Author: Penny Jefferson, MSN, RN, CCDS, CCDS-O, CCS, CDIP, CRC, CHDA, CRCR, CPHQ, ACPA-C | July 28, 2026
The fiscal year (FY) 2027 Inpatient Prospective Payment System (IPPS) Proposed Rule suggests that the next phase of value-based care will require hospitals to manage episodes, networks, and outcomes beyond their own walls.
Each year, healthcare leaders review the Centers for Medicare & Medicaid Services (CMS) Inpatient Prospective Payment System rule for changes affecting hospital payment, coding, quality programs, and operations.
That annual review is necessary, but it can also become too narrow.
When organizations evaluate each provision independently, they may miss the larger direction Medicare is signaling. The FY 2027 IPPS Proposed Rule offers an important example.
CMS displayed the proposed rule on April 10, 2026, and published it on April 14, 2026. Among its provisions, CMS proposes expanding the Comprehensive Care for Joint Replacement Model through a new model called the Comprehensive Care for Joint Replacement Expanded Model, or CJR-X. [1]
If finalized, CJR-X would become a mandatory nationwide episode-based payment model beginning Oct. 1, 2027. The proposal focuses on lower-extremity joint replacements, but its strategic significance extends beyond orthopedics.[2]
When considered alongside the mandatory Transforming Episode Accountability Model, or TEAM, CJR-X signals that Medicare is continuing to move hospitals from responsibility for an individual encounter toward accountability for cost, quality, and coordination across a defined episode of care. [2,3]
This is more than another payment methodology.
It represents a different hospital operating model.
Mandatory Participation Changes the Conversation
Value-based care is not new. Hospitals have participated in accountable care arrangements, bundled-payment initiatives, shared-savings programs, and quality-based reimbursement models for years.
However, voluntary and mandatory participation create different organizational expectations.
Voluntary models may disproportionately attract hospitals that already possess the infrastructure, physician alignment, financial capacity, and analytic sophistication necessary to manage risk. Mandatory models bring a broader range of organizations into the payment transformation, including hospitals that may not have deliberately chosen to assume episode-level accountability.
TEAM is already operating as a mandatory episode-based payment model in selected Core-Based Statistical Areas. The model began Jan. 1, 2026, and will continue through Dec. 31, 2030. Participating acute-care hospitals coordinate care for Original Medicare beneficiaries undergoing one of five surgical episode categories:
- Lower-extremity joint replacement;
- Surgical hip and femur fracture treatment;
- Spinal fusion;
- Coronary artery bypass graft surgery; and
- Major bowel procedures.
TEAM episodes extend from the surgery through 30 days after the patient leaves the hospital.[3]
CJR-X would broaden that direction considerably.
If finalized, most hospitals paid under the IPPS would be required to participate nationwide. Proposed exclusions include hospitals participating in TEAM, hospitals located in Maryland, and hospitals not paid under both the IPPS and the Hospital Outpatient Prospective Payment System. Critical access hospitals and rural emergency hospitals would consequently be excluded. CMS describes CJR-X as the first nationwide test of a mandatory episode-based payment model.[2]
The central signal is not simply that Medicare continues to test value-based care.
The signal is that episode accountability is moving beyond optional experimentation.
Hospital leaders should therefore stop treating bundled payment as a specialized finance initiative that can be activated only when an organization elects to participate. The capabilities necessary to succeed under these models are becoming core operating capabilities.
The Hospitalization Is No Longer the Complete Unit of Performance
Hospitals have traditionally organized performance around identifiable events: an admission, an inpatient stay, a procedure, a discharge, or a claim.
Episode-based payment changes the boundaries of accountability.
Under the proposed CJR-X model, an episode would begin with a qualifying hip, knee, or ankle replacement performed in the hospital inpatient or outpatient setting. The episode would continue through the first 90 days of recovery after discharge from the inpatient hospitalization or completion of the outpatient procedure.[2]
With limited exceptions, the target price would account for Medicare costs associated with the lower-extremity joint-replacement episode. Hospitals and other providers would continue to receive fee-for-service payments through existing Medicare payment systems. CMS would later compare actual episode spending with the participating hospital’s target price. Depending on spending and quality performance, the hospital could receive a reconciliation payment or be required to repay Medicare.[2]
This means that a technically successful procedure and an uncomplicated hospitalization may no longer be sufficient to define a successful episode.
A patient may still experience delayed rehabilitation, an avoidable emergency department visit, a medication-related complication, an unnecessary skilled nursing facility stay, fragmented follow-up care, or a preventable readmission.
Those events may occur after the patient has left the hospital, but they can influence the quality, cost, and overall performance of the episode.
Hospitals are not being asked to control every decision made by every clinician or post-acute provider. They are being asked to establish a more reliable care pathway in which avoidable fragmentation can be identified and reduced.
That distinction matters.
Episode accountability is not simply an extension of the hospital stay. It requires hospitals to understand the recovery process as a connected clinical and financial continuum.
