The Centers for Medicare & Medicaid Services (“CMS”) finalized several important updates to graduate medical education (“GME”) and nursing and allied health educational programs (“NAH Programs”) policies in the FY 2026 Inpatient Prospective Payment System (“IPPS”) Final Rule (“Final Rule”), and proposed a notable limitation on virtual supervision for teaching physicians in the 2026 Medicare Part B proposed rule (“Proposed Rule”). Several of the highlights and implications for hospitals include:
- Changes to reimbursable net cost calculation for NAH Programs;
- Guidance for counting full-time equivalent (“FTE”) residents relative to hospital reporting periods other than 12 months;
- Re-affirming exclusion of GME costs in cost-to-charge ratio (“CCR”) calculations; and
- Proposal to end virtual supervision for teaching physicians in urban areas.
Clarifying FTE Count and Cap Adjustments for Non-12-Month Cost Reporting Periods
CMS finalized clarifications regarding the calculation of FTE resident counts and associated caps for cost reporting periods that deviate from the standard 12-month duration. Under current GME payment methodologies, hospitals receive direct GME (“DGME”) and indirect medical education (“IME”) payments based on the number of FTE residents trained. These payments are subject to statutory caps and limitations, and they are calculated differently in instances where a hospital submits a cost report for a period other than the standard 12-month cost reporting period. CMS reaffirmed that in these instances, DGME FTE counts and caps must be prorated to reflect actual time residents spend in training for cost reporting periods other than 12 months as follows:
- Step 1: Determine the ratio of allowable days to total days in each resident rotation.
- Step 2: Multiply this ratio by the fraction of the year represented by the rotation (i.e., total rotation days ÷ 365 or 366).
- Step 3: Repeat Steps 1 and 2 for all residents and rotations in the hospital’s programs and sum the results from Step 2 to arrive at the total unweighted DGME FTE count for the cost reporting period.
CMS clarified in the Final Rule that the FTE count must be based solely on the number of resident hospital service days falling within the non-12-month cost reporting period, and not on an annualized or calendar-year basis. Importantly, and in contrast to DGME, CMS confirmed that IME FTE caps are not prorated for non-standard reporting periods. This is because IME payments are tied to a hospital’s overall Medicare payments, which inherently reflect the volume of patient care during the reporting period.
Reversing Plans to Finalize Pre-Mercy NAH Program Calculation Costs
In the Final Rule, CMS decided not to adopt changes to calculations of the net cost of NAH Programs under 42 CFR § 413.85(d)(2)(i) and (ii). These proposed changes, discussed in a previous Hall Render article, would have required hospitals with NAH Programs to first offset their tuition costs prior to accounting for their indirect costs. CMS cited commentators criticizing the proposal as inconsistent with general cost-finding principles as persuasive. This decision both reflects CMS’s responsiveness to stakeholder concerns and is financially beneficial for hospitals operating NAH programs, as it allows these hospitals a broader base for reimbursement.
Including GME Costs in CCR Reporting
CMS reaffirmed its long-standing policy to exclude GME costs from the numerator of the CCR used in various Medicare payment calculations. CMS emphasized that the CCR is intended to reflect costs directly associated with patient care services, and that GME costs—while reimbursed under separate methodologies—do not align with the cost categories used in CCR calculations. CMS referred to previous discussions in the FY 2021, FY 2022 and FY 2025 IPPS final rules, wherein CMS affirmed that uncompensated care payments are intended to provide additional payment to hospitals for treating the uninsured, not for other costs incurred, such as those associated with supporting and training physicians and other professionals. CMS’s decision to exclude GME costs from the CCR may disadvantage teaching hospitals by preventing them from reflecting the full scope of their educational investments in Medicare payment calculations. While CMS maintains that CCR should only capture direct patient care costs, this policy overlooks the integral role teaching programs play in hospital operations and the broader health care system.
Proposal to End Virtual Supervision for Teaching Physicians in Urban Areas
In its recent Proposed Rule, CMS announced plans to eliminate the ability of teaching physicians located in OMB-defined metropolitan statistical areas (“MSAs”) (i.e., urban areas) to virtually supervise residents and bill Medicare for those services. Under the proposal, teaching physicians would be required to maintain physical presence during the critical portions of all resident-furnished services to qualify for Medicare payment. CMS cited concerns that virtual supervision outside the COVID-19 public health emergency may not provide sufficient personal oversight, as required under section 1842(b)(7)(A)(i)(I) of the Social Security Act.
Importantly, the proposal does not apply to virtual supervision of non-clinical educational activities (e.g., didactics and research), nor does it affect services provided in rural residency training settings, meaning sites located outside of OMB-defined MSAs. If finalized, this policy change could significantly impact teaching hospitals in urban areas by reducing operational flexibility and increasing staffing demands for resident oversight. CMS additionally did not address the applicability of its proposal to certain teaching settings. For instance, under longstanding policy relating to teaching psychiatric services, CMS allows the supervision requirement for teaching physicians to be met “by concurrent observation of the service by use of a one-way mirror or video equipment.” Medicare Claims Processing Manual, Ch. 12, Section 100.1.3. CMS did not address this existing carve-out in the Proposed Rule.
Practical Takeaways
- Teaching hospitals undergoing organizational changes or reporting on shortened periods should review their GME accounting practices to ensure compliance with the proration methodology.
- Hospitals participating in NAH Programs will continue to operate under existing cost calculation rules as a result of active engagement by stakeholders with the rulemaking process.
- Teaching hospitals located in urban areas should consider beginning preparations to ensure teaching physicians are positioned to meet the proposed compliance standards, or watch for the CMS Medicare Part B final rule, to determine if virtual supervision, in fact, will end.
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-butterfield@hallrender.com;
- Zeke Shen at (414) 721-0912 or zshen@hallrender.com;
- Derek White at (317) 429-3678 or mdjwhite@hallrender.com; or
- Your primary Hall Render contact.
Special thanks to Summer Associate David Yanda for his assistance in the preparation of 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.
