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FROM THE PRESIDENT’S DESK: HEALTH POLICY THROUGH A WIDER LENS

By Jim Scott, President and CEO

But healthcare is shaped by decisions made at multiple levels of government and across many institutions. State legislatures, other federal regulatory agencies, law enforcement, and the courts all influence patients, providers, manufacturers, and payers. When Cheryl Powell, Brittany La Couture, and Lexi Hartranft attended the Alliance for Health Policy's 2026 Signature Series Summit last month, one session—"Bright Spots: Payment Innovation That Is Working Beyond Washington"—reinforced that point by highlighting the growing role of states in shaping health policy.

You'll see that wider lens throughout this issue. Bernard Shreve offers an update on the shifting 340B landscape. Emma Hammer examines emerging state and federal divestiture proposals affecting vertically integrated pharmacy benefit managers, and Annie Tuttle explains how presumptive eligibility may become an increasingly important tool for hospitals and other healthcare providers as Medicaid eligibility requirements evolve. Sampat Nidadavolu and Sabrina Luther examine CMS's proposals to standardize how Medicare pays for diagnostic software and algorithm-driven analyses. We also explore the implications of the Department of Justice's first healthcare declination under its 2026 Corporate Enforcement and Voluntary Self-Disclosure Policy. Finally, we are pleased to launch a new monthly series examining how states are addressing major healthcare issues, from workforce shortages and public health infrastructure to initiatives under the Rural Health Transformation Program.

CMS PROPOSES MAJOR 340B PAYMENT CHANGES AS CONGRESS CONSIDERS REFORMS

By Caitlyn Bernard Shreve, Senior Health Policy Associate

The 340B Program is at a pivotal moment as proposed Medicare payment changes coincide with growing bipartisan interest in broader changes to the program.

In January, Applied Policy reported that CMS planned to conduct an Outpatient Prospective Payment System (OPPS) Drug Acquisition Cost Survey to inform CY 2027 OPPS/Ambulatory Surgical Center (ASC) payment policy. At the time, many stakeholders viewed the survey as laying the groundwork for a new methodology to reduce reimbursement for drugs purchased through the 340B Drug Pricing Program after court decisions invalidated CMS’s previous reimbursement cuts.

CMS’s CY 2027 OPPS/ASC Proposed Rule, released on July 2, 2026, includes two significant proposals affecting the 340B Program: (1) reducing OPPS reimbursement for 340B-acquired drugs from Average Sales Price (ASP) plus 6 percent to ASP minus 33.4 percent, and (2) increasing the annual OPPS conversion factor reduction from 0.5 percent to 3 percent to accelerate recoupment of 340B remedy payments.

Taken together, these proposals could have significant financial implications for many 340B hospitals because they would reduce reimbursement for 340B-acquired drugs while increasing near-term offsets to OPPS payments. CMS argues that the changes would better align reimbursement with hospitals’ reported acquisition costs. Hospital stakeholders contend that they would significantly reduce the resources available to support safety-net services. The proposals also arrive amid growing congressional and administrative interest in broader 340B reform, placing them within a larger discussion about the program’s future direction.

PRESUMPTIVE ELIGIBILITY TAKES ON NEW IMPORTANCE AS MEDICAID REQUIREMENTS SHIFT

By Annie Tuttle, Health Policy Associate

As new federal Medicaid requirements take effect, understanding presumptive eligibility may become increasingly important for hospitals and other healthcare providers.

Recent federal changes to Medicaid are expected to disrupt coverage for millions of beneficiaries. While some will no longer qualify for Medicaid, many others who remain eligible may lose coverage because of renewal and administrative requirements—sometimes without realizing it. Presumptive eligibility offers providers and healthcare systems one strategy to help maintain continuity of coverage while reducing interruptions in patient care and reimbursement.

STATES AND CONGRESS WEIGH DIVESTITURE PROPOSALS FOR VERTICALLY INTEGRATED PBMS

By Emma Hammer, Health Policy Manager

With federal bills stalled in committee, Arkansas and Tennessee have already passed pharmacy-ownership restrictions on pharmacy benefit managers. The courts may have the final say.

Pharmacy benefit managers (PBMs) have become a major focus of healthcare policy debates as policymakers, regulators, and other stakeholders examine the industry's vertically integrated business model. Divestiture proposals would require structural separation between PBMs and affiliated pharmacies or other healthcare entities. As several states have advanced this approach, it has also been challenged in court.

