CMS Changes to Graduate Medical Education in 2027 IPPS Final Rule

On August 4, 2026, the Centers for Medicare & Medicaid Services (“CMS”) published the Fiscal Year (“FY”) 2027 Inpatient Prospective Payment System (“IPPS”) Final Rule (the “Final Rule”), which can be found here. The Final Rule is effective October 1, 2026, and includes several updates affecting Graduate Medical Education (“GME”) and Nursing and Allied Health (“NAH”) education programs under Medicare. These updates include: (i) modifications to the criteria for determining whether a residency program qualifies as a “new program” for Medicare funding purposes; (ii) requirements prohibiting unlawful discrimination in residency and NAH education programs; (iii) updates to the methodology for calculating NAH Medicare Advantage payments and related cost reporting treatment; and (iv) notice regarding the redistribution of Direct GME (“DGME”) and Indirect Medical Education (“IME”) resident cap slots following the closure of two teaching hospitals.

Criteria for New Residency Programs

Under relevant provisions of the Social Security Act, CMS is responsible for establishing rules for applying the DGME and IME caps to residency programs established after January 1, 1995. In the FY 2025 IPPS proposed rule published May 2, 2024, and the FY 2025 IPPS final rule published August 28, 2024, CMS issued RFIs seeking input on the criteria for determining whether program directors, teaching staff and commingled residents affect whether a residency program qualifies as a “new program.” Based on CMS’s assessment of responses to those RFIs, and comments on the FY 2027 IPPS proposed rule, CMS adopted the following criteria for determining whether a GME program is new:

• As a general rule, program newness determinations depend on whether (i) the program 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 had no prior 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 Medicare Administrative Contractor (“MAC”) and CMS to make the initial accreditation determination.
  • The 90% requirement applies to individual residents, not FTEs, and those residents must be new both to the program and to the program’s specialty, measured over the five-year FTE cap-building period. For urban hospitals, this is the one-time five-year FTE cap-building period; for rural hospitals, it is the five-year FTE cap-building period for each new program.
  • In response to concerns that CMS should not restrict new residency programs’ ability to hire experienced faculty and program directors, the Final Rule provides that CMS will no longer consider the prior experience of faculty or program directors in determining program newness. Since 2009, CMS has considered faculty and program director experience in assessing newness, so this change gives new programs greater flexibility to engage experienced faculty.

• The Final Rule provides for several exceptions to the general requirement that 90% of individual residents not have previous training in the same specialty. These are:
  • Small Program Exception: Programs accredited for 16 or fewer residents are exempt from the 90% requirement and may be deemed new based solely on the initial accreditation criterion. For these smaller programs, the focus should be on avoiding or excluding facts suggesting that the program is related to a previously existing program.
  • MATCH Exception: Residents with prior training in the same specialty who enter the program as first-year residents (PGY-1s) through MATCH or another binding third-party matching program are excluded from both the numerator and denominator for purposes of calculating the 90% threshold. CMS also clarified that, although these residents are excluded from the new program determination, they still count for purposes of FTE cap building.
  • Displaced Resident Exception: “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. As finalized, the treatment of displaced residents for FTE cap-building purposes seems workable, but hospitals in their FTE cap-building periods should do a thorough assessment of the potential impact on FTE cap-building if displaced residents are being considered to be added to train in new programs during the FTE cap-building period.

In a departure from the Proposed Rule, these changes will apply to all new programs that are within their five-year cap-building period as of October 1, 2026. This means that the new definition of a new program applies to programs started as early as July 1, 2021. Hospitals in their FTE cap-building period since July 1, 2021 should understand the new definition and be prepared to provide their MACs with the complete training history for each resident who enters the program during the five-year period, even if the cap-building period ends June 30, 2027.

Requirement to Prohibit Unlawful Discrimination in Residency Programs

In its 2026 OPPS/ASC final rule, CMS added a requirement, applicable to GME accrediting bodies, prohibiting 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 Final Rule extends this prohibition to residency programs directly and requires 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. This prohibition takes effect on October 1, 2026.

