On April 10, 2026, the Centers for Medicare & Medicaid Services (CMS) released the proposed rule for the Fiscal Year 2027 Hospital Inpatient Prospective Payment System (IPPS) and Long-Term Care Hospital Prospective Payment System (LTCH PPS). The proposal combines a modest net increase in hospital payments with policy signals around quality reporting and mandatory episode-based payment models—most notably a proposed nationwide expansion of the Comprehensive Care for Joint Replacement (CJR) model.
These proposed updates underscore CMS’s continued emphasis on value-based purchasing, episode accountability, and alignment across quality programs. In addition, CMS resurfaces ongoing debates with hospital stakeholders about the adequacy of Medicare payment updates amid rising costs and coverage disruptions.
This article reviews several key provisions in the FY 2027 proposed rule.
Hospital Payment Updates: Headline Increase Masks Net Impact
Under the proposed rule, CMS would increase base IPPS and LTCH PPS payment rates by 2.4 percent in FY 2027. However, after accounting for proposed reductions to uncompensated care payments for disproportionate share hospitals (DSH) and changes in outlier payments for extraordinarily high-cost cases, CMS estimates the effective payment increase would be closer to 1.2 percent.
In aggregate, CMS projects the proposed update would translate to approximately $1.4 billion in additional payments to acute care hospitals next year. Hospital industry groups—including the American Hospital Association (AHA) and the Federation of American Hospitals (FAH)—have pushed back, arguing that the proposed update does not sufficiently reflect medical inflation, workforce pressures, or anticipated growth in the uninsured population.
These concerns reflect a long-standing dynamic in annual hospital payment rules: CMS seeking to balance statutory updates and budget neutrality constraints against the hospital industry’s concern that Medicare payments are lagging behind underlying costs.
Quality Reporting and Program Alignment
The proposed rule would also make notable updates to the Hospital Inpatient Quality Reporting (IQR) Program. CMS proposes adding three new quality measures to be phased in during 2029 and 2030, while modifying eight existing measures to include Medicare Advantage patients. CMS also proposes shortening the performance period for certain measures from three years to two—a change designed to accelerate feedback and better align measures across programs.
These changes continue CMS’s broader effort to harmonize quality measurement across Medicare payment and value-based programs, reduce reporting lag, and incorporate a more comprehensive view of patient populations.
Updates to Mandatory TEAM Model
CMS also proposes several updates to the Transforming Episode Accountability Model (TEAM), the mandatory episode-based payment model finalized last year. Key proposals include:
- Expanding the list of MS-DRGs included in the spinal fusion episode
- Aligning TEAM quality measurement performance periods with the IQR Program
- Making targeted technical refinements to payment methodology
In addition, CMS is seeking stakeholder feedback on whether ambulatory surgery centers (ASCs) should participate in TEAM and whether participation should be voluntary for physician-owned hospitals, signaling potential future expansion or recalibration of the model.
Proposed Expansion of Joint Replacement Bundles
CMS proposes to expand the existing Comprehensive Care for Joint Replacement Expanded (CJR-X) Model nationwide beginning October 1, 2027. The agency also plans to make participation mandatory for most IPPS hospitals.
CMS tested the original CJR model in 34 metropolitan areas between 2016 and 2024, generating improved patient outcomes and net Medicare savings, according to agency evaluations. CJR-X would become the fifth Center for Medicare and Medicaid Innovation model to meet the statutory criteria for nationwide expansion.
Under CJR-X, hospitals performing lower extremity joint replacements would be accountable for the cost and quality of care for the initial procedure and most related spending during the subsequent 90 days. Although the overall structure mirrors the original CJR model, CMS proposes several important updates:
- Expansion of episodes to include ankle replacements, in addition to hip and knee procedures
- Adoption of a more robust risk adjustment methodology with significantly more variables, aligning closely with the TEAM model
- Introduction of a 5 percent stop-loss policy for hospitals that serve higher proportions of dually eligible beneficiaries and certain smaller hospitals
Participation would be mandatory for most IPPS hospitals, with exceptions for hospitals already participating in TEAM, which includes a lower extremity joint replacement episode; Maryland hospitals operating under global budgets; and hospitals not paid under both IPPS and the Outpatient Prospective Payment System, such as Critical Access Hospitals.
Why It Matters
The 2027 IPPS and LTCH PPS proposed rule reinforces several clear policy signals:
- Pressure on hospital margins is likely to persist, as payment updates continue to trail hospital-reported cost growth.
- Mandatory episode-based models remain central to CMS’s value-based strategy, with CJR-X representing a significant escalation in scope and scale.
- Program alignment and MA inclusion are accelerating, with implications for hospital data systems, care coordination strategies, and reporting infrastructure.
Hospitals and health systems will need to assess not only the near-term financial impact of the proposed payment updates, but also their readiness to accept expanded episode accountability and meet evolving quality measurement requirements.
Comments on the proposed rule will shape final decisions regarding payment levels, quality program changes, and the scope of mandatory participation in CJR-X. Stakeholders will be watching closely to see whether CMS moderates its approach to mandatory models or doubles down on episode-based accountability as a cornerstone of Medicare payment reform.
In parallel, CMS has released several other proposed payment rules this month, including those that would affect skilled nursing facilities, hospice providers, inpatient rehabilitation facilities, and inpatient psychiatric facilities. For these entities, CMS generally proposes payment updates of approximately 2.4 percent and 2.3 percent for inpatient psychiatric facilities. As part of its broader program integrity focus, CMS also has proposed new transparency measures for hospice providers; this follows recent enforcement actions related to fraudulent enrollment.
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Health Management Associates, Inc. (HMA), monitors federal regulatory and legislative developments in the inpatient setting and assesses the impact on hospitals, life science companies, and other stakeholders. Our experts interpret and model hospital payment policies and assist clients in developing CMS comment letters and long-term strategic plans. Our team replicates CMS payment methodologies and model alternative policies using the most recent Medicare fee-for-service and Medicare Advantage (100%) claims data. We also support clients with DRG reassignment requests, New Technology Add-on Payment (NTAP) applications, and analyses of Innovation Center alternative payment models.
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