Lauren Alvarenga
On April 10, the Centers for Medicare and Medicaid Services (CMS) released the federal fiscal year (FFY) 2027 proposed rule for the Medicare Inpatient Prospective Payment System (IPPS). CMS is proposing increases in operating and capital base payment rates, but beneath that, several changes have the potential to shift more financial responsibility back to hospitals. Higher outlier thresholds, expiring rural programs, and expanding episode-based payment models could increase stress on hospitals already stretched thin. Here are some of the policy proposals hospitals should be aware of that could affect FFY 2027 payment rates.
Annual updates under the 2027 IPPS proposed rule
The proposed rule contains annual updates to the Medicare fee-for-service (FFS) IPPS payment rates and policies. In addition to the regular updates to wage indexes and market basket, the following policies are proposed in this rule:
- using FFY 2025 Medicare Provider and Review (MedPAR) and FFY 2024 Hospital Cost Reporting Information System (HCRIS) data for standard calculations;
- updating cost-of-living adjustments (COLAs) for hospitals located in Alaska and Hawaii;
- updates to the Medicare Disproportionate Share Hospital (DSH) payment policies, including hospital eligibility for DSH Uncompensated Care (UCC) payments in FFY 2027 being based on audited FFYs 2021-2023 S-10 data;
- continuing the budget-neutral transitional wage index value for providers who were eligible for the low wage index policy in FFY 2024;
- changes to reclassification policies;
- updates on policies regarding new residency programs;
- updates to the Transforming Episode Accountability Model (TEAM);
- implementation of the Comprehensive Care for Joint Replacement Expanded (CJR-X) Model;
- updates to the Medicare Promoting Interoperability Program; and
- updates to the Value-Based Purchasing (VBP) Program, Readmission Reduction Program (RRP) and Hospital Inpatient Quality Reporting (IQR) Program.
Six key changes to note under the proposed rule
1. Outlier payments
CMS is proposing an outlier fixed-loss cost threshold of $51,704 for FFY 2027. This threshold is 28.0% higher than the FFY 2026 outlier threshold of $40,397, which means fewer inpatient hospital stays may be eligible for outlier payments.
2. Redesignations and reclassifications
CMS is proposing to include ferry routes when mapping shortest routes when determining mileage for the purposes of proximity for Medicare Geographic Classification Review Board (MGCRB) wage index reclassifications. CMS would apply the same measurement method for miles traveled on land to those traveled by ferry over water. Maps submitted to the MGCRB from nationally recognized electronic mapping services showing the shortest route over roads from the front entrance of the hospital to county lines would need to include miles traveled by ferry as evidence of the shortest route.
Separately, it is currently possible that a hospital without three years of published hourly wage data may be denied a reclassification to its home CBSA since current regulations require that a hospital with a rural reclassification must demonstrate that its three-year average hourly wage is at least 82% of the average hourly wage of its own geographic labor market.
CMS is proposing to waive this requirement for hospitals seeking to reclassify into the CBSA in which they are located. These changes could result in a smoother process for hospitals seeking reclassification. The effects of this policy may not be seen for a few years, as other recently adopted reclassification policies are still causing ripples in wage index calculations.
3. DSH and UCC payments
The following table details the proposed total DSH pool and each factor of the UCC pool. It’s important to note that CMS uses the most recent three years of audited cost report data in the determination of Factor 3, which would be FFYs 2021-2023 for FFY 2027.
| Final FFY 2026 | Proposed FFY 2027 | Percent Change | |
| Projected Total DSH Pool | $16,550,000,000 | $15,303,000,000 | -7.53% |
|
UCC Factor 1 – Base Funding (75% of Total DSH Pool) |
$12,412,500,000 | $11,477,250,000 | -7.53% |
| UCC Factor 2 – Available Pool |
$7,713,127,500 |
$7,460,212,500 |
-3.28% |
| UCC Factor 3 – Distribution | Audited FFYs 2020–2022 S-10 Line 30 Data (Trimmed) |
Audited FFYs 2021–2023 S-10 |
N/A |
This would mean that Disproportionate Share Hospitals could receive lower DSH and UCC payments for FFY 2027. It is also important for hospitals to determine how their Factor 3 ratio changes from FFY 2026 to FFY 2027 since that will determine how much of the UCC pool they will get.
4. Low-volume hospital adjustment
Unless extended by Congress, beginning Jan. 1, 2027, hospitals will be subject to the statutory low-volume hospital adjustment. As of this date, only hospitals located more than 25 miles from another subsection (d) hospital, with fewer than 200 total discharges (all payer) could be eligible for a 25% adjustment to their IPPS revenue.
In the FFY 2027 IPPS proposed rule impact file, CMS does not list any hospital as being eligible for this adjustment. A hospital that qualified for the low-volume hospital payment adjustment for FFY 2026 may continue to receive the adjustment for the period beginning Jan.1, 2027, without reapplying if it meets both the more restrictive discharge and mileage criteria applicable for this timeframe.
5. Medicare-Dependent Hospital (MDH) program
Beginning Jan. 1, 2027, all hospitals that previously qualified for MDH status will no longer have MDH status. Hospitals that will lose this status may apply for Sole Community Hospital (SCH) status in advance of the expiration of the MDH program. Hospitals that are not granted SCH status will be paid at the federal rate.
6. Readmission Reduction Program (RRP): Future program years
Beginning with FFY 2029 program year, CMS is proposing to add the Hospital 30-Day, All-Cause, Risk-Standardized Readmission Rate Following Sepsis Hospitalization measure (Sepsis Readmission measure). The methodology calculation for this measure would align with the methodology for the current measures in the RRP. The detailed methodology for the Sepsis Readmission measure is available on CMS’ QualityNet.
What’s ahead
The FFY 2027 proposed rule reinforces the direction CMS has been moving for years: less reliance on broad-based payment support and more emphasis on precision, accountability and performance. The timeline to act is short. Comments are due by June 9, leaving hospitals a narrow window to evaluate impact and respond.
The final rule will determine how these policies ultimately land. Hospitals that adjust their strategies early will be far better positioned when these changes take effect.