The FY 2027 IPF rule raises rates 2.3 percent, delays an outlier cap by a year, and launches a patient assessment that will shape a 2031 payment rewrite.
Key Takeaways
- Rate update: Medicare’s per diem base rate for inpatient psychiatric facilities rose from $892.87 to $912.13 on October 1, after a CMS correction, in an update estimated at 2.3 percent, or about $60 million.
- Outlier concentration: In fiscal 2025, the 20 psychiatric facilities with the largest outlier payments collected more than half of all IPF outlier dollars, CMS reported.
- Cap timing: A limit of 20 percent of each facility’s IPF payments takes effect October 1, 2027, and facilities with fewer than 50 stays a year are exempt.
- Assessment data: Psychiatric hospitals and units will report a standardized patient assessment that Congress requires CMS to use in revising payment rates for fiscal 2031.
When CMS went looking for where Medicare’s psychiatric outlier dollars were going, it found a short list. In fiscal 2025, according to the agency’s final rule for inpatient psychiatric facilities, the 20 facilities that received the most outlier money accounted for more than half of all outlier payments under the IPF prospective payment system. Outlier stays across the system averaged roughly 46 days, against about 12 days for stays that did not qualify, and they carried markedly higher daily routine charges.
CMS concluded that differences in case mix did not fully explain the gap. A large part of outlier spending, the agency wrote, may reflect facility-level costs such as labor, real estate, and overhead rather than patient complexity. Its remedy, finalized on July 29, limits each inpatient psychiatric facility’s outlier payments to 20 percent of its total payments under the system, starting October 1, 2027. Facilities with fewer than 50 stays a year are exempt.
Around the cap, the rule is a routine annual update. CMS’s fact sheet puts the fiscal 2027 increase at 2.3 percent, a 3.2 percent market basket increase reduced by a 0.9 percentage point productivity adjustment, or about $60 million in additional payments. The federal per diem base rate rose from $892.87 to $912.13 on October 1, and the per-treatment payment for electroconvulsive therapy rose from $673.85 to $688.38, figures CMS revised in an October 1 correction after finding a wage index error tied to one Mississippi hospital. Facilities that fail to report quality data receive a 0.3 percent update.
The increase is not uniform. The corrected impact table covers 1,336 facilities and projects a 2.6 percent increase for psychiatric units in urban hospitals, against 1.8 percent for urban freestanding psychiatric hospitals and 1.6 percent for the 349 urban freestanding hospitals under for-profit ownership. Facilities in the East South Central region see the smallest regional gain, 1.3 percent, mostly because of wage index changes.
Medicare Psychiatric Outlier Payments, From Threshold to Cap
Outlier payments exist to protect facilities that admit patients whose care costs far more than a per diem system anticipates. Each year CMS sets a fixed dollar loss threshold intended to hold outliers to 2 percent of total IPF payments. When a stay’s estimated cost exceeds that threshold plus the regular payment, Medicare covers 80 percent of the excess for days one through nine and 60 percent from day 10 onward, a split CMS adopted to avoid rewarding longer stays. The agency estimated outlier payments would reach 2.2 percent of the total in fiscal 2026, above its target.
Facilities that will never approach the cap still feel it through the threshold. In April, CMS proposed lowering the fiscal 2027 threshold to $37,820, a figure that assumed the cap would apply immediately; without the cap, its modeling showed, holding outliers at 2 percent would have required $42,720. Commenters raised cost drivers the agency decided it needed more time to evaluate, so the cap slipped to fiscal 2028 and the final fiscal 2027 threshold landed at $40,750, up from $39,360. A higher threshold means a stay must be costlier before any facility collects an outlier payment.
CMS framed the cap as a question of payment accuracy. It cited the IPF teaching adjustment, which limits the number of residents a facility can count, as precedent for curbing incentives to raise reported costs and charges.
