CMS's Software as a Medical Service Rule: What It Means for Lab Algorithm Billing
Short answer: CMS's CY2027 hospital outpatient (OPPS) and physician fee schedule (PFS) proposed rules would create a new Medicare payment category called “Software as a Medical Service” (SaMS) and move roughly ten algorithm-only laboratory codes — oncology recurrence scores, tumor-profiling and transcriptomic/genomic algorithmic analyses, digital pathology AI, and MSI/HRD assessment — off the Clinical Laboratory Fee Schedule (CLFS) and onto OPPS, where beneficiary coinsurance applies and CMS says a CLIA-certified lab is no longer required. Pathology and lab trade groups uniformly opposed it. Comments on the OPPS piece closed August 31, 2026; PFS comments closed September 14, 2026. If finalized, it takes effect January 1, 2027.
What CMS is actually proposing
On July 2, 2026, CMS released its CY2027 Hospital Outpatient Prospective Payment System (OPPS) proposed rule; the CY2027 Physician Fee Schedule (PFS) proposed rule followed on July 14, 2026. Buried inside both is a genuinely new idea: a Medicare payment category CMS calls “Software as a Medical Service,” or SaMS — a term CMS deliberately chose, according to law firm summaries from Reed Smith and Nixon Law Group, to distinguish healthcare-specific algorithmic analysis from generic commercial “Software as a Service” cloud computing.
The OPPS rule designates 36 HCPCS codes as SaMS technologies and creates a new payment status indicator, O1, to track them on outpatient claims. O1 currently functions like the existing status indicator “S”: the service gets separate APC payment and isn't subject to multiple-procedure discounting. CMS is also asking, in the same rule, whether O1 should instead behave like status indicator “T,” which would allow that discounting — a detail that matters directly to how much a lab or hospital ultimately collects per claim.
Of those 36 codes, 21 are simply being moved from standard clinical APCs into New Technology APCs, with CY2026 payment rates effectively frozen during a data-collection period. The other 10 codes are currently paid under the Clinical Laboratory Fee Schedule — and those are the ones that should have every molecular lab's attention.
Why CMS says these aren't “laboratory tests” anymore
CMS's rationale is a genuinely novel legal theory for Medicare lab payment: once the underlying specimen has been tested and the raw data or images exist, a separate algorithmic pass over that data — a recurrence score, a tumor-profiling classifier, an MSI or HRD call — is, in CMS's view, a distinct computational service rather than a continuation of the original clinical laboratory test. Wilson Sonsini's summary of the rule describes CMS's reasoning directly: these analyses “do not require a CLIA-certified laboratory to perform once the underlying test results or images have been produced.”
That framing does two things at once. It justifies moving the payment out of the CLFS, which by statute carries no beneficiary cost-sharing, and it opens the door to these analyses being performed by non-laboratory software entities outside CLIA's certification regime entirely. CMS also points to a practical problem it says the CLFS structure creates: limited cost transparency for proprietary, largely non-material algorithmic components, and payment comparisons to older wet-lab methods that no longer make sense for a fully computational service.
Notably, this lands in the same year CMS separately opened a Request for Information asking how CLIA regulations — largely unchanged since 1992 — should handle AI and software used in postanalytic interpretation. Comments on that CLIA modernization RFI closed the same week as the PFS comment deadline discussed below, and industry groups have pointedly asked CMS to finish that regulatory homework before it uses a payment rule to functionally decide the CLIA question by exclusion.
Which codes and services are actually at risk
The 10 CLFS codes CMS proposes moving to OPPS New Technology APCs cluster around oncology and molecular diagnostics: recurrence-risk and tumor-profiling algorithmic scores, transcriptomic and genomic algorithmic analyses, MSI/HRD (microsatellite instability / homologous recombination deficiency) assessment, and AI-assisted digital pathology review. These are exactly the kind of multi-analyte, algorithm-derived results that molecular and genetic testing labs increasingly report alongside raw variant calls.
Commenters flagged that CMS's own list isn't clean. The College of American Pathologists, the American Clinical Laboratory Association, and other groups identified specific coding errors in the proposal: CPT 81416 (comparator exome sequence analysis), which actually requires generating a new biological specimen and wet-lab sequencing, was listed as an algorithm-only code; PLA code 0208U had already been deleted; 0511U involves extensive tumor culture, not pure computation; and 0510U has validation costs embedded in its existing gapfill pricing that a New Technology APC wouldn't necessarily preserve. Health policy consultant Bruce Quinn, writing on his Discoveries in Health Policy blog, was among those flagging these list-level errors in early September.
A rare, unified industry “no”
What stands out about this rulemaking isn't just its substance — it's how aligned the opposition has been. Per comment-letter tracking on the OPPS docket, the College of American Pathologists (9 pages), the American Clinical Laboratory Association (8 pages), the Association for Molecular Pathology (3 pages), the Coalition for 21st Century Medicine (14 pages), the PFS Pathology Payment Coalition (5 pages), the Digital Pathology Association, AdvaMed, GeneDx, and Tempus all filed comments opposing the reclassification. That is an unusually broad coalition of labs, pathologists, diagnostics manufacturers, and precision-oncology companies agreeing on the same “no.”