CMS BEGINS BUILDING A NEW MEDICARE PAYMENT FRAMEWORK FOR DIAGNOSTIC SOFTWARE

By Sabrina Luther, Health Policy Associate and Sampat Nidadavolu, Health Policy Manager

Proposed rules would establish new payment policies for Software as a Medical Service (SaMS), signaling CMS's broader effort to develop a more consistent approach to reimbursement for diagnostic software.

Provisions in the recently released CY 2027 OPPS and PFS proposed rules indicate that CMS is working to standardize how Medicare pays for diagnostic software and algorithm-driven analyses by creating new classification and payment pathways. In both proposed rules, the agency proposes moving from the use of the term Software as a Service (SaaS) to Software as a Medical Service (SaMS), which it says better distinguishes clinical software from the generic cloud-computing services the SaaS label denotes in other industries. 

FEDERAL RULEMAKING

CMS PROPOSED RULES

CMS ISSUES CY 2027 PHYSICIAN FEE SCHEDULE PROPOSED RULE WITH REDUCED PHYSICIAN PAYMENT RATES, TELEHEALTH EXPANSIONS, AND MSSP REFORMS

By Caitlyn Bernard Shreve, Senior Health Policy Associate

On July 14, CMS issued its proposed calendar year (CY) 2027 Physician Fee Schedule (PFS), which proposes policies for physician payment and other outpatient services covered under Medicare Part B. 

Key proposals include:

• Decrease CY 2027 Medicare Part B physician payment rates under the PFS
• Modify the practice expense (PE) methodology by phasing out reliance on historical specialty-level survey data
• Extend statutory Medicare telehealth flexibilities, add new telehealth HCPCS codes and claims modifiers, and expand teaching physician virtual presence policies
• Create new HCPCS codes for advance care planning (ACP) services furnished by clinical staff
• Update payment and telehealth policies for Rural Health Clinics (RHCs) and Federally Qualified Health Centers (FQHCs)
• Refine the Ambulatory Specialty Model (ASM) through technical, operational, and quality measurement changes
• Implement statutory changes limiting Medicare eligibility for certain noncitizens and establish related enrollment, termination, and special enrollment period policies
• Update the Medicare Part B and Part D Inflation Rebate Programs and continue the current discarded drug refund policy
• Implement conforming updates to the Clinical Laboratory Fee Schedule (CLFS) required by the Consolidated Appropriations Act, 2026 (CAA, 2026)
• Modify the Medicare Shared Savings Program (MSSP) through changes to beneficiary assignment, financial benchmarks, beneficiary engagement, and participation policies

The proposed rule also includes multiple Requests for Information (RFIs) on redesigning primary care payment, the future of the CPT® coding system, community-based palliative care, intensive lifestyle interventions for Alzheimer’s disease, future MSSP policy, and approaches to reduce duplicative laboratory and imaging testing while improving interoperability.

Comments on the proposed rule are due September 14, 2026.

CMS FINAL RULES

CMS FINALIZES 2.3% FY 2027 IPPS PAYMENT UPDATE, INCREASES UNCOMPENSATED CARE PAYMENTS, EXPANDS MANDATORY EPISODE-BASED PAYMENT, & REVISES GME AND COST-REPORTING POLICIES 

By Meghan Basler, Health Policy Manager

On July 31, CMS issued the fiscal year (FY) 2027 Hospital Inpatient Prospective Payment Systems (IPPS) for Acute Care Hospitals and the Long-Term Care Hospital (LTCH) Prospective Payment System final rule. 

Finalized policies include:

• Increase IPPS operating payment rates by 2.3 percent with approximately $2.9 billion in total payment growth
• Recalibrate MS-DRG weights using updated claims and cost data
• Increase uncompensated care (DSH) payments by approximately 2.9 percent to an estimated $7.94 billion
• Discontinue the low-wage index policy and implement a budget-neutral transition for affected hospitals, while maintaining other wage index adjustments
• Tighten provider-based status criteria
• Establish non-discrimination requirements and new criteria for residency programs
• Continue New Technology Add-on Payments (NTAPs) while eliminating alternative pathways beginning with FY 2028 applications
• Establish the nationwide mandatory Comprehensive Care for Joint Replacement Expanded Model
• Refine the Transforming Episode Accountability Model (TEAM)
• Reconcile non-renal organ acquisition costs and codify appeals processes
• Increase LTCH payment rates by 2.3 percent, with continued reliance on quality reporting penalties and budget neutrality adjustments

Regulations are effective October 1, 2026.

