On April 30, 2025, the Centers for Medicare and Medicaid Services (“CMS”) released the Fiscal Year 2026 Inpatient Prospective Payment System (“IPPS”) Proposed Rule (the “Proposed Rule”) containing several impactful changes to reimbursement for medical, nursing and allied health education programs at teaching hospitals. These CMS developments include:
- Proposing to revise the calculations for reimbursable net costs incurred by nursing and allied health educational programs (“NAH Programs”);
- Clarifying how providers can prorate full-time equivalent (“FTE”) counts and caps for cost reporting periods spanning other than twelve months; and
- Announcing the start of the redistribution process for the direct graduate medical education (“DGME”) and indirect medical education (“IME”) FTE caps following the closure of Wahiawa General Hospital in Wahiawa, Hawaii, and Carney Hospital in Boston, Massachusetts.
Additionally, on May 27, 2025, in a long-awaited announcement for Children’s Hospitals Graduate Medical Education (“CHGME”) programs, the Health Resources and Services Administration (“HRSA”) released a final rule (“HRSA Final Rule”) eliminating its weighting methodology that had reduced the weighting factor for fellows from 0.5 FTE to a lesser amount (the “Fellows Penalty”), aligning the weighting methodology with that utilized for GME.
Changes to Reimbursable Net Cost Calculation for NAH Programs
The Proposed Rule contains several revisions to how NAH Programs may calculate net costs, which are eligible for payment on a reasonable cost basis. These revisions follow a decision from the District Court of D.C. (the “Court”) in Mercy Health-St. Vincent Medical Center d/b/a Mercy St. Vincent Medical Center v. Becerra, wherein the Court decided against CMS’s previous policy for calculating net costs, which required that tuition be subtracted from the direct costs of an NAH program prior to accounting for indirect costs. The Court held that such a calculation process was inconsistent with applicable regulatory text. Following the Court’s decision, CMS proposed changes to the applicable regulation at 42 C.F.R. § 413.85(d), which will allow for reversion to CMS’s pre-Mercy cost calculation, and which describes the following steps for calculating net costs for NAH Programs:
- Determine allowable direct costs incurred by the provider for trainee stipends and compensation of teachers employed by the provider.
- Subtract from allowable direct costs the revenues the provider receives from students or on behalf of students enrolled in the program, such as, but not limited to, tuition, student fees or textbooks purchased for resale.
- Add indirect costs of the activities determined under the Medicare cost-finding principles in 42 CFR 413.24, but limited to indirect costs that the provider itself incurs as a consequence of operating the approved educational activities.
When finalized, the Proposed Rule will result in NAH Programs losing the opportunity to deduct tuition from program revenue after the step-down process, resulting in decreased accumulated costs that providers can allocate to their NAH Programs. Because NAH Programs are reimbursed at reasonable cost, the Proposed Rule will reduce the reimbursement available for NAH Programs.
CMS Clarifies FTE Resident Count for Reporting Periods Other than 12 Months
The Proposed Rule includes an effort by CMS to clarify the methodology used to calculate DGME FTEs for cost reporting periods spanning other than 12 months. When calculating FTE cap in these instances, CMS requires providers to take the relevant FTE cap, multiply this figure by the number of days in the provider’s prorated cost reporting period, then divide this result by 365 (or 366 in a leap year). CMS clarified that a similar process would apply when calculating DGME FTE count, wherein the total allowable time a resident spends at a hospital is prorated for hospitals with a cost reporting period of other than 12 months. Finally, CMS clarified that the IME FTE count and cap for providers with other-than-12-month cost reporting years are not subject to the same prorating methodologies, because the size of a hospital’s DRG payments already reflects the amount of patient care furnished during the year. CMS indicates that this is not a policy change, since what is now described in this rulemaking is simply the restatement and clarification of its long-applied policy on the topic.
Closure of Teaching Hospitals in Hawaii and Boston
CMS provided notice to initiate the process for redistributing FTE caps resulting from the closures of Wahiawa General Hospital in Wahiawa, Hawaii, and Carney Hospital in Dorchester, Massachusetts. The FTE cap for each of these hospitals will be distributed in accordance with the application process established under Section 5506 of the Affordable Care Act. Applications for these FTE slots may be submitted using the MEARIS portal through July 10, 2025. The details for these teaching hospitals are as follows:
| CCN | Provider Name | City and State | CBSA Code | Terminating Date |
IME FTE Resident Cap |
Direct GME FTE
Resident Cap |
| 120004 | Wahiawa General Hospital | Wahiawa, HI | 46520 | 4/2/2024 | 17.16 | 14.31 |
| 220017 | Carney Hospital | Boston, MA | 14454 | 8/31/2024 | 63.15 | 61.14 |
HRSA Eliminates CHGME “Fellows Penalty,” Aligning Weighting Methodology with CMS
The HRSA Final Rule revises CHGME reimbursement methodology to eliminate the “Fellows Penalty,” which had reduced the FTE cap for fellows to a rate below the 0.50 FTE required by statute. This rulemaking from HRSA gives CHGME providers some finality after the decision in Milton S. Hershey. Medical Center, et al., v. Becerra, wherein the Court ruled the Fellows Penalty was inconsistent with the Medicare statute. HRSA’s final rule, effective for the 2026 federal fiscal year, subjects CHGME programs to the same weighting methodology introduced for GME programs by the 2023 CMS rulemaking.
The impact of HRSA eliminating the Fellows Penalty for CHGME programs will have a greater impact on those CHGME Programs with higher fellow-to-resident ratios, because the Fellows Penalty was more penalizing for CHGME Programs with a larger proportion of fellows to residents.
Practical Takeaways
- Providers operating NAH programs should closely monitor the 2026 IPPS Final Rule and review established cost reporting methodologies to determine whether changes will be required if the 2026 IPPS Final Rule is finalized.
- Teaching Hospitals interested in obtaining DGME and IME FTE cap from the closure of Wahiawa Hospital and/or Carney Hospital should review the criteria CMS utilizes to prioritize FTE redistributions and work to submit a request prior to the July 10 deadline.
If you have any questions or would like additional information on this article, please contact:
- Scott Geboy at (414) 721-0451 or sgeboy@hallrender.com;
- Caitlin Bell-Butterfield at (919) 228-2408 or cbell-butterfiled@hallrender.com; or
- Zeke Shen at (414) 721-0912 or zshen@hallrender.com; or
- Your primary Hall Render contact.
Special thanks to Summer Associate David Yanda for his assistance in preparing this alert.
Hall Render blog posts and articles are intended for informational purposes only. For ethical reasons, Hall Render attorneys cannot—outside of an attorney-client relationship—answer specific questions that would be legal advice.