Service-Line Management Must Evolve
Traditional hospital service-line scorecards may include procedural volume, contribution margin, operating-room utilization, length of stay, complications, mortality, and readmissions.
Those measures remain valuable, but they are incomplete when accountability extends for 30 or 90 days beyond discharge.
Under episode-based payment, service-line leaders may also need to understand:
- Total Medicare spending across the episode;
- Variation in discharge destination;
- Skilled nursing facility and home health utilization;
- Emergency department visits after discharge;
- Post-acute complications;
- Outpatient therapy patterns;
- Differences in performance among physicians; and
- The pace and durability of patient recovery.
This does not mean that every higher-cost episode represents poor performance.
A medically complex patient may appropriately require additional services. A patient living alone may have different discharge needs than a patient with reliable caregiver support.
Rural patients may face limited access to home health, physical therapy, or skilled nursing care. Functional status, frailty, comorbidities, housing, transportation, and caregiver availability can all influence the recovery pathway.
The leadership challenge is to understand why the variation occurs.
Organizations should be able to distinguish clinically necessary variation from variation caused by inconsistent practice, limited coordination, unnecessary duplication, or unreliable processes.
That requires a different level of service-line integration.
Physician leaders, finance, nursing, case management, rehabilitation, quality, utilization management, and post-acute partners cannot evaluate episode performance from separate departmental perspectives. They need a shared view of the patient journey and a common understanding of where outcomes and spending begin to diverge.
Post-Acute Performance Is Becoming Hospital Strategy
The growing importance of post-acute care may be one of the most consequential signals from Medicare’s episode-based models.
CMS designed TEAM to address fragmented care from surgery through 30 days after hospitalization. CJR-X would similarly hold participating hospitals responsible for helping patients receive coordinated and affordable care from the time of the qualifying procedure through the first 90 days of recovery. [2,3]
Both models emphasize transitions among hospitals, physicians, rehabilitation providers, and other post-acute services.
A hospital may not own the skilled nursing facility, home health agency, outpatient rehabilitation provider, or physician practice delivering the next phase of care. Nevertheless, the cost, quality, timeliness, and coordination of those services may influence the hospital’s episode performance.
Post-acute relationships can therefore no longer be treated solely as discharge-planning resources.
They are becoming part of hospital strategy.
Organizations should understand which providers consistently achieve strong outcomes, where communication delays occur, whether recommended services are available promptly, and which post-acute patterns are associated with avoidable acute-care utilization.
Hospitals should also evaluate whether patients and post-acute providers receive timely and clinically useful information. A discharge summary that arrives after the first post-acute visit, an incomplete medication list, or an unclear follow-up plan can create risks that are not confined to one department or one claim.
At the same time, hospitals must preserve patient choice.
CMS states that beneficiaries receiving care through CJR-X participants would retain their freedom to choose physicians, facilities, and other providers and services.[2] The objective is not to direct every patient into a closed network. It is to improve coordination, provide meaningful information, and help patients navigate the recovery process while respecting their right to select their providers.
This balance will require thoughtful governance. Hospitals will need transparent criteria for evaluating post-acute performance, compliant methods of sharing information with patients, and processes that do not confuse coordination with control.
Rural and Safety-Net Hospitals Face Different Realities
Episode-based payment can create distinct challenges for rural and safety-net organizations.
A clinically appropriate post-acute service may not be available locally. Transportation barriers, workforce shortages, caregiver limitations, housing instability, and geographic distance may make an otherwise reasonable recovery plan difficult to execute.
Those factors can influence the patient’s use of post-acute care, access to physical therapy, ability to attend follow-up appointments, and risk of returning to the emergency department.
CMS is proposing several protections under CJR-X. These include a five-percent stop-loss limit for hospitals serving a high proportion of patients who are dually eligible for Medicare and Medicaid, geographically rural hospitals, Medicare-dependent small rural hospitals, and sole community hospitals.[2]
CMS is also proposing a more extensive risk-adjustment methodology. CJR-X would use 29 risk adjusters, compared with three in the previous CJR model. The methodology would include hospital-level and patient-level factors such as hospital bed count, age, chronic-condition burden, dual eligibility, procedure type, disability as the original reason for Medicare entitlement, prior post-acute care use, and selected Hierarchical Condition Categories.[2]
These protections acknowledge that hospitals serve different populations and operate within different care environments.
They do not, however, eliminate the need for organizations to understand their own communities, referral patterns, access limitations, and post-acute capacity.
Cost Reduction Cannot Replace Clinical Judgment
Episode-based payment creates pressure to reduce unnecessary spending. CMS identifies fragmented care, duplicated resources, avoidable utilization, complications, and readmissions as problems that TEAM and CJR-X are intended to address.[2,3]
However, lower spending alone is not the definition of high-value care.
The least expensive discharge destination is not always the most appropriate destination. Fewer services do not necessarily produce a better outcome. A patient who requires skilled rehabilitation should not be denied that level of care merely because discharge home is less costly.
