Provisions in the recently released CY 2027 Outpatient Prospective Payment System (OPPS) and Physician Fee Schedule (PFS) proposed rules indicate that the Centers for Medicare & Medicaid Services (CMS) is working to standardize how Medicare pays for diagnostic software and algorithm-driven analyses, on terms that favor agency control and cost containment.
In both the OPPS and PFS 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. Under CMS’s definition, SaMS covers software that supports diagnosis and clinical decision-making, as distinct from software that treats an illness or injury, such as prescription digital therapeutics (PDTs).
The change would be more than semantic. CMS also proposes reassigning many of the Healthcare Common Procedure Coding System (HCPCS) codes it would designate as SaMS from clinical Ambulatory Payment Classifications (APCs) to New Technology APCs. In the OPPS, CMS proposes creating a new status indicator, O1, to identify SaMS services and pay them separately. Across both rules, CMS proposes moving certain algorithm-only laboratory analyses off the Clinical Laboratory Fee Schedule (CLFS), where they are currently paid as clinical diagnostic laboratory tests.
Why software resists Medicare’s payment systems
Because its value lies primarily in proprietary algorithms, software has never fit easily within Medicare’s fee-for-service payment systems, which were designed to pay for material resources such as clinician time, equipment, and supplies.
The question of how to pay for novel and evolving technologies is neither new nor unique to software. Shortly after the launch of the OPPS in 2000, CMS created New Technology APCs as a temporary home for services that lack the claims history needed to price them. Software is one of many technologies that have been paid through this mechanism. More often, though, CMS has treated software licensing and per-use fees as indirect costs bundled with hardware. Neither approach has produced a consistent way to value these services. The Medicare Payment Advisory Commission (MedPAC) has examined the question, as has the American Medical Association (AMA), which has weighed a new coding category for algorithmic analyses. CMS previously solicited comments on how to pay for these services in the rulemaking cycles for both CY 2023 and CY 2026 and issued a request for information in the CY 2026 PFS rule before proposing to act for CY 2027.
Redrawing the line between lab and software
In the CY 2027 PFS proposed rule, CMS proposes to contractor price 10 HCPCS codes that it identifies as SaMS laboratory analyses. It made that identification from the codes’ CPT descriptors, treating a code as a SaMS laboratory analysis where the descriptor included “no laboratory methods” and “only a computer analysis was described.”[1] In effect, CMS is distinguishing between wet laboratory testing, in which a laboratory analyzes a patient specimen to generate new clinical information, and dry testing, in which software performs a secondary analysis of data already generated by a laboratory. The agency contends that these algorithm-only analyses are not laboratory tests for Medicare payment purposes but rather “other diagnostic tests” because they analyze previously generated data and can be performed outside of a Clinical Laboratory Improvement Amendments (CLIA)-certified laboratory.
In the OPPS, CMS proposes to assign these same 10 codes to New Technology APCs at rates that approximate their current CLFS payment.
Implications
Unlike the OPPS and PFS, the CLFS generally applies no beneficiary cost-sharing and is not budget-neutral. Moving these analyses off the CLFS would make them subject to both.
The shift would also change how these tests are priced, and industry observers have raised several concerns about what that could mean. Under the CLFS, developers can use established pricing methods known as crosswalk and gapfill. Crosswalk sets a rate by matching a new test to a comparable existing one; gapfill builds the price up from its components. Moving to the OPPS and PFS removes that familiar path. Some expect this could favor companies that perform both the laboratory test and the software analysis over smaller, software-only developers. CMS does not address this effect in its discussion of these proposals.
A second concern involves transparency, an issue CMS itself raises. The agency says it struggles to price these services because their algorithms are proprietary and their inner workings are not disclosed. Observers acknowledge the concern but worry it could lead CMS to become more cautious about covering or paying for software it cannot fully examine.
A third concern is valuation. Because an algorithm performs the analysis automatically, CMS may treat the service as involving less work and therefore set the payment lower. Developers argue this misreads the value of these tools, which lies in their development and diagnostic insight rather than in the moment of computation. For now, CMS proposes to hold these codes at rates that approximate their current payment, so the near-term effect is muted. The concern is directed at the permanent methodology CMS has said it intends to develop.
These concerns remain preliminary. The comment period for the Outpatient Prospective Payment System proposed rule closes on August 31, 2026, and the comment period for the Physician Fee Schedule proposed rule closes on September 14, 2026. Applied Policy will be reviewing industry comments and CMS’s response.
[1] Per CMS, a code qualifies as a SaMS laboratory analysis where its descriptor shows no laboratory methods. At least two of the ten codes listed appear to involve such methods: 0511U describes tumor cell culture in a three-dimensional microenvironment, and 81416 describes comparator exome sequence analysis.
