Medicare Program; FY 2026 Inpatient Psychiatric Facilities Prospective Payment System-Rate Update 37628 Federal Register / Vol. 90, No. 148 / Tuesday, August 5, 2025 / Rules and Regulations DEPARTMENT OF HEALTH AND HUMAN SERVICES Centers for Medicare & Medicaid Services 42 CFR Part 412 [CMS–1831–F] RIN 0938–AV46 Medicare Program; FY 2026 Inpatient Psychiatric Facilities Prospective Payment System—Rate Update AGENCY: Centers for Medicare & Medicaid Services (CMS), Department of Health and Human Services (HHS). ACTION: Final rule. SUMMARY: This final rule updates the prospective payment rates, the outlier threshold, and the wage index for Medicare inpatient hospital services provided by Inpatient Psychiatric Facilities (IPFs), which include psychiatric hospitals and excluded psychiatric units of an acute care hospital or critical access hospital. This final rule also revises the payment adjustment factors for teaching status and for IPFs located in rural areas. These changes will be effective for IPF discharges occurring during the fiscal year beginning October 1, 2025, through September 30, 2026. We are finalizing changes to measures used in the Inpatient Psychiatric Facilities Quality Reporting (IPFQR) Program, updating and codifying the Extraordinary Circumstances Exception po mber 30, 2026. We are finalizing changes to measures used in the Inpatient Psychiatric Facilities Quality Reporting (IPFQR) Program, updating and codifying the Extraordinary Circumstances Exception policy, and summarizing comments received through requests for information regarding future changes to the IPFQR Program. DATES: These regulations are effective October 1, 2025. FOR FURTHER INFORMATION CONTACT: The IPF Payment Policy mailbox at IPFPaymentPolicy@cms.hhs.gov for general information. Nick Brock, (410) 786–5148, for information regarding the inpatient psychiatric facilities prospective payment system (IPF PPS) and regulatory impact analysis. Kaleigh Emerson, kaleigh.emerson1@ cms.hhs.gov, for information regarding the Inpatient Psychiatric Facilities Quality Reporting (IPFQR) Program. SUPPLEMENTARY INFORMATION: Availability of Certain Tables Exclusively Through the Internet on the CMS Website Addendum A to this final rule summarizes the fiscal year (FY) 2026 IPF PPS payment rates, outlier threshold, cost of living adjustment factors (COLA) for Alaska and Hawaii, national and upper limit cost-to-charge ratios, and adjustment factors. In addition, Addendum B to this final rule s, outlier threshold, cost of living adjustment factors (COLA) for Alaska and Hawaii, national and upper limit cost-to-charge ratios, and adjustment factors. In addition, Addendum B to this final rule shows the complete listing of ICD–10 Clinical Modification (CM) and Procedure Coding System (PCS) codes, the FY 2026 IPF PPS comorbidity adjustment, and electroconvulsive therapy (ECT) procedure codes. Addenda A and B to this final rule are available on the CMS website at https:// www.cms.gov/medicare/payment/ prospective-payment-systems/inpatient- psychiatric-facility/tools-and- worksheets. Tables setting forth the FY 2026 Wage Index for Urban Areas Based on Core Based Statistical Area (CBSA) Labor Market Areas, the FY 2026 Wage Index Based on CBSA Labor Market Areas for Rural Areas, and the FY 2026 CBSA Labor Market Areas are available exclusively through the internet, on the CMS website at https://www.cms.gov/ medicare/payment/prospective- payment-systems/inpatient-psychiatric- facility/wage-index. I. Executive Summary A. Purpose This final rule updates the prospective payment rates, the outlier threshold, and the wage index for Medicare inpatient hospital services provided by Inpa y/wage-index. I. Executive Summary A. Purpose This final rule updates the prospective payment rates, the outlier threshold, and the wage index for Medicare inpatient hospital services provided by Inpatient Psychiatric Facilities (IPFs) for discharges occurring during fiscal year (FY) 2026, (beginning October 1, 2025, through September 30, 2026). This rule also revises the payment adjustment factors for teaching status and for IPFs located in rural areas. Lastly, this final rule modifies a quality measure, removes four quality measures, and updates and codifies the Extraordinary Circumstances Exception (ECE) policy under the Inpatient Psychiatric Facilities Quality Reporting (IPFQR) Program. B. Summary of the Major Provisions 1. Inpatient Psychiatric Facilities Prospective Payment System (IPF PPS) For the IPF PPS, we are finalizing our • Revise the facility-level IPF PPS adjustment factors for teaching status and for IPFs located in rural areas. • Make technical rate setting updates: The IPF PPS payment rates will be adjusted annually for input price inflation, as well as statutory and other policy factors. This rule updates: ++ The IPF PPS Federal per diem base rate from $876.53 to e IPF PPS payment rates will be adjusted annually for input price inflation, as well as statutory and other policy factors. This rule updates: ++ The IPF PPS Federal per diem base rate from $876.53 to $892.87. ++ The IPF PPS Federal per diem base rate for providers who failed to report quality data to $875.44. ++ The electroconvulsive therapy (ECT) payment per treatment from $661.52 to $673.85. ++ The ECT payment per treatment for providers who failed to report quality data to $660.70. ++ The labor-related share from 78.8 percent to 79.0 percent. ++ The wage index budget neutrality factor to 1.0011. This final rule applies a refinement standardization factor of 0.9927. ++ The fixed dollar loss threshold amount from $38,110 to $39,360, to maintain estimated outlier payments at 2 percent of total estimated aggregate IPF PPS payments. 2. Inpatient Psychiatric Facilities Quality Reporting (IPFQR) Program For the Inpatient Psychiatric Facilities Quality Reporting (IPFQR) Program, we are finalizing our proposals to modify the reporting period of the 30-Day Risk- Standardized All Cause Emergency Department (ED) Visit Following an IPF Discharge measure, remove the Facility Commitment to He alizing our proposals to modify the reporting period of the 30-Day Risk- Standardized All Cause Emergency Department (ED) Visit Following an IPF Discharge measure, remove the Facility Commitment to Health Equity measure, remove the COVID–19 Vaccination Coverage Among Healthcare Personnel (HCP) measure, remove the Screening for Social Drivers of Health and Screen Positive Rate for Social Drivers of Health measures, and update and codify changes to the Extraordinary Circumstances Exception (ECE) policy. In addition, we are summarizing comments received on three topics through requests for information on a potential future star rating system for IPFs, future measure concepts for the IPFQR Program, and on using the Fast Healthcare Interoperability Resources® (FHIR® ) standard for electronic exchange of healthcare information for patient assessment reporting. proposals to: C. Summary of Impacts Provision description Total transfers & cost reductions FY 2026 IPF PPS payment update ......................................... The overall economic impact of this final rule is an estimated $70 million in in- creased payments to IPFs during FY 2026. VerDate Sep 2014 19:33 Aug 04, 2025 Jkt 26200 ............................... The overall economic impact of this final rule is an estimated $70 million in in- creased payments to IPFs during FY 2026. VerDate Sep 2014 19:33 Aug 04, 2025 Jkt 262001 PO 00000 Frm 00002 Fmt 4701 Sfmt 4700 E:\FR\FM\05AUR2.SGM 05AUR2 2 S E L U R h t i w D O R P 3 2 N Q X 1 1 K S D n o r e t t o l Federal Register / Vol. 90, No. 148 / Tuesday, August 5, 2025 / Rules and Regulations 37629 Provision description Total transfers & cost reductions IPFQR Program update, including measure removals ............ We estimate a cost reduction of $1,746,474 ($1,731,712 in CY 2026 and a fur- ther $14,761 in CY 2027) for facilities and patients due to the policies we are finalizing for the IPFQR Program. II. Background A. Overview of the Legislative Requirements of the IPF PPS Section 124 of the Medicare, Medicaid, and State Children’s Health Insurance Program Balanced Budget Refinement Act of 1999 (BBRA) (Pub. L. 106–113) required the establishment and implementation of an IPF PPS in a budget neutral manner. Specifically, section 124 of the BBRA mandated that the Secretary of Health and Human Services (the Secretary) develop a per diem prospective payment system of an IPF PPS in a budget neutral manner. Specifically, section 124 of the BBRA mandated that the Secretary of Health and Human Services (the Secretary) develop a per diem prospective payment system (PPS) for inpatient hospital services furnished in psychiatric hospitals and excluded psychiatric units including an adequate patient classification system that reflects the differences in patient resource use and costs among psychiatric hospitals and excluded psychiatric units. ‘‘Excluded psychiatric unit’’ means a psychiatric unit of an acute care hospital or of a Critical Access Hospital (CAH), which is excluded from payment under the Inpatient Prospective Payment System (IPPS) or CAH payment system, respectively. These excluded psychiatric units will be paid under the IPF PPS. Section 405(g)(2) of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) (Pub. L. 108–173) extended the IPF PPS to psychiatric distinct part units of CAHs. Sections 3401(f) and 10322 of the Patient Protection and Affordable Care Act (Pub. L. 111–148) as amended by section 10319(e) of that Act and by section 1105(d) of the Health Care and Education Reconciliation Act of 2010 (Pub. of the Patient Protection and Affordable Care Act (Pub. L. 111–148) as amended by section 10319(e) of that Act and by section 1105(d) of the Health Care and Education Reconciliation Act of 2010 (Pub. L. 111–152) (hereafter referred to jointly as ‘‘the Affordable Care Act’’) added subsection (s) to section 1886 of the Social Security Act (the Act). Section 1886(s)(1) of the Act titled ‘‘Reference to Establishment and Implementation of System,’’ refers to section 124 of the BBRA, which relates to the establishment of the IPF PPS. Section 1886(s)(2)(A)(i) of the Act requires the application of the productivity adjustment described in section 1886(b)(3)(B)(xi)(II) of the Act to the IPF PPS for the rate year (RY) beginning in 2012 (that is, a RY that coincides with a FY) and each subsequent RY. Section 1886(s)(2)(A)(ii) of the Act required the application of an ‘‘other adjustment’’ that reduced any update to an IPF PPS base rate by a percentage point amount specified in section 1886(s)(3) of the Act for the RY beginning in 2010 through the RY beginning in 2019. As noted in the FY 2020 IPF PPS final rule (84 FR 38424), for the RY beginning in 2019, section 1886(s)(3)(E) of the Act requir f the Act for the RY beginning in 2010 through the RY beginning in 2019. As noted in the FY 2020 IPF PPS final rule (84 FR 38424), for the RY beginning in 2019, section 1886(s)(3)(E) of the Act required that the other adjustment reduction be equal to 0.75 percentage point; that was the final year the statute required the application of this adjustment. Because FY 2021 was a RY beginning in 2020, FY 2021 was the first year that section 1886(s)(2)(A)(ii) of the Act did not apply since its enactment. Sections 1886(s)(4)(A) through (D) of the Act require that for RY 2014 and each subsequent RY, IPFs that fail to report required quality data with respect to such a RY will have their annual update to a standard Federal rate for discharges reduced by 2.0 percentage points. This may result in an annual update being less than 0.0 for a RY, and may result in payment rates for the upcoming RY being less than such payment rates for the preceding RY. Any reduction for failure to report required quality data will apply only to the RY involved, and the Secretary will not consider such reduction in computing the payment amount for a subsequent RY. Additional information about the specifics of the lity data will apply only to the RY involved, and the Secretary will not consider such reduction in computing the payment amount for a subsequent RY. Additional information about the specifics of the current IPFQR Program is available in the FY 2020 IPF PPS final rule (84 FR 38459 through 38468). Section 4125 of the Consolidated Appropriations Act, 2023 (CAA, 2023) (Pub. L. 117–328), which amended section 1886(s) of the Act, requires CMS to revise the Medicare prospective payment system for psychiatric hospitals and psychiatric units. Specifically, section 4125(a) of the CAA, 2023 added section 1886(s)(5)(A) of the Act to require the Secretary to collect data and information, as the Secretary determines appropriate, to revise payments under the IPF PPS. CMS discussed this data collection in the FY 2024 IPF PPS final rule (88 FR 51054), as CMS was required to begin collecting this data and information not later than October 1, 2023. As discussed in that rule, the agency has already been collecting data and information consistent with the types set forth in the CAA, 2023 as part of our extensive and years-long analyses and consideration of potential payment system refinements. We ref collecting data and information consistent with the types set forth in the CAA, 2023 as part of our extensive and years-long analyses and consideration of potential payment system refinements. We refer readers to the FY 2024 IPF PPS final rule (88 FR 51095 through 51098) where we discussed existing data collection and requested information to inform future IPF PPS revisions. In addition, section 1886(s)(5)(D) of the Act, as added by section 4125(a) of the CAA, 2023 required that the Secretary implement revisions to the methodology for determining the payment rates under the IPF PPS for psychiatric hospitals and psychiatric units, effective for RY 2025 (FY 2025). Section 1886(s)(5)(D) of the Act provided that these revisions may be based on a review of the data and information collected under section 1886(s)(5)(A) of the Act. For a detailed discussion on the revisions implemented for FY 2025, we refer readers to the FY 2025 IPF PPS final rule (89 FR 64590 through 64636). Section 4125(b) of the CAA, 2023 amended section 1886(s)(4) of the Act by inserting a new subparagraph (E) and redesignating the existing subparagraph (E) as subparagraph (F) which requires IPFs participating in th ) of the CAA, 2023 amended section 1886(s)(4) of the Act by inserting a new subparagraph (E) and redesignating the existing subparagraph (E) as subparagraph (F) which requires IPFs participating in the IPFQR Program to collect and submit to the Secretary standardized patient assessment data, using a standardized patient assessment instrument, for RY 2028 (FY 2028) and each subsequent rate year. IPFs must submit such data with respect to at least the admission and discharge of an individual, or more frequently as the Secretary determines appropriate. For IPFs to meet this new data collection and reporting requirement for RY 2028 and each subsequent rate year, the Secretary must implement a standardized patient assessment instrument that collects data with respect to the following categories: functional status; cognitive function and mental status; special services, treatments, and interventions; medical conditions and comorbidities; impairments; and other categories as determined appropriate by the Secretary. This patient assessment instrument must enable comparison of such patient assessment data that IPFs submit across all such IPFs to which such data are applicable. Section 4125( riate by the Secretary. This patient assessment instrument must enable comparison of such patient assessment data that IPFs submit across all such IPFs to which such data are applicable. Section 4125(b) of the CAA, 2023 further amended section 1886(s) of the Act by adding a new subparagraph (6) that requires the Secretary to implement revisions to the methodology for determining the payment rates for VerDate Sep 2014 19:33 Aug 04, 2025 Jkt 262001 PO 00000 Frm 00003 Fmt 4701 Sfmt 4700 E:\FR\FM\05AUR2.SGM 05AUR2 2 S E L U R h t i w D O R P 3 2 N Q X 1 1 K S D n o r e t t o l 37630 Federal Register / Vol. 90, No. 148 / Tuesday, August 5, 2025 / Rules and Regulations psychiatric hospitals and psychiatric units (that is, payment rates under the IPF PPS), effective for RY 2031 (FY 2031), as the Secretary determines to be appropriate, to take into account the patient assessment data described in paragraph (4)(E)(ii). To implement and periodically update the IPF PPS, we have published various proposed and final rules and notices in the Federal Register. For more information regarding these documents, we refer readers to the CMS website at https://www.cms.gov/ Medicare/Medicare-Fee-for-Serv proposed and final rules and notices in the Federal Register. For more information regarding these documents, we refer readers to the CMS website at https://www.cms.gov/ Medicare/Medicare-Fee-for-Service- Payment/InpatientPsychFacilPPS/index .html?redirect=/ InpatientPsychFacilPPS/. B. Overview of the IPF PPS We issued the rate year (RY) 2005 IPF PPS final rule that appeared in the November 15, 2004 Federal Register (69 FR 66922). The RY 2005 IPF PPS final rule established the IPF PPS, as required by section 124 of the BBRA and codified at 42 CFR part 412, subpart N. The RY 2005 IPF PPS final rule set forth the Federal per diem base rate for the implementation year (the 18-month period from January 1, 2005, through June 30, 2006) and provided payment for the inpatient operating and capital costs to IPFs for covered psychiatric services they furnish (that is, routine, ancillary, and capital costs, but not costs of approved educational activities, bad debts, and other services or items that are outside the scope of the IPF PPS). Covered psychiatric services include services for which benefits are provided under the fee-for-service Part A (Hospital Insurance Program) of the Medicare p hat are outside the scope of the IPF PPS). Covered psychiatric services include services for which benefits are provided under the fee-for-service Part A (Hospital Insurance Program) of the Medicare program. The IPF PPS established the Federal per diem base rate for each patient day in an IPF derived from the national average daily routine operating, ancillary, and capital costs in IPFs in FY 2002. The average per diem cost was updated to the midpoint of the first year under the IPF PPS, standardized to account for the overall positive effects of the IPF PPS payment adjustments, and adjusted for budget neutrality. The Federal per diem payment under the IPF PPS is comprised of the Federal per diem base rate described previously and certain patient- and facility-level payment adjustments for characteristics that were found in the regression analysis to be associated with statistically significant per diem cost differences, with statistical significance defined as p less than 0.05. A complete discussion of the regression analysis that established the IPF PPS adjustment factors can be found in the RY 2005 IPF PPS final rule (69 FR 66933 through 66936). The patient-level adjustments inc lete discussion of the regression analysis that established the IPF PPS adjustment factors can be found in the RY 2005 IPF PPS final rule (69 FR 66933 through 66936). The patient-level adjustments include age, Diagnosis-Related Group (DRG) assignment, and comorbidities, as well as adjustments to reflect higher per diem costs at the beginning of a patient’s IPF stay and lower costs for later days of the stay. Facility-level adjustments include adjustments for the IPF’s wage index, rural location, teaching status, a cost-of-living adjustment for IPFs located in Alaska and Hawaii, and an adjustment for the presence of a qualifying emergency department (ED). The IPF PPS provides additional payment policies for outlier cases, interrupted stays, and a per-treatment payment for patients who undergo ECT. During the IPF PPS mandatory 3-year transition period, stop-loss payments were also provided; however, since the transition ended as of January 1, 2008, these payments are no longer available. C. Annual Requirements for Updating the IPF PPS Section 124 of the BBRA did not specify an annual rate update strategy for the IPF PPS and was broadly written to give the Secretary discretion in esta C. Annual Requirements for Updating the IPF PPS Section 124 of the BBRA did not specify an annual rate update strategy for the IPF PPS and was broadly written to give the Secretary discretion in establishing an update methodology. Therefore, in the RY 2005 IPF PPS final rule, we implemented the IPF PPS using the following update strategy: • Calculate the final Federal per diem base rate to be budget neutral for the 18- month period of January 1, 2005, through June 30, 2006. • Use a July 1 through June 30 annual update cycle. • Allow the IPF PPS first update to be effective for discharges on or after July 1, 2006, through June 30, 2007. The RY 2005 final rule (69 FR 66922) implemented the IPF PPS. In developing the IPF PPS, and to ensure that the IPF PPS can account adequately for each IPF’s case-mix, we performed an extensive regression analysis of the relationship between the per diem costs and certain patient and facility characteristics to determine those characteristics associated with statistically significant cost differences on a per diem basis. That regression analysis is described in detail in our RY 2004 IPF proposed rule (68 FR 66923; 66928 through 66933) and our RY 200 with statistically significant cost differences on a per diem basis. That regression analysis is described in detail in our RY 2004 IPF proposed rule (68 FR 66923; 66928 through 66933) and our RY 2005 IPF final rule (69 FR 66933 through 66960). For characteristics with statistically significant cost differences, we used the regression coefficients of those variables to determine the size of the corresponding payment adjustments. In the RY 2005 IPF final rule, we explained the reasons for delaying an update to the adjustment factors, derived from the regression analysis, including waiting until we have IPF PPS data that yields as much information as possible regarding the patient-level characteristics of the population that each IPF serves. We indicated that we did not intend to update the regression analysis and the patient-level and facility-level adjustments until we complete that analysis. Until that analysis is complete, we stated our intention to publish a notice in the Federal Register each spring to update the IPF PPS (69 FR 66966). We issued a final rule which appeared in the May 6, 2011 Federal Register titled, ‘‘Inpatient Psychiatric Facilities Prospective Payment System egister each spring to update the IPF PPS (69 FR 66966). We issued a final rule which appeared in the May 6, 2011 Federal Register titled, ‘‘Inpatient Psychiatric Facilities Prospective Payment System—Update for Rate Year Beginning July 1, 2011 (RY 2012)’’ (76 FR 26432), which changed the payment rate update period to a RY that coincides with a FY update. Therefore, final rules are now published in the Federal Register in the summer to be effective on October 1st of each year. When proposing changes in IPF payment policy, a proposed rule is issued in the spring, and the final rule in the summer to be effective on October 1st. For a detailed list of updates to the IPF PPS, we refer readers to our regulations at 42 CFR 412.428. Beginning October 1, 2012, we finalized that we would refer to the 12-month period from October 1 through September 30 as a ‘‘fiscal year’’ (FY) rather than a RY (76 FR 26435). Therefore, in this final rule we refer to rules that took effect after RY 2012 by the FY, rather than the RY, in which they took effect. The most recent IPF PPS annual update, the FY 2025 IPF PPS final rule (89 FR 64582), appeared in the Federal Register on August 7, 2024. The FY 2025 I Y, rather than the RY, in which they took effect. The most recent IPF PPS annual update, the FY 2025 IPF PPS final rule (89 FR 64582), appeared in the Federal Register on August 7, 2024. The FY 2025 IPF PPS final rule updated the patient-level adjustments and the ED adjustment as well as increased the ECT per treatment payment amount for FY 2025, in accordance with section 1886(s)(5)(D)(i) of the Act. That final rule also updated the IPF PPS Federal per diem base rates that were published in the FY 2024 IPF