The public comment periods on Medicare's plan to change how it pays for artificial intelligence and other diagnostic software have now closed. Comments on the hospital outpatient proposal were due Aug. 31, and the comment period on the physician fee schedule proposal closed Sept. 14. Final rules are expected later this year, and one piece of the plan could add patient cost sharing to some algorithm-based lab analyses that now carry none.
The proposal is not a coverage decision. It does not add or remove any test from Medicare. It changes how Medicare pays for certain software-based services, and that detail matters to patients because different Medicare payment systems handle patient cost sharing differently.
For beneficiaries, the diagnosis itself does not change. The bill might.
The Category Medicare Is Trying to Build
The Centers for Medicare & Medicaid Services (CMS) laid out the plan in its 2027 hospital outpatient proposed rule, released July 2. It would create a payment category called Software as a Medical Service for clinical software that uses algorithms to analyze patient data and produce a diagnosis, risk score, or treatment recommendation. CMS previously used the term Software as a Service and said the old label could be confused with general cloud-computing terms.
CMS proposes to designate 36 billing codes as Software as a Medical Service and to mark them with a new status indicator, O1. Of those codes, 21 would move from standard clinical payment groups into New Technology payment groups, which CMS generally uses for services that lack enough claims data for a permanent payment group. CMS proposed payment levels that roughly match 2026 rates.
The tools involved are already in clinical use. Examples listed in the rule include AI analysis of retina images, heart failure detection from echocardiograms, coronary blood flow estimates from CT scans of the heart's arteries, CT-based bone fracture risk scoring, concussion assessment based on eye movements, EKG-based cardiac risk scoring, brain MRI comparison, and AI-assisted prostate cancer mapping from biopsy images.
CMS explained why its current system struggles with these products. Its outpatient payment method is built around physical resources such as supplies, equipment, and staff time, not software whose value comes from a proprietary algorithm. The agency also flagged program integrity concerns because hospitals may buy these tools through subscriptions, licenses, or per-use fees.
The Provision That Could Reach a Patient's Bill
One part of the plan has a direct path to beneficiaries' costs.
CMS proposes to move 10 billing codes for algorithm-based analyses of existing lab data, such as a secondary computer interpretation of a genomic sequence, off the Clinical Laboratory Fee Schedule and into the outpatient payment system. CMS said these analyses do not need to be performed by a certified laboratory and should not be treated as lab tests for Medicare payment purposes.
That shift matters because Medicare generally does not charge patients cost-sharing for tests paid under the lab fee schedule, while the outpatient payment system does apply coinsurance. As a result, patients could begin owing a copay for some analyses that previously cost them nothing out of pocket.
The physician fee schedule proposal, released July 14, takes a parallel step. CMS proposes to remove algorithm-only laboratory services from the lab fee schedule and pay for them under the physician fee schedule, which also generally applies Part B coinsurance.
CMS has not said how much patients might owe. The effect would likely be felt most by people in traditional Medicare without supplemental coverage, and by people who need frequent imaging or genomic testing for cancer or heart care.
CMS described the plan as an interim policy for 2027, not a permanent solution. The agency said it intends to develop a more complete long-term payment method as it gathers more data. It asked for comments on whether the new status indicator should allow full separate payment or should be discounted when several procedures are billed together, and on whether more codes should be added.
The Incentive Question Still Unsettled
Paying separately for an algorithm can create a financial reason to use it more often. CMS itself raised program integrity concerns about per-use fees and asked whether payments should be discounted when multiple software services appear on the same claim.
STAT reported in July that CMS signaled it wants to build a more consistent payment structure for clinical software and AI that considers its impact on patient outcomes. The 2027 interim proposal, however, largely keeps payments near 2026 levels rather than tying them to evidence of improved outcomes. Whether the permanent method will include such a requirement is unresolved.
CMS has moved toward stronger evidence requirements elsewhere. MedicalDaily previously reported that the agency ended a shortcut for breakthrough device add-on payments, requiring those devices to show substantial clinical improvement.
Several things remain unknown. CMS has not finalized any part of the proposal, has not said which comments it will adopt, and has not said whether the lab code changes and their cost-sharing effect will survive in the final rules.
Medicare beneficiaries do not need to do anything now. If a clinician recommends an AI-assisted analysis, it is reasonable to ask what the test is expected to change about the treatment plan and what the out-of-pocket cost will be. People who struggle with Medicare costs can ask about Medicare Savings Programs or hospital financial assistance.
Final rules for both payment systems are expected later in 2026, with most policies taking effect Jan. 1, 2027. MedicalDaily will report what CMS finalizes, especially whether the lab code changes and their effect on patient costs remain in place.
Key Questions Answered
What did CMS propose? A new Medicare payment category called Software as a Medical Service for clinical software that analyzes patient data to produce a diagnosis, risk score, or treatment recommendation.
When did comments close? Comments on the hospital outpatient proposal were due Aug. 31. Comments on the physician fee schedule proposal closed Sept. 14.
How many billing codes are involved? CMS proposes designating 36 codes under a new O1 status indicator, with 21 moving into New Technology payment groups. Separately, 10 algorithm-based lab codes would move off the lab fee schedule.
Could this raise what I pay? Possibly, in a narrow way. Medicare generally does not charge cost sharing for lab fee schedule tests, but the outpatient and physician payment systems generally apply coinsurance.
Is this final? No. CMS is expected to issue final rules later in 2026, with most policies effective Jan. 1, 2027.
Does it change what Medicare covers? No. This is a payment change. It does not add or remove tests or services from Medicare coverage.
What should a patient ask? What an AI-assisted test is expected to change about the treatment plan, and what the out-of-pocket cost will be.