Inside the IPF Per Diem: Adjustments Medicare Already Rebuilt
The outlier cap is the latest in a series of structural changes to a payment system that went years without one. Congress ordered a per diem system for psychiatric hospitals and units in 1999, and CMS implemented it in 2005 with a base rate of $575.95, derived from fiscal 2002 cost data. The patient and facility adjustments built from that original regression stayed largely untouched until the Consolidated Appropriations Act, 2023 required CMS to revise the methodology.
CMS did so in two steps. For fiscal 2025 it re-estimated the patient-level factors, including diagnosis-related group adjustments, comorbidities, age, and the variable per diem schedule, from 2019 through 2021 claims and cost reports, and it raised the day-one adjustment for facilities with a qualifying emergency department to 1.54, against 1.28 for those without one. For fiscal 2026 it raised the rural adjustment from 17 percent to 18 percent and increased the teaching adjustment. The fiscal 2027 rule leaves those factors in place and changes the cost-of-living adjustments for Alaska and Hawaii, which now draw on the Pentagon’s overseas cost-of-living allowance data, with a hold-harmless provision for any area that would have seen a reduction.
The labor-related share of the base rate, the portion adjusted for local wages, falls slightly to 78.9 percent. Wage index changes are applied budget neutrally, so geographic gains for some facilities come out of payments to the rest.
Commenters on the IPF Rule Pressed CMS on Margins and Inflation
CMS received 176 public comments. Many argued the 2.3 percent update trails real cost growth, pointing to behavioral health workforce shortages, contract staffing, drug and supply costs, and prior authorization workload, and several noted that the Medicare Payment Advisory Commission had reported negative Medicare margins for psychiatric facilities from 2016 through 2021. Some cited Office of the Actuary data showing that market basket forecasts for fiscal 2021 through 2024 understated actual IPF inflation by a cumulative 4.2 percentage points, and they asked for a one-time correction.
CMS declined to add one. Its response noted that forecast errors have run in both directions over time, that the IPF update has no precedent for such an adjustment, and that the productivity reduction is required by statute.
Several smaller provisions matter to specific operators. Facilities in the 54 counties reclassified from rural to urban under updated federal statistical areas finish their three-year phase-out and receive no rural adjustment in fiscal 2027. The quality program drops two measures beginning with the 2026 reporting period: alcohol use brief intervention (SUB-2 and SUB-2a) and tobacco use treatment at discharge (TOB-3 and TOB-3a). CMS also asked whether to build an IPF-specific wage index from Bureau of Labor Statistics data, after commenters told the agency that psychiatric facilities compete for staff with community behavioral health programs and correctional settings as well as general hospitals.
IPF-PAI and the 2031 Psychiatric Hospital Payment Revision
The change with the longest reach is the inpatient psychiatric facility patient assessment instrument, known as the IPF-PAI. Section 4125 of the Consolidated Appropriations Act, 2023 requires psychiatric hospitals and units to report standardized assessment data, at least at admission and discharge, for fiscal 2028 and later. The data must cover functional status, cognitive function and mental status, special services and interventions, medical conditions and comorbidities, and impairments. The same law requires CMS to revise the payment methodology for fiscal 2031 to take that data into account.
Facilities can submit through a free CMS web application or through application programming interfaces built on the HL7 FHIR standard, and CMS says the IPF-PAI will be the first of its statutory quality reporting programs to use FHIR for patient assessment data. Collection begins October 1, 2027, according to the Michigan Health & Hospital Association’s summary of the final rule. Applied Policy reports that CMS replaced a proposed quarterly reporting mandate with completeness thresholds that start at 50 percent of submitted assessments in the second half of 2028 and rise to 70 percent in 2030. CMS estimates the quality program changes will add about $1.08 million in costs across facilities.
The two provisions run on different clocks. The outlier cap changes revenue for a limited group of facilities starting in 2027, while assessment data will feed the per diem and adjustment structure for every psychiatric hospital and unit four years later. Admission and discharge documentation, long treated as a compliance task, becomes a payment input once that revision takes effect.
CMS proposes IPF rules each spring and finalizes them each summer, a cycle the agency describes in the rule itself. The fiscal 2028 proposal, due next spring, will be the first to set an outlier threshold with the cap in force.