PPS final rule (88 FR 51054). In revising the IPF PPS patient- level adjustment factors, and to ensure that the IPF PPS can account adequately for each IPF’s case-mix, we performed an extensive regression analysis of the relationship between the per diem costs and patient characteristics to determine those characteristics associated with statistically significant cost differences on a per diem basis. That regression analysis is described in detail in our FY 2025 IPF PPS proposed rule (89 FR 23154 through 23161) and our FY 2025 IPF PPS final rule (89 FR 64594 through VerDate Sep 2014 19:33 Aug 04, 2025 Jkt 262001 PO 00000 Frm 00004 Fmt 4701 Sfmt 4700 E:\FR\FM\05AUR2.SGM 05AUR2 2 e (89 FR 23154 through 23161) and our FY 2025 IPF PPS final rule (89 FR 64594 through VerDate Sep 2014 19:33 Aug 04, 2025 Jkt 262001 PO 00000 Frm 00004 Fmt 4701 Sfmt 4700 E:\FR\FM\05AUR2.SGM 05AUR2 2 S E L U R h t i w D O R P 3 2 N Q X 1 1 K S D n o r e t t o l Federal Register / Vol. 90, No. 148 / Tuesday, August 5, 2025 / Rules and Regulations 37631 64601). For characteristics with statistically significant cost differences, we used the regression coefficients of those variables to determine the size of the corresponding payment adjustments. As required by section 1886(s)(5)(D)(iii) of the Act, revisions to the IPF PPS payment rates implemented pursuant to section 1886(s)(5)(D)(i) of the Act must be budget neutral. Therefore, we finalized a refinement standardization factor for the FY 2025 IPF PPS payment rates to maintain budget neutrality for FY 2025. The application of the FY 2025 standardization factor is described in detail in our FY 2025 IPF PPS proposed rule (89 FR 23194) and our FY 2025 IPF PPS final rule (89 FR 64640 and 64641). III. Analysis of and Responses to the Public Comments We received 55 public comments that pertain to proposed IPF PPS payment policies, requests our FY 2025 IPF PPS final rule (89 FR 64640 and 64641). III. Analysis of and Responses to the Public Comments We received 55 public comments that pertain to proposed IPF PPS payment policies, requests for information, and the proposed updates to the IPFQR Program. Comments were from inpatient psychiatric facilities, health systems, national and state level provider and patient advocacy organizations, health information technology providers, and individuals. We reviewed each comment and grouped related comments, after which we placed them in categories based on subject matter or section(s) of the regulation affected. Summaries of the public comments received and our responses to those comments are provided in the appropriate sections in the preamble of this final rule. In addition, we received a few comments that were out of the scope of the FY 2026 IPF PPS proposed rule. We appreciate these comments but note that, because they fall outside the scope of this rulemaking, we do not address them in this rule. We may consider these comments as we continue to develop policies for future rulemaking, as applicable. IV. Provisions of the FY 2026 IPF PPS Final Rule and Responses to Comments s them in this rule. We may consider these comments as we continue to develop policies for future rulemaking, as applicable. IV. Provisions of the FY 2026 IPF PPS Final Rule and Responses to Comments A. FY 2026 Market Basket Increase and Productivity Adjustment for the IPF PPS 1. Background Originally, the input price index used to develop the IPF PPS was the Excluded Hospital with Capital market basket. This market basket was based on 1997 Medicare cost reports for Medicare-participating inpatient rehabilitation facilities (IRFs), IPFs, long-term care hospitals (LTCHs), cancer hospitals, and children’s hospitals. Although ‘‘market basket’’ technically describes the mix of goods and services used in providing health care at a given point in time, this term is also commonly used to denote the input price index (that is, cost category weights and price proxies) derived from that market basket. Accordingly, the term ‘‘market basket,’’ as used in this document, refers to an input price index. Since the IPF PPS inception, the market basket used to update IPF PPS payments has been rebased and revised to reflect more recent data on IPF cost structures. We last rebased and revised the IPF ex. Since the IPF PPS inception, the market basket used to update IPF PPS payments has been rebased and revised to reflect more recent data on IPF cost structures. We last rebased and revised the IPF market basket in the FY 2024 IPF PPS rule, where we adopted a 2021- based IPF market basket, using Medicare cost report data for both Medicare participating freestanding psychiatric hospitals and psychiatric units. We refer readers to the FY 2024 IPF PPS final rule for a detailed discussion of the 2021-based IPF market basket and its development (88 FR 51057 through 51081). Prior to the 2021-based IPF market basket, we used the 2016-based IPF market basket that was adopted in the FY 2020 IPF PPS final rule (84 FR 38426 through 38447). References to the historical market baskets used to update IPF PPS payments prior to the FY 2020 IPF PPS rule are listed in the FY 2016 IPF PPS final rule (80 FR 46656). 2. FY 2026 IPF Market Basket Update For FY 2026 (beginning October 1, 2025, and ending September 30, 2026), we proposed to update the IPF PPS payments by a market basket increase factor, with a productivity adjustment as required by section 1886(s)(2)(A)(i) of the Act. Consistent with his ptember 30, 2026), we proposed to update the IPF PPS payments by a market basket increase factor, with a productivity adjustment as required by section 1886(s)(2)(A)(i) of the Act. Consistent with historical practice, we proposed to estimate the market basket update for the IPF PPS based on the most recent forecast available at the time of rulemaking from IHS Global Inc. (IGI).1 IGI is a nationally recognized economic and financial forecasting firm with which CMS contracts to forecast the components of the market baskets and productivity adjustment. For the proposed rule, based on IGI’s fourth quarter 2024 forecast with historical data through the third quarter of 2024, the proposed 2021-based IPF market basket increase factor for FY 2026 was 3.2 percent. We also proposed that if more recent data became available after the publication of the proposed rule and before the publication of this final rule (for example, a more recent estimate of the market basket percentage increase or productivity adjustment), we would use such data, if appropriate, to determine 1 https://www.spglobal.com/en. the FY 2026 IPF market basket update in this final rule. Section 1886(s)(2)(A)(i) of the Act re ctivity adjustment), we would use such data, if appropriate, to determine 1 https://www.spglobal.com/en. the FY 2026 IPF market basket update in this final rule. Section 1886(s)(2)(A)(i) of the Act requires that, after establishing the increase factor for a FY, the Secretary shall reduce such increase factor for FY 2012 and each subsequent FY, by the productivity adjustment described in section 1886(b)(3)(B)(xi)(II) of the Act. Section 1886(b)(3)(B)(xi)(II) of the Act sets forth the definition of this productivity adjustment. The statute defines the productivity adjustment to be equal to the 10-year moving average of changes in annual economy-wide, private nonfarm business multifactor productivity (MFP) (as projected by the Secretary for the 10-year period ending with the applicable FY, year, cost reporting period, or other annual period) (the ‘‘productivity adjustment’’). The United States Department of Labor’s Bureau of Labor Statistics (BLS) publishes the official measures of productivity for the U.S. economy. We note that previously the productivity measure referenced in section 1886(b)(3)(B)(xi)(II) of the Act was published by BLS as private nonfarm business MFP. Beginning wit tivity for the U.S. economy. We note that previously the productivity measure referenced in section 1886(b)(3)(B)(xi)(II) of the Act was published by BLS as private nonfarm business MFP. Beginning with the November 18, 2021, release of productivity data, BLS replaced the term ‘‘multifactor productivity’’ with ‘‘total factor productivity’’ (TFP). BLS noted that this is a change in terminology only and will not affect the data or methodology. As a result of the BLS name change, the productivity measure referenced in section 1886(b)(3)(B)(xi)(II) of the Act is now published by BLS as private nonfarm business TFP. However, as mentioned previously, the data and methods are unchanged. We refer readers to www.bls.gov for the BLS historical published TFP data. A complete description of IGI’s TFP projection methodology is available on the CMS website at https://www.cms.gov/data- research/statistics-trends-and-reports/ medicare-program-rates-statistics/ market-basket-research-and- information. In addition, in the FY 2022 IPF PPS final rule (86 FR 42611), we noted that effective with FY 2022 and forward, CMS changed the name of this adjustment to refer to it as the productivity adjustment rat n addition, in the FY 2022 IPF PPS final rule (86 FR 42611), we noted that effective with FY 2022 and forward, CMS changed the name of this adjustment to refer to it as the productivity adjustment rather than the MFP adjustment. Section 1886(s)(2)(A)(i) of the Act requires the application of the productivity adjustment described in section 1886(b)(3)(B)(xi)(II) of the Act to the IPF PPS for the RY beginning in 2012 (a RY that coincides with a FY) and each subsequent RY. For the FY 2026 IPF PPS proposed rule, based on IGI’s fourth quarter 2024 forecast, the proposed productivity adjustment for VerDate Sep 2014 19:33 Aug 04, 2025 Jkt 262001 PO 00000 Frm 00005 Fmt 4701 Sfmt 4700 E:\FR\FM\05AUR2.SGM 05AUR2 2 S E L U R h t i w D O R P 3 2 N Q X 1 1 K S D n o r e t t o l 37632 Federal Register / Vol. 90, No. 148 / Tuesday, August 5, 2025 / Rules and Regulations FY 2026 (the 10-year moving average change of TFP for the period ending FY 2026) was projected to be 0.8 percentage point. Accordingly, we proposed to reduce the proposed 3.2 percent IPF market basket increase by the proposed 0.8 percentage point productivity adjustment, as mandated by the Act. This resulted in a proposed FY 2026 ly, we proposed to reduce the proposed 3.2 percent IPF market basket increase by the proposed 0.8 percentage point productivity adjustment, as mandated by the Act. This resulted in a proposed FY 2026 IPF PPS payment rate update of 2.4 percent (3.2 percent¥0.8 percentage point = 2.4 percent). We also proposed that if more recent data became available, we would use such data, if appropriate, to determine the FY 2026 IPF market basket increase and productivity adjustment for the final rule. We solicited comments on the proposed IPF market basket increase and productivity adjustment for FY 2026. The following is a summary of the comments we received and our responses. Comment: Several commenters expressed appreciation for the FY 2026 IPF payment update; however, some commenters stated that the proposed payment update is inadequate to address the current cost pressures IPFs are facing. A commenter highlighted that from 2022 to 2024, general inflation rose by 14.1 percent while Medicare IPF payment rates increased only 5.1 percent, effectively creating a payment cut in real terms. Another commenter provided data showing that hospital employee compensation grew by 45 percent from 2014 to payment rates increased only 5.1 percent, effectively creating a payment cut in real terms. Another commenter provided data showing that hospital employee compensation grew by 45 percent from 2014 to 2023, while IPF PPS updates provided only a 23.5 percent increase during the same period. Commenters explained that this has created an unsustainable financial environment where Medicare payments have consistently failed to keep pace with the actual cost of caring for patients. Commenters stated that workforce shortages and escalating labor costs represent the most significant challenge facing IPFs, with labor constituting approximately 80 percent of the IPF PPS market basket according to CMS data. A commenter reported that advertised salaries for registered nurses have grown 26.6 percent faster than the rate of inflation over the past 4 years, while hospitals have been forced to dramatically increase wages, bonuses, and contract labor rates to maintain critical staffing. A couple of commenters stated that rural facilities face particularly acute challenges because their IPFs rely heavily on traveling clinicians and contract staff due to severe workforce shortages in underserved areas. nters stated that rural facilities face particularly acute challenges because their IPFs rely heavily on traveling clinicians and contract staff due to severe workforce shortages in underserved areas. This commenter stated that rural facilities also face higher per-patient infrastructure costs due to lower patient volumes, limited access to community-based alternatives that result in longer patient stays, and transportation barriers that require additional investment in discharge planning and patient support services. Several commenters stated that IPFs are facing significant increases in pharmaceutical and supply costs that further strain their operating budgets, citing a Department of Health and Human Services report showing that prices for nearly 2,000 drugs increased an average of 15.2 percent from 2017 through 2023, notably faster than general inflation. The commenters indicated that drug shortages have compounded these challenges, with medications commonly used in psychiatric care—including clonazepam, oxazepam, and ketamine— experiencing supply disruptions that force facilities to seek more expensive alternatives and disrupt patient care protocols. A commenter stated the IPF e—including clonazepam, oxazepam, and ketamine— experiencing supply disruptions that force facilities to seek more expensive alternatives and disrupt patient care protocols. A commenter stated the IPF market basket is flawed due to CMS’s use of the Employment Cost Index (ECI) to measure changes in labor compensation in the market basket. The commenter stated that the ECI might not fully capture growth in employment and labor costs, as it does not account for changes driven by shifts between different categories of labor such as between staff and contract employees. Several commenters stated that the inadequate payment update threatens the long-term sustainability of inpatient psychiatric services and could force facilities to reduce capacity or close altogether. A commenter added that Medicare Advantage is having even further negative impacts on IPFs by reimbursing for IPF services at rates below cost. The commenter explained that since their patient mix is close to 50 percent covered by Medicare fee-for- service (FFS) and Medicare Advantage, they are less able to mitigate losses by increasing rates on commercial payors to offset those losses. Commenters urged CMS to adopt a higher by Medicare fee-for- service (FFS) and Medicare Advantage, they are less able to mitigate losses by increasing rates on commercial payors to offset those losses. Commenters urged CMS to adopt a higher market basket update that reflects the true cost of providing inpatient psychiatric care in the current economic environment noting that the Medicare Advantage plans have a forecasted increase for 2026 of about 5 percent. Several organizations specifically requested that CMS utilize more recent cost data in developing the final rule. Response: We appreciate the commenters’ concern regarding inflationary pressure facing IPFs and the proposed FY 2026 market basket update. As stated in the FY 2024 IPF final rule (88 FR 541057) and FY 2025 IPF final rule (89 FR 64586), the 2021- based IPF market basket is a fixed- weight, Laspeyres-type index that measures price changes over time. Since the inception of the IPF PPS, the IPF payment rates (with the exception of statutorily-mandated updates) have been updated by a projection of a market basket percentage increase— consistent with other CMS PPS updates (including IPPS, SNF, and HH). The market basket is designed to measure price inflation fo ve been updated by a projection of a market basket percentage increase— consistent with other CMS PPS updates (including IPPS, SNF, and HH). The market basket is designed to measure price inflation for IPF providers and would not reflect increases in costs associated with changes in the volume or intensity of input goods and services (such as the quantity of labor used). Additionally, we acknowledge that the market basket updates may differ from other overall inflation indexes such as the topline CPI; however, we would reiterate that these topline indexes are not comparable since they measure different mixes of products, services, or wages than the IPF market basket. Additionally, the market basket updates appropriately differ from other payment updates (such as projected increase in the average per capita payments to Medicare Advantage organizations) that are not consistent in concept with the statutory requirement as they would reflect anticipated volume and intensity of services. As is our general practice, we proposed in the FY 2026 IPF proposed rule that if more recent data became available, we would use such data, if appropriate, to derive the final FY 2026 IPF market basket is our general practice, we proposed in the FY 2026 IPF proposed rule that if more recent data became available, we would use such data, if appropriate, to derive the final FY 2026 IPF market basket update for the final rule. The projection of the 2021-based IPF market basket is based on the most recent forecast from IGI—a nationally recognized economic and financial forecasting firm with which we contract to forecast the price proxies of the market baskets. We also note that when developing its forecast for labor prices, IGI considers overall labor market conditions (including rise in contract labor employment due to tight labor market conditions) as well as trends in contract labor wages, which both have an impact on wage pressures for workers employed directly by the hospital. For this final rule, based on the more recent IGI second quarter 2025 forecast with historical data through the first quarter of 2025, the projected 2021- based IPF market basket increase factor for FY 2026 is 3.2 percent, which is unchanged from the projected FY 2026 market basket increase factor in the proposed rule. We note that while there are multiple offsetting factors contributing to differences in s 3.2 percent, which is unchanged from the projected FY 2026 market basket increase factor in the proposed rule. We note that while there are multiple offsetting factors contributing to differences in the forecasts underlying the proposed and final rules, the final FY 2026 productivity-adjusted IPF market basket VerDate Sep 2014 19:33 Aug 04, 2025 Jkt 262001 PO 00000 Frm 00006 Fmt 4701 Sfmt 4700 E:\FR\FM\05AUR2.SGM 05AUR2 2 S E L U R h t i w D O R P 3 2 N Q X 1 1 K S D n o r e t t o l Federal Register / Vol. 90, No. 148 / Tuesday, August 5, 2025 / Rules and Regulations 37633 update is slightly higher due to economic uncertainty. We rebased and revised the IPF market basket in the FY 2024 IPF final rule (88 FR 51057) and did not receive any comments related to the use of the ECIs in the IPF market basket. We continue to believe the ECI is an appropriate index to measure the price changes for Compensation costs. While the ECI reflects the price changes for employed staff only, we believe those price changes accurately reflect the labor price trends for those occupations, regardless of whether they are employed or contracted staff. Additionally, separating the compensation category by those price changes accurately reflect the labor price trends for those occupations, regardless of whether they are employed or contracted staff. Additionally, separating the compensation category by occupation enables us to capture any cost weight changes associated with employing versus contracting labor when the index weights are updated. We will continue to monitor the trends in the ECI as well as the increased use of contract labor. We welcome any additional publicly available data that commenters can provide regarding alternative price indexes. Comment: Several commenters expressed concerns regarding the ongoing application of the productivity adjustment to IPFs. The commenters highlighted that CMS identified a lag in hospital productivity compared to the BLS estimate of private nonfarm business productivity growth. Commenters stated that under these circumstances, expecting an increase in IPF productivity in FY 2026 is unreasonable. A commenter further expressed concerns with the mandated productivity adjustment by stating that private nonfarm business TFP productivity measures are unsuitable for hospitals. They stated that while TFP outputs in private businesses are based he mandated productivity adjustment by stating that private nonfarm business TFP productivity measures are unsuitable for hospitals. They stated that while TFP outputs in private businesses are based on quantities and prices of goods/ services, hospital outputs, such as visit/ procedure volumes, reflect community disease burdens rather than productivity. Additionally, the commenter explained that hospitals cannot adjust their prices like private businesses due to fixed reimbursements and negotiated rates with insurers. This commenter also stated that TFP does not account for the unique challenges faced by hospitals, including unpredictable patient volumes, rising costs, varying acuity levels, and regulatory burdens unfamiliar to other industries. Finally, commenters stated that hospital services are labor-intensive, making sustained productivity gains difficult. Commenters explained that, similar to education and social assistance sectors, hospitals have lower productivity rates. Commenters further noted that CMS recognizes hospitals achieve only one- third of the productivity gains of the private sector, citing a June 2022 memorandum from CMS. This memo stated that ‘‘over the peri nters further noted that CMS recognizes hospitals achieve only one- third of the productivity gains of the private sector, citing a June 2022 memorandum from CMS. This memo stated that ‘‘over the period 1990–2019, the average growth rate of hospital [productivity] using the two methodologies ranges from 0.2 percent to 0.5 percent, compared to the average growth of private nonfarm business [productivity] of 0.8 percent.’’ 2 The memo also indicated that an assumed future rate of hospital industry productivity growth of 0.4 percent per year remained reasonable compared to an assumed productivity growth rate in the private nonfarm business sector of 1.0 percent. A commenter questioned the increase of the FY 2026 productivity cut to 0.8 percent from 0.5 percent in FY 2025 despite being based on a 10-year moving average, which should smooth out fluctuations. They mentioned an inability to fully analyze projections due to CMS’s lack of transparency but suggested that excluding a low-TFP growth period in 2016 from the updated 10-year moving average may unjustifiably increase the productivity adjustment. The commenter also claimed that the productivity adjustment is only applied if it reduc h period in 2016 from the updated 10-year moving average may unjustifiably increase the productivity adjustment. The commenter also claimed that the productivity adjustment is only applied if it reduces Medicare payments, never to increase them. They provided an example from FY 2021, where a ¥0.1 percent productivity factor forecast would have raised the hospital market basket by 0.1 percentage point, but CMS set it at 0, citing a mandate to reduce, not increase, the market basket percentage increase based on productivity changes. This practice leads to cumulative yearly reductions and asymmetric treatment of productivity declines, resulting in underfunding for hospitals. Several commenters acknowledged the Affordable Care Act’s requirement for the productivity adjustment but requested CMS use its ‘‘special exceptions and adjustments’’ authority to eliminate or modify the productivity adjustment for FY 2026. Some commenters requested that CMS carefully monitor the impact of these productivity adjustments on the IPF hospital sector, provide feedback to Congress as appropriate, and reduce the productivity adjustment. Response: Section 1886(s)(2)(A)(i) of the Act requires the applicat ctivity adjustments on the IPF hospital sector, provide feedback to Congress as appropriate, and reduce the productivity adjustment. Response: Section 1886(s)(2)(A)(i) of the Act requires the application of the productivity adjustment described in section 1886(b)(3)(B)(xi)(II) to the IPF PPS market basket update. As required by statute, the FY 2026 productivity 2 Paul Spitalnic, Stephen Heffler, Bridget Dickensheets and Mollie Knight, ‘‘Hospital Multifactor Productivity: An Update Presentation of Two Methodologies Using Data through 2019.’’ (cms.gov). adjustment is derived based on the 10- year moving average growth in economy-wide private nonfarm business total factor productivity for the period ending FY 2026. We recognize the concerns of the commenters regarding the appropriateness of the productivity adjustment; however, we are required pursuant to section 1886(b)(3)(B)(xi)(II) of the Act to apply the specific productivity adjustment described here. We have always made available on the CMS website the general method for calculating the productivity adjustment. This includes providing a link to the most recent BLS historical TFP data (https://www.bls.gov/productivity/), which al the CMS website the general method for calculating the productivity adjustment. This includes providing a link to the most recent BLS historical TFP data (https://www.bls.gov/productivity/), which allows interested parties to obtain historical TFP annual index levels for 1987 through 2024. We also provided the IGI projection model (https://www.cms.gov/research- statistics-data-and-systems/statistics- trends-and-reports/medicareprogram ratesstats/downloads/tfp_ methodology.pdf), which is used to derive annual TFP growth rates for 2025 and 2026. The annual index level derived from this method is then interpolated to quarterly levels, and the FY 2026 productivity adjustment is equal to the percent change in the 40- quarter moving average projected level for the period ending September 30, 2026, relative to the 40-quarter moving average projected level for the period ending September 30, 2025. We believe our methodology for the productivity adjustment is consistent with section 1886(b)(3)(B)(xi)(II) of the Act, which states that the productivity adjustment is equal to the 10-year moving average of changes in annual economy-wide private nonfarm business multi-factor productivity (as pr (B)(xi)(II) of the Act, which states that the productivity adjustment is equal to the 10-year moving average of changes in annual economy-wide private nonfarm business multi-factor productivity (as projected by the Secretary for the 10-year period ending with the applicable fiscal year, year, cost reporting period, or other annual period), which is used to derive annual TFP growth rates for 2025 and 2026. The annual index level derived from this method is then interpolated to quarterly levels, and the FY 2026 productivity adjustment is equal to the percent change in the 40-quarter moving average projected level for the period ending September 30, 2026, relative to the 40-quarter moving average projected level for the period ending September 30, 2025. At the time of this final rule, the FY 2026 productivity adjustment reflects BLS historical TFP data through 2024 (released on March 21, 2025) and IGI’s forecasted TFP growth for 2025 and 2026. The average annual growth rate of historical TFP published by BLS for 2017 through 2024 is currently 0.9 percent and IGI is projecting average VerDate Sep 2014 19:33 Aug 04, 2025 Jkt 262001 PO 00000 Frm 00007 Fmt 4701 Sfmt 4700 E:\FR\FM\05AUR2.S TFP published by BLS for 2017 through 2024 is currently 0.9 percent and IGI is projecting average VerDate Sep 2014 19:33 Aug 04, 2025 Jkt 262001 PO 00000 Frm 00007 Fmt 4701 Sfmt 4700 E:\FR\FM\05AUR2.SGM 05AUR2 2 S E L U R h t i w D O R P 3 2 N Q X 1 1 K S D n o r e t t o l 37634 Federal Register / Vol. 90, No. 148 / Tuesday, August 5, 2025 / Rules and Regulations TFP growth of about 0.0 percent for 2025 and 2026 based on IGI’s second- quarter 2025 forecast. Combining the historical and projected TFP data over the entire 10-year time period results in a compound annual growth rate of TFP of 0.7 percent for 2026. The productivity adjustment (based on the 10-year period ending FY 2026) for this final rule is 0.1 percentage point lower than in the proposed rule and primarily reflects the incorporation of a revised outlook from IGI that has lower projected economic growth over 2025 and 2026. The 0.7 percentage point productivity adjustment in the FY 2026 final rule is larger than the productivity adjustment in prior final rules for FY 2023 and FY 2024 mainly due to the incorporation of updated BLS historical data. In response to commenters’ concerns about the productivity adjustment onl tivity adjustment in prior final rules for FY 2023 and FY 2024 mainly due to the incorporation of updated BLS historical data. In response to commenters’ concerns about the productivity adjustment only being applied if it reduces the payment update, we note that the productivity adjustment was established under the Affordable Care Act with a specific policy intent to encourage efficiency improvements in healthcare delivery by linking Medicare payment updates to economy-wide productivity gains. The statutory language in section 1886(s)(2)(A) of the Act requires that the Secretary reduce (not increase) the market basket percentage increase by changes in economy-wide productivity, therefore, only positive productivity adjustments are applied. Comment: Several commenters noted concerns about CMS’s estimation of the IPF market basket updates since the COVID–19 PHE, stating that it has resulted in several consecutive years of underpayments to IPF providers, with data showing that market basket updates for fiscal years 2021 through 2024 have understated the IPF base rate by 4.2 to 5.1 percentage points. The commenters stated that the pattern of forecast errors stems directly from economic et updates for fiscal years 2021 through 2024 have understated the IPF base rate by 4.2 to 5.1 percentage points. The commenters stated that the pattern of forecast errors stems directly from economic disruption caused by the COVID–19 PHE, which created inflationary pressures that existing forecasting models failed to capture, representing a departure from historically more balanced forecasting performance. Some commenters stated that these under forecasts are built into the IPF base payment and because future updates are based on current payment levels, missed forecasts become permanently established in standard payment rates and continue to compound over time, creating an ever-widening gap between actual costs and reimbursement levels that disadvantages IPFs and inhibits their ability to address behavioral health needs in their communities. Several commenters urged CMS to take corrective measures including one-time adjustments ranging from 3.6 to 4.2 percentage points to account for cumulative forecast errors and requested that CMS use special exceptions and adjustments authority to eliminate productivity cuts and implement base rate corrections that would provide IPFs with stabi cumulative forecast errors and requested that CMS use special exceptions and adjustments authority to eliminate productivity cuts and implement base rate corrections that would provide IPFs with stability needed to maintain access to patient care despite ongoing financial challenges. Response: We appreciate the concerns of commenters; however, we did not propose and are not finalizing a forecast error adjustment for the IPF PPS for FY 2026. The IPF market basket updates are set prospectively, which means that the update relies on a mix of both historical data for part of the period for which the update is calculated and forecasted data for the remainder. For instance, the FY 2026 market basket update in this final rule reflects historical data through the first quarter of CY 2025 and forecasted data through the third quarter of CY 2026. While there is no precedent to adjust for market basket forecast error in the IPF payment update, a forecast error can be calculated by comparing the actual market basket increase for a given year less than the forecasted market basket increase. Due to the uncertainty regarding future price trends, forecast errors can be both positive and negative. ctual market basket increase for a given year less than the forecasted market basket increase. Due to the uncertainty regarding future price trends, forecast errors can be both positive and negative. The forecast error has been both positive and negative during past years, and over longer periods of time the cumulative forecast has not deviated significantly from the historical measures. Only considering the forecast error for years when the IPF market basket update was lower than the actual market basket update does not consider the full experience and impact of forecast error. Final Decision: After consideration of the comments received, we are finalizing our proposal to update IPF PPS payment rates using the latest available productivity-adjusted market basket increase factor. Based on IGI’s second quarter 2025 forecast, the 2021- based IPF market basket percentage increase for FY 2026 is 3.2 percent and the projected FY 2026 productivity adjustment is 0.7 percentage point. Therefore, the final FY 2026 IPF market basket update is equal to 2.5 percent (3.2 percent market basket percentage increase reduced by the 0.7 percentage point productivity adjustment). 3. FY 2026 IPF Labor- e, the final FY 2026 IPF market basket update is equal to 2.5 percent (3.2 percent market basket percentage increase reduced by the 0.7 percentage point productivity adjustment). 3. FY 2026 IPF Labor-Related Share Due to variations in geographic wage levels and other labor-related costs, we believe that payment rates under the IPF PPS should continue to be adjusted by a geographic wage index, which will apply to the labor-related portion of the Federal per diem base rate (hereafter referred to as the ‘‘labor-related share’’). The labor-related share is determined by identifying the national average proportion of total costs that are related to, influenced by, or vary with the local labor market. We proposed to continue to classify a cost category as labor- related if the costs are labor-intensive and vary with the local labor market. Based on our definition of the labor- related share and the cost categories in the 2021-based IPF market basket, we proposed to continue to include in the labor-related share the sum of the relative importance of Wages and Salaries; Employee Benefits; Professional Fees: Labor-Related; Administrative and Facilities Support Services; Installation, Mainte labor-related share the sum of the relative importance of Wages and Salaries; Employee Benefits; Professional Fees: Labor-Related; Administrative and Facilities Support Services; Installation, Maintenance, and Repair Services; All Other: Labor- Related Services; and a portion of the Capital-Related relative importance from the 2021-based IPF market basket. For more details regarding the methodology for determining specific cost categories for inclusion in the labor-related share based on the 2021- based IPF market basket, we refer readers to the FY 2024 IPF PPS final rule (88 FR 51078 through 51081). The relative importance reflects the different rates of price change for these cost categories between the base year (FY 2021) and FY 2026. Based on IGI’s fourth quarter 2024 forecast of the 2021- based IPF market basket, the sum of the FY 2026 relative importance moving average of Wages and Salaries; Employee Benefits; Professional Fees: Labor-Related; Administrative and Facilities Support Services; Installation, Maintenance, and Repair Services; All Other: Labor-Related Services is 75.8 percent. We proposed, consistent with prior rulemaking, that the portion of Capital-Related costs rt Services; Installation, Maintenance, and Repair Services; All Other: Labor-Related Services is 75.8 percent. We proposed, consistent with prior rulemaking, that the portion of Capital-Related costs that are influenced by the local labor market is 46 percent. Since the relative importance for Capital-Related costs is 6.7 percent of the 2021-based IPF market basket for FY 2026, we proposed to take 46 percent of 6.7 percent to determine a labor-related share of Capital-Related costs for FY 2026 of 3.1 percent. Therefore, we proposed a total labor-related share for FY 2026 of 78.9 percent (the sum of 75.8 percent for the labor-related share of operating costs and 3.1 percent for the labor-related share of Capital-Related costs). We also proposed that if more recent data became available, we would use such data, if appropriate, to determine the FY 2026 labor-related share for the final rule. For more information on the labor-related share and its calculation, we refer readers to the FY 2024 IPF PPS final rule (88 FR 51078 through 51081). VerDate Sep 2014 19:33 Aug 04, 2025 Jkt 262001 PO 00000 Frm 00008 Fmt 4701 Sfmt 4700 E:\FR\FM\05AUR2.SGM 05AUR2 2 S E L U R h t i w D O R P 3 2 N Q 024 IPF PPS final rule (88 FR 51078 through 51081). VerDate Sep 2014 19:33 Aug 04, 2025 Jkt 262001 PO 00000 Frm 00008 Fmt 4701 Sfmt 4700 E:\FR\FM\05AUR2.SGM 05AUR2 2 S E L U R h t i w D O R P 3 2 N Q X 1 1 K S D n o r e t t o l Federal Register / Vol. 90, No. 148 / Tuesday, August 5, 2025 / Rules and Regulations 37635 We solicited comments on the proposed labor-related share for FY 2026. The following is a summary of the comments we received and our responses. Comment: A commenter expressed support for the proposed increase in the labor-related share for FY 2026. They also stated that CMS should consider a shorter period than 5 years for the next rebasing and revising of the IPF market basket and revision to the standard payment conversion factor labor share since the current labor share is based on FY 2021 cost reports and may not fully reflect the increase weight of labor in the overall index that hospitals experienced due to the COVID–19 PHE and labor shortages. Response: We appreciate the commenter’s support for the FY 2026 IPF labor-related share. We proposed to use the FY 2026 relative importance values for the labor-related cost categories from the 2021-based IPF market bask ate the commenter’s support for the FY 2026 IPF labor-related share. We proposed to use the FY 2026 relative importance values for the labor-related cost categories from the 2021-based IPF market basket because it accounts for more recent data regarding price pressures and cost structure of IPFs. This methodology is consistent with the determination of the labor-related share since the implementation of the IPF PPS. As stated in the FY 2026 IPF proposed rule, we also proposed that if more recent data became available, we would use such data, if appropriate, to determine the FY 2026 labor-related share for the final rule. Based on IGI’s second quarter 2025 forecast with historical data through the first quarter of 2025, the FY 2026 labor-related share for the final rule is 79.0 percent, which is 0.1 percentage point higher than the proposed rule. We appreciate the commenter’s request for us to consider a shorter period than 5 years for the next rebasing. We generally rebase the IPF market basket every 5 years, in part because the cost weights obtained from the Medicare cost reports did not indicate much of a change in the weights over shorter intervals. However, we recognize the com et basket every 5 years, in part because the cost weights obtained from the Medicare cost reports did not indicate much of a change in the weights over shorter intervals. However, we recognize the commenter’s concern and the potential impact of the PHE on the cost weights. Therefore, we have been regularly monitoring the Medicare cost report data to assess whether a rebasing is technically appropriate, and we will continue to do so in the future. As done historically, a rebasing of the IPF market basket would be proposed in rulemaking and subject to public comments. Final Decision: After consideration of the comments, we are finalizing a FY 2026 labor-related share based on the latest available data. Based on IGI’s second quarter 2025 forecast of the 2021-based IPF market basket, the sum of the FY 2026 relative importance moving average of Wages and Salaries; Employee Benefits; Professional Fees: Labor-Related; Administrative and Facilities Support Services; Installation, Maintenance, and Repair Services; All Other: Labor-Related Services is 75.9 percent. Since the relative importance for Capital-Related costs is 6.7 percent of the 2021-based IPF market basket for FY 2026, we take and Repair Services; All Other: Labor-Related Services is 75.9 percent. Since the relative importance for Capital-Related costs is 6.7 percent of the 2021-based IPF market basket for FY 2026, we take 46 percent of 6.7 percent to determine a labor-related share of Capital-Related costs for FY 2026 of 3.1 percent. Therefore, the total labor-related share for FY 2026 is 79.0 percent (the sum of 75.9 percent for the labor-related share of operating costs and 3.1 percent for the labor-related share of Capital-Related costs). Table 1 shows the final FY 2026 labor-related share and the final FY 2025 labor-related share using the 2021- based IPF market basket relative importance. TABLE 1—FY 2026 FINAL IPF LABOR-RELATED SHARE AND FY 2025 IPF LABOR-RELATED SHARE Wages and Salaries .................................................................................................................... Employee Benefits ....................................................................................................................... Professional Fees: Labor-Related ............................................................................................... Administrative and Facilities Supp .................................... Professional Fees: Labor-Related ............................................................................................... Administrative and Facilities Support Services ........................................................................... Installation, Maintenance and Repair Services ........................................................................... All Other Labor-Related Services ................................................................................................ Subtotal ................................................................................................................................. Labor-related portion of Capital-Related (.46) ............................................................................. Total Labor-Related Share ............................................................................................ 1 Based on the 2nd quarter 2024 IGI forecast of the 2021-based IPF market basket. 2 Based on the 2nd quarter 2025 IGI forecast of the 2021-based IPF market basket. Relative importance, labor-related share FY 2025 1 Relative importance, labor-related share FY 2026 2 53.6 14.1 sket. 2 Based on the 2nd quarter 2025 IGI forecast of the 2021-based IPF market basket. Relative importance, labor-related share FY 2025 1 Relative importance, labor-related share FY 2026 2 53.6 14.1 4.7 0.6 1.2 1.5 75.7 3.1 78.8 53.7 14.2 4.7 0.6 1.2 1.5 75.9 3.1 79.0 B. Updates to the IPF PPS Rates for FY Beginning October 1, 2025 appears in the RY 2005 IPF PPS final rule (69 FR 66926). The IPF PPS is based on a standardized Federal per diem base rate calculated from the IPF average per diem costs and adjusted for budget neutrality in the implementation year. The Federal per diem base rate is used as the standard payment per day under the IPF PPS and is adjusted by the patient-level and facility-level adjustments that are applicable to the IPF stay. A detailed explanation of how we calculated the average per diem cost 1. Determining the Standardized Budget Neutral Federal Per Diem Base Rate Section 124(a)(1) and (c) of the BBRA requires that we implement the IPF PPS in a budget neutral manner. In other words, the amount of total payments under the IPF PPS, including any payment adjustments, must be projected to be equal to the amount of total payments that would have been made if al manner. In other words, the amount of total payments under the IPF PPS, including any payment adjustments, must be projected to be equal to the amount of total payments that would have been made if the IPF PPS were not implemented. Therefore, we calculated the budget neutrality factor by setting the total estimated IPF PPS payments to be equal to the total estimated payments that would have been made under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) (Pub. L. 97–248) methodology had the IPF PPS not been implemented. A step-by-step description of the methodology used to estimate payments under the TEFRA payment system appears in the RY 2005 IPF PPS final rule (69 FR 66926). Under the IPF PPS methodology, we calculated the final Federal per diem base rate to be budget neutral during the IPF PPS implementation period (that is, the 18-month period from January 1, VerDate Sep 2014 19:33 Aug 04, 2025 Jkt 262001 PO 00000 Frm 00009 Fmt 4701 Sfmt 4700 E:\FR\FM\05AUR2.SGM 05AUR2 2 S E L U R h t i w D O R P 3 2 N Q X 1 1 K S D n o r e t t o l 37636 Federal Register / Vol. 90, No. 148 / Tuesday, August 5, 2025 / Rules and Regulations 2005, through June 30, 2006) using a July R2 2 S E L U R h t i w D O R P 3 2 N Q X 1 1 K S D n o r e t t o l 37636 Federal Register / Vol. 90, No. 148 / Tuesday, August 5, 2025 / Rules and Regulations 2005, through June 30, 2006) using a July 1 update cycle. We updated the average cost per day to the midpoint of the IPF PPS implementation period (October 1, 2005), and this amount was used in the payment model to establish the budget neutrality adjustment. Next, we standardized the IPF PPS Federal per diem base rate to account for the overall positive effects of the IPF PPS payment adjustment factors by dividing total estimated payments under the TEFRA payment system by estimated payments under the IPF PPS. The information concerning this standardization can be found in the RY 2005 IPF PPS final rule (69 FR 66932) and the RY 2006 IPF PPS final rule (71 FR 27045). We then reduced the standardized Federal per diem base rate to account for the outlier policy, the stop loss provision, and anticipated behavioral changes. A complete discussion of how we calculated each component of the budget neutrality adjustment appears in the RY 2005 IPF PPS final rule (69 FR 66932 and 66933) and in the RY 2007 IPF PPS final rule (71 FR 27044 discussion of how we calculated each component of the budget neutrality adjustment appears in the RY 2005 IPF PPS final rule (69 FR 66932 and 66933) and in the RY 2007 IPF PPS final rule (71 FR 27044 through 27046). The final standardized budget neutral Federal per diem base rate established for cost reporting periods beginning on or after January 1, 2005 was calculated to be $575.95. The Federal per diem base rate has been updated in accordance with applicable statutory requirements and 42 CFR 412.428 through publication of annual notices or proposed and final rules. A detailed discussion on the standardized budget neutral Federal per diem base rate and the ECT payment per treatment appears in the FY 2014 IPF PPS update notice (78 FR 46738 through 46740). These documents are available on the CMS website at https:// www.cms.gov/Medicare/Medicare-Fee- for-Service-Payment/InpatientPsych FacilPPS/index.html. As discussed in sections IV.D.5. and IV.D.6. of this final rule, we proposed to revise the facility-level adjustment factors for FY 2026 pursuant to section 1886(s)(5)(D)(i) of the Act. Section 1886(s)(5)(D)(iii) of the Act requires that revisions to IPF payment rates implemented evise the facility-level adjustment factors for FY 2026 pursuant to section 1886(s)(5)(D)(i) of the Act. Section 1886(s)(5)(D)(iii) of the Act requires that revisions to IPF payment rates implemented pursuant to section 1886(s)(5)(D)(i) of the Act must be made budget-neutrally. Therefore, as discussed in section IV.D.9. of this final rule, we proposed to apply a standardization factor to the FY 2026 base rate that takes these refinements of facility-level adjustments into account to keep total IPF PPS payments budget neutral. 