis, we used the FY 2024 IPF PPS
wage index to adjust IPF costs in FY 2020, and FY 2025 IPF PPS wage
index to adjust IPF costs in FY 2021 and FY 2022.
b. Trims and Assumptions
For the FY 2026 final rule regression analysis, we used a combined
set of FY 2020 through FY 2022 MedPAR data, consistent with the
approach we adopted for the FY 2025 IPF PPS proposed and final rules to
revise the patient-level adjustment factors. Our analysis demonstrated
that combining multiple years of data yields the most stable and
consistent result. We continue to believe that using a 3-year combined
set of data in the regression analysis helps smooth the impact of
utilization changes driven by the COVID-19 PHE, as well as significant
changes in staffing and labor costs that commenters noted in response
to the FY 2023 and FY 2024 IPF PPS proposed rules. This data set best
reflects the current cost of care as impacted by the COVID-19 PHE,
which has an ongoing impact on IPF cost and utilization trends. Our
approach mitigates the effect of these impacts in any single year by
expanding the set of data.
Within the MedPAR dataset, we included inpatient hospital stays
that met the following criteria:
<bullet> Hospital CMS Certification Number (CCN) contains ``40'',
``41'', ``42'', ``43'', or ``44'' in the third and fourth positions
(freestanding psychiatric hospitals), a special unit code of ``S'' in
the third position (psychiatric unit in an acute care hospital), a
special unit code of ``M'' in the third position (psychiatric unit in a
critical access hospital), or a special unit code of ``SA'', ``SB'',
``SC'', ``SD'', or ``SE'' in the third and fourth positions
(psychiatric unit in a long-term care hospital (LTCH), rehabilitation
hospital, or children's hospital).
<bullet> Beneficiary primary payer code is ``M'', ``N'', or blank,
indicating that Medicare is the primary payer.
<bullet> Group Health Organization (GHO) paid code is zero or
blank, indicating that a GHO has not paid the facility for the stay.
[[Page 37641]]
<bullet> National Claims History (NCH) claim type code is ``60,''
indicating a fee-for-service (FFS) inpatient claim.
<bullet> Covered charge and covered days (or Medicare utilization
days) are greater than zero.\1\
For the FY 2020 through FY 2022 sample period, a total of 712,543
patient stays from 1,650 unique providers in MedPAR met these selection
criteria. That includes 284,176 stays from 1,587 providers in FY 2020,
231,668 stays from 1,546 providers in FY 2021, and 196,699 stays from
1,522 providers in FY 2022.
Using this base sample, we applied a series of additional trimming
steps to remove stays with missing or outlier cost data. A detailed
description of how we estimate IPF per diem costs is provided in
section IV.D.3.c of this-final rule. We removed the following:
<bullet> Stays with missing routine per diem cost data or missing
provider hospital cost reports for the FY 2020-FY 2022 period. This
step removed 240 stays from the sample, which came from 13 unique
providers.
<bullet> Stays with extraordinarily high or low costs per day.
Specifically, we removed 2,345 stays whose routine per diem costs fell
outside the mean plus or minus 3.00 standard deviations of the natural
logarithm of routine per diem costs in the combined 3-year sample. We
also removed an additional 1,631 stays with total per diem costs that
fell outside the mean plus or minus 3.00 standard deviations of the
natural logarithm of total per diem costs in the combined 3-year
sample. (All cost estimates were adjusted for geographic differences
and year-over-year inflation.) In total, this trimming step removed
3,976 stays with extraordinarily high or low costs per day from 323
providers across the 3-year sample.\2\
Finally, we excluded all stays with an MS-DRG that is not
recognized by the IPF PPS, which removed 3,855 stays from 954 providers
from the remaining sample.
After these trimming steps, our final cost regression sample
included 704,472 IPF stays by Medicare FFS beneficiaries from 1,633
unique IPF providers in MedPAR FY 2020 through FY 2022. This final
sample consists of 280,959 stays from 1,569 providers in FY 2020,
229,125 stays from 1,521 providers in FY 2021, and 194,388 stays from
1,491 providers in FY 2022.
c. Calculation of the Dependent Variable
The regression model for this FY 2026 IPF PPS final rule uses the
natural logarithm of the total per diem cost, adjusted for geographic
differences and inflation, as the dependent variable. Total per diem
costs are calculated as the sum of routine per diem costs and ancillary
per diem costs, with both components including operating and capital
costs.
<bullet> Routine per diem costs are derived from facility-level
average routine cost per day reported in provider hospital cost reports
as total inpatient routine costs divided by total inpatient days
(Worksheet D-1, Part II, column 1, Line 41 divided by Line 9)\3\ and
assigned to individual patient stays within the facility.
<bullet> Ancillary per diem costs are calculated by applying the
cost center cost-to-charge ratio (CCR) from the cost report to the
covered charges from ancillary departments on CWF inpatient claims,
then dividing by the number of Medicare covered days of the stay
(available in MedPAR).
The total per diem costs (or costs per day) are further adjusted
for geographic cost differences using IPF wage indices (for the labor-
related share portion) and COLA factors (for the non-labor-related
share portion for IPFs located in Alaska and Hawaii). Cost estimates
are also adjusted for annual inflation based on the historical growth
rates of the 2021-based IPF market basket.
To promote consistency, accuracy, and comparability of our data, we
apply a series of methodological steps when calculating the dependent
variable as follows:
(1) Addressing Variation in Cost Report Reporting Periods
Because providers can select their own fiscal/reporting periods for
hospital cost reports, there is a lack of uniformity in the time
periods covered by the raw cost report data from different providers.
For example, within each annual HCRIS file, roughly 40 percent of the
reports have a January through December cost reporting period (Calendar
Year), 30 percent have a July through June cost reporting period, 15
percent have an October through September cost reporting period
(Federal fiscal year (FFY), and the remaining 15 percent cover various
other cost reporting periods. Moreover, some providers change their
fiscal/reporting periods mid-year (sometimes due to an ownership
change), resulting in shorter or longer hospital cost reports and, in
some cases, multiple hospital cost reports within a single year.
To address this lack of uniformity in provider reporting periods
and enhance data accuracy and consistency, we apply a re-allocation
procedure to align all provider hospital cost reports data to the FFY
basis before matching them to MedPAR stays. First, we allocate each
provider's annual cost report data across the months, assuming uniform
values per month within the reporting period. Then we regroup the
monthly data to align with the FFY for each provider and calculate
annual averages. When data for some months are missing, we use
available partial-year data to extrapolate and construct the annual
estimate.
For example, suppose a provider uses the CY as its cost reporting
period. Its reported average routine per diem cost was $900 in CY 2019,
$950 in CY 2020, $1000 in CY 2021, and $1100 in CY 2022. Its CCR for
laboratory services is 0.30 in CY 2019, 0.25 in CY 2020, 0.32 in CY
2021, and 0.28 in CY 2022. Using the reallocation method, this
provider's average routine per diem costs were $937.50 for FY 2020 (=
3/12*$900 + 9/12*$950), $987.50 for FY 2021, and $1,075.00 for FY 2022.
Its CCR for laboratory services were 0.2625 for FY 2020, 0.3025 for FY
2021, and 0.2900 for FY 2022.
(2) Obtaining CCRs for Ancillary Cost Estimation
To estimate the costs of non-routine services provided during IPF
stays, we group the cost centers from hospital cost reports and the
revenue centers from CWF claims into 25 ``ancillary departments'':
Pharmacy, Laboratory, Emergency Room, Medical/Surgical Supplies,
Cardiology, Radiology, Magnetic Resonance Imaging (MRI), Physical
Therapy, Occupational Therapy, Inhalation Therapy, Speech Pathology,
Anesthesia, Operating Room, Intensive Care Unit (ICU), Coronary Care
Unit (CCU), End Stage Renal Disease (ESRD), Professional Fees, Clinic
Visit, Outpatient Services, Durable Medical Equipment (DME), Used DME,
Blood, Blood Storage and Processing, Lithotripsy, and Other
Services.\4\
For each ancillary department, we calculate each provider's CCR
using the provider's cost report, Worksheet D. Specifically, we take
ancillary department costs (Worksheet D-3, Column 3), subtract any
positive inpatient pass-through costs (Worksheet D, Part IV, Column
11), and divide the result by ancillary department charges (Worksheet
D-3, Column 2).\5\
To address extreme values and missing data in CCRs, we apply
winsorization and imputation. For extreme values, we examine the
distribution of CCR data (after aligning to FFY) for each ancillary
department across providers from FY 2020 through FY 2022 and winsorize
values at the 2nd and 98th percentiles. In addition,
[[Page 37642]]
we consider all CCRs lower than 0.01 or higher than 10.0 as improbable
and recode them to 0.01 or 10.0, respectively.
After adjusting for extreme values, we impute missing CCRs using
available data, prioritizing provider-specific information. (A CCR is
considered missing only if the provider had charges from the ancillary
department on MedPAR and CWF claims for that year but did not report a
CCR.) If a provider's CCR for an ancillary department is missing for a
given year but available in other years, we use the weighted average of
the provider's CCRs for that ancillary department from other years
(weights based on the provider's stay counts in those years) to fill in
the missing value. If those data are unavailable, we use the provider's
all-ancillary CCR for that year, the weighted average of the provider's
all-ancillary CCRs from other years, or the median CCR for that
ancillary department from other providers of the same type
(freestanding or unit-based) for that year, in descending order of
preference. For ancillary departments such as ICU and CCU, where CCRs
are rarely reported despite the presence of service charges on claims,
we use the median all-ancillary CCR from other providers of the same
type to fill in missing values.
(3) Accounting for Geographic Differences and Inflation
To account for geographic differences in costs, we construct a
geographic adjustment factor using the formula:
Geographic cost adjustment factor = IPF wage index * labor-related
share + COLA for AK and HI * (1-labor-related share).
We adjust the labor-related portion of per diem costs using the IPF
wage index to account for regional differences in labor costs, while
the non-labor portion is adjusted using COLA factors for IPFs in Alaska
and Hawaii. Because the IPF wage index reflects local cost differences
with a lag, we adjust for that timing discrepancy by applying more
recent IPF wage indexes to the FY 2020-FY 2022 MedPAR stays. (We remind
readers that the IPF PPS wage index is based on the pre-floor, pre-
reclassified IPPS hospital wage index, which in turn is derived from
hospital cost reports data from approximately 3-4 years prior. For
example, the FY 2025 IPF PPS wage index reflects cost data from local
labor markets around 2021-2022.) For this analysis, we used the FY 2024
IPF PPS wage index to adjust IPF costs in FY 2020, and FY 2025 IPF PPS
wage index to adjust IPF costs in FY 2021 and FY 2022.
