Health Law Daily Wrap Up, INPATIENT PSYCHIATRIC FACILITIES—FINAL RULES: IPF PPS payments rates increase 2.3 percent for FY 2027, (Jul 31, 2026)

By WK Editorial Staff

CMS updates Medicare payment rates for inpatient psychiatric facilities, modifies quality reporting requirements, and finalizes limits on provider-level outlier payments.

CMS finalized annual updates to Medicare payment policies and rates for inpatient psychiatric facilities (IPF) under the Inpatient Psychiatric Facility Prospective Payment System (IPF PPS) for fiscal year (FY) 2027. The rule updates payment rates, revises the outlier payment threshold, implements changes to the IPF Quality Reporting Program (QRP), and adopts a standardized patient assessment instrument. CMS also finalized a policy, effective in FY 2028, that limits provider-level outlier payments to no more than 20 percent of an IPF's total IPF PPS payments for facilities with at least 50 stays annually (Final rule, 91 Fed. Reg. 48514 (July 31, 2026)).

Payment rates. For FY 2027, CMS is increasing IPF PPS payment rates by 2.3 percent, calculated from a 3.2 percent increase in the 2021-based IPF market basket and reduced by a 0.9 percentage point productivity adjustment. As stated in the original proposal, CMS estimated that the payment update will increase total payments to IPFs by approximately $60 million compared with FY 2026 payment levels (see CMS proposes FY 2027 payment and policy changes for inpatient psychiatric facilities (Apr. 10, 2026)).

Outlier payments. CMS is also updating the outlier threshold to maintain the longstanding policy that outlier payments represent 2 percent of total IPF PPS payments. CMS uses outlier payments to address cases involving exceptionally high treatment costs and to reduce the financial risk associated with treating unusually costly patients. According to CMS, these supplemental payments improve the accuracy of the IPF PPS by better reflecting resource use at both the patient and facility levels.

Outlier payments are determined by comparing the estimated cost of an inpatient psychiatric stay to a fixed threshold. If a case exceeds that threshold, the facility may qualify for additional reimbursement. CMS noted that the outlier fixed dollar loss threshold is recalculated annually to ensure that total outlier payments remain equal to approximately 2 percent of overall IPF PPS payments.

CMS stated it found certain IPFs reporting exceptionally high costs and receiving outlier payments on a substantial share of their claims. The agency determined that these elevated costs were primarily attributable to routine facility expenses, including labor, real estate, overhead, and other provider-level costs that do not vary significantly based on the characteristics or treatment needs of individual patients.

As such, CMS noted that these unusually high-cost facilities can have a disproportionate impact on the overall outlier pool. Because the outlier threshold is calibrated to maintain total outlier spending at 2 percent of aggregate payments, high outlier utilization by a relatively small number of facilities can influence the threshold applicable to all providers. Commenters had previously expressed concern that the threshold has increased substantially in recent years, making it increasingly difficult for facilities treating genuinely costly cases to qualify for outlier payments.

In response to those concerns, CMS finalized a policy that caps outlier payments at the provider level. Under the policy, effective beginning in FY 2028, outlier payments may not exceed 20 percent of an IPF's total IPF PPS payments during a year. The agency stated that the cap is intended to minimize the effect of facilities with unusually high routine costs on the broader outlier payment system and to preserve the outlier adjustment's focus on exceptionally costly patient care.

Although CMS finalized the policy, the agency deferred implementation until FY 2028. CMS explained that commenters identified cost drivers that warrant additional evaluation before the cap becomes effective. The delayed implementation date is intended to provide more time for that review. CMS also finalized an exemption for facilities with fewer than 50 stays per year, recognizing that low-volume providers may experience greater variation in individual case costs and payment results.

Quality reporting. The final rule also includes several modifications to the IPF Quality Reporting Program. CMS reiterated that participation in the program is mandatory for facilities paid under the IPF PPS. Facilities must submit required quality data in the form, manner, and timeframes specified by CMS. Failure to satisfy quality reporting requirements results in a 2-percentage-point reduction in the facility's annual payment update.

As part of the FY 2027 final rule, CMS is removing two quality measures beginning with the calendar year (CY) 2026 reporting period and the FY 2028 payment determination. The agency finalized the removal of the Alcohol Use Brief Intervention Provided or Offered (SUB-2) measure and the related Alcohol Use Brief Intervention subset (SUB-2a) measure. CMS also finalized removal of the Tobacco Use Treatment Provided or Offered at Discharge (TOB-3) measure and the related Tobacco Use Treatment at Discharge subset (TOB-3a) measure.

In addition to these measure changes, CMS will implement a standardized inpatient psychiatric facility patient assessment instrument known as the IPF-PAI. CMS noted that implementation of the assessment instrument is required by section 4125(b)(1) of the Consolidated Appropriations Act of 2023. CMS indicated that standardizing patient assessment data collection will support quality reporting activities within the IPF setting.

CMS also finalized two options for submission of IPF-PAI data. Facilities may use the agency's Patient Assessment Reporting Interoperability Tool (PARIT), a web-based application developed by CMS, or they may submit data through Application Programming Interfaces (APIs) that CMS developed using the Health Level Seven Fast Healthcare Interoperability Resources (FHIR) standard. CMS highlighted that the IPF Quality Reporting Program will be the first CMS statutory quality reporting program to support patient assessment data submission using the FHIR standard.

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