Clarification Regarding Calculation of Direct GME and IME Payments Following a Merger of Hospitals

In the Final Rule, CMS finalized a clarification regarding the methodology for calculating DGME and IME payments after a hospital merger involving one or more teaching hospitals. Although the approaches are similar, CMS describes separate merger-based calculations for DGME and IME because the underlying payment methodologies differ:

• For DGME, CMS clarifies that if a merger occurs during the surviving hospital’s cost reporting period, the applicable MAC performs off-the-cost-report calculations that treat the surviving hospital’s pre-merger and post-merger periods as separate cost reporting periods. The pre-merger calculation reflects only the surviving hospital’s pre-merger FTE counts and other GME characteristics, while the post-merger calculation reflects the characteristics of both the surviving hospital and the merged hospital or hospitals. The results are then combined with the subsequent two cost reporting periods to determine the three-year rolling average FTE count.
• For IME, the process is similar: the MAC performs separate off-the-cost-report calculations for the pre-merger and post-merger portions of the cost reporting period. The pre-merger calculation reflects the surviving hospital alone, while the post-merger calculation reflects the surviving hospital and the merged hospital or hospitals collectively, including the rate, resident count, intern-and-resident-to-bed ratio cap, rolling average and bed count.

Because Medicare DGME and IME payment calculations are complex, the CMS methodologies for calculating GME payments after a hospital merger are correspondingly detailed. Teaching hospitals considering a merger, and hospitals that have recently completed one, should closely review the sample calculations described by CMS at 91 FR pages 19510 to 19517. Because CMS characterizes this information as a clarification of existing methodologies rather than a new policy, hospitals that merged in prior years also may benefit from assessing the clarified calculations.

Updates to NAH Education Programs Payments and Nondiscrimination Requirements

In the Final Rule, CMS finalized a proposal to subtract administrative and general costs from tuition and other revenue to establish “net costs” allowed for the calculation of pass-through reimbursement of NAH programs. This change reduces the amount of NAH costs available for pass-through reimbursement and is effective for cost-reporting periods beginning on or after October 1, 2026.

CMS also finalized its methodology for calculating the NAH Medicare Advantage (“MA”) pool and the MA DGME percent reduction, based on the most recent available cost report data.

Finally, the Final Rule extends the new nondiscrimination prohibition to residency programs, NAH educational programs and NAH accrediting programs.

Closure of Insight Hospital and Medical Center Trumbull (Warren, OH), and of M Health Fairview St. Joseph’s Hospital (Saint Paul, MN)

CMS announced that it will soon begin redistributing DGME and IME caps resulting from the closures of Insight Hospital and Medical Center Trumbull in Warren, Ohio (CCN360055), and M Health Fairview St. Joseph’s Hospital in Saint Paul, Minnesota (CCN 240063).

In total, Insight Hospital and Medical Center Trumbull has 75.11 IME and 76.93 DGME FTE slots available for distribution, and M Health Fairview St. Joseph’s Hospital has 13.36 IME and 13.38 DGME FTE slots available for distribution. The slots associated with each closure will be distributed through the application process for redistributing FTE slots following the closure of a teaching hospital under Section 5506 of the Affordable Care Act. The application period is now open, and hospitals must submit applications by October 29, 2026. Applications for Rounds 30 and 31 can be submitted through the MEARIS portal. Related policy and procedure guidance is available here, under the Section 5506: Preservation of Resident Cap Positions from Closed Hospitals heading.

Practical Takeaways

• Teaching hospitals and hospitals with NAH education programs should review Diversity, Equity and Inclusion and other residency- and NAH training-related policies and procedures for compliance with the Final Rule and plan for any needed changes by October 1, 2026.
• Hospitals in their five-year cap-building period, or considering new residency programs, should review the updated program newness criteria carefully and be prepared to present documentation of all residents’ previous training.
• Teaching hospitals seeking to expand GME should consider applying for redistributed FTE slots from the closed hospitals before the October 29, 2026, deadline.
• Hospitals considering mergers or that have undergone mergers in the past should review CMS’s clarified DGME and IME merger calculations and related examples.

For questions or assistance with submitting applications, please contact:

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