Finally, to promote comparability across the 3 years, we adjust
cost estimates for year-over-year inflation using historical IPF market
basket increases and labor-related shares, converting all cost
estimates into 2022 dollars.
We calculated routine per diem cost, ancillary per diem cost, and
the total per diem using the approach discussed in this section for all
IPF stays in our FY 2020-FY 2022 MedPAR sample. We then excluded stays
with missing routine costs and outlier routine or total per diem costs,
based on the approach described earlier in section IV.D.3.b of this
final rule.
Among the 704,472 stays in the final FY 2020-FY 2022 cost
regression sample, the median total per diem cost was $1,135 in 2022
dollars, with a range of $355 to $4,201 and a mean of $1,205 (the
standard deviation was $539). Consistent with our approach in the FY
2025 IPF PPS final rule (89 FR 64596), the stays with zero ancillary
charges were retained in the sample.
d. Independent Variables
The independent variables in the regression model represent
patient-level and facility-level characteristics that influence the
cost of an IPF stay. Some of these variables are adjustment-related,
meaning that they are used for payment adjustments, while others are
control variables, which are used to account for variation in the
dependent variable associated with factors outside the adjustment
factors in the payment model.
(1) Adjustment-Related Variables
Patient-level adjustment-related variables in the model include MS-
DRG, comorbidity categories, patient age, and length of stay. Because
we did not propose any changes to these patient-level adjustment
factors in the FY 2026 IPF PPS proposed rule, we constrained their
coefficients to their corresponding FY 2025 adjustment factor values in
the regression, instead of estimating them in the model.
Facility-level adjustment-related variables in the model include
the facility's teaching status and whether the facility is located in a
rural area. (A facility's rural status in each year is determined based
on its CBSA designation.) We refer readers to sections IV.D.4. and
IV.D.5. of this-final rule for a more detailed explanation of the
payment adjustment for rural location. In sections III.D.5. and
III.D.6. of the proposed rule, we proposed to revise the IPF PPS
payment adjustment factors for these two facility-level characteristics
based on the estimated coefficients of these variables in the
constrained regression.
(2) Control Variables
As we noted in the FY 2025 IPF PPS proposed and final rules (89 FR
23157; and 89 FR 64596 and 64597, respectively), the original
regression model included a control variable for the presence of ECT
because ECT is paid on a per-treatment basis under the IPF PPS. We
continue to observe that IPF stays with ECT have significantly higher
costs per day. For FY 2026 we will continue paying for ECT on a per-
treatment basis; therefore, we included a control variable to account
for the additional costs associated with ECT, which will continue to be
paid outside the regression model.
Similarly, we included a control variable for stays with positive
covered ED-related charges. To address the costs of maintaining an ED
and providing ED services, IPF PPS pays facilities with a qualified ED
an additional 26 percent of the payment rate for the first day of the
stay. To prevent ED adjustment from serving as an incentive for
unnecessary ED use, all stays in facilities with qualifying EDs receive
the payment, except in cases when the admission source code is ``D,''
indicating that the patient was transferred from the inpatient part of
the same facility. (In such cases, the ED costs would have already been
covered under the preceding claim.) The 26 percent ED adjustment,
updated in the FY 2025 IPF PPS final rule (89 FR 64635 and 64636), was
calculated in a way that accounts for the percentage of stays with ED
charges and different admission sources, and that calculation was
performed outside the cost regression framework. Since our regression
model includes all costs associated with each IPF stay, including ED
costs, we included a control variable for stays with positive covered
ED charges to control for the additional costs associated with ED
services in this FY 2026 IPF PPS final rule.
Lastly, we included control variables for the data year. Since the
model uses a combined set of data from 3 years, we adjusted cost
estimates for year-over-year inflation using historical IPF market
basket increases and labor-related shares. However, external factors
beyond this inflation adjustment may have influenced cost differences
across the 3 years included in our sample. These factors, such as the
impact of the COVID-19 PHE, may affect cost variation in our sample
period. To account for these additional year-related factors, we
continued to include a set of
[[Page 37643]]
year controls in the FY 2026 IPF PPS final rule regression model.
e. Regression Results
We estimated the constrained regression using ordinary least
squares (OLS) on 704,472 IPF stays from FY 2020 to FY 2022, clustering
standard errors at the provider level. Table 2 presents the estimation
results, along with the number and percentage of stays associated with
each independent variable. The regression model has an R-squared value
of 0.27799, meaning that the independent variables included in the
regression (facility characteristics and control variables) were able
to explain approximately 27.8 percent of the variation in per diem
costs among IPF stays. We note that the R-squared value of our
regression model is comparable to the R-squared values of prior models
used for the IPF PPS (for example, see the R-squared value of 0.32340
in the FY 2025 IPF PPS final rule (89 FR 64597) and the finding that
the payment model explained 33 percent of the variation in per diem
cost among IPFs in the RY 2005 IPF PPS final rule (69 FR 66957)).
Except for the teaching variable, each of the adjustment factors
presented in Table 2 is the exponentiated regression coefficient from
our regression model, which as we previously noted uses the natural
logarithm of per diem total cost as the dependent variable. We present
the exponentiated regression results, as these most directly translate
to the way that IPF PPS adjustment factors are calculated for payment
purposes. That is, the exponentiated adjustment factors presented in
this-final rule represent a percentage increase or decrease in per diem
cost for IPF stays with each characteristic. In the case of the
teaching variable, the result presented is the un-exponentiated
regression coefficient. As discussed in section IV.D.6. of this final
rule, the current IPF PPS teaching adjustment is calculated as 1 + a
facility's ratio of interns and residents to its average daily census,
raised to the power of 0.5150. The coefficient for teaching status
presented in Table 2 can be interpreted in the same way.
Lastly, we consider regression factors to be statistically
significant when the p-value is less than or equal to the significance
level of 0.05 (*), 0.01 (**), and 0.001 (***), as notated in the Table
2 presented in this final rule.
We discuss the changes to the adjustment factors for IPFs located
in rural areas and for teaching status in sections IV.D.5. and IV.D.6.
of this final rule, respectively, and the refinement standardization
factor in section IV.D.9. of this final rule.
Table 2--IPF PPS Per Diem Cost Regression Results With Data From FY 2020 Through FY 2022
----------------------------------------------------------------------------------------------------------------
Number of Percentage of FY2025 Estimated
Variable Description stays FY2020- Stays FY2020- adjustment adjustment Statistical
FY2022 FY2022 factor factor significance
----------------------------------------------------------------------------------------------------------------
Total..................................... 704,472 100.0 ........... ........... ............
Provider: Rural........................... 88,437 12.6 1.17 1.18 ***
Provider: Teaching Status, log(1 + FTE 146,175 20.7 0.5150 0.7957 ***
Residents/Average Daily Census)..........
Control Variable: Stay Has ECT treatment.. 11,269 1.6 N/A 1.31 ***
Control Variable: Stay Has Positive 227,647 32.3 N/A 1.46 ***
Covered ED Charge........................
Control Variable: Stay Discharged in 280,959 39.9 N/A 1.00 ............
FY2020...................................
Control Variable: Stay Discharged in 229,125 32.5 N/A 1.01 **
FY2021...................................
Control Variable: Stay Discharged in 194,388 27.6 N/A 1.03 ***
FY2022...................................
MS-DRG 056: Degenerative Nervous System 4,251 0.6 1.12 ........... ............
Disorders w MCC..........................
MS-DRG 057: Degenerative Nervous System 33,401 4.7 1.11 ........... ............
Disorders w/out MCC......................
MS-DRG 876: OR Procedures with Principal 671 0.1 1.29 ........... ............
Diagnosis of Mental Health...............
MS-DRG 880: Acute Adjustment Reaction and 6,996 1.0 1.08 ........... ............
Psychosocial Dysfunction.................
MS-DRG 881: Depressive Neuroses........... 19,756 2.8 1.06 ........... ............
MS-DRG 882: Neuroses Except Depressive.... 8,944 1.3 1.02 ........... ............
MS-DRG 883: Disorders of Personality and 5,067 0.7 1.17 ........... ............
Impulse Control..........................
MS-DRG 884: Organic Disturbances and 48,587 6.9 1.08 ........... ............
Intellectual Disability..................
MS-DRG 885: Psychosis..................... 529,855 75.2 1.00 ........... ............
MS-DRG 886: Behavioral and Developmental 1,340 0.2 1.07 ........... ............
Disorders................................
MS-DRG 887: Other Mental Disorder 309 0.0 1.00 ........... ............
Diagnoses................................
MS-DRG 894: Alcohol, Drug Abuse or 2,631 0.4 0.86 ........... ............
Dependence, Left AMA.....................
MS-DRG 895: Alcohol, Drug Abuse or 10,346 1.5 0.90 ........... ............
Dependence w Rehab Therapy...............
MS-DRG 896: Alcohol, Drug Abuse or 920 0.1 1.00 ........... ............
Dependence w/out rehab therapy w MCC.....
MS-DRG 897: Alcohol, Drug Abuse or 29,884 4.2 0.95 ........... ............
Dependence w/out rehab therapy w/out MCC.
MS-DRG 917: Poisoning and Toxic Effects of 128 0.0 1.19 ........... ............
Drugs w MCC..............................
MS-DRG 918: Poisoning and Toxic Effects of 742 0.1 1.12 ........... ............
Drugs w/out MCC..........................
MS-DRG 947: Signs and Symptoms w MCC...... 56 0.0 1.12 ........... ............
MS-DRG 948: Signs and Symptoms w/out MCC.. 588 0.1 1.09 ........... ............
Comorbidity: Artificial Openings-- 3,217 0.5 1.07 ........... ............
Digestive & Urinary......................
Comorbidity: Cardiac Conditions........... 19,478 2.8 1.04 ........... ............
Comorbidity: Chronic Obstructive Pulmonary 40,003 5.7 1.09 ........... ............
Disease and Sleep Apnea..................
Comorbidity: Developmental Disabilities... 24,782 3.5 1.04 ........... ............
Comorbidity: Eating Disorders............. 2,577 0.4 1.09 ........... ............
Comorbidity: Gangrene..................... 207 0.0 1.12 ........... ............
Comorbidity: Oncology Treatment........... 10 0.0 1.44 ........... ............
Comorbidity: Poisoning.................... 5,436 0.8 1.16 ........... ............
Comorbidity: Renal Failure, Acute......... 17,466 2.5 1.06 ........... ............
Comorbidity: Renal Failure, Chronic....... 42,544 6.0 1.08 ........... ............
