Proof should set the price
Medicare has renamed the diagnostic software it pays hospitals for and parked it in temporary payment groups, an interim step. The next step should pay for software that shows patients do better.
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read by an AI voiceMedicare already pays hospitals for diagnostic software. From January it will do so under a name of its own. Its final outpatient rule for 2027, issued on Nov. 4 beside a cut in physicians' pay rate, renames programs that analyze a patient's data and return a diagnosis, a risk score or a treatment recommendation. Software as a Service becomes Software as a Medical Service. For now these services go into payment groups Medicare keeps for new arrivals, a move the Centers for Medicare and Medicaid Services, or CMS, calls "an interim step toward a broader payment policy."
That broader policy is not yet written, and it matters. Hospitals buy the software that earns its keep, and Medicare's rules decide what earns. Payment is among the strongest levers over which AI reaches patients. When the interim ends, Medicare should pay for software that shows its patients do better, not merely software that has been cleared and sells well. The new category's rules should say so.
CMS has sound reasons to go slowly. In its July proposal it said its outpatient prices are built around supplies, equipment and staff time, which say little about what an algorithm is worth, and some vendors charge by subscription, by license or by the click. The proposal named 36 billing codes, from AI reading of retinal photographs to estimates of blood flow in the heart's arteries from a CT scan. The rule parks such services in groups that pay for newcomers until CMS has gathered enough claims data to place them for good. Under the outpatient system Medicare pays the hospital, not the vendor.
The second change reaches patients directly. A small number of analyses leave the lab fee schedule, under which Medicare patients generally owe nothing. They work only on data a laboratory has already produced. One of the ten in the proposal was a secondary computer interpretation of a genomic sequence. The outpatient system, unlike the lab fee schedule, charges patients a share, so from January some will owe a copay for them. CMS says the analyses are substantially similar to software it already pays hospitals for, and it set their new rates in line with the old. The Association for the Advancement of Blood and Biotherapies had warned that the move would subject the analyses to budget neutrality as well as cost-sharing, "potentially shifting costs to beneficiaries and providers."
Nothing in CMS's summary of its software policy, or in its criteria for the new-technology groups, asks whether patients do better. To enter those groups a service must be new, must not be eligible for pass-through payment and must be "reasonable and necessary," the ordinary test for coverage. Under the usual rules for those groups, the permanent price would come from claims, which pile up fastest for what sells. Yet CMS knows how to ask. In July it finalized the repeal of a shortcut that let devices with the Food and Drug Administration's breakthrough designation collect extra inpatient and outpatient payments without showing that they substantially improve diagnosis or treatment. From the 2028 round of applications, after a transition, they must show it again. An agency that has just ruled that an FDA designation cannot stand in for proof of benefit should not let a sales record stand in for it either.
Evidence of that kind can be had. Take the estimate of blood flow in the heart's arteries from a CT scan. In a randomized trial of 2,103 patients with stable symptoms of possible coronary disease, a strategy that used it sharply cut the number of patients sent for a catheter test, a tube threaded to the heart, only to find no significant blockage. With usual testing that was about one patient in ten. With the new strategy it was one in forty. Those are people spared a needless procedure. The trial was sponsored by HeartFlow and bundled the software with a risk score and the scan, and its authors concede that "the separate effects of each choice cannot be determined." Heart attacks, more than twice as common with the new strategy, were too few to draw a conclusion. Still, it is evidence a payer can price.
There is a serious case for paying first. Diagnostic software helps a patient only through what a doctor does with its answer, so trials that follow patients are slow and costly. Why, the argument goes, should an algorithm face a test that routine lab work is spared? Demand such trials and only the largest companies will afford them, while patients wait for tools that may well work. Grant all of it. It argues for paying in stages, a base rate through the interim and more once trials in patients show a benefit, so that Medicare's money pays for the evidence instead of standing in for it.
CMS should build the broader policy on what happened to patients. A code backed by trials showing fewer missed diagnoses, needless procedures or deaths should earn more than one backed only by accuracy on stored images, and the evidence behind each code should be posted beside its price. The outpatient rule was issued as final with a comment period, so medical societies should make that case in writing before the next rule is drafted. Hospitals should ask vendors for the same evidence before they sign, and physicians should warn patients that some analyses will carry a copay from January. The nearly 1,400 critical access hospitals are paid on their own costs, not these rates, so a price that rewards evidence would miss the smallest rural hospitals. A coverage rule would reach them.
CMS called its decision an interim step, and it is. For now the agency can still choose what its money rewards. Once the claims arrive, they will choose for it, and a claim records what was billed, not how the patient fared.