Their core objections, as summarized in comment-letter coverage: algorithm-only analysis of laboratory data should stay classified as a laboratory service, not an “other diagnostic test”; CMS should finish its CLIA modernization RFI before using a payment rule to preempt that policy question; moving payment to OPPS creates billing anomalies where a hospital would bill for an analysis actually performed by an independent reference laboratory; and introducing coinsurance for services Congress specifically placed on a fee schedule without patient cost-sharing deserves more scrutiny than a routine annual payment update typically gets.
What labs and RCM teams should do now
Nothing has changed yet for claims submitted today. Both comment periods are closed, but CMS has not issued a final rule, and there is no guarantee the SaMS reclassification survives in its current form — CMS regularly narrows or drops proposals after significant pushback, and the volume and specificity of these comments (including the identified coding errors) give CMS real reasons to revise before finalizing. Even so, labs performing or billing algorithm-derived results — recurrence scores, tumor-profiling classifiers, digital pathology AI review, or similar multi-analyte algorithmic assays — should treat this as a live 2027 planning item, not background noise.
Concretely: identify which of your billed codes fall inside the proposed CLFS-to-OPPS list and model what a shift to OPPS pricing and ~20% coinsurance would do to both net revenue and patient billing operations; confirm whether your algorithmic analysis step is performed by the same CLIA-certified entity that runs the underlying assay, since CMS's exclusion theory turns on that separation; and coordinate with billing and compliance counsel before assuming current CLFS crosswalk or gapfill pricing carries into 2027 for any code on CMS's list. This is a related but separate track from the broader CY2027 CLFS PAMA rate cuts already scheduled for other lab tests — a code could face both a PAMA-driven rate reduction and, if it also lands on the SaMS list, a wholesale move to a different payment system entirely.
Frequently asked questions
What is “Software as a Medical Service” (SaMS) under the CY2027 OPPS rule?
SaMS is a new CMS payment category for algorithm-driven diagnostic technologies. The CY2027 OPPS proposed rule (CMS-1850-P, released July 2, 2026) designates 36 HCPCS codes as SaMS and pays them through OPPS New Technology Ambulatory Payment Classifications rather than existing clinical APCs or, for lab codes, the CLFS.
What is status indicator O1, and why does it matter for billing?
O1 is the new OPPS status indicator identifying SaMS claims. It currently behaves like status indicator “S” — separate payment, no multiple-procedure discount — but CMS is asking whether it should instead behave like “T,” which permits discounting. That choice directly affects per-claim reimbursement once the category is live.
Which lab tests could move off the Clinical Laboratory Fee Schedule?
CMS proposes moving 10 currently CLFS-paid codes to OPPS: algorithmic oncology recurrence and tumor-profiling scores, transcriptomic and genomic algorithmic analyses, MSI/HRD assessment, and AI-assisted digital pathology review. Commenters flagged that CMS's list also mistakenly includes at least one code, CPT 81416, that requires new wet-lab sequencing rather than pure algorithmic analysis.
Has CMS finalized the SaMS reclassification?
No. Both comment periods are closed — OPPS on August 31, 2026, and PFS on September 14, 2026 — but CMS has not issued a final rule as of this writing. A final OPPS rule for CY2027 would typically be expected around November 2026, ahead of a January 1, 2027 effective date if finalized as proposed.
Why did pathology and lab groups oppose this so broadly?
Groups including CAP, ACLA, AMP, the Coalition for 21st Century Medicine, the Digital Pathology Association, AdvaMed, GeneDx, and Tempus argued that algorithm-only analysis of lab data is still a laboratory service, that CMS should finish its separate CLIA modernization review first, that moving payment to OPPS creates billing anomalies for hospital versus independent-lab claims, and that CMS's own proposed code list contained factual errors.
This article summarizes proposed federal rulemaking as of September 2026 for general information for laboratory, compliance, and revenue-cycle audiences. It is not billing, legal, or medical advice. The rules discussed are proposed, not final; verify current status directly against CMS.gov and the Federal Register, and consult qualified reimbursement or healthcare counsel before making billing, coding, or operational decisions based on this rulemaking.
Sources: CMS, CY2027 Hospital Outpatient Prospective Payment System proposed rule (CMS-1850-P), released July 2, 2026; CMS, CY2027 Physician Fee Schedule proposed rule, released July 14, 2026; Reed Smith, “CMS Proposes an Interim Payment Policy for Software as a Medical Service in Outpatient Rule” (2026); Nixon Law Group, “What is Software as a Medical Service (SaMS) under the 2027 OPPS Proposed Rule?” (2026); Wilson Sonsini, “CMS Proposes Payment Frameworks for ‘Software as a Medical Service’” (2026); Discoveries in Health Policy, “OPPS Rule: Ditching Digital Pathology from CLFS and CLIA? Stakeholder Organizations Comment” (September 2026) and related 2026 coverage of the CY2027 OPPS rule. For related coverage, see our guides to the CMS CLIA modernization RFI and CY2027 CLFS PAMA rate cuts, or visit the ScreenMyGene homepage for more coverage and coding resources.