What happened
The Centers for Medicare & Medicaid Services released its calendar year 2027 Hospital Outpatient Prospective Payment System proposed rule on July 2, 2026. Inside it is a newly named Medicare billing category, Software as a Medical Service, for clinical software that analyzes patient data and produces a diagnosis, risk score or treatment recommendation (CMS, 2026, as reported by Wilson Sonsini, 2026).
Under the proposal, CMS would designate 36 HCPCS codes as Software as a Medical Service and create a new payment status indicator, O1, to mark them as separately payable outside a bundled procedure fee. The agency also proposed moving 21 currently separately paid codes for this kind of software out of standard clinical Ambulatory Payment Classifications and into New Technology APCs, which carry different payment mechanics (Wilson Sonsini, 2026; Applied Policy, 2026).
CMS drew a line between this category and prescription digital therapeutics: Software as a Medical Service covers tools that support diagnosis and clinical decision-making, not software that treats a condition directly (Wilson Sonsini, 2026).
Who is affected
The category is built for algorithm-driven diagnostic tools already used in specific clinical workflows, with AI-based retina imaging and echocardiogram analysis software named as examples in CMS's own framing of the proposal (STAT News, 2026). Hospitals and outpatient facilities that bill Medicare for these tools would see a defined payment pathway instead of relying on existing codes that were not built for software-based diagnostics. Vendors of clinical decision-support and diagnostic AI software have a direct stake in how CMS finalizes the code list and payment status.
What CMS has not yet decided
The July 2 release is a proposed rule, not a final one. CMS has not set final payment rates for the 36 candidate HCPCS codes, and the list of codes itself is open to change based on public comment. The agency has also not clarified how Software as a Medical Service will interact with existing coverage determinations for AI diagnostic tools that already have Medicare billing codes under other categories (Applied Policy, 2026).
What happens next
The comment period for the Outpatient Prospective Payment System proposed rule closes August 31, 2026. A related proposal in the companion Physician Fee Schedule rule has a comment period closing September 14, 2026 (Wilson Sonsini, 2026). CMS is expected to respond to comments and finalize payment policy for 2027 in its final rule, typically issued in the fall.
Sources
- Wilson Sonsini, "CMS Proposes Payment Frameworks for 'Software as a Medical Service'" - https://www.wsgr.com/en/insights/cms-proposes-payment-frameworks-for-software-as-a-medical-service.html
- STAT News, "CMS signals intent to revamp how it pays for clinical software, AI" - https://www.statnews.com/2026/07/16/cms-to-revamp-payments-for-clinical-software-ai/
- Applied Policy, "CMS Begins Building a New Medicare Payment Framework for Diagnostic Software" - https://www.appliedpolicy.com/cms-begins-building-a-new-medicare-payment-framework-for-clinical-software/
- Becker's Payer Issues, "CMS floats new Medicare payment category for AI diagnostic software: 6 notes" - https://www.beckerspayer.com/financial/cms-floats-new-medicare-payment-category-for-ai-diagnostic-software-6-notes/