[[Page 37644]]
Comorbidity: Severe Musculoskeletal & 3,765 0.5 1.05 ........... ............
Connective Tissue Disease................
Comorbidity: Severe Protein Malnutrition.. 4,907 0.7 1.17 ........... ............
Comorbidity: Tracheostomy................. 260 0.0 1.09 ........... ............
Comorbidity: Uncontrolled Diabetes........ 20,001 2.8 1.05 ........... ............
Comorbidity: Intensive Management for High- 18,815 2.7 1.07 ........... ............
Risk Behavior............................
Ages: Under 45............................ 208,334 29.6 1.00 ........... ............
Ages: 45 and under 55 years............... 102,694 14.6 1.02 ........... ............
Ages: 55 and under 60 years............... 61,728 8.8 1.05 ........... ............
Ages: 60 and under 65 years............... 58,702 8.3 1.06 ........... ............
Ages: 65 and under 70 years............... 83,972 11.9 1.09 ........... ............
Ages: 70 and under 80 years............... 113,411 16.1 1.11 ........... ............
Ages: 80 years and over................... 75,631 10.7 1.13 ........... ............
Length of stay--1 day..................... 15,429 2.2 1.28 ........... ............
Length of stay--2 days.................... 24,436 3.5 1.20 ........... ............
Length of stay--3 days.................... 36,245 5.1 1.15 ........... ............
Length of stay--4 days.................... 41,061 5.8 1.12 ........... ............
Length of stay--5 days.................... 46,857 6.7 1.08 ........... ............
Length of stay--6 days.................... 50,853 7.2 1.06 ........... ............
Length of stay--7 days.................... 54,636 7.8 1.03 ........... ............
Length of stay--8 days.................... 44,677 6.3 1.02 ........... ............
Length of stay--9 days.................... 36,935 5.2 1.01 ........... ............
Length of stay--10 days................... 33,644 4.8 1.00 ........... ............
Length of stay--11 days................... 30,418 4.3 1.00 ........... ............
Length of stay--12 days................... 28,017 4.0 1.00 ........... ............
Length of stay--13 days................... 28,089 4.0 1.00 ........... ............
Length of stay--14 days................... 30,556 4.3 1.00 ........... ............
Length of stay--15 days................... 21,953 3.1 1.00 ........... ............
Length of stay--16 days................... 16,502 2.3 1.00 ........... ............
Length of stay--17 days................... 14,126 2.0 1.00 ........... ............
Length of stay--18 days................... 12,300 1.7% 1.00 ........... ............
Length of stay--19 days................... 11,467 1.6 1.00 ........... ............
Length of stay--20 days................... 11,702 1.7 1.00 ........... ............
Length of stay--21 days................... 11,018 1.6 1.00 ........... ............
Length of stay--22 days or longer......... 103,551 14.7 1.00 ........... ............
----------------------------------------------------------------------------------------------------------------
4. Wage Index Adjustment
a. Background
As discussed in the RY 2007 IPF PPS final rule (71 FR 27061), and
the RY 2009 IPF PPS (73 FR 25719) and RY 2010 IPF PPS notices (74 FR
20373), to provide an adjustment for geographic wage levels, the labor-
related portion of an IPF's payment is adjusted using an appropriate
wage index. Currently, an IPF's geographic wage index value is
determined based on the actual location of the IPF in an urban or rural
area, as defined in Sec. 412.64(b)(1)(ii)(A) and (C).
Due to the variation in costs and because of the differences in
geographic wage levels, in the RY 2005 IPF PPS final rule, we required
that payment rates under the IPF PPS be adjusted by a geographic wage
index. We proposed and finalized a policy to use the unadjusted, pre-
floor, pre-reclassified IPPS hospital wage index to account for
geographic differences in IPF labor costs. We implemented use of the
pre-floor, pre-reclassified IPPS hospital wage data to compute the IPF
wage index since there was not an IPF-specific wage index available. We
believe that IPFs generally compete in the same labor market as IPPS
hospitals, and therefore, the pre-floor, pre-reclassified IPPS hospital
wage data should be reflective of labor costs of IPFs. We believe this
pre-floor, pre-reclassified IPPS hospital wage index to be the best
available data to use as proxy for an IPF-specific wage index. As
discussed in the RY 2007 IPF PPS final rule (71 FR 27061 through
27067), under the IPF PPS, the wage index is calculated using the IPPS
wage index for the labor market area in which the IPF is located,
without considering geographic reclassifications, floors, and other
adjustments made to the wage index under the IPPS. For a complete
description of these IPPS wage index adjustments, we refer readers to
the FY 2019 IPPS/LTCH PPS final rule (83 FR 41362 through 41390). Our
wage index policy at Sec. 412.424(a)(2) provides that we use the best
Medicare data available to estimate costs per day, including an
appropriate wage index to adjust for wage differences.
When the IPF PPS was implemented in the RY 2005 IPF PPS final rule,
with an effective date of January 1, 2005, the pre-floor, pre-
reclassified IPPS hospital wage index that was available at the time
was the FY 2005 pre-floor, pre-reclassified IPPS hospital wage index.
Historically, the IPF wage index for a given RY has used the pre-floor,
pre-reclassified IPPS hospital wage index from the prior FY as its
basis. This has been due in part to the pre-floor, pre-reclassified
IPPS hospital wage index data that were available during the IPF
rulemaking cycle, where an annual IPF notice or IPF final rule was
usually published in early May. This publication timeframe was
relatively early compared to other Medicare payment rules because the
IPF PPS follows a RY, which was defined in the implementation of the
IPF PPS as the 12-month period from July 1 to June 30 (69 FR 66927).
Therefore, the best available data at the time the IPF PPS was
implemented was the pre-floor, pre-reclassified IPPS hospital wage
index from the prior FY (for example, the RY 2006 IPF wage index was
based on the
[[Page 37645]]
FY 2005 pre-floor, pre-reclassified IPPS hospital wage index).
In the RY 2012 IPF PPS final rule, we changed the reporting year
timeframe for IPFs from a RY to FY, which begins October 1 and ends
September 30 (76 FR 26434 and 26435). In that FY 2012 IPF PPS final
rule, we continued our established policy of using the pre-floor, pre-
reclassified IPPS hospital wage index from the prior year (that is,
from FY 2011) as the basis for the FY 2012 IPF wage index. This policy
of basing a wage index on the prior year's pre-floor, pre-reclassified
IPPS hospital wage index has been followed by other Medicare payment
systems, such as hospice and inpatient rehabilitation facilities. By
continuing with our established policy, we remained consistent with
other Medicare payment systems.
In FY 2020, we finalized the IPF wage index methodology to align
the IPF PPS wage index with the same wage data timeframe used by the
IPPS for FY 2020 and subsequent years. Specifically, we finalized the
use of the pre-floor, pre-reclassified IPPS hospital wage index from
the FY concurrent with the IPF FY as the basis for the IPF wage index.
For example, the FY 2020 IPF wage index was based on the FY 2020 pre-
floor, pre-reclassified IPPS hospital wage index rather than on the FY
2019 pre-floor, pre-reclassified IPPS hospital wage index.
We explained in the FY 2020 proposed rule (84 FR 16973), that using
the concurrent pre-floor, pre-reclassified IPPS hospital wage index
will result in the most up-to-date wage data being the basis for the
IPF wage index. We noted that it would also result in more consistency
and parity in the wage index methodology used by other Medicare payment
systems. We indicated that the Medicare skilled nursing facility (SNF)
PPS already used the concurrent IPPS hospital wage index data as the
basis for the SNF PPS wage index. We proposed and finalized similar
policies to use the concurrent pre-floor, pre-reclassified IPPS
hospital wage index data in other Medicare payment systems, such as
hospice and inpatient rehabilitation facilities. Thus, the wage
adjusted Medicare payments of various provider types are based upon
wage index data from the same timeframe. For FY 2026, we proposed to
continue to use the concurrent pre-floor, pre-reclassified IPPS
hospital wage index as the basis for the IPF wage index.
In the FY 2023 IPF PPS final rule (87 FR 46856 through 46859), we
finalized a permanent 5-percent cap on any decrease to a provider's
wage index from its wage index in the prior year, and we stated that we
will apply this cap in a budget neutral manner. In addition, we
finalized a policy that a new IPF will be paid the wage index for the
area in which it is geographically located for its first full or
partial FY with no cap applied because a new IPF will not have a wage
index in the prior FY. We amended the IPF PPS regulations at Sec.
412.424(d)(1)(i) to reflect this permanent cap on wage index decreases.
We refer readers to the FY 2023 IPF PPS final rule for a more detailed
discussion about this policy.
In the FY 2026 IPF PPS proposed rule, we proposed to apply the IPF
wage index adjustment to the labor-related share of the national IPF
PPS base rate and ECT payment per treatment. As discussed in section
IV.A.3 of this final rule, the final labor-related share of the IPF PPS
national base rate and ECT payment per treatment is 79.0 percent in FY
2026. This percentage reflects the labor-related share relative
importance of the 2021-based IPF market basket for FY 2026 and is 0.2
percentage point higher than the FY 2025 labor-related share.
The following is a summary of the comments we received on the
proposed wage index adjustment and our responses.
Comment: A commenter recommended CMS apply the wage index 5-percent
cap in a non-budget neutral manner.
Response: We did not propose any new policies this year pertaining
to the 5-percent cap, and accordingly, we are not finalizing any new
policies in this final rule. In accordance with our longstanding policy
under the IPF PPS, we updated the wage index in such a way that total
estimated payments to IPFs for FY 2026 are the same with or without the
changes (that is, in a budget-neutral manner) by applying a budget
neutrality factor to the IPF PPS rates. We applied the wage index cap
in a budget-neutral manner in accordance with this overall budget
neutrality policy for the IPF PPS wage index so that wage index changes
do not increase aggregate Medicare spending. In the FY 2023 IPF PPS
proposed rule (87 FR 19423 through 19425), we noted that applying a 5-
percent cap on all wage index decreases would have a very small effect
on the wage index budget neutrality factor for FY 2023. We explained
that we anticipate that in the absence of proposed policy changes, most
providers will not experience year to-year wage index declines greater
than 5 percent in any given year and that we expect the impact to the
wage index budget neutrality factor in future years will continue to be
minimal.
Comment: Two commenters requested CMS revise the IPF wage index
methodology. Specifically, the commenters suggested CMS revise the
policy so that the post-reclassification and post-floor hospital IPPS
wage index is used to calculate the wage index for IPFs. The commenter
stated that the continued use of the pre-reclassification and pre-floor
hospital inpatient wage index is unreasonable because it places IPFs at
a disadvantage in the labor markets in which they operate relative to
hospitals in the same markets. In addition, a commenter urged CMS to
apply an out-migration adjustment to IPFs to account for the employment
of hospital employees who reside in one county but commute to work in a
county with a higher wage index.