The goal is not indiscriminate utilization reduction.
The goal is to remove services that do not add clinical value while preserving those necessary for safe recovery.
That distinction requires clinical leadership.
Organizations need mechanisms for identifying when variation is supported by patient complexity and when it reflects a process that should be redesigned. Financial data can show where spending differs, but it cannot independently explain whether the difference was appropriate.
A higher-cost episode may represent an avoidable complication. It may also reflect legitimate clinical complexity, a limited post-acute market, or a patient who required additional support to recover safely.
Leaders must be able to tell the difference.
Clinically Credible Information Supports Fair Performance Analysis
Clinically credible information becomes essential when organizations evaluate episode performance.
The medical record should accurately describe the patient’s baseline condition, functional limitations, comorbidities, procedural risk, complications, discharge needs, and reasons for selecting a particular level of post-acute care.
Clinical Documentation Integrity has a focused role, but not simply as a method of increasing coded severity.
In an episode-based environment, documentation helps the organization interpret performance accurately. It may clarify whether resource use reflected legitimate patient needs, an unexpected clinical event, or an avoidable breakdown in the care pathway.
Documentation should not be used to explain away poor outcomes. At the same time, incomplete documentation should not allow legitimate complexity to disappear from the analysis.
This requires balanced oversight. Organizations need accurate clinical information, but they must also ensure that documentation, coding, and risk-adjustment efforts remain clinically supported and compliant.
The purpose is not to make the patient appear more complex.
The purpose is to ensure that the information used to evaluate the episode reflects the clinical reality.
Readiness Requires More Than a Project Plan
Hospitals should not wait until CJR-X is finalized or until they receive a participation notice to begin developing episode-management capabilities.
The most important preparation is not a narrow implementation checklist. It is an honest assessment of whether the organization can manage care and performance across settings.
Leadership teams should be able to answer five questions.
Do we understand the complete cost of the episode?
Hospitals should know where spending occurs during and after the hospitalization, including post-acute care, rehabilitation, follow-up services, emergency department utilization, and readmissions.
Can we identify the source of variation?
Organizations should be able to differentiate patient-driven, clinically necessary, geographic, provider-related, and process-related variation.
Do service lines share responsibility for downstream outcomes?
Accountability should not end when the patient leaves the operating room or is discharged from the hospital.
Do we understand our post-acute environment?
Hospitals need visibility into provider availability, outcomes, communication reliability, and barriers affecting patient access.
Can we explain our performance clinically?
Financial and utilization data must be interpreted alongside accurate clinical information.
These capabilities will remain valuable even if individual provisions of CJR-X change before the model is finalized.
Reading Medicare’s Direction
The current CMS Innovation Center strategic direction reinforces the larger movement toward financial accountability. CMS has stated that future Innovation Center models will prioritize high-value care, incentivize reductions in unnecessary utilization, include downside financial risk, and move more Medicare and Medicaid beneficiaries into accountable-care arrangements in which providers assume financial responsibility.[4]
That does not mean every service will immediately be placed into a mandatory episode model.
It does mean hospital leaders should recognize the trajectory.
Medicare is moving from isolated services toward connected episodes.
It is moving from responsibility for the hospital encounter toward responsibility for recovery.
It is moving from voluntary experimentation toward broader financial accountability.
And it is asking hospitals to understand not only what care was delivered, but whether the entire pathway was coordinated, clinically appropriate, and financially sustainable.
The question is no longer limited to:
What changed in the annual rule?
The more important question is:
What kind of healthcare delivery organization is Medicare asking hospitals to become?
The signals point toward hospitals that can manage beyond their own walls, understand variation without compromising clinical judgment, build stronger relationships across the care continuum, and accept accountability for both outcomes and resources.
That is not simply another regulatory requirement.
It is the emerging operating model for healthcare’s next decade.
References
1. Centers for Medicare & Medicaid Services. FY 2027 Hospital Inpatient Prospective Payment System Proposed Rule Home Page. CMS. Displayed April 10, 2026; published April 14, 2026.
https://www.cms.gov/medicare/payment/prospective-payment-systems/acute-inpatient-pps/fy-2027-ipps-proposed-rule-home-page
2. Centers for Medicare & Medicaid Services Innovation Center. CJR-X: Comprehensive Care for Joint Replacement Expanded Model. CMS. Updated April 14, 2026.
https://www.cms.gov/priorities/innovation/innovation-models/cjr-x
3. Centers for Medicare & Medicaid Services Innovation Center. TEAM: Transforming Episode Accountability Model. CMS. Updated July 6, 2026.
https://www.cms.gov/priorities/innovation/innovation-models/team-model
4. Centers for Medicare & Medicaid Services Innovation Center. Strategic Direction. CMS. Originally posted May 13, 2025; updated March 16, 2026.
https://www.cms.gov/priorities/innovation/about/strategic-direction
This article was originally published on RACmonitor.
