Final 2027 IPPS Rule: Significant Changes to GME Program Newness Criteria

On July 31, 2026, the Centers for Medicare & Medicaid Services (CMS) released the Final FY 2027 Inpatient Prospective Payment System (IPPS) Rule. The final rule includes several changes relevant to Graduate Medical Education (GME), including long-awaited clarification of the criteria used to determine whether a residency program qualifies as new for Medicare cap-building purposes. CMS also finalized new nondiscrimination requirements, clarified the calculation of GME payments following hospital mergers, established the Medicare Advantage (MA) DGME reduction factor, and announced two additional rounds of Section 5506 cap redistribution.

Below, Germane Solutions highlights the finalized provisions most relevant to teaching hospitals and health systems.

New Residency Program Criteria

For the past several years, CMS has solicited feedback regarding the criteria used to determine whether a residency program qualifies as new for Medicare cap-building purposes. Historically, CMS considered the “newness” of the program director, faculty, and residents when making this determination.

In the Final FY 2027 IPPS Rule, CMS established a clearer standard and removed the prior employment of program directors and faculty from its evaluation. Under the finalized policy, a residency program must meet the following criteria to qualify as new:

• The program must receive initial accreditation from the appropriate accrediting body.

• At least 90% of the individual residents entering the program during its five-year cap-building period must not have previously trained in another program in the same specialty.

• CMS will no longer consider whether the program director or faculty previously worked in another program in the same specialty.

For purposes of the 90% calculation, CMS will exclude:

• Residents with previous training in the same specialty who enter the new program as first-year residents through the National Resident Matching Program (NRMP) or another binding third-party matching program.

• Residents who meet Medicare’s definition of a displaced resident.

Programs accredited for 16 or fewer total resident positions are exempt from the 90% requirement, regardless of whether the program is located in an urban or rural area. These programs must still receive initial accreditation to qualify as new.

The removal of the program director and faculty “newness” criteria addresses a long-standing tension between CMS interpretations and accreditation requirements. New programs may now recruit experienced GME leaders and faculty without their prior employment jeopardizing the program’s eligibility to build Medicare FTE caps.

Monitoring Resident Composition During the Cap-Building Period

CMS will evaluate a program’s compliance with the newness criteria following the conclusion of the five-year cap-building period. Medicare Administrative Contractors (MACs) are not required to provide an advance determination of program newness.

As a result, hospitals must carefully monitor and document the prior training history of every resident entering a new program throughout the cap-building period. If the program does not satisfy the 90% threshold after applying the permitted exclusions, it would not qualify as new for Medicare cap-building purposes.

This creates a significant financial and compliance risk for hospitals developing new residency programs. Institutions should establish a process for reviewing residents’ prior training, documenting applicable exclusions, and monitoring the program’s projected compliance before admitting residents with previous experience in the same specialty.

The finalized criteria apply both to programs that begin training residents on or after October 1, 2026, and to programs that remain within their five-year cap-building period as of October 1, 2026. Therefore, hospitals with programs already building their caps should promptly evaluate their resident composition under the new standard.

GME Nondiscrimination Requirements

CMS finalized its proposed nondiscrimination requirements without modification. Effective October 1, 2026, approved medical residency training programs may not discriminate, or promote or encourage discrimination, based on race, color, national origin, sex, age, disability, or religion.

The prohibition applies to the use of these characteristics, or intentional proxies for them, in employment, program participation, resource allocation, and similar activities, opportunities, or benefits.

Hospitals and sponsoring institutions should review their recruitment, selection, employment, and resource-allocation policies to ensure alignment with the finalized requirements.

GME Payment Calculations Following Hospital Mergers

CMS also finalized its methodology for calculating DGME and IME payments when hospitals merge during a cost reporting period.

For DGME, the MAC will perform separate calculations for the portions of the cost reporting period before and after the merger. The post-merger calculation will incorporate the merged weighted-average per resident amounts (PRAs), combined rolling-average FTE counts, and combined Medicare utilization.

For IME, the calculation will incorporate the terminating hospitals’ FTE caps and available beds, as well as combined Medicare Part A and simulated Medicare Advantage diagnosis-related group revenues.

These clarifications are particularly important for hospitals considering or completing mergers during a cost reporting period. Organizations should model the GME reimbursement implications of a transaction and ensure that the underlying PRA, FTE, utilization, cap, and available-bed data are properly combined.

Medicare Advantage DGME Adjustment

CMS finalized a 2.34% reduction to Medicare Advantage DGME payments for FY 2027. This remains a relatively low reduction factor and will continue to minimize the reduction to DGME payments for institutions serving Medicare Advantage beneficiaries.

Redistribution of Closed Hospitals’ IME and DGME Slots

CMS announced Rounds 30 and 31 of the Section 5506 application process to redistribute the FTE resident caps of two closed teaching hospitals.

Round 30: Insight Hospital and Medical Center Trumbull

Insight Hospital and Medical Center Trumbull (CCN 360055), located in Warren, Ohio, closed on October 10, 2025. CMS will redistribute:

• 75.11 IME FTE cap positions

• 76.93 DGME FTE cap positions

Round 31: M Health Fairview St. Joseph’s Hospital

M Health Fairview St. Joseph’s Hospital (CCN 240063), located in Saint Paul, Minnesota, closed on July 1, 2022. CMS will redistribute:

• 13.36 IME FTE cap positions

• 13.38 DGME FTE cap positions

Hospitals must submit applications for Rounds 30 and 31 through the Medicare Electronic Application Request Information System (MEARIS) no later than October 29, 2026. CMS will not accept applications submitted through another method.

Section 5506 redistribution continues to provide eligible hospitals with an important opportunity to expand funded residency training capacity. Eligibility and application priority depend on several factors, including geographic proximity to the closed hospital and how the requested positions will be used.

Looking Ahead

The Final FY 2027 IPPS Rule provides meaningful clarification for hospitals developing new residency programs. Although removing the program director and faculty newness criteria gives institutions greater flexibility to recruit experienced GME leaders, the finalized resident-composition standard creates a measurable requirement that must be monitored throughout the entire cap-building period.

Hospitals with programs currently building their caps, as well as institutions planning programs that will begin training on or after October 1, 2026, should evaluate the new criteria and establish appropriate documentation and monitoring processes.

Germane Solutions works with hospitals and health systems to assess program newness, monitor cap-building compliance, model GME reimbursement, and pursue Section 5506 cap redistribution opportunities. If your organization is evaluating how the Final FY 2027 IPPS Rule may affect its GME strategy, please contact our team to discuss your current programs and future plans.

Link to the Final FY 2027 IPPS Rule: CMS-1849-F