2. Determining the Electroconvulsive Therapy (ECT) Payment per Treatment In the RY 2005 IPF PPS final rule (69 FR 66951), we analyzed the costs of IPF stays that included ECT treatment using the FY 2002 Medicare Provider and Analysis Review (MedPAR) data based on comments we received on the RY 2005 IPF PPS proposed rule. Consistent with the comments we received about ECT, our analysis and review indicated that cases with ECT treatment are substantially more costly than cases without ECT treatment. Based on this analysis, in that final rule we finalized an additional payment for each ECT treatment furnished during the IPF stay. This ECT payment per treatment is than cases without ECT treatment. Based on this analysis, in that final rule we finalized an additional payment for each ECT treatment furnished during the IPF stay. This ECT payment per treatment is made in addition to the per diem and outlier payments under the IPF PPS. To receive the payment per ECT treatment, IPFs must indicate on their claims the revenue code and procedure code for ECT (Rev Code 901; procedure code 90870) and the number of units of ECT, that is, the number of ECT treatments the patient received during the IPF stay. To establish the ECT per treatment payment, we used the pre-scaled and pre-adjusted median cost for procedure code 90870 developed for the Hospital Outpatient Prospective Payment System (OPPS), based on hospital claims data. We explained in the RY 2005 IPF PPS final rule that we used OPPS data because after careful review and analysis of IPF claims, we were unable to separate out the cost of a single ECT treatment (69 FR 66922). We used the unadjusted hospital claims data under the OPPS because we did not want the ECT payment under the IPF PPS to be affected by factors that are relevant to OPPS, but not specifically applicable to IPFs. The median c hospital claims data under the OPPS because we did not want the ECT payment under the IPF PPS to be affected by factors that are relevant to OPPS, but not specifically applicable to IPFs. The median cost was then standardized and adjusted for budget neutrality. We also adjusted the ECT rate for wage differences in the same manner that we adjust the per diem rate. Since the ECT payment rate was established in the RY 2005 IPF PPS rule, it has been updated annually by application of each year’s market basket, productivity adjustment, and wage index budget neutrality factor to the previous year’s ECT payment rate (referred to as our ‘‘standard methodology’’ in this section). We last updated the ECT payment amount per treatment for FY 2025. As we explained in the FY 2025 IPF PPS proposed rule (89 FR 23146), we analyzed recent data from both the IPF PPS and the OPPS. Findings revealed that costs for IPF stays involving ECT were significantly more costly than stays without ECT, with cost driven primarily by longer stays and higher ancillary expenses. These IPF stays with ECT treatment, which accounted for only 1.7 percent of all IPF stays in 2022 (down from 6.0 percent in 2002), were appr en primarily by longer stays and higher ancillary expenses. These IPF stays with ECT treatment, which accounted for only 1.7 percent of all IPF stays in 2022 (down from 6.0 percent in 2002), were approximately three times more costly than IPF stays without ECT treatment. We noted that on average, IPF stays with ECT cost $44,687.50 compared to $15,432.30 for IPF stays without ECT treatment in 2022, with notable increases in per-day costs and ancillary expenses. While our standard payment update methodologies would have resulted in only minor adjustments, the analysis indicated that the updates to the ECT payment rates since 2005 had not kept pace with rising costs. To address this, we finalized a new ECT payment calculation based on the pre-scaled and pre-adjusted CY 2024 OPPS geometric mean cost, adjusted by the market basket update and wage index budget neutrality factor. We stated that the change to the ECT per treatment amount aligned payments more closely with the actual cost of providing ECT. We noted that the increase to the ECT per treatment amount would be associated with a minor decrease to the IPF per diem base rate as a result of the refinement standardization factor, an oviding ECT. We noted that the increase to the ECT per treatment amount would be associated with a minor decrease to the IPF per diem base rate as a result of the refinement standardization factor, and it would increase payments to facilities providing ECT. A complete discussion of the final FY 2025 ECT payment per treatment can be found in the FY 2025 IPF PPS final rule (89 FR 64591 through 64593). 3. Update of the Federal per Diem Base Rate and Electroconvulsive Therapy Payment per Treatment The current (FY 2025) Federal per diem base rate is $876.53 and the ECT payment per treatment is $661.52. For the final FY 2026 Federal per diem base rate, we applied the final IPF market basket update of 2.5 percent (that is, the final 2021-based IPF market basket percentage increase for FY 2026 of 3.2 percent reduced by the final productivity adjustment of 0.7 percentage point), the final wage index budget neutrality factor of 1.0011 (as discussed in section IV.D.4.c. of this final rule), and the final refinement standardization factor of 0.9927 (as discussed in section IV.D.9. of this final rule) to the FY 2025 Federal per diem base rate of $876.53, yielding a final Federal per diem base r he final refinement standardization factor of 0.9927 (as discussed in section IV.D.9. of this final rule) to the FY 2025 Federal per diem base rate of $876.53, yielding a final Federal per diem base rate of $892.87 for FY 2026. We applied the final IPF market basket update of 2.5 percent, the final wage index budget neutrality factor of 1.0011, and the final refinement standardization factor of 0.9927 to the final FY 2025 ECT payment per treatment of $661.52, yielding a final ECT payment per treatment of $673.85 for FY 2026. VerDate Sep 2014 19:33 Aug 04, 2025 Jkt 262001 PO 00000 Frm 00010 Fmt 4701 Sfmt 4700 E:\FR\FM\05AUR2.SGM 05AUR2 2 S E L U R h t i w D O R P 3 2 N Q X 1 1 K S D n o r e t t o l Federal Register / Vol. 90, No. 148 / Tuesday, August 5, 2025 / Rules and Regulations 37637 Section 1886(s)(4)(A)(i) of the Act requires that for RY 2014 and each subsequent RY, in the case of an IPF that fails to report required quality data with respect to such RY, the Secretary will reduce any annual update to a standard Federal rate for discharges during the RY by 2.0 percentage points. Therefore, we applied a 2.0 percentage point reduction to the final annual update to the Federal pe any annual update to a standard Federal rate for discharges during the RY by 2.0 percentage points. Therefore, we applied a 2.0 percentage point reduction to the final annual update to the Federal per diem base rate and the final ECT payment per treatment as follows: • For IPFs that fail to report required data under the IPFQR Program, we will apply a 0.5 percent payment rate update—that is, the final IPF market basket increase for FY 2026 of 3.2 percent reduced by the final productivity adjustment of 0.7 percentage point for an update of 2.5 percent, and further reduced by 2.0 percentage points in accordance with section 1886(s)(4)(A)(i) of the Act. We will also apply the refinement standardization factor of 0.9927 and the wage index budget neutrality factor of 1.0011 to the FY 2025 Federal per diem base rate of $876.53, yielding a Federal per diem base rate of $875.44 for FY 2026. • For IPFs that fail to report required data under the IPFQR Program, we will apply a 0.5 percent payment rate update, the 0.9927 refinement standardization factor, and the 1.0011 wage index budget neutrality factor to the FY 2025 ECT payment per treatment of $661.52, yielding an ECT payment per treatm nt rate update, the 0.9927 refinement standardization factor, and the 1.0011 wage index budget neutrality factor to the FY 2025 ECT payment per treatment of $661.52, yielding an ECT payment per treatment of $660.70 for FY 2026. C. Updates to the IPF PPS Patient-Level Adjustment Factors 1. Overview of the IPF PPS Adjustment Factors The IPF PPS payment adjustment factors were originally derived from a regression analysis of 100 percent of the FY 2002 MedPAR data file, which contained 483,038 cases. For a more detailed description of the data file used for this regression analysis, we refer readers to the RY 2005 IPF PPS final rule (69 FR 66935 and 66936). In FY 2025, we implemented revisions to the methodology for determining payment rates under the IPF PPS, as required by section 1886(s)(5)(D) of the Act. We developed the current (FY 2025) adjustment factors based on a regression analysis of IPF cost and claims data. The primary sources of this analysis were CY 2019 through 2021 MedPAR files and Medicare cost report data (CMS Form 2552–10, OMB No. 0938–0050) from the FY 2019 through 2021 Hospital Cost Report Information System (HCRIS). For a more detailed description of the data fil files and Medicare cost report data (CMS Form 2552–10, OMB No. 0938–0050) from the FY 2019 through 2021 Hospital Cost Report Information System (HCRIS). For a more detailed description of the data files used for this regression analysis, we refer readers to the FY 2025 IPF PPS final rule (89 FR 64593 through 64601). For FY 2026, we proposed to use the existing regression-derived patient-level adjustment factors established for FY 2025. We did not propose any changes to the patient-level adjustment factors for FY 2026; however, we used more recent claims data to simulate payments, to finalize the outlier fixed dollar loss threshold amount, and to assess the impact of the IPF PPS updates. 2. IPF PPS Patient-Level Adjustments The IPF PPS includes payment adjustments for the following patient- level characteristics: Medicare Severity Diagnosis Related Groups (MS–DRGs) assignment of the patient’s principal diagnosis, selected comorbidities, patient age, and the variable per diem adjustments. a. Update to MS–DRG Assignment We believe it is important to maintain for IPFs the same diagnostic coding and DRG classification used under the IPPS for providing psychiatric care. For this reason, . a. Update to MS–DRG Assignment We believe it is important to maintain for IPFs the same diagnostic coding and DRG classification used under the IPPS for providing psychiatric care. For this reason, when the IPF PPS was implemented for cost reporting periods beginning on or after January 1, 2005, we adopted the same diagnostic code set (ICD–9 Clinical Modification (CM)) and DRG patient classification system (MS– DRGs) that were utilized at the time under the IPPS. In the RY 2009 IPF PPS notice (73 FR 25709), we discussed CMS’s effort to better recognize resource use and the severity of illness among patients. CMS adopted the new MS– DRGs for the IPPS in the FY 2008 IPPS final rule with comment period (72 FR 47130). In the RY 2009 IPF PPS notice (73 FR 25716), we provided a crosswalk to reflect changes that were made under the IPF PPS to adopt the new MS–DRGs. For a detailed description of the mapping changes from the original DRG adjustment categories to the current MS–DRG adjustment categories, we refer readers to the RY 2009 IPF PPS notice (73 FR 25714). The IPF PPS includes payment adjustments for designated psychiatric DRGs assigned to the claim based on the patient’s principa categories, we refer readers to the RY 2009 IPF PPS notice (73 FR 25714). The IPF PPS includes payment adjustments for designated psychiatric DRGs assigned to the claim based on the patient’s principal diagnosis. The DRG adjustment factors were expressed relative to the most frequently reported psychiatric DRG in FY 2002, that is, DRG 430 (psychoses). The coefficient values and adjustment factors were derived from the regression analysis discussed in detail in the RY 2004 IPF proposed rule (68 FR 66923; 66928 through 66933) and the RY 2005 IPF final rule (69 FR 66933 through 66960). Mapping the DRGs to the MS–DRGs resulted in 17 IPF MS–DRGs, instead of the original 15 DRGs, for which the IPF PPS provides an adjustment. In the FY 2015 IPF PPS final rule (79 FR 45945 through 45947), we finalized conversions of the ICD–9–CM–based MS–DRGs to ICD–10–CM/Procedure Coding System (PCS)–based MS–DRGs, which were implemented on October 1, 2015. Further information on the ICD– 10–CM/PCS MS–DRG conversion project can be found on the CMS ICD– 10–CM website at https://www.cms.gov/ medicare/coding-billing/icd-10-codes/ icd-10-ms-drg-conversion-project. In the FY 2025 IPF PPS final rule (89 FR 6460 version project can be found on the CMS ICD– 10–CM website at https://www.cms.gov/ medicare/coding-billing/icd-10-codes/ icd-10-ms-drg-conversion-project. In the FY 2025 IPF PPS final rule (89 FR 64602 through 64606), we revised the payment adjustments for designated psychiatric DRGs assigned to the claim based on the patient’s principal diagnosis, following our longstanding policy of using the ICD–10–CM/PCS- based MS–DRG system. In that final rule, we identified 19 DRGs for which the IPF PPS adjusts payment. In addition, we implemented a sub- regulatory process to adopt routine coding updates that incorporate new or revised codes with an April 1 effective date (89 FR 64602 and 64603). For FY 2026, we proposed to continue making the existing payment adjustments for psychiatric diagnoses that group to one of the existing 19 IPF MS–DRGs listed in Addendum A. We did not receive any comments on this proposal, and we are finalizing it as proposed. Addendum A is available on our website at https://www.cms.gov/ Medicare/Medicare-Fee-forService- Payment/InpatientPsychFacilPPS/ tools.html. Psychiatric principal diagnoses that do not group to one of the 19 designated MS–DRGs will still recei ttps://www.cms.gov/ Medicare/Medicare-Fee-forService- Payment/InpatientPsychFacilPPS/ tools.html. Psychiatric principal diagnoses that do not group to one of the 19 designated MS–DRGs will still receive the Federal per diem base rate and all other applicable adjustments, but the payment will not include an MS–DRG adjustment. The diagnoses for each IPF MS–DRG will be updated as of October 1, 2025, using the final IPPS FY 2026 ICD–10– CM/PCS code sets. The FY 2026 IPPS/ LTCH PPS final rule will include tables of the changes to the ICD–10–CM/PCS code sets that underlie the final FY 2026 IPF MS–DRGs. Both the FY 2026 IPPS/ LTCH PPS final rule and the tables of final changes to the ICD–10–CM/PCS code sets, which underlie the FY 2026 MS–DRGs, will be available on the CMS IPPS website at https://www.cms.gov/ medicare/payment/prospective- payment-systems/acute-inpatient-pps. Additionally, as discussed in the ICD– 10–CM Official Guidelines for Coding and Reporting, certain conditions have both an underlying etiology and multiple body system manifestations VerDate Sep 2014 19:33 Aug 04, 2025 Jkt 262001 PO 00000 Frm 00011 Fmt 4701 Sfmt 4700 E:\FR\FM\05AUR2.SGM 05AUR2 2 S E L U R h t i w D O R an underlying etiology and multiple body system manifestations VerDate Sep 2014 19:33 Aug 04, 2025 Jkt 262001 PO 00000 Frm 00011 Fmt 4701 Sfmt 4700 E:\FR\FM\05AUR2.SGM 05AUR2 2 S E L U R h t i w D O R P 3 2 N Q X 1 1 K S D n o r e t t o l 37638 Federal Register / Vol. 90, No. 148 / Tuesday, August 5, 2025 / Rules and Regulations due to the underlying etiology. For such conditions, the ICD–10–CM has a coding convention that requires the underlying condition be sequenced first, followed by the manifestation. Wherever such a combination exists, there is a ‘‘use additional code’’ note at the etiology code, and a ‘‘code first’’ note at the manifestation code. These instructional notes indicate the proper sequencing order of the codes (etiology followed by manifestation). In accordance with the ICD–10–CM Official Guidelines for Coding and Reporting, when a primary (psychiatric) diagnosis code has a code first note, the provider will follow the instructions in the ICD–10–CM Tabular List. The submitted claim goes through the CMS processing system, which will identify the principal diagnosis code as non- psychiatric and search the secondary codes for a psychiatric code to assign a DRG code submitted claim goes through the CMS processing system, which will identify the principal diagnosis code as non- psychiatric and search the secondary codes for a psychiatric code to assign a DRG code for adjustment. The system will continue to search the secondary codes for those that are appropriate for comorbidity adjustment. For more information on the code first policy, we refer readers to the RY 2005 IPF PPS final rule (69 FR 66945). We also refer readers to sections I.A.13 and I.B.7 of the FY 2020 ICD–10–CM Coding Guidelines, which is available at https:// www.cdc.gov/nchs/data/icd/ 10cmguidelinesFY2020_final.pdf. In the FY 2015 IPF PPS final rule, we provided a code first table for reference that highlights the same or similar manifestation codes where the code first instructions apply in ICD–10–CM that were present in ICD–10–CM (79 FR 46009). As discussed in the FY 2025 IPF PPS final rule (89 FR 64602 and 64603), we adopted a sub-regulatory approach to handle the coding updates, rather than discussing coding updates in the Federal Register during regulatory updates prior to implementation. This approach mirrors the approach taken by the IPPS, allows for flexibility in the I , rather than discussing coding updates in the Federal Register during regulatory updates prior to implementation. This approach mirrors the approach taken by the IPPS, allows for flexibility in the ICD–10 code update process for the IPF PPS, and reduces the lead time for making routine coding updates to the IPF PPS code first list, comorbidities, and ECT coding categories. In the FY 2026 IPF PPS proposed rule, we did not describe any code first changes effective for April 1, 2025, and we did not receive any comments about coding updates for the IPF PPS code first list. For this FY 2026 IPF PPS final rule, we are removing one ICD–10–CM diagnosis code and adding eight ICD– 10–CM diagnosis codes to the IPF PPS code first list effective for October 1, 2025. The final FY 2026 Code First table is shown in Addendum B on the CMS website at https://www.cms.gov/ Medicare/Medicare-Fee-forService Payment/InpatientPsychFacilPPS/ tools.html. b. Payment for Comorbid Conditions The intent of the comorbidity adjustments is to recognize the increased costs associated with active comorbid conditions by providing additional payments for certain existing medical or psychiatric conditions that are expe rbidity adjustments is to recognize the increased costs associated with active comorbid conditions by providing additional payments for certain existing medical or psychiatric conditions that are expensive to treat. Comorbidities are specific patient conditions that are secondary to the patient’s principal diagnosis and that require active treatment during the stay. Diagnoses that relate to an earlier episode of care and have no bearing on the current hospital stay are excluded and must not be reported on IPF claims. Comorbid conditions must exist at the time of admission or develop subsequently, and affect the treatment received, length of stay (LOS), or both treatment and LOS. For each claim, an IPF may receive only one comorbidity adjustment within a comorbidity category, but it may receive an adjustment for more than one comorbidity category. Current billing instructions for discharge claims, on or after October 1, 2015, require IPFs to enter the complete ICD–10–CM codes for up to 24 additional diagnoses if they co-exist at the time of admission, or develop subsequently and impact the treatment provided. The IPF PPS comorbidity adjustments were originally determined based on th 24 additional diagnoses if they co-exist at the time of admission, or develop subsequently and impact the treatment provided. The IPF PPS comorbidity adjustments were originally determined based on the regression analysis using the diagnoses reported by IPFs in FY 2002. The principal diagnoses were used to establish the DRG adjustments and were not accounted for in establishing the comorbidity category adjustments, except where ICD–9–CM code first instructions applied. In a code first situation, the submitted claim goes through the CMS processing system, which identifies the principal diagnosis code as non-psychiatric and searches the secondary codes for a psychiatric code to assign an MS–DRG code for adjustment. The system continues to search the secondary codes for those that are appropriate for a comorbidity adjustment. In FY 2025, we revised the comorbidity adjustment factors based on the results of the 2019 through 2021 regression analysis described in the FY 2025 IPF PPS final rule (89 FR 64606 through 64612). In addition, we made additions and changes to the comorbidity categories for which we adjust payment based on our analysis of ICD–10–CM codes currently included in each le (89 FR 64606 through 64612). In addition, we made additions and changes to the comorbidity categories for which we adjust payment based on our analysis of ICD–10–CM codes currently included in each category as well as public comments received in response to the FY 2022 and FY 2023 IPF PPS proposed rules. Specifically, we removed 3 existing comorbidity categories, revised 2 existing comorbidity categories, and added 1 new comorbidity category. We finalized 15 comorbidity categories for FY 2025. We did not propose any changes to the comorbidity adjustment factors, and we are retaining the existing comorbidity adjustment factors for FY 2026. The final FY 2026 comorbidity adjustment factors are found in Addendum A, available on the CMS website at https://www.cms.gov/ Medicare/Medicare-Fee-for-Service Payment/InpatientPsychFacilPPS/ tools.html. As noted previously, it is our policy to maintain the same diagnostic coding set for IPFs that is used under the IPPS for providing the same psychiatric care. In the FY 2015 IPF PPS final rule (79 FR 45947 through 45955), the comorbidity categories formerly defined using ICD– 9–CM codes were converted to ICD–10– CM/PCS. The goal for converting hiatric care. In the FY 2015 IPF PPS final rule (79 FR 45947 through 45955), the comorbidity categories formerly defined using ICD– 9–CM codes were converted to ICD–10– CM/PCS. The goal for converting the comorbidity categories is referred to as replication, meaning that the payment adjustment for a given patient encounter is the same after ICD–10–CM implementation as it would be if the same record had been coded in ICD–9– CM and submitted prior to ICD–10–CM/ PCS implementation on October 1, 2015. All conversion efforts were made with the intent of achieving this goal. As discussed in section IV.C.2.a of this final rule, in the FY 2025 IPF PPS final rule (89 FR 64602 and 64603) we adopted an April 1 implementation date for ICD–10–CM diagnosis and ICD–10– PCS procedure code updates, in addition to the annual October 1 update, beginning with April 1, 2025 for the IPF PPS. Coding updates related to the IPF PPS comorbidity categories are adopted following a sub-regulatory process as finalized in the FY 2025 IPF PPS final rule (89 FR 64602 and 64603). In the FY 2026 IPF PPS proposed rule, we explained that for April 1, 2025, we added two ICD–10–PCS procedure codes to the Oncology Treatm zed in the FY 2025 IPF PPS final rule (89 FR 64602 and 64603). In the FY 2026 IPF PPS proposed rule, we explained that for April 1, 2025, we added two ICD–10–PCS procedure codes to the Oncology Treatment Procedures list. We did not receive any comments on the April 1, 2025, coding changes. For this FY 2026 IPF PPS final rule, we are adding 12 ICD–10–CM diagnosis codes to the Poisoning code list, removing 4 ICD–10–PCS procedure codes to the Oncology Treatment Procedure code list, and adding 2 ICD– 10–CM diagnosis codes to the Oncology Treatment Diagnosis code list. The final FY 2026 comorbidity codes are shown in Addenda B, available on the CMS website at https://www.cms.gov/ Medicare/Medicare-Fee-for- VerDate Sep 2014 19:33 Aug 04, 2025 Jkt 262001 PO 00000 Frm 00012 Fmt 4701 Sfmt 4700 E:\FR\FM\05AUR2.SGM 05AUR2 2 S E L U R h t i w D O R P 3 2 N Q X 1 1 K S D n o r e t t o l Federal Register / Vol. 90, No. 148 / Tuesday, August 5, 2025 / Rules and Regulations 37639 ServicePayment/InpatientPsych FacilPPS/tools.html. c. Patient Age Adjustments As