Here's Why Hospital Leaders Hate the Proposed IPPS Rate Increase

While CMS proposes a modest Medicare payment bump and an increase in uncompensated care funds, industry leaders argue it's not enough to offset rising costs, especially as potential Medicaid cuts loom.

The Centers for Medicare & Medicaid Services (CMS) has announced proposed changes to the Inpatient Prospective Payment System (IPPS) that would result in a net 2.4% increase for fiscal year 2026. This reflects an estimated hospital market basket increase of 3.2%, minus a 0.8% productivity adjustment, which anticipates an increase in hospital efficiency.

The proposed rule would also increase uncompensated care payments to disproportionate share hospitals to $7.29 billion, an increase of approximately $1.5 billion from fiscal year 2025.

The proposed increase falls below increases set by CMS in each of the past two years. The IPPS increased by 2.9% for fiscal year 2025 and by 3.1% for fiscal year 2024.

Unsurprisingly, the American Hospital Association (AHA) was quick to criticize the increase, paying special attention to the productivity adjustment.

“We are very concerned that this update will hurt our ability to care for our communities,” Ashley Thompson, AHA senior vice president for public policy, said in a statement. “Indeed, many hospitals across the country, especially those in rural and underserved communities, already operate under unsustainable financial situations, including negative margins.”

There is some data to support Thompson’s position. A recent report from Fitch Ratings found that nonprofit hospitals ended fiscal year 2024 with a razor-thin median operating margin of 1.2%. And these hospitals had just found stable footing, raising the median operating margin from -0.5% in fiscal year 2023.

The increase to Medicare payments proposed by CMS would also be unlikely to match the amount that many of these hospitals will lose in revenue from Medicaid should proposed policy changes go into effect.

“Federal budget cuts that may decrease Medicaid reimbursement and increase uninsured care would reduce hospitals’ ability to recover operating costs," according to the Fitch Ratings report. "Providers, particularly those with a higher share of Medicaid patients, could cut services, close locations, or reduce staff."

Hospitals stand to lose $408 billion in revenue over 10 years if changes to Medicaid currently under consideration are enacted and Affordable Care Act tax credits expire, according to a separate report from the Urban Institute and Robert Wood Johnson Foundation. Researchers also estimated that the resulting rise in uncompensated care would reach a value of $248 billion over the 10-year time frame.

While revenue cycle leaders await the release of a final rule on changes to the IPPS, they should continue identifying areas for improvement in operational efficiency, optimizing collection of patient payments, and developing contingency plans for potential changes to Medicaid.