The Centers for Medicare and Medicaid Services is proposing a one-year temporary payment category for clinical AI and diagnostic software tools, marking the agency’s most concrete step yet toward paying for algorithms based on their clinical value rather than as generic supplies. The 2027 proposal would rename and repackage certain software services under a new “Software as a Medical Service” label, affecting dozens of hospital billing codes and shifting some lab-analysis algorithms out of the lab fee schedule.
For hospitals running Windows-based imaging, EHR, and revenue-cycle systems, the changes could mean cleaner billing pathways and fewer reimbursement headaches — but only if IT and compliance teams act before the September 14 comment deadline.
What’s in the Proposal?
CMS’s hospital outpatient rule proposes to rebrand its existing “Software as a Service” (SaaS) category as “Software as a Medical Service,” or SaMS. The reason, according to CMS, is that “SaaS” carries a well-established meaning in general cloud computing, while the tools in question perform clinical or diagnostic functions using algorithmic analysis. The new label is meant to clarify that these are not generic IT services but regulated medical devices or decision-support tools.
The agency would transfer 36 HCPCS codes into the SaMS bucket for calendar year 2027. These codes currently reside in ordinary clinical payment groups; under the proposal, they would move to New Technology Ambulatory Payment Classifications (APCs) with payment rates aligned to their 2026 levels. A new outpatient status indicator — O1 — would provide separate payment for SaMS services, similar to the existing “S” indicator, while making the clinical-software category visible in claims and payment policy.
The services covered include decision support, risk modeling, computer-aided detection, and software that analyzes diagnostic images to support diagnosis or treatment planning. Some of these software functions are already FDA-regulated medical devices.
CMS is explicit that this is not a blanket coverage decision for all AI products, nor does it create a new Medicare payment for ambient documentation systems or general-purpose generative AI. It is strictly a proposed, one-year interim structure for a specific set of clinical software services.
In a complementary move, the physician-fee proposal addresses algorithms that analyze data generated by an earlier lab test — for example, genomic sequencing. CMS argues these secondary analyses are not clinical diagnostic laboratory tests because they can be run without a CLIA-certified laboratory. The agency proposes moving 10 HCPCS-coded services from the Clinical Laboratory Fee Schedule (CLFS) to contractor-priced payments under the Physician Fee Schedule (PFS). New codes describing the same type of lab-data algorithm would also be contractor-priced under the PFS beginning in 2027, if the proposal is finalized.
This matters because the lab fee schedule operates under different pricing mechanics, cost-sharing rules, and budget-neutrality requirements. CMS cited limited transparency into proprietary algorithm costs and potential program-integrity concerns as reasons to reconsider that route.
Why It Matters for Your Hospital
The immediate practical impact falls on hospital IT, informatics, compliance, and billing teams. For those running Windows-based infrastructure that supports imaging, EHR, or revenue-cycle workflows, the proposed changes could simplify the reimbursement process for AI tools that have long been an awkward fit inside payment systems built around physical supplies and equipment.
If your hospital already uses clinical AI for radiology, cardiology, or pathology, you’ll need to identify which products are attached to billable workflows and confirm their CPT and HCPCS mappings with vendors. The proposed SaMS category gives those tools a clearer payment home — but only if you map them correctly in your charge description master and billing systems.
For clinical departments, the SaMS designation could accelerate adoption of new AI tools because the payment pathway becomes less ambiguous. However, the proposal does not guarantee blanket coverage. Each service must still meet existing coverage criteria, and the temporary nature of the framework means hospitals should not overhaul long-term budgets based on 2027 alone.
The shift of lab-data algorithms from the CLFS to the PFS is equally significant. If your institution runs genomic sequencing or other molecular tests that rely on algorithmic interpretation, those interpretation services may soon be priced by Medicare contractors rather than under the national lab fee schedule. That could introduce regional variation in payment rates and require closer attention to local coverage determinations.
How We Got Here
For years, Medicare has struggled to pay for software-based clinical tools. The agency is adept at calculating the costs of physical items — from cotton swabs to CT scanner maintenance — but an algorithm that predicts cardiac risk from a CT scan or maps prostate cancer spread doesn’t fit that model. The economics of clinical AI are driven by proprietary models, subscriptions, licenses, or per-use fees, not tangible supplies.
CMS first began experimenting with payments for software as a service in the outpatient setting several years ago, but the category “SaaS” never quite captured the clinical nature of the tools. The SaMS proposal is the agency’s acknowledgment that a more precise framework is needed — and that it must eventually tie payment to patient outcomes, not just inputs.
The 2027 proposal arrives as part of the annual rulemaking cycle for the Hospital Outpatient Prospective Payment System and the Physician Fee Schedule, released in early July. As STAT first reported, the changes are framed as an interim step while CMS develops a permanent methodology that could incorporate value-based metrics.
The lab algorithm shift has its own backstory. CMS has grown concerned that algorithms analyzing existing lab data are being priced through the CLFS without the transparency and oversight it expects for clinical diagnostic tests. By moving these services to contractor-priced PFS codes, CMS gains flexibility to negotiate rates and address program-integrity risks.
What to Do Before the September 14 Deadline
The most pressing action item is the comment period. While the hospital outpatient rule’s exact comment deadline has not been explicitly called out in the available sources, the physician-fee rule’s comment window closes on September 14, 2026. Because the lab algorithm proposals reside in that rule, and because CMS typically aligns comment deadlines when rules overlap, any hospital stakeholder hoping to influence the final policy should aim to submit comments by that date.
Here are the concrete steps your team should take now:
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Audit your clinical AI inventory. List every AI or algorithm-driven tool that interacts with billable patient encounters — imaging CAD tools, risk-stratification modules, digital pathology software. Note their current HCPCS or CPT codes.
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Confirm mappings with vendors. Reach out to software suppliers and ask how they intend to map their products to the proposed SaMS codes and whether they plan to apply for New Technology APC assignments.
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Involve revenue cycle and compliance early. The new O1 status indicator and SaMS category will require updates to your charge description master and claim scrubbing logic. Start those conversations now rather than scrambling at go-live.
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Review the lab algorithm impact. If your lab offers genomic interpretation or similar algorithmic services, determine which current CLFS codes might move to PFS contractor pricing. Project the revenue impact under both scenarios and incorporate that data into your comment letter.
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Submit a comment letter. Visit the Federal Register rulemaking docket — typically CMS-1801-P for the physician fee schedule — and submit specific, data-driven feedback. CMS responds to concrete examples and quantifiable concerns more than generic support or opposition.
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Do not assume finality. These are proposed rules. CMS will consider comments, issue final rules later in 2026, and likely adjust the framework before the 2027 effective date. Treat this as a planning exercise, not a settled outcome.
What Comes Next
CMS has made clear that SaMS is a temporary bridge, not a permanent settlement. The agency intends to develop a long-term payment method that ties reimbursement more closely to clinical outcomes — a shift that could significantly alter how hospitals value and purchase AI software.
The lab algorithm proposal may also expand. CMS’s rationale for moving those 10 codes out of the CLFS could apply to other algorithm-driven interpretation services, especially as genomic testing becomes more routine and more proprietary models hit the market.
For hospital IT and informatics teams, the message is clear: clinical AI payment policy is finally evolving, and the window to shape it is open. But the structure that emerges in 2027 will only be the beginning. How CMS defines value — and how it measures outcomes — will determine whether SaMS becomes a permanent category or merely a footnote in the longer arc of health tech reimbursement.