On April 14, 2026, the Centers for Medicare & Medicaid Services (“CMS”) published the Fiscal Year (“FY”) 2027 Inpatient Prospective Payment System (“IPPS”) Proposed Rule (the “Proposed Rule”), which can be found here. Among other things, the Proposed Rule would make updates to Graduate Medical Education (“GME”) policies for teaching hospitals under the Medicare program. These updates include (i) modifications to the criteria by which a program is deemed a “new program” for Medicare funding purposes; (ii) clarification of the methodology for calculating direct GME (“DGME”) and Indirect Medical Education (“IME”) payments following a teaching hospital merger; and (iii) a proposed requirement to prohibit illegal discrimination in GME programs. The Proposed Rule also includes a notice of closure of two teaching hospitals and opportunities to apply for available slots.
Proposed Modifications to the Criteria for New Residency Programs
Under relevant provisions of the Social Security Act, CMS is responsible for establishing rules to apply the DGME cap and IME adjustment for residency programs established after January 1, 1995. In its FY 2025 IPPS proposed rule published May 2, 2024, and then again in the FY 2025 IPPS final rule published August 28, 2024, CMS initiated RFIs through which CMS sought input on criteria for determining whether program directors, teaching staff and comingled residents impart the meaning of “new” for purposes of defining a “new program.” Based on the CMS assessment of the responses to the RFIs, the Proposed Rule proposes the following criteria for determining program newness:
- As a general rule, program newness determinations are contingent upon (i) the program having received initial accreditation from the applicable accrediting body and (ii) at least 90% of the individual residents (not full-time equivalents (“FTEs”)) during the five-year FTE cap building period must not have previous training in the same specialty as the new program.
- Under prior CMS rulemaking, “initial accreditation” means that the program does not have any antecedent programs from which it evolved, but some discretion does remain with the MAC and CMS to make the initial accreditation determination.
- 90% of the individual residents, not FTEs, need to be both new to the program and the specialty of the program, measured over the five-year FTE cap building period. For urban hospitals, that means the one-time five-year FTE cap building period, and for rural hospitals, that means the five-year FTE cap building for each new program.
- Given concerns voiced in response to the RFI that “CMS should not restrict the ability of new residency programs to hire experienced faculty and program directors,” under the Proposed Rule, CMS is proposing to no longer take into account the previous experiences of the faculty or program director in determining program newness. Since 2009, CMS has assessed the program faculty and program director in assessing newness, so this is a very positive proposed change.
- The Proposed Rule also introduces several exceptions to the general requirement that 90% of individual residents not have previous training in the same specialty. These are:
- Any program accredited for 16 or fewer residents is exempt from the 90% requirement. Programs accredited for 16 or fewer residents may be deemed a new program based solely upon the initial accreditation criterion. So, for new programs approved for 16 or fewer residents, the focus should be on avoiding or excluding any facts that could indicate that the program is somehow related to a program that existed previously.
- Any residents who enter a program through the MATCH or another binding third-party matching program with previous training in another program in the same specialty who enter the program as first-year (PGY-1) residents are excluded from both the numerator and denominator for purposes of calculating the 90% threshold. In other words, trainees with prior specialty training who enter a program via MATCH or comparable matching programs are not counted for determining whether the 90% threshold is met. CMS also clarified that, notwithstanding the exclusion of the residents from the new program determination, these residents do count for purposes of FTE cap building.
- “Displaced residents” (as defined in 42 CFR 413.79(h)(1)(iii)) from programs or hospitals that close are also excluded from both the numerator and denominator for purposes of calculating the 90% threshold. However, unlike residents who enter a new program through the MATCH, displaced residents are excluded from the new program’s FTE cap calculations and must be reported as displaced residents on the Medicare cost report.
If finalized, these proposed changes to the “new program” classification would take effect on October 1, 2026, and would apply to new programs starting on or after that date. In other words, these changes will not apply retroactively to residency programs that had “started” prior to October 1, 2026. But what constitutes the “start date” for a new program: the date set by the accrediting body as the “initial accreditation” date for the program, or the date when residents first begin clinical training? The determination of the meaning of a new program’s initial “start date” will be a good topic for comments to be submitted.
Clarification Regarding Calculating Medicare GME Payments Following a Merger
Although CMS did not propose new policies regarding Medicare GME payments following a merger of two or more teaching hospitals, it did clarify the methodology for calculating DGME and IME payments for the surviving hospital following a merger. While similar in approach, CMS describes two different hospital merger-based calculations for DGME and IME, given the differences in how the DGME and IME calculations work.