Response: We appreciate the commenters' recommendations. We did not
propose the specific policies suggested by commenters, but we will take
these recommendations into consideration to potentially inform future
rulemaking. We do not believe that the continued use of the pre-
reclassification and pre-floor hospital inpatient wage index for FY
2026 is unreasonable or that this policy puts IPFs at a disadvantage
relative to hospitals in the labor markets in which they operate. As we
have previously discussed in the RY 2007 final rule (71 FR 27066), we
believe that the actual location of an IPF (as opposed to the location
of affiliated providers) is most appropriate for determining the wage
adjustment because the prevailing wages in the area in which the IPF is
located influence the cost of a case. In that same RY 2007 final rule
(71 FR 27066), we also stated that we believe the ``rural floor'' is
required only for the acute care hospital payment system because
section 4410 of the Balanced Budget Act of 1997 (Pub. L. 105-33)
applies specifically to acute care hospitals and not excluded hospitals
and excluded units. As we have previously discussed, the IPF wage index
is intended to be a relative measure of the value of labor in
prescribed labor market areas (87 FR 46857). There are a variety of
reasons why our longstanding IPF wage index policy have not applied
floors or reclassifications, which, as we previously noted, are not
applied to the IPF wage index by statute. For example, applying floors
and reclassifications to the IPF wage index would significantly
increase administrative burden, both for IPFs and for CMS, associated
with IPFs reclassifying from one CBSA to another, and it would
significantly increase the
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complexity of the methodology. Furthermore, because floors and
reclassifications would be applied budget-neutrally under the wage
index, these policies would increase the wage index for some IPFs while
reducing IPF PPS payments for all other IPFs, which would upset the
long-settled expectations with which IPFs across the country have been
operating. For these reasons, we believe using the pre-floor, pre-
reclassified IPPS hospital wage index is the most appropriate data to
use as a proxy for an IPF wage index. We appreciate the commenter's
suggestion to apply an out-migration adjustment to IPFs to account for
employment of hospital staff who commute to work in counties with a
higher wage index. However, we note that the out-migration adjustment
is applied to the IPPS hospital wage index under section 1886(d)(13) of
the Act, which is a statutory provision that specifically applies to
subsection (d) hospitals paid under the IPPS. As discussed in the prior
paragraph, we do not believe it is appropriate for the IPF PPS to apply
an out-migration adjustment that is not statutorily required, because
such a policy would increase administrative burden and have
distributional impacts on IPFs.
Final Decision: After consideration of the comments received, we
are finalizing our proposal for FY 2026 to continue to use the
concurrent pre-floor, pre-reclassified IPPS hospital wage index as the
basis for the IPF wage index. We will apply the IPF wage index
adjustment to the labor-related share of the national base rate and ECT
payment per treatment. The labor-related share of the national rate and
ECT payment per treatment will change from 78.8 percent in FY 2025 to
79.0 percent in FY 2026. This percentage reflects the labor-related
share of the 2021-based IPF market basket for FY 2026 (see section
IV.A.3 of this final rule).
b. Office of Management and Budget (OMB) Bulletins
The wage index used for the IPF PPS is calculated using the
unadjusted, pre-reclassified and pre-floor IPPS wage index data and is
assigned to the IPF based on the labor market area in which the IPF is
geographically located. IPF labor market areas are delineated based on
the Core-Based Statistical Area (CBSAs) established by the OMB.
Generally, OMB issues major revisions to statistical areas every 10
years, based on the results of the decennial census. However, OMB
occasionally issues minor updates and revisions to statistical areas in
the years between the decennial censuses through OMB Bulletins. These
bulletins contain information regarding CBSA changes, including changes
to CBSA numbers and titles. In accordance with our established
methodology, the IPF PPS has historically adopted any CBSA changes that
are published in the OMB bulletin that corresponds with the IPPS
hospital wage index used to determine the IPF wage index and, when
necessary and appropriate, has proposed and finalized transition
policies for these changes.
In the RY 2007 IPF PPS final rule (71 FR 27061 through 27067), we
adopted the changes discussed in OMB Bulletin No. 03-04 (June 6, 2003),
which announced revised definitions for Metropolitan Statistical Areas
(MSAs), and the creation of Micropolitan Statistical Areas and Combined
Statistical Areas. We refer readers to the FY 2007 IPF PPS final rule
(71 FR 27064 and 27065) for a complete discussion regarding treating
Micropolitan Areas as rural. In adopting the OMB CBSA geographic
designations in RY 2007, we did not provide a separate transition for
the CBSA-based wage index since the IPF PPS was already in a transition
period from TEFRA payments to PPS payments.
In the RY 2009 IPF PPS notice, we incorporated the CBSA
nomenclature changes published in the most recent OMB bulletin that
applied to the IPPS hospital wage index used to determine the current
IPF wage index and stated that we expected to continue to do the same
for all the OMB CBSA nomenclature changes in future IPF PPS rules and
notices, as necessary (73 FR 25721).
Subsequently, CMS adopted the changes that were published in past
OMB bulletins in the FY 2016 IPF PPS final rule (80 FR 46682 through
46689), the FY 2018 IPF PPS rate update (82 FR 36778 and 36779), the FY
2020 IPF PPS final rule (84 FR 38453 and 38454), and the FY 2021 IPF
PPS final rule (85 FR 47051 through 47059). We direct readers to each
of these rules for more information about the changes that were adopted
and any associated transition policies.
As discussed in the FY 2023 IPF PPS final rule, we did not adopt
OMB Bulletin 20-01, which was issued March 6, 2020, because we
determined this bulletin had no material impact on the IPF PPS wage
index. This bulletin creates only one Micropolitan statistical area,
and Micropolitan areas are considered rural for the IPF PPS wage index.
That is, the constituent county of the new Micropolitan area was
considered rural effective as of FY 2021 and would continue to be
considered rural if we adopted OMB Bulletin 20-01.
In the FY 2025 IPF PPS final rule (89 FR 64614 through 64633), we
adopted the updates set forth in OMB Bulletin No. 23-01 effective July
21, 2023, beginning with the FY 2025 IPF PPS wage index. These updates
included material changes to the OMB statistical area delineations,
which included 53 urban counties that became rural, 54 rural counties
that became urban, and 88 counties that moved to a new or modified
CBSA. These updates also included replacing the 8 counties in
Connecticut with 9 new ``Planning Regions.'' Planning regions now serve
as county-equivalents within the CBSA system. OMB Bulletin No. 23 may
be accessed online at <a href="https://www.whitehouse.gov/wp-content/uploads/2023/07/OMB-Bulletin-23-01.pdf">https://www.whitehouse.gov/wp-content/uploads/2023/07/OMB-Bulletin-23-01.pdf</a>.
Given the scope of changes involved in adopting the CBSA
delineations for FY 2025, we finalized a budget neutral 3-year phase
out policy for IPFs transitioning from rural to urban based on CBSA
revisions, as discussed further in section IV.D.5.c of this final rule.
We also applied the permanent 5-percent cap on wage index decreases
described at Sec. 412.424(d)(1)(i).
c. Wage Index Budget Neutrality Adjustment
In accordance with Sec. 412.424(c)(5), changes to the wage index
are made in a budget neutral manner so that updates do not increase
expenditures. Therefore, for FY 2026, we are continuing to apply a
budget neutrality adjustment in accordance with our existing budget
neutrality policy. This policy requires us to update the wage index in
such a way that total estimated payments to IPFs for FY 2026 are the
same with or without the changes (that is, in a budget neutral manner)
by applying a budget neutrality factor to the IPF PPS rates. We will
use the following steps to ensure that the rates reflect the FY 2026
update to the wage indexes (based on FY 2022 hospital cost report data)
and the labor-related share in a budget-neutral manner:
Step 1: Simulate estimated IPF PPS payments, using the FY 2025 IPF
wage index values (available on the CMS website) and labor-related
share (as published in the FY 2025 IPF PPS final rule (89 FR 64582)).
Step 2: Simulate estimated IPF PPS payments using the FY 2026 IPF
wage index values (available on the CMS website), and the FY 2026
labor-related share (based on the latest available data as discussed
previously).
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Step 3: Divide the amount calculated in step 1 by the amount
calculated in step 2. The resulting quotient is the FY 2026 budget
neutral wage adjustment factor of 1.0011.
Step 4: Apply the FY 2026 budget neutral wage adjustment factor
from step 3 to the FY 2025 IPF PPS Federal per diem base rate after the
application of the final IPF market basket increase reduced by the
final productivity adjustment described in section IV.A.2 of this final
rule to determine the final FY 2026 IPF PPS Federal per diem base rate.
As discussed in section IV.D.9 of this final rule, we are also applying
a refinement standardization factor to determine the FY 2026 IPF PPS
Federal per diem base rate.
5. Adjustment for Rural Location
a. Background
In the RY 2005 IPF PPS final rule (69 FR 66954), we provided a 17-
percent payment adjustment for IPFs located in a rural area. This
adjustment was based on the regression analysis, which indicated that
the per diem cost of rural facilities was 17 percent higher than that
of urban facilities after accounting for the influence of the other
variables included in the regression. This 17-percent adjustment has
been part of the IPF PPS each year since the inception of the IPF PPS.
In the FY 2025 IPF PPS final rule, we revised the patient-level
adjustment factors and changed the CBSA delineations. To minimize the
scope of changes that would impact providers in any single year, we
maintained the existing regression-derived adjustment factor, which was
established in RY 2005, for IPFs located in a rural area as defined at
Sec. 412.64(b)(1)(ii)(C) for FY 2025. See the RY 2005 IPF PPS final
rule (69 FR 66954) for a complete discussion of the adjustment for
rural locations.
b. Adjustment for Rural Location
As discussed in section IV.D.3. of this FY 2026 IPF PPS final rule,
we have completed analysis of more recent cost and claims data, which
indicate that revisions to the facility-level IPF PPS payment
adjustment factors would be appropriate.
In the FY 2025 IPF PPS proposed rule, we included a request for
information (RFI) regarding a potential revision to the payment
adjustment for rural location (89 FR 23194 and 23195); we refer readers
to section V.A. of the FY 2025 IPF PPS final rule (89 FR 64641) for
summaries of the comments we received, and our responses. In the FY
2026 IPF PPS proposed rule, we explained that we took the comments
received into consideration for development of the proposed FY 2026
revision of the payment adjustment for rural location.
