Cost report considerations in the Medicare Inpatient Prospective Payment System (IPPS) Proposed Rule

By Marc Levy April 17, 2026

On April 10, 2026, the Centers for Medicare and Medicaid Services (CMS) published the proposed Federal Fiscal Year (FFY) 2027 inpatient prospective payment system (IPPS) rule for discharges from October 1, 2026 through September 30, 2027.

There are many updates, discussions, and changes in the proposed rule. Our healthcare advisory monitors and reviews these changes and updates for reimbursement, financial, and operational impacts for healthcare organizations. The summary below focuses on areas that have a direct impact on cost reports.

Payment Rate Update

CMS has proposed a net 2.4% increase in payments for hospitals that report quality data and are meaningful users of Electronic Health Records. CMS estimates that hospitals will see a total increase of $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:

• The program director is new; and
• The teaching staff are new; and
• 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 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 proposed 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 is proposing to change 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 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 on Worksheet A-8 the total revenue generated by each NAH program even if it creates a negative Worksheet A, Column 7 total expense amount.
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 is considered to be allowable indirect (overhead) costs for NAH programs effective for cost report periods beginning on or after October 1, 2026.

CMS proposes that hospitals must identify the overhead departments that either provide or do not provide services to the NAH program.

From there, CMS instructs 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.

Proposed CY 2025 NAH MA Rates	Proposed CY 2025	Source
NAH Pass-Through	$288,934,483	Cost reports ending in FY 2023 HCRIS
Part A Inpatient Days	$74,710,041	Cost reports ending in FY 2023 HCRIS
MA Inpatient Days	$17,735,281	Cost reports ending in FY 2023 HCRIS
Part A Direct GME	$3,066,894,317	CY 2023 HCRIS + CPI-U + MA enrollment
MA Direct GME	$2,575,061,976	CY 2023 HCRIS + CPI-U + MA enrollment
Pool (not to exceed $60 million)	$60,000,000	((MA DGME /Part A DGME) * (NAH Pass-through))
Percent Reduction to MA DGME Payments	2.33%	Pool/MA direct GME

Revision to Provider Based “Same Patient Population” Criteria

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

CMS is proposing to revise § 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, we are proposing 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 has proposed 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 is proposing that the FFY 2027 uncompensated care payment (UCP) portion of the Medicare DSH payments as $7.563 billion. This represents a 3.3% decrease from FFY 2026 total of $7.821 billion

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

Expansion of the Comprehensive Joint Replacement Model (CJR)

CMS proposes 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 proposing to expand the model based on the initial successful reduction in spending while at the same time not reducing quality of care.

CMS is proposing to expand the mandatory CJR model to all eligible acute care hospitals starting on October 1, 2027.

Want to learn more? 

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!