explained in the RY 2005 IPF PPS final rule (69 FR 66922), we analyzed the impact of age on per diem cost by examining the age variable (ran entPsych FacilPPS/tools.html. c. Patient Age Adjustments As explained in the RY 2005 IPF PPS final rule (69 FR 66922), we analyzed the impact of age on per diem cost by examining the age variable (range of ages) for payment adjustments. In general, we found that the cost per day increases with age. The older age groups are costlier than the under 45 age group, the differences in per diem cost increase for each successive age group, and the differences are statistically significant. In FY 2025, we adopted revised patient age adjustments derived from the regression model using a blended set of 2019 through 2021 data (89 FR 64612 and 64613). For FY 2026, we proposed to use the patient age adjustments currently in effect for FY 2025. We did not propose any changes to the patient age adjustment factors, and we are retaining the existing patient age adjustment factors for FY 2026, as shown in Addendum A of this final rule (see https://www.cms.gov/Medicare/ Medicare-Fee-for-ServicePayment/ InpatientPsychFacilPPS/tools.html). d. Variable Per Diem Adjustments We explained in the RY 2005 IPF PPS final rule (69 FR 66946) that the regression analysis indicated that per diem cost declines as th patientPsychFacilPPS/tools.html). d. Variable Per Diem Adjustments We explained in the RY 2005 IPF PPS final rule (69 FR 66946) that the regression analysis indicated that per diem cost declines as the LOS increases. The variable per diem adjustments to the Federal per diem base rate account for ancillary and administrative costs that occur disproportionately in the first days after admission to an IPF. As discussed in the RY 2005 IPF PPS final rule, where a complete discussion of the variable per diem adjustments can be found, we used a regression analysis to estimate the average differences in per diem cost among stays of different lengths (69 FR 66947 through 66950). As a result of this analysis, we established variable per diem adjustments that begin on day 1 and decline gradually over the course of the patient’s stay. In addition, the adjustment applied to day 1 depends upon whether the IPF has a qualifying ED. If an IPF has a qualifying ED, it receives a higher adjustment factor for day 1 of each stay than it would receive if it did not have a qualifying ED. The ED adjustment is explained in more detail in section IV.D.8. of this final rule. In FY 2025, we revised the variabl for day 1 of each stay than it would receive if it did not have a qualifying ED. The ED adjustment is explained in more detail in section IV.D.8. of this final rule. In FY 2025, we revised the variable per diem adjustment factors based on the 2019 through 2021 regression analysis (89 FR 64613 and 64614). For FY 2026, we proposed to use the variable per diem adjustment factors currently in effect in FY 2025. We did not propose any changes to the variable per diem adjustment factors, and we are retaining the existing variable per diem adjustment factors for FY 2026 as shown in Addendum A of this final rule (available at https:// www.cms.gov/Medicare/Medicare-Fee- for-ServicePayment/InpatientPsych FacilPPS/tools.html). D. Updates to the IPF PPS Facility-Level Adjustments 1. Overview of the IPF PPS Facility- Level Adjustment Factors The IPF PPS includes facility-level adjustments for the wage index, IPFs located in rural areas, teaching IPFs, cost of living adjustments for IPFs located in Alaska and Hawaii, and IPFs with a qualifying ED. The facility-level adjustment factors currently in place for rural location and teaching status are the existing regression-derived factors establishe Alaska and Hawaii, and IPFs with a qualifying ED. The facility-level adjustment factors currently in place for rural location and teaching status are the existing regression-derived factors established in the RY 2005 IPF final rule. As discussed in the following sections, we proposed annual updates to the FY 2026 IPF PPS wage index. In addition, we proposed to update the facility-level adjustment factors for rural location and teaching status for FY 2026 to reflect more recent cost and claims data. 2. History of IPF PPS Cost and Claims Analyses In the FY 2023 IPF PPS proposed rule (87 FR 19428 and 19429), we briefly discussed past analyses and areas of interest for future refinement, about which we previously solicited comments. At the same time, CMS also released a technical report posted to the CMS website 3 accompanying the rule, summarizing these analyses. In that same proposed rule, we described the results of the agency’s latest analysis of the IPF PPS and solicited comments on certain topics from the report. We summarized the considerations and findings related to our analyses of the IPF PPS adjustment factors in the FY 2023 IPF PPS final rule (46864 through 46865). In the F ertain topics from the report. We summarized the considerations and findings related to our analyses of the IPF PPS adjustment factors in the FY 2023 IPF PPS final rule (46864 through 46865). In the FY 2024 IPF PPS proposed rule (88 FR 21269 through 21272), we requested information from the public to inform revisions to the IPF PPS required by the CAA, 2023. Specifically, we sought information about which data and information would be most appropriate and useful for the purposes of refining IPF PPS payments. We requested information related to the specific types of data and information mentioned in the CAA, 2023. We also 3 https://www.cms.gov/files/document/technical- report-medicare-program-inpatient-psychiatric- facilities-prospective-payment-system.pdf. solicited comments on the reporting of ancillary charges, such as labs and drugs, on IPF claims. In response to those requests for information in the FY 2024 IPF PPS proposed rule, commenters offered a number of suggestions for further analysis, including recommendations to consider adjusting payment for patients with sleep apnea, violent behavior, and patients that transfer from an acute care unit. In the FY 2025 IPF PPS propose er analysis, including recommendations to consider adjusting payment for patients with sleep apnea, violent behavior, and patients that transfer from an acute care unit. In the FY 2025 IPF PPS proposed rule, we discussed our latest regression analysis results and the methodology we used to calculate proposed revisions to the patient-level adjustment factors (89 FR 23154 through 23161). In that same proposed rule (89 FR 23161 through 23172), we also discussed the analyses that we conducted and our findings, as related to patient-level adjustment factors, in response to the comments we received on the FY 2024 IPF PPS proposed rule. As we have previously noted in the FY 2025 IPF PPS proposed rule (89 FR 23154), the primary goal in refining the IPF PPS payment adjustment factors is to pay each IPF an appropriate amount for the efficient delivery of care to Medicare beneficiaries. The system must be able to account adequately for each IPF’s case-mix to allow for both fair distribution of Medicare payments and access to adequate care for those beneficiaries who require more costly care. As required by section 1886(s)(5)(D)(iii) of the Act, revisions to the IPF PPS adjustment factors made dicare payments and access to adequate care for those beneficiaries who require more costly care. As required by section 1886(s)(5)(D)(iii) of the Act, revisions to the IPF PPS adjustment factors made pursuant to section 1886(s)(5)(D)(i) of the Act must be budget neutral. As discussed in section IV.D.9 of this final rule, we are applying a refinement standardization factor to the final IPF PPS payment rates to maintain budget neutrality for FY 2026. 3. Development of the Revised Regression for Facility-Level Refinements In the FY 2026 IPF PPS proposed rule, we explained that we performed an extensive regression analysis of the relationship between the per diem costs and certain patient- and facility-level characteristics to analyze those characteristics associated with statistically significant cost differences. As discussed in section IV.C of this final rule, we finalized revisions to the IPF PPS patient-level adjustments in the FY 2025 IPF PPS final rule (89 FR 64593 through 64614). As a result, we used a constrained regression model for FY 2026 to hold the patient-level adjustments at the level finalized for FY 2025. We discuss the results of this constrained regression analysis As a result, we used a constrained regression model for FY 2026 to hold the patient-level adjustments at the level finalized for FY 2025. We discuss the results of this constrained regression analysis in VerDate Sep 2014 19:33 Aug 04, 2025 Jkt 262001 PO 00000 Frm 00013 Fmt 4701 Sfmt 4700 E:\FR\FM\05AUR2.SGM 05AUR2 2 S E L U R h t i w D O R P 3 2 N Q X 1 1 K S D n o r e t t o l 37640 Federal Register / Vol. 90, No. 148 / Tuesday, August 5, 2025 / Rules and Regulations section IV.D.3.e of this final rule. We further discuss policies related to the revisions to the IPF PPS facility-level adjustment factors based on this regression analysis in sections IV.D.5 and IV.D.6 of this final rule. For this FY 2026 IPF PPS final rule, we calculated a per diem cost (including routine and ancillary components) and identified patient and facility characteristics for each Medicare inpatient psychiatric stay using information from MedPAR files, Common Working File (CWF) inpatient claims, Medicare hospital cost reports, and other data sources for FY 2020 through FY 2022. We refer readers to the FY 2025 IPF PPS final rule for a discussion of the impact of the COVID– 19 PHE and the benefits of using a al cost reports, and other data sources for FY 2020 through FY 2022. We refer readers to the FY 2025 IPF PPS final rule for a discussion of the impact of the COVID– 19 PHE and the benefits of using a combined set of data for the accuracy of the results (89 FR 64594). We began with a base sample of IPF stays by Medicare FFS beneficiaries in MedPAR from FY 2020 through FY 2022, which contain a total of 712,543 stays from 1,650 IPFs. We applied several data restrictions and exclusions to remove stays with missing and or aberrant data. The final sample used for the regression analysis contained 704,472 stays from 1,633 IPFs, which reflects the removal of 17 providers and 8,071 stays. In preparing the cost regression sample and analysis, we incorporated more recent input data and refined our data processing method, as described in this section. We estimated a baseline regression using the constrained model and conducted sensitivity analysis to confirm the robustness of our results. a. Data Sources For the regression analysis, our primary data sources include the annual MedPAR files, which provide stay-level summaries of IPF stays, and Medicare hospital cost reports, which contain provid Sources For the regression analysis, our primary data sources include the annual MedPAR files, which provide stay-level summaries of IPF stays, and Medicare hospital cost reports, which contain provider-level data on costs, utilization, and other financial information. Additionally, we used the Common Working File (CWF) claims data, the Provider of Services (POS) files, and the Provider Specific File (PSF) to identify provider and patient characteristics and to construct variables in the regression model. More specifically, we used the following sources of data: • MedPAR Files: The annual MedPAR file compiles final action claims records for IPF stays discharged during the fiscal year. Each MedPAR record provides a summary of clinical characteristics, service utilization, facility billings, and Medicare coverage for an inpatient hospital stay. We use MedPAR to identify all IPF stays by Medicare FFS beneficiaries during the fiscal year, along with key variables such as MS–DRG, principal and secondary diagnosis, length of stay, patient age, admission source, provider charges by revenue center, and other patient and provider attributes. For the FY 2026 final rule cost regression, we us and secondary diagnosis, length of stay, patient age, admission source, provider charges by revenue center, and other patient and provider attributes. For the FY 2026 final rule cost regression, we used MedPAR files for FY 2020 through FY 2022. • Hospital Cost Reports: Medicare hospital cost reports (CMS Form 2552– 10; OMB control number 0938–0050) provide the key inputs for estimating the per diem cost of IPF stays, specifically the facility’s routine per diem cost and Cost-to-Charge Ratios (CCRs) for detailed cost centers for each Federal FY. We also use hospital cost reports to obtain key facility characteristics, including teaching status, bed counts, and ownership type. For providers whose own fiscal periods align with the FY, we directly match their FY 2020–FY 2022 hospital cost reports to the corresponding MedPAR stays. For providers whose own fiscal periods differ from the FY, we use multiple years of hospital cost reports data and proportionally allocate and align them to the FY basis for FY 2020 through FY 2022 before linking them to other data sources. This allocation and alignment is discussed in greater detail later in this section of this final rule. • Common Working FY basis for FY 2020 through FY 2022 before linking them to other data sources. This allocation and alignment is discussed in greater detail later in this section of this final rule. • Common Working File (CWF) Inpatient Claims Data: We use detailed claims data from the CWF to supplement MedPAR stay records, specifically obtaining data on covered charges by detailed revenue center and utilization of ECT treatments during each IPF stay. To promote internal consistency, we use the CWF claims data with the same final action week as the corresponding MedPAR record. • Provider of Services (POS) File: The POS file contains facility characteristics such as name, address, and types of services provided. For the regression analysis for this FY 2026 IPF PPS final rule, we primarily use the POS file to identify providers’ Federal Information Processing Series (FIPS) codes, which determine each provider’s designated Core-Based Statistical Area (CBSA). The CBSA is then used to match providers with the corresponding geographic cost adjustment factor. Additionally, we use the POS file as a secondary source for provider ownership type. • Provider Specific Data for Public Use Files for the IPF PPS: the corresponding geographic cost adjustment factor. Additionally, we use the POS file as a secondary source for provider ownership type. • Provider Specific Data for Public Use Files for the IPF PPS: We use the Provider Specific File (PSF) to identify providers’ COLA factors and other facility-level characteristics, including whether a facility has a qualified Emergency Department (ED). • IPF Market Baskets: We used the historical IPF market basket increases and labor-related shares for the FY 2020–FY 2022 period. • IPF PPS Wage Index: We use the IPF PPS wage index, along with COLA and labor-related share, to calculate the geographic cost adjustment factor, which accounts for regional cost differences among providers in each year. In this analysis, we used the FY 2024 IPF PPS wage index to adjust IPF costs in FY 2020, and FY 2025 IPF PPS wage index to adjust IPF costs in FY 2021 and FY 2022. b. Trims and Assumptions For the FY 2026 final rule regression analysis, we used a combined set of FY 2020 through FY 2022 MedPAR data, consistent with the approach we adopted for the FY 2025 IPF PPS proposed and final rules to revise the patient-level adjustment factors. Our analysis demonstr t of FY 2020 through FY 2022 MedPAR data, consistent with the approach we adopted for the FY 2025 IPF PPS proposed and final rules to revise the patient-level adjustment factors. Our analysis demonstrated that combining multiple years of data yields the most stable and consistent result. We continue to believe that using a 3-year combined set of data in the regression analysis helps smooth the impact of utilization changes driven by the COVID–19 PHE, as well as significant changes in staffing and labor costs that commenters noted in response to the FY 2023 and FY 2024 IPF PPS proposed rules. This data set best reflects the current cost of care as impacted by the COVID–19 PHE, which has an ongoing impact on IPF cost and utilization trends. Our approach mitigates the effect of these impacts in any single year by expanding the set of data. Within the MedPAR dataset, we included inpatient hospital stays that met the following criteria: • Hospital CMS Certification Number (CCN) contains ‘‘40’’, ‘‘41’’, ‘‘42’’, ‘‘43’’, or ‘‘44’’ in the third and fourth positions (freestanding psychiatric hospitals), a special unit code of ‘‘S’’ in the third position (psychiatric unit in an acute care hos 0’’, ‘‘41’’, ‘‘42’’, ‘‘43’’, or ‘‘44’’ in the third and fourth positions (freestanding psychiatric hospitals), a special unit code of ‘‘S’’ in the third position (psychiatric unit in an acute care hospital), a special unit code of ‘‘M’’ in the third position (psychiatric unit in a critical access hospital), or a special unit code of ‘‘SA’’, ‘‘SB’’, ‘‘SC’’, ‘‘SD’’, or ‘‘SE’’ in the third and fourth positions (psychiatric unit in a long- term care hospital (LTCH), rehabilitation hospital, or children’s hospital). • Beneficiary primary payer code is ‘‘M’’, ‘‘N’’, or blank, indicating that Medicare is the primary payer. • Group Health Organization (GHO) paid code is zero or blank, indicating that a GHO has not paid the facility for the stay. VerDate Sep 2014 19:33 Aug 04, 2025 Jkt 262001 PO 00000 Frm 00014 Fmt 4701 Sfmt 4700 E:\FR\FM\05AUR2.SGM 05AUR2 2 S E L U R h t i w D O R P 3 2 N Q X 1 1 K S D n o r e t t o l Federal Register / Vol. 90, No. 148 / Tuesday, August 5, 2025 / Rules and Regulations 37641 • National Claims History (NCH) claim type code is ‘‘60,’’ indicating a fee-for-service (FFS) inpatient claim. • Covered charge and covered days (or Medicare utilization days) are grea gulations 37641 • National Claims History (NCH) claim type code is ‘‘60,’’ indicating a fee-for-service (FFS) inpatient claim. • Covered charge and covered days (or Medicare utilization days) are greater than zero.1 For the FY 2020 through FY 2022 sample period, a total of 712,543 patient stays from 1,650 unique providers in MedPAR met these selection criteria. That includes 284,176 stays from 1,587 providers in FY 2020, 231,668 stays from 1,546 providers in FY 2021, and 196,699 stays from 1,522 providers in FY 2022. Using this base sample, we applied a series of additional trimming steps to remove stays with missing or outlier cost data. A detailed description of how we estimate IPF per diem costs is provided in section IV.D.3.c of this-final rule. We removed the following: • Stays with missing routine per diem cost data or missing provider hospital cost reports for the FY 2020–FY 2022 period. This step removed 240 stays from the sample, which came from 13 unique providers. • Stays with extraordinarily high or low costs per day. Specifically, we removed 2,345 stays whose routine per diem costs fell outside the mean plus or minus 3.00 standard deviations of the natural logarithm of th extraordinarily high or low costs per day. Specifically, we removed 2,345 stays whose routine per diem costs fell outside the mean plus or minus 3.00 standard deviations of the natural logarithm of routine per diem costs in the combined 3-year sample. We also removed an additional 1,631 stays with total per diem costs that fell outside the mean plus or minus 3.00 standard deviations of the natural logarithm of total per diem costs in the combined 3-year sample. (All cost estimates were adjusted for geographic differences and year-over-year inflation.) In total, this trimming step removed 3,976 stays with extraordinarily high or low costs per day from 323 providers across the 3-year sample.2 Finally, we excluded all stays with an MS–DRG that is not recognized by the IPF PPS, which removed 3,855 stays from 954 providers from the remaining sample. After these trimming steps, our final cost regression sample included 704,472 IPF stays by Medicare FFS beneficiaries from 1,633 unique IPF providers in MedPAR FY 2020 through FY 2022. This final sample consists of 280,959 stays from 1,569 providers in FY 2020, 229,125 stays from 1,521 providers in FY 2021, and 194,388 stays from 1,491 pr providers in MedPAR FY 2020 through FY 2022. This final sample consists of 280,959 stays from 1,569 providers in FY 2020, 229,125 stays from 1,521 providers in FY 2021, and 194,388 stays from 1,491 providers in FY 2022. c. Calculation of the Dependent Variable The regression model for this FY 2026 IPF PPS final rule uses the natural logarithm of the total per diem cost, adjusted for geographic differences and inflation, as the dependent variable. Total per diem costs are calculated as the sum of routine per diem costs and ancillary per diem costs, with both components including operating and capital costs. • Routine per diem costs are derived from facility-level average routine cost per day reported in provider hospital cost reports as total inpatient routine costs divided by total inpatient days (Worksheet D–1, Part II, column 1, Line 41 divided by Line 9)3 and assigned to individual patient stays within the facility. • Ancillary per diem costs are calculated by applying the cost center cost-to-charge ratio (CCR) from the cost report to the covered charges from ancillary departments on CWF inpatient claims, then dividing by the number of Medicare covered days of the stay (availabl er cost-to-charge ratio (CCR) from the cost report to the covered charges from ancillary departments on CWF inpatient claims, then dividing by the number of Medicare covered days of the stay (available in MedPAR). The total per diem costs (or costs per day) are further adjusted for geographic cost differences using IPF wage indices (for the labor-related share portion) and COLA factors (for the non-labor-related share portion for IPFs located in Alaska and Hawaii). Cost estimates are also adjusted for annual inflation based on the historical growth rates of the 2021- based IPF market basket. To promote consistency, accuracy, and comparability of our data, we apply a series of methodological steps when calculating the dependent variable as follows: (1) Addressing Variation in Cost Report Reporting Periods Because providers can select their own fiscal/reporting periods for hospital cost reports, there is a lack of uniformity in the time periods covered by the raw cost report data from different providers. For example, within each annual HCRIS file, roughly 40 percent of the reports have a January through December cost reporting period (Calendar Year), 30 percent have a July through J fferent providers. For example, within each annual HCRIS file, roughly 40 percent of the reports have a January through December cost reporting period (Calendar Year), 30 percent have a July through June cost reporting period, 15 percent have an October through September cost reporting period (Federal fiscal year (FFY), and the remaining 15 percent cover various other cost reporting periods. Moreover, some providers change their fiscal/ reporting periods mid-year (sometimes due to an ownership change), resulting in shorter or longer hospital cost reports and, in some cases, multiple hospital cost reports within a single year. To address this lack of uniformity in provider reporting periods and enhance data accuracy and consistency, we apply a re-allocation procedure to align all provider hospital cost reports data to the FFY basis before matching them to MedPAR stays. First, we allocate each provider’s annual cost report data across the months, assuming uniform values per month within the reporting period. Then we regroup the monthly data to align with the FFY for each provider and calculate annual averages. When data for some months are missing, we use available partial-year data the reporting period. Then we regroup the monthly data to align with the FFY for each provider and calculate annual averages. When data for some months are missing, we use available partial-year data to extrapolate and construct the annual estimate. For example, suppose a provider uses the CY as its cost reporting period. Its reported average routine per diem cost was $900 in CY 2019, $950 in CY 2020, $1000 in CY 2021, and $1100 in CY 