As discussed in section IV.D.3. of this FY 2026 IPF PPS final rule,
we proposed to derive updated IPF PPS facility-level adjustment factors
for FY 2026 using a regression analysis of data from the FY 2020
through 2022 MedPAR data files and Medicare cost report data from the
FY 2020 through 2022 Hospital Cost Report Information System (HCRIS).
More information about the data used for the impact simulations is
found in section VII.C. of this FY 2026 IPF PPS final rule.
For FY 2026, we proposed to increase the rural adjustment to 18
percent. Our regression analysis described in section IV.D.3 of this
final rule indicates that this revised adjustment more accurately
represents the difference in costs between urban and rural IPFs. As
discussed in section IV.D.9 of this final rule, we proposed to
implement this revision to the rural adjustment budget-neutrally. A
detailed discussion of the distributional impacts of this change is
found in section VII.C. of this final rule.
We solicited comments on the proposed revision to the payment
adjustment for rural location. Lastly, we proposed that if more recent
data become available, we would consider using such data to determine
the final FY 2026 adjustment factor for rural location. As discussed in
section IV.D.3 of this final rule, our updated regression analysis for
this final rule incorporated more recent claims data. The regression
analysis of this updated data yields an FY 2026 adjustment factor for
rural location of 18 percent; this result is consistent with the rural
adjustment factor we proposed for FY 2026.
The following is a summary of the comments we received and our
responses.
Comment: Several commenters supported the update of the adjustment
factor for rural location. A commenter appreciated this update to
reflect more recent data, completing the updates of both patient-level
and facility-level adjustment factors in FY 2025 and in this final
rule.
A commenter advocated for a larger increase to 20 percent or more
to be implemented with new funding; another suggested that the proposed
update to 18 percent be implemented non-budget neutrally to avoid
lowering payments for urban facilities. Commenters also suggested
exploring policy alternatives like a low-volume adjustment, a small
facility supplemental payment, or extension of the rural designation
and payment adjustment to all safety net facilities.
Response: We appreciate the commenters' support for updating the
adjustment factor for rural location. We share the commenters' concerns
regarding protecting access to inpatient psychiatric care in rural
areas but note that our regression analysis does not support an
adjustment of 20 percent. We additionally note that section
1886(s)(5)(D)(iii) of the Act requires that revisions to the IPF PPS
payment rates implemented pursuant to section 1886(s)(5)(D)(i) of the
Act be made budget neutrally. We thank commenters for their policy
suggestions for improving the IPF PPS and will take these suggestions
into consideration as we continue to analyze and revise the IPF PPS in
future years.
Final Decision: After consideration of the comments, we are
finalizing an increase in the rural adjustment to 18 percent as
proposed. Our regression analysis described in section IV.D.3 of this
final rule indicates that this increased adjustment more accurately
represents the difference in costs between urban and rural IPFs. This
revision to the rural adjustment will be implemented budget-neutrally,
as proposed. A detailed discussion of the distributional impacts of
this change is found in section VII.C. of this final rule.
c. Continuation of Rural Transition
The adoption of OMB Bulletin No. 23-01 in the FY 2025 IPF PPS final
rule (89 FR 64632) in accordance with our established methodology
determines whether a facility is classified as urban or rural for
purposes of the rural payment adjustment in the IPF PPS. Implementation
of the updated OMB delineations results in the rural payment adjustment
being applied where it is appropriate to adjust for higher costs
incurred by IPFs in rural locations; however, these changes have
distributional effects among IPF providers. Some providers lost
eligibility for the rural payment adjustment in FY 2025 as a result of
these changes. Therefore, we provided a transition period to implement
the updated OMB delineations (89 FR 64633).
In the FY 2025 IPF PPS final rule, we phased out the rural
adjustment for facilities located in a county that transitioned from
rural to urban due to the changes outlined in OMB Bulletin 23-01. We
implemented a 3-year budget neutral phase-out of the rural adjustment
for IPFs located in the 54 rural counties that would become urban under
the new OMB delineations, given the potentially significant payment
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impacts for these IPFs (89 FR 64632 and 64633), consistent with the
transition policy we adopted for IPFs in FY 2016 (80 FR 46682 through
46689). Under this 3-year phase-out, for FY 2026, IPFs that became
urban due to these OMB delineation changes will receive one-third of
the rural adjustment that was applicable in FY 2024. For FY 2027, these
IPFs will not receive a rural adjustment.
6. Teaching Adjustment
a. Background
In the RY 2005 IPF PPS final rule, we implemented regulations at
Sec. 412.424(d)(1)(iii) to establish a facility-level adjustment for
IPFs that are, or are part of, teaching hospitals (69 FR 66954 through
66957). The teaching adjustment accounts for the higher indirect
operating costs experienced by hospitals that participate in graduate
medical education (GME) programs. As detailed further in the following
paragraphs, the payment adjustments are made based on the ratio of the
number of fulltime equivalent (FTE) interns and residents training in
the IPF to the IPF's average daily census.
Medicare makes direct GME payments (for direct costs such as
resident and teaching physician salaries, and other direct teaching
costs) to all teaching hospitals, including those paid under a PPS and
those paid under the TEFRA rate-of-increase limits. These direct GME
payments are made separately from payments for hospital operating costs
and are not part of the IPF PPS. The direct GME payments do not address
the estimated higher indirect operating costs teaching hospitals may
face.
The results of the regression analysis of FY 2002 IPF data
established the basis for the payment adjustments included in the RY
2005 IPF PPS final rule. The results showed that the indirect teaching
cost variable is significant in explaining the higher costs of IPFs
that have teaching programs. We calculated the teaching adjustment
based on the IPF's ``teaching variable,'' which is (1 + [the number of
FTE residents training in the IPFs divided by the IPF's average daily
census]). The teaching variable is then raised to the 0.5150 power,
resulting in the IPF PPS teaching adjustment. This formula is subject
to limitations on the number of FTE residents, which are discussed in
greater detail in this final rule at section IV.D.6.c.
We established the teaching adjustment in a manner that limited the
incentives for IPFs to add FTE residents for the purpose of increasing
their teaching adjustment. We imposed a cap on the number of FTE
residents that may be counted for purposes of calculating the teaching
adjustment. The cap limits the number of FTE residents that teaching
IPFs may count for the purpose of calculating the IPF PPS teaching
adjustment, not the number of residents teaching institutions can hire
or train. We calculated the number of FTE residents that trained in the
IPF during a ``base year'' and used that FTE resident number as the
cap. An IPF's FTE resident cap is ultimately determined based on the
final settlement of the IPF's most recent cost report filed before
November 15, 2004 (69 FR 66955). A complete discussion of the temporary
adjustment to the FTE cap to reflect residents due to hospital closure
or residency program closure appears in the RY 2012 IPF PPS proposed
rule (76 FR 5018 through 5020) and the RY 2012 IPF PPS final rule (76
FR 26453 through 26456). As discussed in section IV.D.6.c. of this
final rule, we proposed to make conforming changes to the IPF resident
cap policy beginning in FY 2026 to recognize permanent cap increases
awarded under section 4122 of the CAA, 2023.
In the regression analysis that informed the RY 2004 IPF PPS final
rule, the logarithm of the teaching variable had a coefficient value of
0.5150. We converted this cost effect into a teaching payment
adjustment by treating the regression coefficient as an exponent and
raising the teaching variable to a power equal to the coefficient
value. We note that the coefficient value of 0.5150 was based on the
regression analysis holding all other components of the payment system
constant. A complete discussion of how the teaching adjustment was
calculated appears in the RY 2005 IPF PPS final rule (69 FR 66954
through 66957) and the RY 2009 IPF PPS notice (73 FR 25721).
b. Revision to the IPF PPS Teaching Adjustment
As we previously described in section IV.D.3.e. of this final rule,
we have completed analysis of more recent cost and claims data, which
indicate that revisions to the facility-level IPF PPS payment
adjustment factors would be appropriate. Accordingly, we proposed to
revise the IPF PPS teaching adjustment for FY 2026 based on these
results.
In the FY 2025 IPF PPS proposed rule, we included an RFI regarding
a potential revision to the payment adjustment for teaching status (89
FR 23194 and 23195); we refer readers to section V.A. of the FY 2025
IPF PPS final rule (89 FR 64641) for summaries of the comments we
received, and our responses. In general, commenters were supportive of
increasing the IPF teaching adjustment based on the more recent
analysis presented in that FY 2025 proposed rule. In the FY 2026 IPF
PPS proposed rule, we explained that we took these previous comments
into consideration when we developed our proposal for the FY 2026
revision of the payment adjustment for teaching status.
For FY 2026, we proposed to increase the teaching adjustment to
0.7981, based on the results of our latest regression model (90 FR
18494, 18510). We explained that this un-exponentiated regression
coefficient for the teaching status variable was found to be
statistically significant at the 0.001 level. We stated that in
accordance with our longstanding methodology, we would convert this
cost effect to a teaching payment adjustment by treating the regression
coefficient as an exponent and raising the teaching variable to a power
equal to the coefficient value. In the FY 2026 IPF PPS proposed rule,
we stated that we believe increasing the teaching adjustment from
0.5150 to 0.7981 would more appropriately adjust IPF PPS payments for
IPFs that have qualified teaching programs and would address the
estimated higher indirect operating costs for teaching IPFs (90 FR
18494, 18511). As discussed in section IV.D.9 of this final rule, we
proposed to implement this revision to the teaching adjustment budget-
neutrally. A detailed discussion of the distributional impacts of this
change is found in section VII.C. of this final rule.
We solicited comments on this proposed revision to the payment
adjustment for teaching status. Lastly, we proposed that, if more
recent data were to become available, we would consider using such data
to determine the final FY 2026 adjustment factor for teaching status.
The following is a summary of the comments we received and our
responses.
Comment: Commenters were supportive of CMS's proposal to increase
the IPF PPS teaching status adjustment from 0.5150 to 0.7981. A
commenter noted that the teaching adjustment presently in use was
derived from 2002 data and stated their support for an update using
more recent data.
Response: We appreciate these comments in support of an update to
the teaching status adjustment. As discussed in section IV.D.3.e. of
this FY 2026 IPF PPS final rule, we note that we have revised our
regression model for FY 2026 based on the latest available
[[Page 37649]]
cost and claims data, as proposed. We believe the results of our latest
regression model best address the estimated higher indirect operating
costs for teaching IPFs and will most appropriately adjust IPF PPS
payments for IPFs that have qualified teaching programs.
