FIELD NOTE
Medicare gave clinical software its own payment category, then moved genomic algorithms into it.
CMS issued the calendar year 2027 hospital outpatient payment rule on November 4, and the provision that will outlast every rate in it is not a rate. Buried in a document whose own press release leads with 340B drug savings and surgical site-of-service, the agency created a Medicare payment status indicator for clinical software and, in the same section, moved a group of stand-alone algorithmic analyses out of the Clinical Laboratory Fee Schedule and into the hospital outpatient system.
The naming change is the smaller half. CMS had been paying for a short list of these products under the label Software as a Service, a term borrowed from enterprise IT, and says in its fact sheet that it is “finalizing a change in Medicare terminology for these services from Software as a Service (SaaS) to Software as a Medical Service (SaMS).”
The structural half is the status indicator. The final rule, CMS-1850-FC, says the agency is “finalizing the creation of new status indicator (SI) ‘O1’ (Software as a Medical Service, paid under OPPS; separate APC payment).” CMS first floated O1 in the July proposed rule. A status indicator is the quiet machinery that decides whether a service gets paid on its own or vanishes into the payment for whatever procedure it rode in on. Until now clinical algorithms had no indicator of their own. They lived wherever CMS could find room.
Where CMS found room is New Technology APCs, which are payment bands rather than calculated rates. The rule assigns SaMS codes to bands “with payment rates that closely align with current CY 2026 payment rates,” and the fact sheet is explicit that this is “an interim step toward a broader payment policy.” Nobody at CMS is claiming to have priced anything.
Then the lab provision. CMS also took what it calls SaMS analyses performed on laboratory tests, described in the rule as “stand-alone algorithmic analyses performed on data from prior laboratory tests, such as secondary genomic sequencing analyses,” off the Clinical Laboratory Fee Schedule and onto the outpatient system, paying them as “other diagnostic tests” under section 1861(s)(3) of the Social Security Act. Bruce Quinn, who read the final rule the day it dropped, counts fourteen codes moved, up from ten in the proposal, with two pulled back because they still involve bench work and two added that the proposal had missed.
That reclassification is the part worth sitting with. The reasoning is that once a sequence exists, the computation performed on it can be run any number of times, from anywhere, without a CLIA laboratory doing the running, which makes it a diagnostic test rather than a laboratory test. Follow that logic and the CLIA certificate stops being what defines the service. For molecular diagnostics, the certificate has been the moat. It is also the reason the economics worked: a lab fee schedule rate is a national price with no beneficiary coinsurance attached, and outpatient payment rules carry coinsurance.
Industry asked for a category. It did not ask for this one. In June 2024 the Senate AI Caucus chairs, Martin Heinrich and Mike Rounds, joined by Marsha Blackburn and Todd Young, urged CMS to “develop a formal payment pathway” for algorithm-based healthcare services and to codify the SaaS policy the agency had articulated in the CY2023 outpatient rule. AdvaMed made the same argument through successive comment cycles. What arrived is a pathway in the sense that a doorway is a pathway. It has a name, a status indicator, and a set of bands anchored to last year’s numbers.
Two things follow for anyone selling an algorithm into this market. The band is now the ceiling until CMS replaces it, and the agency has said it will weigh suggestions toward possible CY2028 proposals, which puts the real pricing fight a year out with the opening position already set at CY2026 rates. And a diagnostic built to live on the lab fee schedule is not the same business as one built to live in a New Technology APC: different buyers, a different cost-sharing conversation, a different evidence burden. The rule moved a cohort of them across that line without asking.
The rule takes effect January 1, 2027. CMS is accepting comments on it until January 4, 2027, three days after it is already law. The physician fee schedule final rule landed the same day with a conversion factor of $32.95 for qualifying APM participants, down 1.83%, and no mention of software at all.
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