2022. Its CCR for laboratory services is 0.30 in CY 2019, 0.25 in CY 2020, 0.32 in CY 2021, and 0.28 in CY 2022. Using the reallocation method, this provider’s average routine per diem costs were $937.50 for FY 2020 (= 3/12*$900 + 9/ 12*$950), $987.50 for FY 2021, and $1,075.00 for FY 2022. Its CCR for laboratory services were 0.2625 for FY 2020, 0.3025 for FY 2021, and 0.2900 for FY 2022. (2) Obtaining CCRs for Ancillary Cost Estimation To estimate the costs of non-routine services provided during IPF stays, we group the cost centers from hospital cost reports and the revenue centers from CWF claims into 25 ‘‘ancillary departments’’: Pharmacy, Laboratory, Emergency Room, Medical/Surgical Supplies, Cardiology, Radiology, Magnetic Resonance Imaging (MR eports and the revenue centers from CWF claims into 25 ‘‘ancillary departments’’: Pharmacy, Laboratory, Emergency Room, Medical/Surgical Supplies, Cardiology, Radiology, Magnetic Resonance Imaging (MRI), Physical Therapy, Occupational Therapy, Inhalation Therapy, Speech Pathology, Anesthesia, Operating Room, Intensive Care Unit (ICU), Coronary Care Unit (CCU), End Stage Renal Disease (ESRD), Professional Fees, Clinic Visit, Outpatient Services, Durable Medical Equipment (DME), Used DME, Blood, Blood Storage and Processing, Lithotripsy, and Other Services.4 For each ancillary department, we calculate each provider’s CCR using the provider’s cost report, Worksheet D. Specifically, we take ancillary department costs (Worksheet D–3, Column 3), subtract any positive inpatient pass-through costs (Worksheet D, Part IV, Column 11), and divide the result by ancillary department charges (Worksheet D–3, Column 2).5 To address extreme values and missing data in CCRs, we apply winsorization and imputation. For extreme values, we examine the distribution of CCR data (after aligning to FFY) for each ancillary department across providers from FY 2020 through FY 2022 and winsorize values at the 2nd utation. For extreme values, we examine the distribution of CCR data (after aligning to FFY) for each ancillary department across providers from FY 2020 through FY 2022 and winsorize values at the 2nd and 98th percentiles. In addition, VerDate Sep 2014 19:33 Aug 04, 2025 Jkt 262001 PO 00000 Frm 00015 Fmt 4701 Sfmt 4700 E:\FR\FM\05AUR2.SGM 05AUR2 2 S E L U R h t i w D O R P 3 2 N Q X 1 1 K S D n o r e t t o l 37642 Federal Register / Vol. 90, No. 148 / Tuesday, August 5, 2025 / Rules and Regulations we consider all CCRs lower than 0.01 or higher than 10.0 as improbable and recode them to 0.01 or 10.0, respectively. After adjusting for extreme values, we impute missing CCRs using available data, prioritizing provider-specific information. (A CCR is considered missing only if the provider had charges from the ancillary department on MedPAR and CWF claims for that year but did not report a CCR.) If a provider’s CCR for an ancillary department is missing for a given year but available in other years, we use the weighted average of the provider’s CCRs for that ancillary department from other years (weights based on the provider’s stay counts in those years) to fill in the missing value. her years, we use the weighted average of the provider’s CCRs for that ancillary department from other years (weights based on the provider’s stay counts in those years) to fill in the missing value. If those data are unavailable, we use the provider’s all- ancillary CCR for that year, the weighted average of the provider’s all-ancillary CCRs from other years, or the median CCR for that ancillary department from other providers of the same type (freestanding or unit-based) for that year, in descending order of preference. For ancillary departments such as ICU and CCU, where CCRs are rarely reported despite the presence of service charges on claims, we use the median all-ancillary CCR from other providers of the same type to fill in missing values. (3) Accounting for Geographic Differences and Inflation To account for geographic differences in costs, we construct a geographic adjustment factor using the formula: Geographic cost adjustment factor = IPF wage index * labor-related share + COLA for AK and HI * (1-labor- related share). We adjust the labor-related portion of per diem costs using the IPF wage index to account for regional differences in labor costs, while the non-labor po COLA for AK and HI * (1-labor- related share). We adjust the labor-related portion of per diem costs using the IPF wage index to account for regional differences in labor costs, while the non-labor portion is adjusted using COLA factors for IPFs in Alaska and Hawaii. Because the IPF wage index reflects local cost differences with a lag, we adjust for that timing discrepancy by applying more recent IPF wage indexes to the FY 2020– FY 2022 MedPAR stays. (We remind readers that the IPF PPS wage index is based on the pre-floor, pre-reclassified IPPS hospital wage index, which in turn is derived from hospital cost reports data from approximately 3–4 years prior. For example, the FY 2025 IPF PPS wage index reflects cost data from local labor markets around 2021–2022.) For this analysis, we used the FY 2024 IPF PPS wage index to adjust IPF costs in FY 2020, and FY 2025 IPF PPS wage index to adjust IPF costs in FY 2021 and FY 2022. Finally, to promote comparability across the 3 years, we adjust cost estimates for year-over-year inflation using historical IPF market basket increases and labor-related shares, converting all cost estimates into 2022 dollars. We calculated routine per diem cos t cost estimates for year-over-year inflation using historical IPF market basket increases and labor-related shares, converting all cost estimates into 2022 dollars. We calculated routine per diem cost, ancillary per diem cost, and the total per diem using the approach discussed in this section for all IPF stays in our FY 2020–FY 2022 MedPAR sample. We then excluded stays with missing routine costs and outlier routine or total per diem costs, based on the approach described earlier in section IV.D.3.b of this final rule. Among the 704,472 stays in the final FY 2020–FY 2022 cost regression sample, the median total per diem cost was $1,135 in 2022 dollars, with a range of $355 to $4,201 and a mean of $1,205 (the standard deviation was $539). Consistent with our approach in the FY 2025 IPF PPS final rule (89 FR 64596), the stays with zero ancillary charges were retained in the sample. d. Independent Variables The independent variables in the regression model represent patient-level and facility-level characteristics that influence the cost of an IPF stay. Some of these variables are adjustment- related, meaning that they are used for payment adjustments, while others are control varia cility-level characteristics that influence the cost of an IPF stay. Some of these variables are adjustment- related, meaning that they are used for payment adjustments, while others are control variables, which are used to account for variation in the dependent variable associated with factors outside the adjustment factors in the payment model. (1) Adjustment-Related Variables Patient-level adjustment-related variables in the model include MS– DRG, comorbidity categories, patient age, and length of stay. Because we did not propose any changes to these patient-level adjustment factors in the FY 2026 IPF PPS proposed rule, we constrained their coefficients to their corresponding FY 2025 adjustment factor values in the regression, instead of estimating them in the model. Facility-level adjustment-related variables in the model include the facility’s teaching status and whether the facility is located in a rural area. (A facility’s rural status in each year is determined based on its CBSA designation.) We refer readers to sections IV.D.4. and IV.D.5. of this-final rule for a more detailed explanation of the payment adjustment for rural location. In sections III.D.5. and III.D.6. of t A designation.) We refer readers to sections IV.D.4. and IV.D.5. of this-final rule for a more detailed explanation of the payment adjustment for rural location. In sections III.D.5. and III.D.6. of the proposed rule, we proposed to revise the IPF PPS payment adjustment factors for these two facility-level characteristics based on the estimated coefficients of these variables in the constrained regression. (2) Control Variables As we noted in the FY 2025 IPF PPS proposed and final rules (89 FR 23157; and 89 FR 64596 and 64597, respectively), the original regression model included a control variable for the presence of ECT because ECT is paid on a per-treatment basis under the IPF PPS. We continue to observe that IPF stays with ECT have significantly higher costs per day. For FY 2026 we will continue paying for ECT on a per- treatment basis; therefore, we included a control variable to account for the additional costs associated with ECT, which will continue to be paid outside the regression model. Similarly, we included a control variable for stays with positive covered ED-related charges. To address the costs of maintaining an ED and providing ED services, IPF PPS pays facilities ssion model. Similarly, we included a control variable for stays with positive covered ED-related charges. To address the costs of maintaining an ED and providing ED services, IPF PPS pays facilities with a qualified ED an additional 26 percent of the payment rate for the first day of the stay. To prevent ED adjustment from serving as an incentive for unnecessary ED use, all stays in facilities with qualifying EDs receive the payment, except in cases when the admission source code is ‘‘D,’’ indicating that the patient was transferred from the inpatient part of the same facility. (In such cases, the ED costs would have already been covered under the preceding claim.) The 26 percent ED adjustment, updated in the FY 2025 IPF PPS final rule (89 FR 64635 and 64636), was calculated in a way that accounts for the percentage of stays with ED charges and different admission sources, and that calculation was performed outside the cost regression framework. Since our regression model includes all costs associated with each IPF stay, including ED costs, we included a control variable for stays with positive covered ED charges to control for the additional costs associated with ED services in t costs associated with each IPF stay, including ED costs, we included a control variable for stays with positive covered ED charges to control for the additional costs associated with ED services in this FY 2026 IPF PPS final rule. Lastly, we included control variables for the data year. Since the model uses a combined set of data from 3 years, we adjusted cost estimates for year-over- year inflation using historical IPF market basket increases and labor- related shares. However, external factors beyond this inflation adjustment may have influenced cost differences across the 3 years included in our sample. These factors, such as the impact of the COVID–19 PHE, may affect cost variation in our sample period. To account for these additional year-related factors, we continued to include a set of VerDate Sep 2014 19:33 Aug 04, 2025 Jkt 262001 PO 00000 Frm 00016 Fmt 4701 Sfmt 4700 E:\FR\FM\05AUR2.SGM 05AUR2 2 S E L U R h t i w D O R P 3 2 N Q X 1 1 K S D n o r e t t o l Federal Register / Vol. 90, No. 148 / Tuesday, August 5, 2025 / Rules and Regulations 37643 year controls in the FY 2026 IPF PPS final rule regression model. e. Regression Results We estimated the constrained regression Vol. 90, No. 148 / Tuesday, August 5, 2025 / Rules and Regulations 37643 year controls in the FY 2026 IPF PPS final rule regression model. e. Regression Results We estimated the constrained regression using ordinary least squares (OLS) on 704,472 IPF stays from FY 2020 to FY 2022, clustering standard errors at the provider level. Table 2 presents the estimation results, along with the number and percentage of stays associated with each independent variable. The regression model has an R- squared value of 0.27799, meaning that the independent variables included in the regression (facility characteristics and control variables) were able to explain approximately 27.8 percent of the variation in per diem costs among IPF stays. We note that the R-squared value of our regression model is comparable to the R-squared values of prior models used for the IPF PPS (for example, see the R-squared value of 0.32340 in the FY 2025 IPF PPS final rule (89 FR 64597) and the finding that the payment model explained 33 percent of the variation in per diem cost among IPFs in the RY 2005 IPF PPS final rule (69 FR 66957)). Except for the teaching variable, each of the adjustment factors presented in Tabl l explained 33 percent of the variation in per diem cost among IPFs in the RY 2005 IPF PPS final rule (69 FR 66957)). Except for the teaching variable, each of the adjustment factors presented in Table 2 is the exponentiated regression coefficient from our regression model, which as we previously noted uses the natural logarithm of per diem total cost as the dependent variable. We present the exponentiated regression results, as these most directly translate to the way that IPF PPS adjustment factors are calculated for payment purposes. That is, the exponentiated adjustment factors presented in this-final rule represent a percentage increase or decrease in per diem cost for IPF stays with each characteristic. In the case of the teaching variable, the result presented is the un- exponentiated regression coefficient. As discussed in section IV.D.6. of this final rule, the current IPF PPS teaching adjustment is calculated as 1 + a facility’s ratio of interns and residents to its average daily census, raised to the power of 0.5150. The coefficient for teaching status presented in Table 2 can be interpreted in the same way. Lastly, we consider regression factors to be statistically sign aily census, raised to the power of 0.5150. The coefficient for teaching status presented in Table 2 can be interpreted in the same way. Lastly, we consider regression factors to be statistically significant when the p- value is less than or equal to the significance level of 0.05 (*), 0.01 (**), and 0.001 (***), as notated in the Table 2 presented in this final rule. We discuss the changes to the adjustment factors for IPFs located in rural areas and for teaching status in sections IV.D.5. and IV.D.6. of this final rule, respectively, and the refinement standardization factor in section IV.D.9. of this final rule. TABLE 2—IPF PPS PER DIEM COST REGRESSION RESULTS WITH DATA FROM FY 2020 THROUGH FY 2022 Variable Description Number of stays FY2020– FY2022 Percentage of Stays FY2020– FY2022 FY2025 adjustment factor Estimated adjustment factor Statistical significance Total ......................................................................................................... Provider: Rural ......................................................................................... Provider: Teaching Status, log(1 + FTE Residents/Average Daily Cen- sus) ................................. ral ......................................................................................... Provider: Teaching Status, log(1 + FTE Residents/Average Daily Cen- sus) ....................................................................................................... Control Variable: Stay Has ECT treatment ............................................. Control Variable: Stay Has Positive Covered ED Charge ...................... Control Variable: Stay Discharged in FY2020 ......................................... Control Variable: Stay Discharged in FY2021 ......................................... Control Variable: Stay Discharged in FY2022 ......................................... MS–DRG 056: Degenerative Nervous System Disorders w MCC ......... MS–DRG 057: Degenerative Nervous System Disorders w/out MCC ... MS–DRG 876: OR Procedures with Principal Diagnosis of Mental Health ................................................................................................... MS–DRG 880: Acute Adjustment Reaction and Psychosocial Dysfunc- tion ........................................................................................................ MS–DRG 881: Depressive Neuroses ... 0: Acute Adjustment Reaction and Psychosocial Dysfunc- tion ........................................................................................................ MS–DRG 881: Depressive Neuroses ...................................................... MS–DRG 882: Neuroses Except Depressive .......................................... MS–DRG 883: Disorders of Personality and Impulse Control ................ MS–DRG 884: Organic Disturbances and Intellectual Disability ............ MS–DRG 885: Psychosis ........................................................................ MS–DRG 886: Behavioral and Developmental Disorders ...................... MS–DRG 887: Other Mental Disorder Diagnoses .................................. MS–DRG 894: Alcohol, Drug Abuse or Dependence, Left AMA ............ MS–DRG 895: Alcohol, Drug Abuse or Dependence w Rehab Therapy MS–DRG 896: Alcohol, Drug Abuse or Dependence w/out rehab ther- apy w MCC ........................................................................................... MS–DRG 897: Alcohol, Drug Abuse or Dependence w/out rehab ther- apy w/out MCC ..................................................................................... MS–DRG 91 .......................... MS–DRG 897: Alcohol, Drug Abuse or Dependence w/out rehab ther- apy w/out MCC ..................................................................................... MS–DRG 917: Poisoning and Toxic Effects of Drugs w MCC ............... MS–DRG 918: Poisoning and Toxic Effects of Drugs w/out MCC ......... MS–DRG 947: Signs and Symptoms w MCC ......................................... MS–DRG 948: Signs and Symptoms w/out MCC ................................... Comorbidity: Artificial Openings—Digestive & Urinary ............................ Comorbidity: Cardiac Conditions ............................................................. Comorbidity: Chronic Obstructive Pulmonary Disease and Sleep Apnea ................................................................................................... Comorbidity: Developmental Disabilities ................................................. Comorbidity: Eating Disorders ................................................................. Comorbidity: Gangrene ............................................................................ Comorbidity: Oncology Treatment ..................................................... ............... Comorbidity: Gangrene ............................................................................ Comorbidity: Oncology Treatment ........................................................... Comorbidity: Poisoning ............................................................................ Comorbidity: Renal Failure, Acute ........................................................... Comorbidity: Renal Failure, Chronic ........................................................ 704,472 88,437 146,175 11,269 227,647 280,959 229,125 194,388 4,251 33,401 671 6,996 19,756 8,944 5,067 48,587 529,855 1,340 309 2,631 10,346 920 29,884 128 742 56 588 3,217 19,478 40,003 24,782 2,577 207 10 5,436 17,466 42,544 100.0 12.6 .................... 1.17 .................... 1.18 .................... *** 20.7 1.6 32.3 39.9 32.5 27.6 0.6 4.7 0.1 1.0 2.8 1.3 0.7 6.9 75.2 0.2 0.0 0.4 1.5 0.1 4.2 0.0 0.1 0.0 0.1 0.5 2.8 5.7 3.5 0.4 0.0 0.0 0.8 2.5 6.0 0.5150 N/A N/A N/A N/A N/A 1.12 1.11 0.7957 1.31 1.46 1.00 1.01 1.03 .................... .................... *** *** *** .................... ** *** .................... .................... 1.29 .................... .................... 1.08 1.31 1.46 1.00 1.01 1.03 .................... .................... *** *** *** .................... ** *** .................... .................... 1.29 .................... .................... 1.08 1.06 1.02 1.17 1.08 1.00 1.07 1.00 0.86 0.90 .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... 1.00 .................... .................... 0.95 1.19 1.12 1.12 1.09 1.07 1.04 1.09 1.04 1.09 1.12 1.44 1.16 1.06 1.08 .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... ............. .................. .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... VerDate Sep 2014 19:33 Aug 04, 2025 Jkt 262001 PO 00000 Frm 00017 Fmt 4701 Sfmt 4700 E:\FR\FM\05AUR2.SGM 05AUR2 2 S E L U R h t i w D O R P 3 2 N Q X 1 1 K S D n o r e t t o l 37644 Federal Register / Vol. 90, No. 148 / Tuesday, August 5, 2025 / Rules and Regulations TABLE 2—IPF PPS PER DIEM COST REGRESSION RESULTS WITH DATA FROM FY 2020 THROUGH FY 2022—Continued Variable Description Number of stays FY2020– FY2022 Percentage of Stays FY2020– FY2022 FY2025 adjustment factor Estimated adjustment factor Statistical significance Comorbidity: Severe Musculoskeletal & Connective Tissue Disease ..... Comorbidity: Severe Protein Malnutrition ................................................ Comorbidity: Tracheostomy ................................................................. ssue Disease ..... Comorbidity: Severe Protein Malnutrition ................................................ Comorbidity: Tracheostomy ..................................................................... Comorbidity: Uncontrolled Diabetes ........................................................ Comorbidity: Intensive Management for High-Risk Behavior .................. Ages: Under 45 ........................................................................................ Ages: 45 and under 55 years .................................................................. Ages: 55 and under 60 years .................................................................. Ages: 60 and under 65 years .................................................................. Ages: 65 and under 70 years .................................................................. Ages: 70 and under 80 years .................................................................. Ages: 80 years and over ......................................................................... Length of stay—1 day ............................................................................. Length of stay—2 days ............................. ................................................. Length of stay—1 day ............................................................................. Length of stay—2 days ............................................................................ Length of stay—3 days ............................................................................ Length of stay—4 days ............................................................................ Length of stay—5 days ............................................................................ Length of stay—6 days ............................................................................ Length of stay—7 days ............................................................................ Length of stay—8 days ............................................................................ Length of stay—9 days ............................................................................ Length of stay—10 days .......................................................................... Length of stay—11 days .......................................................................... Length of stay—12 days ........................................ ...................................... Length of stay—11 days .......................................................................... Length of stay—12 days .......................................................................... Length of stay—13 days .......................................................................... Length of stay—14 days .......................................................................... Length of stay—15 days .......................................................................... Length of stay—16 days .......................................................................... Length of stay—17 days .......................................................................... Length of stay—18 days .......................................................................... Length of stay—19 days .......................................................................... Length of stay—20 days .......................................................................... Length of stay—21 days .......................................................................... Length of stay—22 days or longer .................................................. .................. Length of stay—21 days .......................................................................... Length of stay—22 days or longer .......................................................... 