Comment: Some commenters who expressed support for the update to
the teaching adjustment nevertheless expressed concerns about payment
stability. A commenter stated that the proposed increase to the
adjustment for teaching could lead to large swings in payment. A
commenter stated that the proposed changes to the teaching and rural
adjustment factors together would necessitate an adjustment of nearly
three-quarters of 1 percentage point, for budget neutrality. These
commenters suggested the adjustment be phased in over 2 years to
mitigate negative distributional impacts on payments to non-teaching
hospitals.
Response: We thank the commenters for the suggestion to phase in
the proposed increase to the teaching adjustment over 2 years. Given
the requirement under section 1886(s)(5)(D)(3) of the Act to apply
revisions to the IPF PPS budget-neutrally, we estimate that the
proposed increase to the teaching adjustment would result in
distributional impacts across IPFs. However, we note that the total
effect of the proposed facility-level revisions (to the adjustments for
both rural location and teaching status) is a reduction of only $6.56
to the final FY 2026 IPF PPS Federal per diem base rate, which we
believe IPFs have historically been able to adapt to in a single year.
Moreover, our analysis indicates that the largest decrease any
provider will experience as a result of the increase in the teaching
adjustment is 0.6 percent. By comparison, we have historically
considered a 5 percent decrease (in a provider's wage index, for
example), to be a level at which a policy limiting the decrease should
be considered. We do not agree that the effect of the increase in the
teaching adjustment on the base rate is substantial enough to warrant
phasing in over 2 years. Additionally, we note that our latest analysis
shows that IPFs with teaching programs have significantly higher costs
than our current teaching adjustment recognizes. We believe that
implementing the full revised teaching adjustment in FY 2026 would best
support teaching facilities by more appropriately aligning IPF PPS
payment with the level of resources involved in the delivery of care to
Medicare beneficiaries.
Comment: Several commenters called for additional measures to
expand the workforce in psychiatry and other clinicians providing
mental health services. A few commenters broadly advocated for more
training programs, training slots, and funding. Another commenter
recommended that CMS consider complementary strategies that would
support development of the IPF workforce at non-teaching hospitals,
which could include incentive payments or launching a demonstration
project at non-teaching hospitals to support new psychiatry residency
rotations or training for non-physician practitioners.
Response: We appreciate the commenters' suggestions; however, these
comments are out of scope with regard to the current IPF PPS proposal.
We will consider these suggestions to potentially inform future
rulemaking.
Final Decision: After consideration of the comments we received, we
are finalizing a teaching adjustment of 0.7957 for FY 2026 based on the
latest available data. In accordance with our longstanding methodology,
we will convert this cost effect to a teaching payment adjustment by
treating the regression coefficient as an exponent and raising the
teaching variable to a power equal to the coefficient value. This
revision to the rural adjustment will be implemented budget-neutrally.
c. Update to IPF PPS Resident Caps
As we described earlier in this FY 2026 IPF PPS final rule, the IPF
PPS teaching adjustment includes a policy of capping the number of FTE
residents that an IPF can include in the calculation of its teaching
adjustment. As previously noted, we established this policy to limit
the incentives for IPFs to add FTE residents for the purpose of
increasing their teaching adjustment, in keeping with CMS's statutory
responsibility under the requirements of the Balanced Budget Act of
1997 (BBA) (Pub. L. 105-33). In the RY 2005 IPF PPS final rule (69 FR
66955), we noted that the IPF PPS statute did not require us to impose
resident FTE caps, but we recognized that if we imposed no limits on
the teaching adjustment under the IPF PPS, teaching programs in those
facilities could grow and receive payments in a manner that would be
inconsistent with the methodology for teaching hospitals paid under the
IPPS. In addition, we were concerned that if a teaching hospital had a
distinct part psychiatric unit and had a number of FTE residents above
the amount recognized for reimbursement under the limits established by
the Balanced Budget Act of 1997 (BBA) (Pub. L. 105-33), the hospital
could potentially circumvent those limits by assigning residents to
train in the IPF. We explained that after carefully reviewing the
public comments, we decided to adopt a cap on the number of FTE
residents that may be counted under the IPF PPS for the teaching
adjustment. We stated that we made this decision in order to (1)
exercise our statutory responsibility under the BBA to prevent any
erosion of the resident caps established under the IPPS that could
result from the perverse incentives created by the facility adjustment
for teaching under the IPF PPS; and (2) avoid creating incentives to
artificially expand residency training in IPFs, and ensure that the
resident base used to determine payments is related to the care needs
in IPF institutions.
Since the establishment of the IPF PPS, there have been numerous
statutory resident cap increases, which have impacted GME payments as
well as IME payments under the IPPS. These statutory resident cap
increases have generally not been applicable to IPF hospitals or
subunits, because caps are awarded to IPPS hospitals which receive both
direct GME payments and indirect medical education (IME) payments under
the IPPS.
Section 4122 of the CAA, 2023 provided for the distribution of at
least 100 resident FTEs to be distributed for hospitals with a
psychiatry or psychiatry subspecialty residency, which the CAA, 2023
defines as a residency in psychiatry as accredited by the Accreditation
Council for Graduate Medical Education for the purpose of preventing,
diagnosing, and treating mental health disorders. Hospitals with a
psychiatry or psychiatry subspecialty residency could include not only
acute care hospitals paid under the IPPS, but also freestanding
psychiatric hospitals paid under the IPF PPS.
The CAA, 2023 also included a provision for IME payments under the
IPPS, which stated that for discharges occurring on or after July 1,
2026, insofar as an additional payment amount under section 4122 is
attributable to resident positions distributed to a hospital that is
identified under subsection (h)(10), the indirect teaching adjustment
factor would be computed in the same manner as provided under section
1886(d)(5)(B)(ii) with respect to such resident positions (in other
words, utilizing 1.35 as the value of ``c'' in the adjustment formula).
We note that IPF hospitals paid under the IPF PPS are not considered a
hospital under subsection (h)(10) and do not receive IME
[[Page 37650]]
payments paid under the IPPS, under section 1886(d)(5)(B) of the Act.
Historically, the IPF PPS teaching adjustment at Sec. 412.424 has
not recognized permanent resident cap increases, which, as we noted
earlier, have historically impacted GME payments and IME payments under
the IPPS. However, current regulations at Sec. 412.424(d)(1)(iii)(D)
allow for an adjustment to an IPF's resident FTE cap for a new approved
GME program. When we initially established this regulation in the RY
2005 IPF PPS final rule (69 FR 66955 and 66956), we explained that for
new teaching IPFs and for teaching IPFs that start new programs, we
were adopting the policy that was applied under the BBA for IPPS
teaching hospitals that start new teaching programs as specified in
Sec. 413.79(e)(1). We noted that under Sec. 412.105(f)(1)(vi)
concerning IME payments under the IPPS, hospitals that have shared
residency rotational relationships may elect to apply their respective
IME resident caps on an aggregate basis via a Medicare GME affiliation
agreement. We explained that our intent was not to affect affiliation
agreements and rotational arrangements for hospitals that have
residents that train in more than one hospital. We did not implement a
provision concerning affiliation agreements specifically pertaining to
the FTE caps used in the teaching adjustment under the IPF PPS.
We also stated that we believe these policies fairly balance our
responsibilities under the statute to assure appropriate enforcement of
the BBA and the overall limits on payment adjustments for teaching
hospitals with the greater precision that can be achieved by adjusting
payments for teaching IPFs. We also stated that we believe that we have
designed a cap that balances the need for limits with the unique
conditions of teaching programs in freestanding psychiatric hospitals
and in distinct part psychiatric units. We noted in our RY 2005 IPF PPS
final rule establishing the teaching adjustment, however, that we would
monitor the impact of these policies closely and consider changes in
the future when appropriate (69 FR 66954 through 66957).
In summary, the CAA, 2023 provides for the distribution of at least
100 psychiatry or psychiatry subspecialty resident FTEs and provides
for corresponding increases to IME payments under the IPPS but makes no
provisions pertaining to the indirect operating costs for IPFs with
teaching programs. For FY 2026, we proposed to recognize resident FTE
cap increases that are awarded under section 4122 of the CAA, 2023,
either to an IPF hospital or to an IPPS hospital for resident FTEs that
are allocated to the IPF subunit paid under the IPF PPS. Specifically,
we proposed that such resident FTE cap increases would align with our
current IPF PPS teaching regulation at Sec. 412.424(d)(1)(iii)(D),
which allows for increases to IPF resident FTE caps for a new approved
graduate medical education program. As we previously noted, we
established the teaching cap policy under the IPF PPS to maintain
alignment with the requirements of the BBA that applied to IME payments
under the IPPS, and we have noted that Sec. 412.424(d)(1)(iii)(D) is
intended to achieve the same purpose. We stated that we believe this
proposal would be consistent with our current regulation and our
longstanding policy of maintaining IPF PPS teaching cap policies that
align with IME cap policies under the IPPS. We further stated that we
believe this proposal would continue to appropriately limit the
incentives for IPFs to add FTE residents for the purpose of increasing
their teaching adjustment. We solicited comments on the proposed update
to the IPF PPS teaching policy.
The following is a summary of the comments we received and our
responses.
Comment: Commenters broadly supported our proposal to recognize
resident FTE cap increases awarded under section 4122 of the CAA, 2023,
either to an IPF hospital or to an IPPS hospital for resident FTEs that
are allocated to the IPF subunit paid under the IPF PPS. Commenters
stated that this proposal would support the development of the IPF
clinical workforce and would increase IPFs' capacity to meet patient
needs. Commenters expressed that this proposal is especially important
due to the shortage of psychiatrists nationwide.
Response: We appreciate the support of commenters. We agree with
commenters about the importance of supporting the clinical workforce
for IPF hospitals and units. We agree that IPF patients have unique
needs, and we believe this proposed policy would help IPFs to better
meet those needs.
Comment: Several commenters requested that CMS make changes to the
Medicare cost report to allow IPFs to increase their resident caps. A
commenter requested that CMS work with the Medicare Administrative
Contractors to ensure that adjusted FTEs align with the program's slots
awarded under section 4122. A commenter further noted that hospitals
are instructed to reduce their IME applications for section 4122 slots
for any portion of an FTE that is working in an IPF hospital or unit.
Response: We thank commenters for their careful consideration of
the proposal. We will issue revised instructions and guidance to the
Medicare Administrative Contractors in the near future. We intend to
make updates to Worksheet E-3, Part II of the Medicare Hospital Cost
Report (CMS-2552-10, OMB No. 0938-0050) to enable IPFs to document the
additional FTEs awarded under section 4122 of the CAA, 2023, that are
allocated to an IPF hospital or IPF unit that is paid under the IPF
PPS. We are clarifying that we will not include FTE increases that are
awarded under section 4122 of the CAA, 2023, in an IPF's teaching cap
if those FTE increases are included in any IME cap increases for the
same hospital.