- The software category in the 2027 outpatient ruleCMS's fact sheet on the CY 2027 Hospital Outpatient Prospective Payment System and Ambulatory Surgical Center final rule (CMS-1850-FC, a final rule with comment period), dated Nov. 4, 2026, says CMS is finalizing a change in terminology from Software as a Service (SaaS) to Software as a Medical Service (SaMS), and is finalizing its proposal to assign SaMS to New Technology APCs "as an interim step toward a broader payment policy." The fact sheet gives no number of codes and no payment amounts. The July 2, 2026 proposal, as summarized by Reed Smith and Becker's, would have designated 36 HCPCS codes as SaMS under a new status indicator, O1, moving 21 of them from clinical APCs to New Technology APCs while "maintaining approximate rate continuity with CY 2026 payment." Becker's lists among the proposal's examples AI analysis of retina images and coronary blood flow estimates from CT angiography. The final rule's own list of codes, and whether the O1 indicator was finalized, were not read for this piece.
- CMS's reasons, from the proposalBecker's (Andrew Cass, July 7, 2026) reports that CMS proposed the new name because the old one could be confused with generic cloud computing; that CMS said its outpatient methodology is built around physical resources such as supplies, equipment and staff time, making an accurate rate hard to set; that it flagged program integrity concerns about subscription, license and per-click fee models; and that it called the policy interim while it works toward a long-term valuation methodology. Reed Smith (July 7, 2026) describes vendor arrangements that include subscription and license fees and per-use or per-click fees, and says CMS is using the period to consider comprehensive, long-term approaches.
- Laboratory analyses moved off the lab fee scheduleThe OPPS fact sheet says these secondary analyses, now paid under the Clinical Laboratory Fee Schedule as clinical diagnostic laboratory tests, will be paid for CY 2027 as "other diagnostic tests" under the OPPS, by assigning "a small number" of codes to New Technology APCs that align with current CY 2026 CLFS rates. CMS gives as its reason that it believes they are substantially similar to SaMS already paid under the OPPS. The July proposal would have moved 10 codes (Reed Smith; Becker's). The final number was not confirmed from CMS's own pages. On cost-sharing, Becker's wrote of the proposal that "the outpatient payment system applies beneficiary cost-sharing," unlike the lab fee schedule, "so patients could begin owing a copay on tests that previously carried none." AABB said in its Sept. 23, 2026 summary of its comments on the proposed 2027 physician fee schedule that the move would subject the services to budget neutrality and beneficiary cost-sharing.
- What a New Technology APC requiresCMS's guide for medical technology companies says the OPPS uses New Technology APCs "to pay for certain new services until CMS gathers sufficient claims data to enable it to assign the service to an appropriate clinical APC." A service must be truly new, must not be eligible for transitional pass-through payment, and must fall within Medicare benefits and be "reasonable and necessary in accordance with section 1862(a)(1)(A) of the Act." The criteria as listed there include no test of clinical improvement. The guide says APC payments are made for items and services furnished by hospital outpatient departments.
- The breakthrough-device shortcut, repealedMcDermott+ reports that in the FY 2027 inpatient final rule, issued July 31, 2026, "CMS finalized its proposals, with modifications, to repeal the alternative IPPS new technology add-on payment (NTAP)" pathway and the parallel outpatient transitional pass-through pathway, so that applicants must meet the eligibility criteria regardless of FDA breakthrough device designation. Applied Policy (William Rogers, Sept. 7, 2026) says the change restores the requirement to demonstrate substantial clinical improvement beginning with FY 2028 applications; a technology with breakthrough designation as of Sept. 30, 2026 that gains FDA marketing authorization by May 1, 2028 may use the alternative inpatient pathway through FY 2029, with a parallel outpatient exception through CY 2029. Foley Hoag, describing the April proposal, wrote that such technologies "did not need to demonstrate that they substantially improve the diagnosis or treatment of Medicare beneficiaries."
- The PRECISE trialDouglas and colleagues, JAMA Cardiology 2023;8(10):904-914. A pragmatic randomized trial that enrolled 2,103 patients with stable symptoms of suspected coronary artery disease and no prior testing at 65 North American and European sites from Dec. 3, 2018 to May 18, 2021. The new strategy deferred testing for minimal-risk patients and gave the rest CT angiography with selective CT-derived fractional flow reserve. Primary end point (death, nonfatal myocardial infarction or catheterization without obstructive disease): 44 of 1,057 (4.2%) against 118 of 1,046 (11.3%) (hazard ratio 0.35). Catheterization without obstructive disease: 27 (2.6%) against 107 (10.2%) (hazard ratio 0.24). Deaths 5 (0.5%) against 7 (0.7%); nonfatal myocardial infarction 13 (1.2%) against 5 (0.5%) (hazard ratio 2.65; 95% CI 0.96 to 7.36). The authors write that the separate effects of each choice cannot be determined and that additional randomized trials are needed, including on safety. The paper says HeartFlow Inc. sponsored the investigator-initiated trial and had no role in outcome determinations, data analysis or interpretation; three authors list HeartFlow affiliations. NCT03702244.
- Critical access hospitalsThe Medicare Payment Advisory Commission's payment basics on critical access hospitals (revised October 2026) says Medicare beneficiaries can receive care in nearly 1,400 small hospitals called critical access hospitals, that each receives 101 percent of its costs for outpatient, inpatient, laboratory and therapy services, unlike hospitals paid under prospective payment systems, and that outpatient coinsurance is 20 percent of charges, not costs.