3,765 4,907 260 20,001 18,815 208,334 102,694 61,728 58,702 83,972 113,411 75,631 15,429 24,436 36,245 41,061 46,857 50,853 54,636 44,677 36,935 33,644 30,418 28,017 28,089 30,556 21,953 16,502 14,126 12,300 11,467 11,702 11,018 103,551 0.5 0.7 0.0 2.8 2.7 29.6 14.6 8.8 8.3 11.9 16.1 10.7 2.2 3.5 5.1 5.8 6.7 7.2 7.8 6.3 5.2 4.8 4.3 4.0 4.0 4.3 3.1 2.3 2.0 1.7% 1.6 1.7 1.6 14.7 1.05 1.17 1.09 1.05 1.07 1.00 1.02 1.05 1.06 1.09 1.11 1.13 1.28 1.20 1.15 1.12 1.08 1.06 1.03 1.02 1.01 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .......... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... 4. Wage Index .................. .................... .................... .................... .................... .................... .................... .................... .................... 4. Wage Index Adjustment a. Background As discussed in the RY 2007 IPF PPS final rule (71 FR 27061), and the RY 2009 IPF PPS (73 FR 25719) and RY 2010 IPF PPS notices (74 FR 20373), to provide an adjustment for geographic wage levels, the labor-related portion of an IPF’s payment is adjusted using an appropriate wage index. Currently, an IPF’s geographic wage index value is determined based on the actual location of the IPF in an urban or rural area, as defined in § 412.64(b)(1)(ii)(A) and (C). Due to the variation in costs and because of the differences in geographic wage levels, in the RY 2005 IPF PPS final rule, we required that payment rates under the IPF PPS be adjusted by a geographic wage index. We proposed and finalized a policy to use the unadjusted, pre-floor, pre-reclassified IPPS hospital wage index to account for geographic differences in IPF labor costs. We implemented use of the pre- floor, pre-reclassified IPPS hospital wage data to compute the IPF wage index since there was not an age index to account for geographic differences in IPF labor costs. We implemented use of the pre- floor, pre-reclassified IPPS hospital wage data to compute the IPF wage index since there was not an IPF- specific wage index available. We believe that IPFs generally compete in the same labor market as IPPS hospitals, and therefore, the pre-floor, pre- reclassified IPPS hospital wage data should be reflective of labor costs of IPFs. We believe this pre-floor, pre- reclassified IPPS hospital wage index to be the best available data to use as proxy for an IPF-specific wage index. As discussed in the RY 2007 IPF PPS final rule (71 FR 27061 through 27067), under the IPF PPS, the wage index is calculated using the IPPS wage index for the labor market area in which the IPF is located, without considering geographic reclassifications, floors, and other adjustments made to the wage index under the IPPS. For a complete description of these IPPS wage index adjustments, we refer readers to the FY 2019 IPPS/LTCH PPS final rule (83 FR 41362 through 41390). Our wage index policy at § 412.424(a)(2) provides that we use the best Medicare data available to estimate costs per day, including an approp 2019 IPPS/LTCH PPS final rule (83 FR 41362 through 41390). Our wage index policy at § 412.424(a)(2) provides that we use the best Medicare data available to estimate costs per day, including an appropriate wage index to adjust for wage differences. When the IPF PPS was implemented in the RY 2005 IPF PPS final rule, with an effective date of January 1, 2005, the pre-floor, pre-reclassified IPPS hospital wage index that was available at the time was the FY 2005 pre-floor, pre- reclassified IPPS hospital wage index. Historically, the IPF wage index for a given RY has used the pre-floor, pre- reclassified IPPS hospital wage index from the prior FY as its basis. This has been due in part to the pre-floor, pre- reclassified IPPS hospital wage index data that were available during the IPF rulemaking cycle, where an annual IPF notice or IPF final rule was usually published in early May. This publication timeframe was relatively early compared to other Medicare payment rules because the IPF PPS follows a RY, which was defined in the implementation of the IPF PPS as the 12-month period from July 1 to June 30 (69 FR 66927). Therefore, the best available data at the time the IPF PPS was implem follows a RY, which was defined in the implementation of the IPF PPS as the 12-month period from July 1 to June 30 (69 FR 66927). Therefore, the best available data at the time the IPF PPS was implemented was the pre-floor, pre- reclassified IPPS hospital wage index from the prior FY (for example, the RY 2006 IPF wage index was based on the VerDate Sep 2014 19:33 Aug 04, 2025 Jkt 262001 PO 00000 Frm 00018 Fmt 4701 Sfmt 4700 E:\FR\FM\05AUR2.SGM 05AUR2 2 S E L U R h t i w D O R P 3 2 N Q X 1 1 K S D n o r e t t o l Federal Register / Vol. 90, No. 148 / Tuesday, August 5, 2025 / Rules and Regulations 37645 FY 2005 pre-floor, pre-reclassified IPPS hospital wage index). In the RY 2012 IPF PPS final rule, we changed the reporting year timeframe for IPFs from a RY to FY, which begins October 1 and ends September 30 (76 FR 26434 and 26435). In that FY 2012 IPF PPS final rule, we continued our established policy of using the pre-floor, pre-reclassified IPPS hospital wage index from the prior year (that is, from FY 2011) as the basis for the FY 2012 IPF wage index. This policy of basing a wage index on the prior year’s pre-floor, pre-reclassified IPPS hospital wage index has been followed b ear (that is, from FY 2011) as the basis for the FY 2012 IPF wage index. This policy of basing a wage index on the prior year’s pre-floor, pre-reclassified IPPS hospital wage index has been followed by other Medicare payment systems, such as hospice and inpatient rehabilitation facilities. By continuing with our established policy, we remained consistent with other Medicare payment systems. In FY 2020, we finalized the IPF wage index methodology to align the IPF PPS wage index with the same wage data timeframe used by the IPPS for FY 2020 and subsequent years. Specifically, we finalized the use of the pre-floor, pre- reclassified IPPS hospital wage index from the FY concurrent with the IPF FY as the basis for the IPF wage index. For example, the FY 2020 IPF wage index was based on the FY 2020 pre-floor, pre- reclassified IPPS hospital wage index rather than on the FY 2019 pre-floor, pre-reclassified IPPS hospital wage index. We explained in the FY 2020 proposed rule (84 FR 16973), that using the concurrent pre-floor, pre-reclassified IPPS hospital wage index will result in the most up-to-date wage data being the basis for the IPF wage index. We noted that it would also result in mo using the concurrent pre-floor, pre-reclassified IPPS hospital wage index will result in the most up-to-date wage data being the basis for the IPF wage index. We noted that it would also result in more consistency and parity in the wage index methodology used by other Medicare payment systems. We indicated that the Medicare skilled nursing facility (SNF) PPS already used the concurrent IPPS hospital wage index data as the basis for the SNF PPS wage index. We proposed and finalized similar policies to use the concurrent pre-floor, pre-reclassified IPPS hospital wage index data in other Medicare payment systems, such as hospice and inpatient rehabilitation facilities. Thus, the wage adjusted Medicare payments of various provider types are based upon wage index data from the same timeframe. For FY 2026, we proposed to continue to use the concurrent pre-floor, pre-reclassified IPPS hospital wage index as the basis for the IPF wage index. In the FY 2023 IPF PPS final rule (87 FR 46856 through 46859), we finalized a permanent 5-percent cap on any decrease to a provider’s wage index from its wage index in the prior year, and we stated that we will apply this cap in a budget neutral manne ugh 46859), we finalized a permanent 5-percent cap on any decrease to a provider’s wage index from its wage index in the prior year, and we stated that we will apply this cap in a budget neutral manner. In addition, we finalized a policy that a new IPF will be paid the wage index for the area in which it is geographically located for its first full or partial FY with no cap applied because a new IPF will not have a wage index in the prior FY. We amended the IPF PPS regulations at § 412.424(d)(1)(i) to reflect this permanent cap on wage index decreases. We refer readers to the FY 2023 IPF PPS final rule for a more detailed discussion about this policy. In the FY 2026 IPF PPS proposed rule, we proposed to apply the IPF wage index adjustment to the labor-related share of the national IPF PPS base rate and ECT payment per treatment. As discussed in section IV.A.3 of this final rule, the final labor-related share of the IPF PPS national base rate and ECT payment per treatment is 79.0 percent in FY 2026. This percentage reflects the labor-related share relative importance of the 2021-based IPF market basket for FY 2026 and is 0.2 percentage point higher than the FY 2025 labor-related sha t in FY 2026. This percentage reflects the labor-related share relative importance of the 2021-based IPF market basket for FY 2026 and is 0.2 percentage point higher than the FY 2025 labor-related share. The following is a summary of the comments we received on the proposed wage index adjustment and our responses. Comment: A commenter recommended CMS apply the wage index 5-percent cap in a non-budget neutral manner. Response: We did not propose any new policies this year pertaining to the 5-percent cap, and accordingly, we are not finalizing any new policies in this final rule. In accordance with our longstanding policy under the IPF PPS, we updated the wage index in such a way that total estimated payments to IPFs for FY 2026 are the same with or without the changes (that is, in a budget-neutral manner) by applying a budget neutrality factor to the IPF PPS rates. We applied the wage index cap in a budget-neutral manner in accordance with this overall budget neutrality policy for the IPF PPS wage index so that wage index changes do not increase aggregate Medicare spending. In the FY 2023 IPF PPS proposed rule (87 FR 19423 through 19425), we noted that applying a 5-percent cap on al PF PPS wage index so that wage index changes do not increase aggregate Medicare spending. In the FY 2023 IPF PPS proposed rule (87 FR 19423 through 19425), we noted that applying a 5-percent cap on all wage index decreases would have a very small effect on the wage index budget neutrality factor for FY 2023. We explained that we anticipate that in the absence of proposed policy changes, most providers will not experience year to-year wage index declines greater than 5 percent in any given year and that we expect the impact to the wage index budget neutrality factor in future years will continue to be minimal. Comment: Two commenters requested CMS revise the IPF wage index methodology. Specifically, the commenters suggested CMS revise the policy so that the post-reclassification and post-floor hospital IPPS wage index is used to calculate the wage index for IPFs. The commenter stated that the continued use of the pre-reclassification and pre-floor hospital inpatient wage index is unreasonable because it places IPFs at a disadvantage in the labor markets in which they operate relative to hospitals in the same markets. In addition, a commenter urged CMS to apply an out-migration adjus onable because it places IPFs at a disadvantage in the labor markets in which they operate relative to hospitals in the same markets. In addition, a commenter urged CMS to apply an out-migration adjustment to IPFs to account for the employment of hospital employees who reside in one county but commute to work in a county with a higher wage index. Response: We appreciate the commenters’ recommendations. We did not propose the specific policies suggested by commenters, but we will take these recommendations into consideration to potentially inform future rulemaking. We do not believe that the continued use of the pre- reclassification and pre-floor hospital inpatient wage index for FY 2026 is unreasonable or that this policy puts IPFs at a disadvantage relative to hospitals in the labor markets in which they operate. As we have previously discussed in the RY 2007 final rule (71 FR 27066), we believe that the actual location of an IPF (as opposed to the location of affiliated providers) is most appropriate for determining the wage adjustment because the prevailing wages in the area in which the IPF is located influence the cost of a case. In that same RY 2007 final rule (71 FR 27066), s most appropriate for determining the wage adjustment because the prevailing wages in the area in which the IPF is located influence the cost of a case. In that same RY 2007 final rule (71 FR 27066), we also stated that we believe the ‘‘rural floor’’ is required only for the acute care hospital payment system because section 4410 of the Balanced Budget Act of 1997 (Pub. L. 105–33) applies specifically to acute care hospitals and not excluded hospitals and excluded units. As we have previously discussed, the IPF wage index is intended to be a relative measure of the value of labor in prescribed labor market areas (87 FR 46857). There are a variety of reasons why our longstanding IPF wage index policy have not applied floors or reclassifications, which, as we previously noted, are not applied to the IPF wage index by statute. For example, applying floors and reclassifications to the IPF wage index would significantly increase administrative burden, both for IPFs and for CMS, associated with IPFs reclassifying from one CBSA to another, and it would significantly increase the VerDate Sep 2014 19:33 Aug 04, 2025 Jkt 262001 PO 00000 Frm 00019 Fmt 4701 Sfmt 4700 E:\FR\FM\05AUR2.SGM 05AUR with IPFs reclassifying from one CBSA to another, and it would significantly increase the VerDate Sep 2014 19:33 Aug 04, 2025 Jkt 262001 PO 00000 Frm 00019 Fmt 4701 Sfmt 4700 E:\FR\FM\05AUR2.SGM 05AUR2 2 S E L U R h t i w D O R P 3 2 N Q X 1 1 K S D n o r e t t o l 37646 Federal Register / Vol. 90, No. 148 / Tuesday, August 5, 2025 / Rules and Regulations complexity of the methodology. Furthermore, because floors and reclassifications would be applied budget-neutrally under the wage index, these policies would increase the wage index for some IPFs while reducing IPF PPS payments for all other IPFs, which would upset the long-settled expectations with which IPFs across the country have been operating. For these reasons, we believe using the pre-floor, pre-reclassified IPPS hospital wage index is the most appropriate data to use as a proxy for an IPF wage index. We appreciate the commenter’s suggestion to apply an out-migration adjustment to IPFs to account for employment of hospital staff who commute to work in counties with a higher wage index. However, we note that the out-migration adjustment is applied to the IPPS hospital wage index under section 1886(d)(13) of the Act, which i ff who commute to work in counties with a higher wage index. However, we note that the out-migration adjustment is applied to the IPPS hospital wage index under section 1886(d)(13) of the Act, which is a statutory provision that specifically applies to subsection (d) hospitals paid under the IPPS. As discussed in the prior paragraph, we do not believe it is appropriate for the IPF PPS to apply an out-migration adjustment that is not statutorily required, because such a policy would increase administrative burden and have distributional impacts on IPFs. Final Decision: After consideration of the comments received, we are finalizing our proposal for FY 2026 to continue to use the concurrent pre-floor, pre-reclassified IPPS hospital wage index as the basis for the IPF wage index. We will apply the IPF wage index adjustment to the labor-related share of the national base rate and ECT payment per treatment. The labor- related share of the national rate and ECT payment per treatment will change from 78.8 percent in FY 2025 to 79.0 percent in FY 2026. This percentage reflects the labor-related share of the 2021-based IPF market basket for FY 2026 (see section IV.A.3 of this final rule). b nge from 78.8 percent in FY 2025 to 79.0 percent in FY 2026. This percentage reflects the labor-related share of the 2021-based IPF market basket for FY 2026 (see section IV.A.3 of this final rule). b. Office of Management and Budget (OMB) Bulletins The wage index used for the IPF PPS is calculated using the unadjusted, pre- reclassified and pre-floor IPPS wage index data and is assigned to the IPF based on the labor market area in which the IPF is geographically located. IPF labor market areas are delineated based on the Core-Based Statistical Area (CBSAs) established by the OMB. Generally, OMB issues major revisions to statistical areas every 10 years, based on the results of the decennial census. However, OMB occasionally issues minor updates and revisions to statistical areas in the years between the decennial censuses through OMB Bulletins. These bulletins contain information regarding CBSA changes, including changes to CBSA numbers and titles. In accordance with our established methodology, the IPF PPS has historically adopted any CBSA changes that are published in the OMB bulletin that corresponds with the IPPS hospital wage index used to determine the IPF wage index and, wh ethodology, the IPF PPS has historically adopted any CBSA changes that are published in the OMB bulletin that corresponds with the IPPS hospital wage index used to determine the IPF wage index and, when necessary and appropriate, has proposed and finalized transition policies for these changes. In the RY 2007 IPF PPS final rule (71 FR 27061 through 27067), we adopted the changes discussed in OMB Bulletin No. 03–04 (June 6, 2003), which announced revised definitions for Metropolitan Statistical Areas (MSAs), and the creation of Micropolitan Statistical Areas and Combined Statistical Areas. We refer readers to the FY 2007 IPF PPS final rule (71 FR 27064 and 27065) for a complete discussion regarding treating Micropolitan Areas as rural. In adopting the OMB CBSA geographic designations in RY 2007, we did not provide a separate transition for the CBSA-based wage index since the IPF PPS was already in a transition period from TEFRA payments to PPS payments. In the RY 2009 IPF PPS notice, we incorporated the CBSA nomenclature changes published in the most recent OMB bulletin that applied to the IPPS hospital wage index used to determine the current IPF wage index and stated that we expec incorporated the CBSA nomenclature changes published in the most recent OMB bulletin that applied to the IPPS hospital wage index used to determine the current IPF wage index and stated that we expected to continue to do the same for all the OMB CBSA nomenclature changes in future IPF PPS rules and notices, as necessary (73 FR 25721). Subsequently, CMS adopted the changes that were published in past OMB bulletins in the FY 2016 IPF PPS final rule (80 FR 46682 through 46689), the FY 2018 IPF PPS rate update (82 FR 36778 and 36779), the FY 2020 IPF PPS final rule (84 FR 38453 and 38454), and the FY 2021 IPF PPS final rule (85 FR 47051 through 47059). We direct readers to each of these rules for more information about the changes that were adopted and any associated transition policies. As discussed in the FY 2023 IPF PPS final rule, we did not adopt OMB Bulletin 20–01, which was issued March 6, 2020, because we determined this bulletin had no material impact on the IPF PPS wage index. This bulletin creates only one Micropolitan statistical area, and Micropolitan areas are considered rural for the IPF PPS wage index. That is, the constituent county of the new Micropolitan area was co his bulletin creates only one Micropolitan statistical area, and Micropolitan areas are considered rural for the IPF PPS wage index. That is, the constituent county of the new Micropolitan area was considered rural effective as of FY 2021 and would continue to be considered rural if we adopted OMB Bulletin 20– 01. In the FY 2025 IPF PPS final rule (89 FR 64614 through 64633), we adopted the updates set forth in OMB Bulletin No. 23–01 effective July 21, 2023, beginning with the FY 2025 IPF PPS wage index. These updates included material changes to the OMB statistical area delineations, which included 53 urban counties that became rural, 54 rural counties that became urban, and 88 counties that moved to a new or modified CBSA. These updates also included replacing the 8 counties in Connecticut with 9 new ‘‘Planning Regions.’’ Planning regions now serve as county-equivalents within the CBSA system. OMB Bulletin No. 23 may be accessed online at https:// www.whitehouse.gov/wp-content/ uploads/2023/07/OMB-Bulletin-23- 01.pdf. Given the scope of changes involved in adopting the CBSA delineations for FY 2025, we finalized a budget neutral 3-year phase out policy for IPFs transitioning from ds/2023/07/OMB-Bulletin-23- 01.pdf. Given the scope of changes involved in adopting the CBSA delineations for FY 2025, we finalized a budget neutral 3-year phase out policy for IPFs transitioning from rural to urban based on CBSA revisions, as discussed further in section IV.D.5.c of this final rule. We also applied the permanent 5-percent cap on wage index decreases described at § 412.424(d)(1)(i). c. Wage Index Budget Neutrality Adjustment In accordance with § 412.424(c)(5), changes to the wage index are made in a budget neutral manner so that updates do not increase expenditures. Therefore, for FY 2026, we are continuing to apply a budget neutrality adjustment in accordance with our existing budget neutrality policy. This policy requires us to update the wage index in such a way that total estimated payments to IPFs for FY 2026 are the same with or without the changes (that is, in a budget neutral manner) by applying a budget neutrality factor to the IPF PPS rates. We will use the following steps to ensure that the rates reflect the FY 2026 update to the wage indexes (based on FY 2022 hospital cost report data) and the labor-related share in a budget- neutral manner: Step 1: Sim ollowing steps to ensure that the rates reflect the FY 2026 update to the wage indexes (based on FY 2022 hospital cost report data) and the labor-related share in a budget- neutral manner: Step 1: Simulate estimated IPF PPS payments, using the FY 2025 IPF wage index values (available on the CMS website) and labor-related share (as published in the FY 2025 IPF PPS final rule (89 FR 64582)). Step 2: Simulate estimated IPF PPS payments using the FY 2026 IPF wage index values (available on the CMS website), and the FY 2026 labor-related share (based on the latest available data as discussed previously). VerDate Sep 2014 19:33 Aug 04, 2025 Jkt 262001 PO 00000 Frm 00020 Fmt 4701 Sfmt 4700 E:\FR\FM\05AUR2.SGM 05AUR2 2 S E L U R h t i w D O R P 3 2 N Q X 1 1 K S D n o r e t t o l Federal Register / Vol. 90, No. 148 / Tuesday, August 5, 2025 / Rules and Regulations 37647 Step 3: Divide the amount calculated in step 1 by the amount calculated in step 2. The resulting quotient is the FY 2026 budget neutral wage adjustment factor of 1.0011. Step 4: Apply the FY 2026 budget neutral wage adjustment factor from step 3 to the FY 2025 IPF PPS Federal per diem base rate after the application of the et neutral wage adjustment factor of 1.0011. Step 4: Apply the FY 2026 budget neutral wage adjustment factor from step 3 to the FY 2025 IPF PPS Federal per diem base rate after the application of the final IPF market basket increase reduced by the final productivity adjustment described in section IV.A.2 of this final rule to determine the final FY 2026 IPF PPS Federal per diem base rate. As discussed in section IV.D.9 of this final rule, we are also applying a refinement standardization factor to determine the FY 2026 IPF PPS Federal per diem base rate. 5. Adjustment for Rural Location a. Background In the RY 2005 IPF PPS final rule (69 FR 66954), we provided a 17-percent payment adjustment for IPFs located in a rural area. This adjustment was based on the regression analysis, which indicated that the per diem cost of rural facilities was 17 percent higher than that of urban facilities after accounting for the influence of the other variables included in the regression. This 17- percent adjustment has been part of the IPF PPS each year since the inception of the IPF PPS. In the FY 2025 IPF PPS final rule, we revised the patient-level adjustment factors and changed the CBSA delinea nt adjustment has been part of the IPF PPS each year since the inception of the IPF PPS. In the FY 2025 IPF PPS final rule, we revised the patient-level adjustment factors and changed the CBSA delineations. To minimize the scope of changes that would impact providers in any single year, we maintained the existing regression- derived adjustment factor, which was established in RY 2005, for IPFs located in a rural area as defined at § 412.64(b)(1)(ii)(C) for FY 2025. See the RY 2005 IPF PPS final rule (69 FR 66954) for a complete discussion of the adjustment for rural locations. b. Adjustment for Rural Location received into consideration for development of the proposed FY 2026 revision of the payment adjustment for rural location. As discussed in section IV.D.3. of this FY 2026 IPF PPS final rule, we proposed to derive updated IPF PPS facility-level adjustment factors for FY 2026 using a regression analysis of data from the FY 2020 through 2022 MedPAR data files and Medicare cost report data from the FY 2020 through 2022 Hospital Cost Report Information System (HCRIS). More information about the data used for the impact simulations is found in section VII.C. of this FY 2026 IPF PPS data from the FY 2020 through 2022 Hospital Cost Report Information System (HCRIS). More information about the data used for the impact simulations is found in section VII.C. of this FY 2026 IPF PPS final rule. For FY 2026, we proposed to increase the rural adjustment to 18 percent. Our regression analysis described in section IV.D.3 of this final rule indicates that this revised adjustment more accurately represents the difference in costs between urban and rural IPFs. As discussed in section IV.D.9 of this final rule, we proposed to implement this revision to the rural adjustment budget- neutrally. A detailed discussion of the distributional impacts of this change is found in section VII.C. of this final rule. We solicited comments on the proposed revision to the payment adjustment for rural location. Lastly, we proposed that if more recent data become available, we would consider using such data to determine the final FY 2026 adjustment factor for rural location. As discussed in section IV.D.3 of this final rule, our updated regression analysis for this final rule incorporated more recent claims data. The regression analysis of this updated data yields an FY 2026 adjustment fac ction IV.D.3 of this final rule, our updated regression analysis for this final rule incorporated more recent claims data. The regression analysis of this updated data yields an FY 2026 adjustment factor for rural location of 18 percent; this result is consistent with the rural adjustment factor we proposed for FY 2026. The following is a summary of the comments we received and our responses. Comment: Several commenters As discussed in section IV.D.3. of this FY 2026 IPF PPS final rule, we have completed analysis of more recent cost and claims data, which indicate that revisions to the facility-level IPF PPS payment adjustment factors would be appropriate. supported the update of the adjustment factor for rural location. A commenter appreciated this update to reflect more recent data, completing the updates of both patient-level and facility-level adjustment factors in FY 2025 and in this final rule. In the FY 2025 IPF PPS proposed rule, A commenter advocated for a larger we included a request for information (RFI) regarding a potential revision to the payment adjustment for rural location (89 FR 23194 and 23195); we refer readers to section V.A. of the FY 2025 IPF PPS final rule ( request for information (RFI) regarding a potential revision to the payment adjustment for rural location (89 FR 23194 and 23195); we refer readers to section V.A. of the FY 2025 IPF PPS final rule (89 FR 64641) for summaries of the comments we received, and our responses. In the FY 2026 IPF PPS proposed rule, we explained that we took the comments increase to 20 percent or more to be implemented with new funding; another suggested that the proposed update to 18 percent be implemented non-budget neutrally to avoid lowering payments for urban facilities. Commenters also suggested exploring policy alternatives like a low-volume adjustment, a small facility supplemental payment, or extension of the rural designation and payment adjustment to all safety net facilities. Response: We appreciate the commenters’ support for updating the adjustment factor for rural location. We share the commenters’ concerns regarding protecting access to inpatient psychiatric care in rural areas but note that our regression analysis does not support an adjustment of 20 percent. We additionally note that section 1886(s)(5)(D)(iii) of the Act requires that revisions to the IPF PPS payment rates implemented our regression analysis does not support an adjustment of 20 percent. We additionally note that section 1886(s)(5)(D)(iii) of the Act requires that revisions to the IPF PPS payment rates implemented pursuant to section 1886(s)(5)(D)(i) of the Act be made budget neutrally. We thank commenters for their policy suggestions for improving the IPF PPS and will take these suggestions into consideration as we continue to analyze and revise the IPF PPS in future years. Final Decision: After consideration of the comments, we are finalizing an increase in the rural adjustment to 18 percent as proposed. Our regression analysis described in section IV.D.3 of this final rule indicates that this increased adjustment more accurately represents the difference in costs between urban and rural IPFs. This revision to the rural adjustment will be implemented budget-neutrally, as proposed. A detailed discussion of the distributional impacts of this change is found in section VII.C. of this final rule. c. Continuation of Rural Transition The adoption of OMB Bulletin No. 23–01 in the FY 2025 IPF PPS final rule (89 FR 64632) in accordance with our established methodology determines whether a facility is c ontinuation of Rural Transition The adoption of OMB Bulletin No. 23–01 in the FY 2025 IPF PPS final rule (89 FR 64632) in accordance with our established methodology determines whether a facility is classified as urban or rural for purposes of the rural payment adjustment in the IPF PPS. Implementation of the updated OMB delineations results in the rural payment adjustment being applied where it is appropriate to adjust for higher costs incurred by IPFs in rural locations; however, these changes have distributional effects among IPF providers. Some providers lost eligibility for the rural payment adjustment in FY 2025 as a result of these changes. Therefore, we provided a transition period to implement the updated OMB delineations (89 FR 64633). In the FY 2025 IPF PPS final rule, we phased out the rural adjustment for facilities located in a county that transitioned from rural to urban due to the changes outlined in OMB Bulletin 23–01. We implemented a 3-year budget neutral phase-out of the rural adjustment for IPFs located in the 54 rural counties that would become urban under the new OMB delineations, given the potentially significant payment VerDate Sep 2014 19:33 Aug 04, 2025 J f the rural adjustment for IPFs located in the 54 rural counties that would become urban under the new OMB delineations, given the potentially significant payment VerDate Sep 2014 19:33 Aug 04, 2025 Jkt 262001 PO 00000 Frm 00021 Fmt 4701 Sfmt 4700 E:\FR\FM\05AUR2.SGM 05AUR2 2 S E L U R h t i w D O R P 3 2 N Q X 1 1 K S D n o r e t t o l 37648 Federal Register / Vol. 90, No. 148 / Tuesday, August 5, 2025 / Rules and Regulations impacts for these IPFs (89 FR 64632 and 64633), consistent with the transition policy we adopted for IPFs in FY 2016 (80 FR 46682 through 46689). Under this 3-year phase-out, for FY 2026, IPFs that became urban due to these OMB delineation changes will receive one- third of the rural adjustment that was applicable in FY 2024. For FY 2027, these IPFs will not receive a rural adjustment. 6. Teaching Adjustment a. Background In the RY 2005 IPF PPS final rule, we implemented regulations at § 412.424(d)(1)(iii) to establish a facility- level adjustment for IPFs that are, or are part of, teaching hospitals (69 FR 66954 through 66957). The teaching adjustment accounts for the higher indirect operating costs experienced by hospitals that participate in graduate medic re, or are part of, teaching hospitals (69 FR 66954 through 66957). The teaching adjustment accounts for the higher indirect operating costs experienced by hospitals that participate in graduate medical education (GME) programs. As detailed further in the following paragraphs, the payment adjustments are made based on the ratio of the number of fulltime equivalent (FTE) interns and residents training in the IPF to the IPF’s average daily census. Medicare makes direct GME payments (for direct costs such as resident and teaching physician salaries, and other direct teaching costs) to all teaching hospitals, including those paid under a PPS and those paid under the TEFRA rate-of-increase limits. These direct GME payments are made separately from payments for hospital operating costs and are not part of the IPF PPS. The direct GME payments do not address the estimated higher indirect operating costs teaching hospitals may face. The results of the regression analysis of FY 2002 IPF data established the basis for the payment adjustments included in the RY 2005 IPF PPS final rule. The results showed that the indirect teaching cost variable is significant in explaining the higher costs of ablished the basis for the payment adjustments included in the RY 2005 IPF PPS final rule. The results showed that the indirect teaching cost variable is significant in explaining the higher costs of IPFs that have teaching programs. We calculated the teaching adjustment based on the IPF’s ‘‘teaching variable,’’ which is (1 + [the number of FTE residents training in the IPFs divided by the IPF’s average daily census]). The teaching variable is then raised to the 0.5150 power, resulting in the IPF PPS teaching adjustment. This formula is subject to limitations on the number of FTE residents, which are discussed in greater detail in this final rule at section IV.D.6.c. We established the teaching adjustment in a manner that limited the incentives for IPFs to add FTE residents for the purpose of increasing their teaching adjustment. We imposed a cap on the number of FTE residents that may be counted for purposes of calculating the teaching adjustment. The cap limits the number of FTE residents that teaching IPFs may count for the purpose of calculating the IPF PPS teaching adjustment, not the number of residents teaching institutions can hire or train. We calculated the number of FTE dents that teaching IPFs may count for the purpose of calculating the IPF PPS teaching adjustment, not the number of residents teaching institutions can hire or train. We calculated the number of FTE residents that trained in the IPF during a ‘‘base year’’ and used that FTE resident number as the cap. An IPF’s FTE resident cap is ultimately determined based on the final settlement of the IPF’s most recent cost report filed before November 15, 2004 (69 FR 66955). A complete discussion of the temporary adjustment to the FTE cap to reflect residents due to hospital closure or residency program closure appears in the RY 2012 IPF PPS proposed rule (76 FR 5018 through 5020) and the RY 2012 IPF PPS final rule (76 FR 26453 through 26456). As discussed in section IV.D.6.c. of this final rule, we proposed to make conforming changes to the IPF resident cap policy beginning in FY 2026 to recognize permanent cap increases awarded under section 4122 of the CAA, 2023. In the regression analysis that informed the RY 2004 IPF PPS final rule, the logarithm of the teaching variable had a coefficient value of 0.5150. We converted this cost effect into a teaching payment adjustment by treating the regr informed the RY 2004 IPF PPS final rule, the logarithm of the teaching variable had a coefficient value of 0.5150. We converted this cost effect into a teaching payment adjustment by treating the regression coefficient as an exponent and raising the teaching variable to a power equal to the coefficient value. We note that the coefficient value of 0.5150 was based on the regression analysis holding all other components of the payment system constant. A complete discussion of how the teaching adjustment was calculated appears in the RY 2005 IPF PPS final rule (69 FR 66954 through 66957) and the RY 2009 IPF PPS notice (73 FR 25721). b. Revision to the IPF PPS Teaching Adjustment As we previously described in section IV.D.3.e. of this final rule, we have completed analysis of more recent cost and claims data, which indicate that revisions to the facility-level IPF PPS payment adjustment factors would be appropriate. Accordingly, we proposed to revise the IPF PPS teaching adjustment for FY 2026 based on these results. In the FY 2025 IPF PPS proposed rule, we included an RFI regarding a potential revision to the payment adjustment for teaching status (89 FR 23194 and 23195); we refer rea 2026 based on these results. In the FY 2025 IPF PPS proposed rule, we included an RFI regarding a potential revision to the payment adjustment for teaching status (89 FR 23194 and 23195); we refer readers to section V.A. of the FY 2025 IPF PPS final rule (89 FR 64641) for summaries of the comments we received, and our responses. In general, commenters were supportive of increasing the IPF teaching adjustment based on the more recent analysis presented in that FY 2025 proposed rule. In the FY 2026 IPF PPS proposed rule, we explained that we took these previous comments into consideration when we developed our proposal for the FY 2026 revision of the payment adjustment for teaching status. For FY 2026, we proposed to increase the teaching adjustment to 0.7981, based on the results of our latest regression model (90 FR 18494, 18510). We explained that this un-exponentiated regression coefficient for the teaching status variable was found to be statistically significant at the 0.001 level. We stated that in accordance with our longstanding methodology, we would convert this cost effect to a teaching payment adjustment by treating the regression coefficient as an exponent and raising th We stated that in accordance with our longstanding methodology, we would convert this cost effect to a teaching payment adjustment by treating the regression coefficient as an exponent and raising the teaching variable to a power equal to the coefficient value. In the FY 2026 IPF PPS proposed rule, we stated that we believe increasing the teaching adjustment from 0.5150 to 0.7981 would more appropriately adjust IPF PPS payments for IPFs that have qualified teaching programs and would address the estimated higher indirect operating costs for teaching IPFs (90 FR 18494, 18511). As discussed in section IV.D.9 of this final rule, we proposed to implement this revision to the teaching adjustment budget-neutrally. A detailed discussion of the distributional impacts of this change is found in section VII.C. of this final rule. We solicited comments on this proposed revision to the payment adjustment for teaching status. Lastly, we proposed that, if more recent data were to become available, we would consider using such data to determine the final FY 2026 adjustment factor for teaching status. The following is a summary of the comments we received and our responses. Comment: Commenters we we would consider using such data to determine the final FY 2026 adjustment factor for teaching status. The following is a summary of the comments we received and our responses. Comment: Commenters were supportive of CMS’s proposal to increase the IPF PPS teaching status adjustment from 0.5150 to 0.7981. A commenter noted that the teaching adjustment presently in use was derived from 2002 data and stated their support for an update using more recent data. Response: We appreciate these comments in support of an update to the teaching status adjustment. As discussed in section IV.D.3.e. of this FY 2026 IPF PPS final rule, we note that we have revised our regression model for FY 2026 based on the latest available VerDate Sep 2014 19:33 Aug 04, 2025 Jkt 262001 PO 00000 Frm 00022 Fmt 4701 Sfmt 4700 E:\FR\FM\05AUR2.SGM 05AUR2 2 S E L U R h t i w D O R P 3 2 N Q X 1 1 K S D n o r e t t o l Federal Register / Vol. 90, No. 148 / Tuesday, August 5, 2025 / Rules and Regulations 37649 cost and claims data, as proposed. We believe the results of our latest regression model best address the estimated higher indirect operating costs for teaching IPFs and will most appropriately adjust IPF PPS pay ims data, as proposed. We believe the results of our latest regression model best address the estimated higher indirect operating costs for teaching IPFs and will most appropriately adjust IPF PPS payments for IPFs that have qualified teaching programs. Comment: Some commenters who expressed support for the update to the teaching adjustment nevertheless expressed concerns about payment stability. A commenter stated that the proposed increase to the adjustment for teaching could lead to large swings in payment. A commenter stated that the proposed changes to the teaching and rural adjustment factors together would necessitate an adjustment of nearly three-quarters of 1 percentage point, for budget neutrality. These commenters suggested the adjustment be phased in over 2 years to mitigate negative distributional impacts on payments to non-teaching hospitals. Response: We thank the commenters for the suggestion to phase in the proposed increase to the teaching adjustment over 2 years. Given the requirement under section 1886(s)(5)(D)(3) of the Act to apply revisions to the IPF PPS budget- neutrally, we estimate that the proposed increase to the teaching adjustment would result in dist en the requirement under section 1886(s)(5)(D)(3) of the Act to apply revisions to the IPF PPS budget- neutrally, we estimate that the proposed increase to the teaching adjustment would result in distributional impacts across IPFs. However, we note that the total effect of the proposed facility-level revisions (to the adjustments for both rural location and teaching status) is a reduction of only $6.56 to the final FY 2026 IPF PPS Federal per diem base rate, which we believe IPFs have historically been able to adapt to in a single year. Moreover, our analysis indicates that the largest decrease any provider will experience as a result of the increase in the teaching adjustment is 0.6 percent. By comparison, we have historically considered a 5 percent decrease (in a provider’s wage index, for example), to be a level at which a policy limiting the decrease should be considered. We do not agree that the effect of the increase in the teaching adjustment on the base rate is substantial enough to warrant phasing in over 2 years. Additionally, we note that our latest analysis shows that IPFs with teaching programs have significantly higher costs than our current teaching adjustment recogn gh to warrant phasing in over 2 years. Additionally, we note that our latest analysis shows that IPFs with teaching programs have significantly higher costs than our current teaching adjustment recognizes. We believe that implementing the full revised teaching adjustment in FY 2026 would best support teaching facilities by more appropriately aligning IPF PPS payment with the level of resources involved in the delivery of care to Medicare beneficiaries. Comment: Several commenters called for additional measures to expand the workforce in psychiatry and other clinicians providing mental health services. A few commenters broadly advocated for more training programs, training slots, and funding. Another commenter recommended that CMS consider complementary strategies that would support development of the IPF workforce at non-teaching hospitals, which could include incentive payments or launching a demonstration project at non-teaching hospitals to support new psychiatry residency rotations or training for non-physician practitioners. Response: We appreciate the commenters’ suggestions; however, these comments are out of scope with regard to the current IPF PPS proposal. We will conside or training for non-physician practitioners. Response: We appreciate the commenters’ suggestions; however, these comments are out of scope with regard to the current IPF PPS proposal. We will consider these suggestions to potentially inform future rulemaking. Final Decision: After consideration of the comments we received, we are finalizing a teaching adjustment of 0.7957 for FY 2026 based on the latest available data. In accordance with our longstanding methodology, we will convert this cost effect to a teaching payment adjustment by treating the regression coefficient as an exponent and raising the teaching variable to a power equal to the coefficient value. This revision to the rural adjustment will be implemented budget-neutrally. c. Update to IPF PPS Resident Caps As we described earlier in this FY 2026 IPF PPS final rule, the IPF PPS teaching adjustment includes a policy of capping the number of FTE residents that an IPF can include in the calculation of its teaching adjustment. As previously noted, we established this policy to limit the incentives for IPFs to add FTE residents for the purpose of increasing their teaching adjustment, in keeping with CMS’s statutory responsi As previously noted, we established this policy to limit the incentives for IPFs to add FTE residents for the purpose of increasing their teaching adjustment, in keeping with CMS’s statutory responsibility under the requirements of the Balanced Budget Act of 1997 (BBA) (Pub. L. 105–33). In the RY 2005 IPF PPS final rule (69 FR 66955), we noted that the IPF PPS statute did not require us to impose resident FTE caps, but we recognized that if we imposed no limits on the teaching adjustment under the IPF PPS, teaching programs in those facilities could grow and receive payments in a manner that would be inconsistent with the methodology for teaching hospitals paid under the IPPS. In addition, we were concerned that if a teaching hospital had a distinct part psychiatric unit and had a number of FTE residents above the amount recognized for reimbursement under the limits established by the Balanced Budget Act of 1997 (BBA) (Pub. L. 105– 33), the hospital could potentially circumvent those limits by assigning residents to train in the IPF. We explained that after carefully reviewing the public comments, we decided to adopt a cap on the number of FTE residents that may be counted under t limits by assigning residents to train in the IPF. We explained that after carefully reviewing the public comments, we decided to adopt a cap on the number of FTE residents that may be counted under the IPF PPS for the teaching adjustment. We stated that we made this decision in order to (1) exercise our statutory responsibility under the BBA to prevent any erosion of the resident caps established under the IPPS that could result from the perverse incentives created by the facility adjustment for teaching under the IPF PPS; and (2) avoid creating incentives to artificially expand residency training in IPFs, and ensure that the resident base used to determine payments is related to the care needs in IPF institutions. Since the establishment of the IPF PPS, there have been numerous statutory resident cap increases, which have impacted GME payments as well as IME payments under the IPPS. These statutory resident cap increases have generally not been applicable to IPF hospitals or subunits, because caps are awarded to IPPS hospitals which receive both direct GME payments and indirect medical education (IME) payments under the IPPS. Section 4122 of the CAA, 2023 provided for the distrib