Comment: Several commenters suggested that we adopt the same policy
with respect to FTE cap slots awarded under section 126 of the CAA,
2021. A commenter stated that in the first three rounds of section 126
awards, CMS distributed 139.72 DGME slots and 90.78 IME slots to
teaching hospitals that applied for funding to expand psychiatry and
psychiatric subspecialty programs, even though the statute did not
specify that the slots must be awarded for psychiatry residencies.
Response: We appreciate the commenters' suggestion, but we note
that we did not propose to recognize slots awarded under section 126 of
the CAA, 2021. As commenters pointed out, section 4122 of the CAA,
2023, is uniquely focused on psychiatry and psychiatric subspecialty
residency slots. We are not finalizing any change to the FTE teaching
adjustment policy with regard to section 126 of the CAA, 2021, but we
will take these comments into consideration to potentially inform
future rulemaking.
Comment: Some commenters suggested that CMS should reconsider its
cap policy for the IPF teaching adjustment, noting that CMS has broad
authority to determine the application of caps to the IPF PPS teaching
adjustment.
Response: As we previously noted, we established the teaching cap
policy under the IPF PPS to maintain alignment with the requirements of
the BBA that applied to IME payments under the IPPS. We believe that
the current policy fairly balances our responsibilities under the
statute to assure appropriate enforcement of the BBA and the overall
limits on payment adjustments for teaching hospitals with the greater
precision that can be achieved by adjusting payments for teaching IPFs.
We will continue to
[[Page 37651]]
monitor the impact of these policies closely and may consider changes
in the future if appropriate.
Final Decision: After consideration of the comments, we are
finalizing our proposal to recognize resident FTE cap increases awarded
under section 4122 of the CAA, 2023, either to an IPF hospital or to an
IPPS hospital for resident FTEs that are allocated to the IPF subunit
paid under the IPF PPS.
7. Cost of Living Adjustment for IPFs Located in Alaska and Hawaii
The IPF PPS includes a payment adjustment for IPFs located in
Alaska and Hawaii based upon the area in which the IPF is located. As
we explained in the RY 2005 IPF PPS final rule, the FY 2002 data
demonstrated that IPFs in Alaska and Hawaii had per diem costs that
were disproportionately higher than other IPFs. As a result of this
analysis, we provided a COLA in the RY 2005 IPF PPS final rule. We
refer readers to the FY 2024 IPF PPS final rule for a complete
discussion of the currently applicable COLA factors (88 FR 51088 and
51089).
In the FY 2013 IPPS/LTCH final rule (77 FR 53700 and 53701), we
established a new methodology to update the COLA factors for Alaska and
Hawaii and adopted this methodology for the IPF PPS in the FY 2015 IPF
PPS final rule (79 FR 45958 through 45960). We also specified that the
COLA updates will be determined every 4 years, in alignment with the
IPPS market basket labor-related share update (79 FR 45958 through
45960). Because the labor-related share of the IPPS market basket was
updated for FY 2022, the COLA factors were updated in FY 2022 IPPS/LTCH
rulemaking (86 FR 45547) reflecting CPI data through 2020. As such, we
also finalized an update to the IPF PPS COLA factors in the FY 2022 IPF
PPS final rule to reflect the updated COLA factors finalized in the FY
2022 IPPS/LTCH rulemaking effective for FY 2022 through FY 2025 (86 FR
42621 and 42622).
Generally, under our existing methodology, we update the 2009 COLA
factors published by the U.S. Office of Personnel Management (OPM) by a
comparison of the growth in the Consumer Price Indices (CPIs) for the
areas of Urban Alaska and Urban Hawaii, relative to the growth in the
CPI for the average U.S. city as published by the Bureau of Labor
Statistics (BLS). Using the respective CPI commodities index and CPI
services index and using the approximate commodities/services shares
obtained from the IPPS market basket, we create reweighted CPIs for
each of the respective areas to reflect the underlying composition of
the IPPS market basket nonlabor-related share. Lastly, we apply a 25
percent cap, which was incorporated into our methodology to reflect the
statutory cap used to calculate OPM's COLA factors. For a complete
discussion, we refer readers to the FY 2015 IPF PPS final rule (79 FR
45958 through 45960) as well as the FY 2022 IPF PPS final rule (86 FR
42621 and 42622).
Table 3 lists the COLA factors for IPFs located in Alaska and
Hawaii as calculated under our current methodology, using updated CPI
data through 2024 and the approximate 60 percent commodities/40 percent
services shares obtained from the 2023-based IPPS market basket.
Table 3--IPF PPS Cost-of-Living Adjustment Factors: IPFs Located in Alaska and Hawaii
----------------------------------------------------------------------------------------------------------------
FY 2022 Updated COLA
through FY factors under
Area 2025 COLA current Difference
factors methodology
----------------------------------------------------------------------------------------------------------------
Alaska:
City of Anchorage and 80-kilometer (50-mile) radius by road. 1.22 1.18 -0.04
City of Fairbanks and 80-kilometer (50-mile) radius by road. 1.22 1.18 -0.04
City of Juneau and 80-kilometer (50-mile) radius by road.... 1.22 1.18 -0.04
Rest of Alaska.............................................. 1.24 1.20 -0.04
Hawaii:
City and County of Honolulu................................. 1.25 1.25 0
County of Hawaii............................................ 1.22 1.21 -0.01
County of Kauai............................................. 1.25 1.25 0
County of Maui and County of Kalawao........................ 1.25 1.25 0
----------------------------------------------------------------------------------------------------------------
In the FY 2026 IPF PPS proposed rule, we stated that we believe it
is appropriate to have a consistent policy approach with that of other
hospitals in Alaska and Hawaii. We explained that we believe it would
be appropriate to maintain the current COLA factors to allow CMS to
consider whether any other data sources or methodology changes may
improve the adjustment we make to hospital payments that accounts for
the unique circumstances of hospitals located in Alaska and Hawaii.
Therefore, we proposed to continue to use the FY 2025 COLA factors to
adjust the non-labor-related portion of the standardized amount for
IPFs located in Alaska and Hawaii for FY 2026.
Comment: A commenter suggested reevaluating the COLA factors for
IPFs located in Alaska and Hawaii annually due to the rise in cost of
living and economic instability. The commenter also suggested the
formation of a committee to inform future rate adjustments.
Response: We appreciate the commenter's suggestions; however, we
did not propose the specific policies suggested by the commenter. As
discussed earlier in this section, we believe it is appropriate to have
a consistent policy approach with that of other hospitals in Alaska and
Hawaii. At this time, we continue to believe our current methodology
for calculating the COLA factors for IPFs located in Alaska and Hawaii
is appropriate.
Final Decision: After consideration of the public comments
received, we are maintaining the current (FY 2025) IPF PPS COLA factors
as proposed, for FY 2026. For a complete discussion of the final FY
2026 COLA factors, including a summary of comments received under the
IPPS, we refer readers to the FY 2026 IPPS/LTCH final rule, published
elsewhere in the Federal Register.
Table 4 lists the final FY 2026 COLA factors. The final IPF PPS
COLA factors for FY 2026 are also shown in Addendum A to this final
rule, which is available on the CMS website at <a href="https://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/InpatientPsychFacilPPS/tools.html">https://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/InpatientPsychFacilPPS/tools.html</a>.
[[Page 37652]]
Table 4--Final FY 2026 Cost of Living Adjustment (COLA) Factors: IPFs
Located in Alaska and Hawaii
------------------------------------------------------------------------
Area Final COLA
------------------------------------------------------------------------
Alaska:
City of Anchorage and 80-kilometer (50-mile) 1.22
radius by road..................................
City of Fairbanks and 80-kilometer (50-mile) 1.22
radius by road..................................
City of Juneau and 80-kilometer (50-mile) radius 1.22
by road.........................................
Rest of Alaska................................... 1.24
Hawaii:
City and County of Honolulu...................... 1.25
County of Hawaii................................. 1.22
County of Kauai.................................. 1.25
County of Maui and County of Kalawao............. 1.25
------------------------------------------------------------------------
8. Adjustment for IPFs With a Qualifying ED
The IPF PPS includes a facility-level adjustment for IPFs with
qualifying EDs. As defined in Sec. 412.402, qualifying emergency
department means an emergency department that is staffed and equipped
to furnish a comprehensive array of emergency services and meets the
requirements of Sec. 489.24(b) and Sec. 413.65.
We provide an adjustment to the Federal per diem base rate to
account for the costs associated with maintaining a full-service ED.
The adjustment is intended to account for ED costs incurred by a
psychiatric hospital with a qualifying ED, or an excluded psychiatric
unit of an IPPS hospital or a critical access hospital (CAH), and the
overhead cost of maintaining the ED. This payment applies to all IPF
admissions (with one exception which we describe in this section),
regardless of whether the patient was admitted through the ED. The ED
adjustment is made on every qualifying claim except as described in
this section of this final rule. As specified at Sec.
412.424(d)(1)(v)(B), the ED adjustment is not made when a patient is
discharged from an IPPS hospital or CAH and admitted to the same IPPS
hospital's or CAH's excluded psychiatric unit. We clarified in the RY
2005 IPF PPS final rule (69 FR 66960) that an ED adjustment is not made
in this case because the costs associated with ED services are
reflected in the DRG payment to the IPPS hospital or through the
reasonable cost payment made to the CAH.
In the FY 2025 IPF PPS final rule, we updated the adjustment factor
from 1.31 to 1.54 for IPFs with qualifying EDs using the same
methodology used to determine ED adjustments in prior years (89 FR
64636). Beginning in FY 2025, IPFs with a qualifying ED receive an
adjustment factor of 1.54 as the variable per diem adjustment for day 1
of each patient stay. If an IPF does not have a qualifying ED, it
receives an adjustment factor of 1.27 as the variable per diem
adjustment for day 1 of each patient stay. For FY 2026, we proposed to
maintain the 1.54 adjustment factor for IPFs with qualifying EDs. A
complete discussion of the steps involved in the most recent
calculation of the ED adjustment factor can be found in the FY 2025 IPF
PPS final rule (89 FR 64636).
