FFY 2026 IPPS Final Rules: Market Basket Rebasing and Update Factor for PPS Hospitals
Section 404 of the Prescription Drug, Improvement, and Modernization Act of 2003 required the Centers for Medicare and Medicaid Services (CMS) to update the market basket weighting more frequently. As a result of this decision, CMS adopted an update interval of every four years. The market basket assessment provides the purest measurement of price changes for healthcare organizations and is used to update payments and cost limits in the CMS payment systems.
In the FFY 2026 IPPS final rule, CMS has updated the market basket weighting utilizing, in part, FFY 2023 Medicare cost reports. CMS only included the cost reports for hospitals that are reimbursed under the IPPS payment system (i.e., critical access hospitals were excluded).
How is the market basket rate calculated?
The Medicare IPPS payment per discharge begins with a standardized base rate. This base rate is comprised of a labor and non-labor component. The hospital’s wage index is multiplied by the labor portion of the base rate which is then added to the non-labor component.
For FFY 2026, the total base rate is $6,752.61 as compared to FFY 2025’s interim final action notice total of $6,624.39. Learn more here.
For FFY 2026, CMS is using the cost report data related to:
- Wages and Salaries
- Employee Benefits
- Contract Labor
- Professional Liability Insurance
- Pharmaceuticals
- Blood and Blood Products
- Home Office/Related Organization Contract Labor
- Estimated “Residual Category” or All Other which includes all other expenses not included above
How do the most recent rates compare?
Below is CMS’s comparison of the percentages by category from the cost reports.
| Category | FFY 2018 Cost Report based IPPS Market Basket | FFY 2023 Cost Report based IPPS Market Basket |
| Wages and Salaries | 39.7% | 37.8% |
| Employee Benefits | 11.3% | 9.8% |
| Contract Labor | 2.0% | 3.6% |
| Professional Liability Insurance (Malpractice) |
1.0% |
1.0% |
| Pharmaceuticals | 7.1% | 7.4% |
| Blood and Blood Products | 0.6% | 0.5% |
| Home Office/Related Organization Contract Labor | 5.9% | 6.7% |
| All Other | 32.4% | 33.2% |
The Labor Share is 66% (down from 67.6%) which equates to a non-labor share of 34% (up from 32.4%).
Below is CMS’s final labor share comparison after taking into account the cost reports and the other sources used in the process.
| Category | 2018-Based IPPS Market Basket Cost Weights | 2023-Based IPPS Market
Basket Cost Weights |
| Wages and Salaries | 41.2% | 40.6% |
| Employee Benefits | 11.7% | 10.5% |
| Professional Fees: Labor-Related | 8.6% | 10.0% |
| Administrative and Facilities Support Services | 1.1% | 0.8% |
| Installation, Maintenance, and Repair Services | 2.4% | 1.5% |
| All Other: Labor-Related Services | 2.6% | 2.6% |
| Total Labor-Related Share | 67.6% | 66.0% |
This means for hospitals whose wage index is greater than 1, the IPPS base rate will be lower.
We recommend that hospitals continue to be diligent when filing their cost reports to properly assign and/or reclass their expenses, malpractice insurance, contract labor and physician and mid-level part a/b splits.
If you have questions or would like to discuss these matters further, please contact Marc Levy or your BNN healthcare advisor.
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The BNN Healthcare Advisory team specializes in cost report and reimbursement across the continuum of care. If your healthcare organization is experiencing challenges with reimbursement, or you are interested in learning more about improving your processes, technology, and strategy, get in touch with our healthcare industry specialists today!
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