In the Proposed Rule for DGME, CMS clarifies that if the merger occurs during the surviving hospital’s cost reporting period, the applicable MAC performs a series of off-the-cost-report calculations, treating the pre-merger and post-merger periods of the surviving hospital as though they were separate cost reporting periods. While the pre-merger period calculation accounts only for the surviving hospital’s pre-merger FTE counts and other GME characteristics, the post-merger period calculations include the characteristics of both the surviving and merged hospitals. The calculations of these two periods are then combined with the subsequent two cost reporting periods to determine the three-year rolling average FTE count.
The process for determining IME is similar: the MAC conducts an off-the-cost report, separate calculation for the pre- and post-merger periods within the cost reporting period, including the rate, resident count, Income-Based Repayment cap, rolling average and bed count of the surviving hospital alone pre-merger and the surviving hospital and merged hospital(s) collectively, for the post-merger period.
Since the Medicare DGME and IME payment calculations are very complex, the CMS methodologies used and described to calculate the Medicare GME payments resulting from a hospital merger are equally complex. Any teaching hospitals considering a merger and hospitals that have recently completed a merger are well advised to make a close review of the sample calculations described by CMS at 91 FR pages 19510 to 19517. And since CMS considers this information as a clarification of existing determination methodologies and not a new policy, even hospitals that merged in the past may benefit from assessing the clarified calculations.
Proposed Requirement to Prohibit Unlawful Discrimination in Residency Programs
In its 2026 OPPS/ASC final rule, CMS added a requirement, applicable to GME accrediting bodies, which prohibits the use of accrediting criteria “that promote or encourage discrimination on the basis of race, color, national origin, sex, age, disability, or religion, including the use of those characteristics or intentional proxies for those characteristics as a selection criterion for employment, program participation, resource allocation, or similar activities, opportunities, or benefits.”
The Proposed Rule extends this prohibition to residency programs directly and would require that, in addition to meeting all other applicable requirements, an approved residency program must not discriminate based on the characteristics listed above or on intentional proxies thereof. If finalized, this prohibition would take effect on October 1, 2026.
Closure of Delaware County Memorial Hospital (Drexel Hill, PA) and Crozer-Chester Medical Center (Chester, PA)
CMS provided notice that it would soon begin the process of redistributing DGME and IME caps resulting from the closures of Delaware County Memorial Hospital in Drexel Hill, Pennsylvania, and Crozer-Chester Medical Center in Chester, Pennsylvania.
In total, Delaware County Memorial Hospital has 28.6 IME and 27.96 DGME FTE slots available for distribution, and Crozer-Chester Medical Center has 101.32 IME and 100.89 DGME FTE slots available for distribution. The slots relative to each closure will be distributed in accordance with the application process for redistributing FTE slots following the closure of a teaching hospital established under Section 5506 of the Affordable Care Act. The application period for hospitals to apply for these FTE slots is open, and applications must be submitted by July 9, 2026. Applications for Rounds 27 and 28 can be submitted through the MEARIS portal. Policy and procedure for doing so can be found here, under the Section 5506: Preservation of Resident Cap Positions from Closed Hospitals heading.
Practical Takeaways
- Teaching hospitals should carefully review DEI and other residency-related policies and procedures to determine compliance with the Proposed Rule and plan for any needed changes by October 1, 2026, in the event the proposal is finalized.
- Hospitals, particularly those considering establishing new residency programs, should monitor for the final rule.
- In light of the redistribution of the FTE resident caps following the closure of the Delaware County and Crozer-Chester hospitals, teaching hospitals looking to expand GME should consider applying before July 9, 2026.
- Hospitals considering mergers and even hospitals that have merged in the past may benefit from closely reviewing the methodology for calculating the DGME and IME results of the merger, given the complexity of the determinations and the examples published by CMS.
- Consider submitting comments: CMS will accept comments on the Proposed Rule until 5:00 PM ET, June 9, 2026.
For more information on the Proposed Rule or if you would like assistance with submitting comments or applying for FTE slots, please contact:
- Scott Geboy at sgeboy@hallrender.com or (414) 721-0451;
- Caitlin Bell-Butterfield at cbell-butterfield@hallrender.com or (919) 228-2408; or
- Your primary Hall Render contact.
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.
