Final Federal Fiscal Year (FFY) 2027 IPPS rule published with notable cost report impacts

By Marc Levy August 11, 2026

On July 31, 2026, the Centers for Medicare and Medicaid Services (CMS) published the final Federal Fiscal Year (FFY) 2027 inpatient prospective payment system (IPPS) rule for discharges October 1, 2026, through September 30, 2027.

There are many updates, discussions, and changes in the final rule. The summary below focuses on areas that have a direct cost report impact. We have noted where the final rule deviates from what was proposed in April 2026. To review the proposed rule, see our prior article here.

Payment rate update

CMS has finalized a net 2.3% (proposed was 2.4%) increase in payments for hospitals that report quality data and are meaningful Electronic Health Record users. CMS estimates that hospitals will see a total approximate increase of $2.1 billion (proposed was $1.9 billion) for FFY 2027.

Criteria for new residency programs

Under CMS’s current policy, to be considered a “new” residency program for which new cap adjustments can be established, a residency program must receive its initial accreditation in addition to satisfying the following three primary criteria:

1. The program director is new; and
2. The teaching staff are new; and
3. The residents are new.

Over the years, CMS has received questions regarding the application of the above criteria, such as whether CMS would consider a program as being new for cap adjustment purposes if the three criteria are partially, but not fully, satisfied. CMS answered such questions by stating that, generally, a residency program’s newness would not be compromised if the “overwhelming majority” of the residents and staff are not coming from previously existing programs in the same specialty.

Effective for new programs beginning on or after October 1, 2026, CMS has finalized the following changes:

• The initial accreditation requirement is still effective.
• CMS is removing the criteria above that the program director and the teaching staff are new.
• At least 90% of the individual residents (NOT FTEs) that enter a new program during the five-year cap building period must not have previous experience training in another program within the same specialty
  • The count of individual residents excludes individuals with previous experience training in another program in the same specialty who enter the program as first-year residents through the National Resident Matching Program or another binding third-party resident matching program.
  • The 90 percent new resident requirement does not apply to a program accredited for 16 or fewer resident positions.

Nursing and Allied Health Education (NAHE)

Proposed changes to the regulations for determining the net cost of Nursing and Allied Health Education programs and clarifications regarding the correct allocation of overhead costs

CMS has finalized its proposed change to the regulations at 42 CFR 413.85(d)(2)(i) and (ii) to state the following:

…the net cost of approved educational activities is determined by taking the allowable direct costs incurred by the provider for trainee stipends and compensation of faculty employed by the provider, and subtracting from those direct costs the revenues the provider receives from students or on behalf of students enrolled in the program, such as, but not limited to, tuition, student fees, or textbooks purchased for resale. After subtracting revenues from allowable direct costs, indirect costs would be allocated to the nursing and allied health cost centers (limited to those costs that the provider itself incurs in connection with the operation of its approved educational activities), consistent with Medicare cost-finding principles at 42 CFR 413.24. The effective date of this proposed change would be cost reporting periods beginning on or after October 1, 2026.

In short, CMS is attempting to comply with the February 9, 2024, the U.S. District Court for the District of Columbia (DC) decision involving five plaintiff hospitals (Mercy Health – St. Vincent Medical Center LLC d/b/a Mercy St. Vincent Medical Center v. Becerra, 717 F. Supp. 3d 33 (D.D.C. 2024) where the court ruled in the hospitals favor that the offsets for revenue from tuition and student fees should be made after indirect costs are allocated, using Worksheet B-2, which follows the allocation of indirect costs on Worksheet B, Part I.

CMS outlines the following steps:

1. Hospitals offset the total revenue generated by each NAH program on Worksheet A-8 even if it creates a negative Worksheet A, Column 7 total expense amount.[AB4.1] 2. Providers utilize the reconciliation column on Worksheet B-1 to adjust the accumulated cost statistic by the total amount of NAH revenue offset on Worksheet A-8, effectively reversing that offset for purposes of overhead allocation only.

Identification of allowable indirect (overhead) costs of approved educational activities

CMS is also clarifying what it considers to be allowable indirect (overhead) costs for NAH programs effective for cost report periods beginning on or after October 1, 2026.

CMS is not finalizing its proposal that hospitals must identify the overhead departments that either provide or do not provide services to the NAH program.

Nor is CMS finalizing its proposal to instruct hospitals to subscript overhead lines for the departments that either do or do not provide services to the NAH program.

Subsequently, the NAH program would only receive overhead from the appropriate departments that provide services to the NAH program.

Medicare Advantage Nursing and Allied Health Education payments

CMS published the Medicare Advantage Nursing and Allied Health Education add-on payments (these go on Worksheet E, Part A, Line 53) update factors for the calendar year 2025 calculations.

Revision to provider-based “same patient population” criteria

CMS finalized its proposal to limit the provider based “same patient population” criteria found in §413.65(e)(3)(iii)(B) to outpatient departments only.

CMS is revising § 413.65(e)(3)(iii)(B) to specify that at least 75 percent of the patients served by an outpatient facility or organization who required the type of care furnished by the main provider received that care from that provider. An inpatient facility or organization, by contrast, would be excluded from utilizing this test to meet the location requirement altogether. Further, they finalized the addition of clarifying language at § 413.65(e)(3)(iii)(A) to make explicit that provision may still be utilized by either an inpatient or outpatient facility or organization.

Medicare Geographical Classification Review Board (MGCRB) proximity testing to include the use of ferry routes

CMS finalized its proposal to codify that hospitals can use ferry routes as part of the MGCRB proximity test with the following 412.230(c)(1) regulation language change:

To demonstrate proximity to the area, the hospital must submit evidence from a nationally recognized electronic mapping service of the shortest route from the front entrance of the hospital over improved roads or waterways traveled by ferry boats to the county line of the requested area and the distance of that route.

Medicare DSH Uncompensated Care Payment (UCP) pool

CMS has finalized the FFY 2027 uncompensated care payment (UCP) portion of the Medicare DSH payment at $7.939 billion. This represents a 2.93% increase from FFY 2026 total of $7.713 billion

Qualifying hospitals receive their portion based on the calculated “factor 3”. The FFY 2027 factor 3 is based on Worksheet S-10 data from the FY21, FY22 and FY23 cost reports.

Expansion of the Comprehensive Joint Replacement (CJR) model

CMS finalized the proposal to expand the mandatory CJR alternative payment model that was in effect from April 1, 2016, through December 31, 2024 for all eligible acute care hospitals within the selected Metropolitan Statistical Areas (MSAs). They are expanding the model based on the initial successful reduction in spending while at the same time not reducing quality of care.

The mandatory CJR model to all eligible acute care hospitals will begin on January 1, 2028 instead of the proposed October 1, 2027 start date.

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BNN’s Healthcare Advisory  team specializes in cost report and Medicare/Medicaid reimbursement across the continuum of care and provides customized training and education to healthcare teams on a variety of CMS regulations and protocols. If your healthcare organization is experiencing challenges with reimbursement, accounting practices, or you are interested in learning more about improving your processes, technology, and strategy, get in touch with our healthcare industry specialists today!