FY 2027 IRF PPS FINAL RULE SIGNALS MODEST GROWTH AND BROADER PAYMENT REFORM DIRECTION

By Caitlyn Bernard Shreve, Senior Health Policy Associate

On July 30, CMS released the fiscal year (FY) 2027 Inpatient Rehabilitation Facility (IRF) Prospective Payment System (PPS) final rule.

In this rule, CMS finalizes policies to:

• Increase IRF payment rates by 2.3 percent
• Update Case-Mix Group (CMG) relative weights and average length of stay (ALOS) values
• Maintain the current wage index methodology while updating the labor-related share, outlier threshold, and cost-to-charge ratio (CCR) policies
• Revise IRF coverage requirements and care coordination policies, including the 36-hour therapy initiation and interdisciplinary team (IDT) meeting requirements
• Update the IRF Quality Reporting Program (QRP) by shortening data submission timelines (beginning FY 2029)
• Update the Durable Medical Equipment, Prosthetics, Orthotics, and Supplies (DMEPOS) Competitive Bidding Program (CBP) bid surety bond requirements for Remote Item Delivery (RID) CBPs

The final rule also discusses two Requests for Information (RFIs) included in the proposed rule: one on potential IRF PPS payment reform, including diagnosis-based patient classification and revised comorbidity scoring methodologies, and another on future IRF QRP quality measure concepts, including Advance Care Planning (ACP). CMS states it may take the stakeholder feedback received into consideration in future rulemaking.

CMS FINALIZES 2.3% PAYMENT UPDATE FOR HOSPICES IN FY 2027 

By Meghan Basler, Health Policy Manager

On July 30, CMS issued the fiscal year (FY) 2027 Medicare Program; FY 2027 Hospice Wage Index and Payment Rate Update and Hospice Quality Reporting Program Requirements final rule. 

Finalized policies include:

• Increasing hospice payment rates by 2.3 percent and establishing the FY 2027 hospice cap at $36,174.75
• Updating the hospice wage index under the existing methodology, including the hospice floor and five percent cap on annual decreases
• Requiring hospices to provide the hospice election statement addendum to all beneficiaries electing hospice
• Implementing the Service and Spending Variation Index (SSVI) to identify potential utilization, quality-of-care, or compliance concerns
• Continuing implementation of the Hospice Outcomes and Patient Evaluation (HOPE) instrument and maintaining the existing quality measure set
• Adding an icon to the Medicare.gov Compare Tool, no earlier than FY 2028, to identify hospices that do not meet HOPE data-submission requirements

The proposed rule also sought feedback through three Requests for Information (RFIs) concerning: (1) ways to enhance palliative care outside the Medicare hospice benefit; (2) the potential development of a hospice-specific wage index; and (3) issues arising when a Medicare hospice patient requests medical aid in dying, including potential federal oversight mechanisms. CMS does not establish new policies in response to these RFIs but states that it will consider the comments in future policymaking.

EMMA HAMMER ELECTED VICE CHAIR OF SHPYP

Applied Policy congratulates Health Policy Manager Emma Hammer on her election as Vice Chair of the Society of Health Policy Young Professionals (SHPYP).

Emma began a two-year term as Vice Chair on August 1 after being elected by SHPYP's membership. She previously served the organization as Membership and Sponsorship Director and as a member of its Steering Committee.

Founded in 2006, SHPYP is a volunteer-led, nonpartisan 501(c)(3) organization dedicated to supporting young professionals in the health, healthcare, and health policy fields through networking, professional development, and community-building opportunities. Applied Policy is proud to support SHPYP as a Champion sponsor, reflecting the firm's commitment to developing the next generation of health policy leaders.

Emma assumed the role shortly after SHPYP's 20th Anniversary Gala, held on July 25 at the National Press Club in Washington, D.C. The event brought together members, alumni, and leaders from across the health policy community to celebrate two decades of impact. Julie Rovner, Chief Washington Correspondent for KFF Health News and host of What the Health?, delivered the evening's featured remarks.

"SHPYP is celebrating its 20th anniversary this year, and our anniversary gala was the result of tremendous work by our Executive Board, Steering Committee, and Advisory Board," Emma said. "It was our biggest event yet, surpassing our fundraising and attendance goals. I'm excited to build on that momentum as I begin my term as Vice Chair."

As Vice Chair, Emma will facilitate the selection and management of SHPYP's Steering Committee while helping guide the organization's continued growth and its mission of supporting the next generation of health policy professionals.

We congratulate Emma on this well-deserved achievement and look forward to seeing the impact of her leadership during her two-year term.

Emma Hammer (center right) with members of SHPYP's outgoing Executive Board and Steering Committee at the organization's 20th Anniversary Gala, held July 25 at the National Press Club in Washington, D.C. Photo courtesy of SHPYP via Sam Hurd Photography.