Lastly, we note that following display of the FY 2026 IPF PPS
proposed rule with comment period, we identified a typographical error
in the preamble text regarding the FY 2025 adjustment factor for IPFs
with qualifying EDs. On page 18513, in the first column, in the last
paragraph, we made a typographical error and stated the current (FY
2025) adjustment factor was updated ``from 1.31 to 1.53'' instead of
``from 1.31 to 1.54''. We note that the correct FY 2025 adjustment
factor for IPFs with qualifying EDs (that is, 1.54) is stated on page
18506, in Table 2; and in Addendum A of the FY 2026 IPF PPS proposed
rule with comment period.
We did not receive any comments on the proposal to maintain the
existing ED adjustment factor for FY 2026, and we are finalizing it as
proposed.
9. Refinement Standardization Factor
Section 1886(s)(5)(D)(iii) of the Act provides that revisions in
payment implemented pursuant to section 1886(s)(5)(D)(i) for a rate
year shall result in the same estimated amount of aggregate
expenditures under Title XVIII of the Act for psychiatric hospitals and
psychiatric units furnished in the RY as would have been made under
this Title for such care in such rate year if such revisions had not
been implemented. We interpret this to mean that revisions in payment
adjustments implemented for FY 2026 (and for any subsequent fiscal
year) must be budget neutral.
Historically, we have maintained budget neutrality in the IPF PPS
using the application of a standardization factor, which is codified in
our regulations at Sec. 412.424(c)(5) to account for the overall
positive effects resulting from the facility-level and patient-level
adjustments. As discussed in section IV.B.1 of this final rule, section
124(a)(1) of the BBRA required that we implement the IPF PPS in a
budget neutral manner. In other words, the amount of total payments
under the IPF PPS, including any payment adjustments, must be projected
to be equal to the amount of total payments that would have been made
if the IPF PPS were not implemented. Therefore, we calculated the
standardization factor by setting the total estimated IPF PPS payments,
taking into account all of the adjustment factors under the IPF PPS, to
be equal to the total estimated payments that would have been made
using TEFRA methodology had the IPF PPS not been implemented. A step-
by-step description of the methodology used to estimate payments under
the TEFRA payment system appears in the RY 2005 IPF PPS final rule (69
FR 66926).
We believe the budget neutrality requirement of section
1886(s)(5)(D)(iii) of the Act is consistent with our longstanding
methodology for maintaining budget neutrality under the IPF PPS
pursuant to section 124(a)(1) of the BBRA. We note that for the FY 2025
IPF PPS rule (89 FR 64640 and 64641), we applied a refinement
standardization factor to the FY 2024 IPF Federal per diem base rate
and ECT per treatment amount to maintain budget neutrality for the
change in the patient-level adjustment factors, ED adjustment, and ECT
per treatment amount finalized in the FY 2025 IPF PPS rule.
Therefore, for FY 2026, we proposed to apply a refinement
standardization factor in accordance with our existing policy at Sec.
412.424(c)(5). Under this policy, we would update IPF PPS adjustment
factors for teaching status and for IPFs located in rural areas, as
finalized in this FY 2026 IPF PPS final rule, in such a way that total
estimated payments to IPFs for FY 2026 are the same with or without the
changes (that is, in a budget neutral manner) by
[[Page 37653]]
applying a refinement standardization factor to the IPF PPS rates. We
proposed to use the following steps to ensure that the rates reflect
the final FY 2026 update to the facility-level adjustment factors (as
previously discussed in sections IVII.D.5 and IV.D.6. of this final
rule and summarized in Addendum A) in a budget neutral manner:
Step 1: Simulate estimated IPF PPS payments using the FY 2025 IPF
facility-level adjustment factor values (available on the CMS website).
Step 2: Simulate estimated IPF PPS payments using the final FY 2026
IPF facility-level adjustment factor values (see Addendum A of this
final rule, which is available on the CMS website).
Step 3: Divide the amount calculated in step 1 by the amount
calculated in step 2. The resulting quotient is the final FY 2026
refinement standardization factor of 0.9927.
Step 4: Apply the FY 2026 refinement standardization factor from
step 3 to the FY 2025 IPF PPS Federal per diem base rate and ECT per
treatment amount, after the application of the wage index budget
neutrality factor and the IPF market basket increase reduced by the
productivity adjustment described in section IV.A. of this final rule
to determine the final FY 2026 IPF PPS Federal per diem base rate and
FY 2026 ECT payment amount per treatment.
E. Other Payment Adjustments and Policies
1. Outlier Payment Overview
The IPF PPS includes an outlier adjustment to promote access to IPF
care for those patients who require expensive care and to limit the
financial risk of IPFs treating unusually costly patients. In the RY
2005 IPF PPS final rule, we implemented regulations at Sec.
412.424(d)(3)(i) to provide a per case payment for IPF stays that are
extraordinarily costly. Providing additional payments to IPFs for
extremely costly cases strongly improves the accuracy of the IPF PPS in
determining resource costs at the patient- and facility-level. These
additional payments reduce the financial losses that would otherwise be
incurred in treating patients who require costlier care; therefore,
reduce the incentives for IPFs to under-serve these patients. We make
outlier payments for discharges where an IPF's estimated total cost for
a case exceeds a fixed dollar loss threshold amount (multiplied by the
IPF's facility-level adjustments) plus the Federal per diem payment
amount for the case.
In instances when the case qualifies for an outlier payment, we pay
80 percent of the difference between the estimated cost for the case
and the adjusted threshold amount for days 1 through 9 of the stay
(consistent with the median LOS for IPFs in FY 2002), and 60 percent of
the difference for day 10 and thereafter. The adjusted threshold amount
is equal to the outlier threshold amount adjusted for wage area,
teaching status, rural area, and the COLA factor (if applicable), plus
the amount of the Medicare IPF payment for the case. We established the
80 percent and 60 percent loss sharing ratios because we were concerned
that a single ratio established at 80 percent (like other Medicare
PPSs) might provide an incentive under the IPF per diem payment system
to increase LOS to receive additional payments.
After establishing the loss sharing ratios, we determined the
current fixed dollar loss threshold amount through payment simulations
designed to compute a dollar loss beyond which payments are estimated
to meet the 2 percent outlier spending target. Each year when we update
the IPF PPS, we simulate payments using the latest available data to
compute the fixed dollar loss threshold so that outlier payments
represent 2 percent of total estimated IPF PPS payments.
2. Update to the Outlier Fixed Dollar Loss Threshold Amount
In accordance with the update methodology described in Sec.
412.428(d), we proposed to update the fixed dollar loss threshold
amount used under the IPF PPS outlier policy. Based on the regression
analysis and payment simulations used to develop the IPF PPS, we
established a 2 percent outlier policy, which strikes an appropriate
balance between protecting IPFs from extraordinarily costly cases while
ensuring the adequacy of the Federal per diem base rate for all other
cases that are not outlier cases. We proposed to maintain the
established 2 percent outlier policy for FY 2026.
Our longstanding methodology for updating the outlier fixed dollar
loss threshold involves using the best available data, which is
typically the most recent available data. We note that for FY 2022 and
FY 2023 only, we made certain methodological changes to our modeling of
outlier payments, and we discussed the specific circumstances that led
to those changes for those years (86 FR 42623 and 42624; 87 FR 46862
through 46864). We direct readers to the FY 2022 and FY 2023 IPF PPS
proposed and final rules for a more complete discussion.
We proposed to update the IPF outlier threshold amount for FY 2026
using FY 2024 claims data and the same methodology that we have used to
set the initial outlier threshold amount each year beginning with the
RY 2007 IPF PPS final rule (71 FR 27072 and 27073). For this FY 2026
IPF PPS rulemaking, consistent with our longstanding practice, based on
an analysis of the latest available data (the December 2024 update of
FY 2024 IPF claims) and rate increases, we believe it is necessary to
update the fixed dollar loss threshold amount to maintain an outlier
percentage that equals 2 percent of total estimated IPF PPS payments.
Based on an analysis of these updated data, we estimated that IPF
outlier payments as a percentage of total estimated payments would be
slightly higher than 2.0 percent in FY 2025. Therefore, we proposed to
update the outlier threshold amount to $39,360 to maintain estimated
outlier payments at 2 percent of total estimated aggregate IPF payments
for FY 2026. The proposed update would be an increase from the FY 2025
threshold of $38,110. Lastly, we proposed that if more recent data
become available for the FY 2026 IPF PPS final rule, we would consider
using such data to determine the final outlier fixed dollar loss
threshold amount for FY 2026.
We solicited comments on the proposed update to the outlier fixed
dollar loss threshold amount. The following is a summary of the
comments we received and our responses.
Comment: A commenter expressed concern about CMS's proposal to
raise the IPF outlier fixed-loss threshold to $39,360 for FY 2026. The
commenter stated the proposed threshold is too high and will reduce the
number of cases qualifying for outlier payment relief. The commenter
expressed concern about the impact on facilities that treat the most
medically complex or violent psychiatric patients, as this creates
significant financial risk for these specialized providers.
Response: The proposed increase in the IPF outlier fixed-loss
threshold from $38,110 to $39,360 is intended to maintain budget
neutrality by ensuring outlier payments remain at approximately 2.0
percent of total IPF payments as required by statute, reflect cost
inflation to account for general cost increases in healthcare delivery,
and preserve program integrity by maintaining the outlier payment
system's role in protecting facilities from truly extraordinary costs.
We carefully calibrate the threshold annually using the most recent
available cost and claims data, with the 2.0 percent target for outlier
payments representing a balance between
[[Page 37654]]
providing adequate protection for high-cost cases while maintaining
overall payment system stability, supported by historical data analysis
to achieve the statutory target. Our analysis indicates that the
proposed threshold maintains the appropriate balance between outlier
payment availability and budget neutrality, and while the proportion of
cases receiving outlier payments may decrease, the total outlier
payment pool remains consistent with statutory requirements, with the
threshold adjustment reflecting actual cost trends in IPF services.
Comment: Two commenters noted concern that the increase in the
outlier fixed loss threshold exceeds the proposed 2.4 percent update to
IPF rates, creating a disparity that could negatively impact
facilities. The commenters specifically requested that CMS consider
adopting an alternative methodology used in FY 2022 and FY 2023, which
involved removing IPFs with extremely high or low costs per day (3+
standard deviations from the mean) to create a more homogeneous
dataset, as this approach previously helped mitigate increases in the
fixed loss threshold and could serve as an effective means of reducing
the proposed threshold increase for FY 2026.
Response: While the commenters correctly reference our use of
statistical trimming methodology in prior years, it is important to
clarify that the approach used in FY 2023 (87 FR 46862)--which involved
excluding providers whose change in estimated average cost per day fell
outside 3 standard deviations from the mean--was implemented as a
targeted response to extraordinary data distortions caused by the
COVID-19 PHE, rather than as a routine alternative methodolog
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