We’ve seen this playbook before. In 2019 when CMS created CPT codes to reimburse connected health devices and digital therapeutics under Remote Patient Monitoring (RPM), the digital health industry exploded. A flood of vendors emerged, utilizing patient-generated data and outsourced clinical teams to deliver 20-minute care sessions—all footed by Medicare.
In the newly released CY 2027 Hospital Outpatient Prospective Payment System (OPPS) proposed rule (CMS-1850-P), CMS is introducing a groundbreaking payment pathway designed specifically for algorithm-driven diagnostic software and clinical AI tools. With this move Medicare is signaling that clinical AI is an independent, reimbursable component of modern clinical care.
A Dual Narrative: Fostering AI While Tightening RPM
Interestingly, as CMS moves to incentivize algorithmic AI, it is simultaneously pulling back the reins on RPM. While these updates come from two separate proposed rules released in July—CMS-1850-P for hospital outpatient services and CMS-1848-P for the Physician Fee Schedule—they share crossover implications for digital health strategies.
Stay Tuned: In my next blog post, I’ll dive deep into where these two rules intersect. We’ll examine why CMS chose to build a supportive payment framework for AI while actively constraining a remote care model that many feel has grown out of control.
Defining "Software as a Medical Service" (SaMS)
Looking closely at CMS-1850-P, this proposal marks Medicare’s first formal attempt to build a standardized, dedicated payment structure for what it terms Software as a Medical Service (SaMS).
To be clear: SaMS is distinct from Software as a Service (SaaS). While SaaS refers to cloud-based software subscriptions, SaMS refers to clinical software algorithms that analyze patient data to output a diagnosis, risk score, or treatment recommendation.
For years AI advancement has moved faster than any reimbursement models. While these algorithms provide crucial intelligence that drives faster, more accurate care, health systems have historically had to absorb them as software licenses or overhead expenses. The new framework changes that paradigm, establishing reimbursement across four core clinical areas:
- Advanced Diagnostic & Image Analysis: Software that independently evaluates imaging scans (e.g., CT, MRI, or retinal scans) to identify early-stage disease or quantify risk.
- Standalone Genomics & Secondary Lab Analysis: Algorithmic post-processing of genomic data that runs outside traditional physical lab infrastructure.
- Autonomous & Algorithmic Risk Scoring: Continuous monitoring software that analyzes physiological streams to output actionable clinical risk alerts.
- Value-Based Care & Predictive Intervention Models: Algorithms designed to predict acute health deterioration, avoiding hospital readmissions before they occur.
Why Place Software in a Hospital Outpatient Payment Rule?
It might seem counterintuitive for CMS to house software policy inside the Hospital Outpatient Prospective Payment System (OPPS) rather than a general digital health or physician payment rule. The answer is CMS wants a flexible framework.
For rapidly changing software models, like AI, CMS wants to avoid locking in rigid, permanent reimbursement rates. By placing SaMS under OPPS, the agency can leverage New Technology Ambulatory Payment Classifications (APCs) as a temporary, transitional laboratory.
This setup gives software tools immediate coverage while allowing CMS to collect real-world claims data. By tracking how often hospitals use these tools and what they actually cost, CMS can evaluate the technology over time before establishing a permanent fee structure. As this data rolls in, we will undoubtedly see further adaptations to the framework.
This proposal represents a fundamental shift in how health tech companies should consider packaging, pricing, and selling these clinical AI solutions.
CMS Comment Period is Now
I urge all health tech vendors to participate in public comments by adding your commentary on the OPPS proposed rule CMS-1850-P. This proposed rule is over 1,500 pages where CMS explicitly asks for input. While I encourage all health tech stakeholders across this digital ecosystem to review the details closely and submit your feedback, it can be overwhelming, that’s where LexaView can help. Comments close on August 31, 2026.