DOJ DECLINES TO PROSECUTE EYE-CARE COMPANY IN FIRST HEALTHCARE TEST OF NEW ENFORCEMENT POLICY 

A New Jersey eye-care company avoided prosecution by disclosing a Medicare-fraud scheme and cooperating. The company's founder was indicted the same day.

The Trump administration has made combating healthcare fraud a priority. From CMS's “Medicaid Fraud War Room” to the Department of Justice's “whole-of-government” campaign against those who defraud federal health programs, its message has been forceful. CMS Administrator Mehmet Oz has warned that if you defraud Medicaid, the government is prepared to “track you down” and “cut you off.” Considered against that backdrop, a recent decision by the Department of Justice (DOJ) not to prosecute a New Jersey eye-care company is notable for displaying a willingness to employ a more targeted approach.

OUR NEW SERIES: STATE HEALTH INITIATIVES

In recent polling by both Gallup and the Pew Research Center, Americans continue to rank healthcare—and its affordability in particular—among their top concerns. At the same time, they consistently express greater trust in state and local government than in Washington. That makes this an appropriate time to take a closer look at how states are responding to today's healthcare challenges.

We are pleased to introduce a new recurring feature in Applied Policy Insight. Each month, we'll look beyond Washington to examine how states are addressing healthcare issues through legislation, regulation, Medicaid policy, executive action, and other initiatives.

Some of this activity follows from federal policy, but implementation varies widely. As an example, states are taking notably different approaches to the implementation of Medicaid community engagement requirements. Nebraska implemented its requirements through a state plan amendment several weeks before CMS issued an interim final rule implementing the requirement. Montana has followed, while Arkansas has opted for a "soft implementation" ahead of any disenrollments in 2027. Every state is participating in CMS's Rural Health Transformation Program, but each based its application for a share of the program's $50 billion in funding on different priorities.

Many initiatives originate with the states themselves—from regulating pharmacy benefit managers and addressing workforce shortages to strengthening public health infrastructure and shaping the use of artificial intelligence in healthcare.

Rather than cataloging every state action, this series will highlight initiatives that reflect broader healthcare trends and may ultimately shape policy well beyond state borders.

If you know of a state health initiative that deserves attention, tell us at news@appliedpolicy.com. We may feature it in a future installment.

Applied Policy is following these regulatory actions currently under review at the Office of Management and Budget:

• Exchange Pre-Enrollment Eligibility Verification (CMS-9873)
• Strengthening the Integrity of Medicaid and CHIP Managed Care, Financing, and Access to Care (CMS-2450)
• Short-Term, Limited-Duration Insurance (CMS-9881)
• Guarding U.S. Medicare Against Rising Drug Costs (GUARD) Model (CMS-5546)
• Global Benchmark for Efficient Drug Pricing (GLOBE) Model (CMS-5545)
• Cutting Administrative Requirements for Excellence in Patient Care (CMS-3484)
• Patient Protection and Affordable Care Act; State Innovation Waivers and Health Care Choice Compacts (CMS-9877)
• Prohibition on Federal Medicaid and Children's Health Insurance Program Funding for Specified Sex-Rejecting Procedures Furnished to Children and Youth (CMS-2451)
• Contract Year 2028 Policy and Technical Changes to the Medicare Advantage Program, Medicare Prescription Drug Benefit Program, Medicare Cost Plan Program, and PACE (CMS-4214)
• Clinical Laboratory Improvement Amendments of 1988 (CLIA) Virtual Access, Gynecologic Cytology Proficiency Testing (PT), Personnel Qualification Requirements, and Other Changes (CMS-3478)
• Regulatory Alignment for Predictable and Immediate Device (RAPID) Coverage Pathway (CMS-3487)
• Transparency in Coverage (CMS-9882)

See all rules under OMB review here.

Applied Policy continues to track executive orders that could impact healthcare and health policy. Access our regularly updated page below.

PROCLAMATION GRANTS TEMPORARY HON RULE EXEMPTION

On July 13, President Trump issued a proclamation granting certain synthetic organic chemical manufacturers a two-year exemption from portions of EPA's 2024 HON Rule (89 FR 42932) under the national security exemption in section 112(i)(4) of the Clean Air Act. The proclamation cites domestic chemical production as essential to supply chains supporting energy, defense, agriculture, and healthcare, including medical sterilization.

Why did the amoeba fail its math test?

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Questions, comments, or concerns? Please contact us at news@appliedpolicy.com