CMS Shakes Up Lab Billing: Algorithm-Only Tests Reclassified as Medical Devices in 2027 Proposed Rule

In a move that has sparked widespread alarm among clinical laboratories, the Centers for Medicare & Medicaid Services (CMS) is fundamentally changing how it pays for artificial intelligence (AI) and algorithm-driven diagnostics. Buried within the CY 2027 Hospital Outpatient Prospective Payment System (OPPS) and Physician Fee Schedule (PFS) proposed rules, released in July 2026, is a controversial provision: CMS plans to pull certain algorithm-only laboratory-developed tests (LDTs) off the traditional Medicare Clinical Laboratory Fee Schedule (CLFS).

Instead of treating them as clinical lab tests, CMS is reclassifying these digital diagnostics under a new payment framework dubbed Software as a Medical Service (SaMS).

For medical coding and billing professionals, this regulatory pivot represents a massive shift. It threatens to upend established revenue cycles, introduce new patient cost-sharing requirements, and force billing departments to completely overhaul how they report Multianalyte Assays with Algorithmic Analyses (MAAAs) and proprietary predictive risk scores.

From "Wet Lab" to "Software as a Medical Service" (SaMS)

Historically, Medicare has paid for diagnostic laboratory tests—including complex genomic sequencing and algorithmic risk scoring—under the CLFS. However, CMS is now drawing a hard line between traditional "wet lab" testing (where physical patient specimens are manipulated) and "dry" algorithmic testing (where software analyzes existing data to generate a clinical output).

Under the CY 2027 OPPS proposed rule, CMS argues that algorithm-only tests do not require CLIA-regulated laboratory processes. Because their value lies in proprietary software algorithms rather than physical laboratory resources, CMS believes they function more like medical devices and physician services.

To address this, CMS is proposing to:

1. Transfer 10 specific HCPCS level II codes describing algorithm-only lab analyses off the CLFS (identified in Table 62 of the proposed rule).
2. Reassign these tests to New Technology Ambulatory Payment Classifications (APCs) under the OPPS.
3. Introduce a brand-new OPPS status indicator—O1—designated specifically for SaMS, which allows for separate APC payment without multiple-procedure discounting.

Why Clinical Labs Are Sounding the Alarm

The transition from the CLFS to the OPPS is not merely a semantic coding update; it carries severe financial and operational implications.

Under the CLFS, diagnostic laboratory tests are generally exempt from beneficiary cost-sharing. If an algorithm-only test is moved to the OPPS and assigned to a New Technology APC, it becomes subject to standard hospital outpatient rules. This means patients could suddenly be hit with copayments for tests that were previously fully covered.

Furthermore, OPPS payments are subject to budget-neutrality adjustments, which could lead to unpredictable reimbursement rates compared to the static fee schedule of the CLFS. Labs offering predictive risk scores, digital pathology tools, and AI-driven diagnostic software are directly in the crosshairs. If finalized, this rule could disrupt the commercial viability of numerous tests currently on the market, mirroring the recent FDA push to regulate LDTs as medical devices.

Coding and Billing Impact: What You Need to Know

For medical coders and billers, the introduction of the SaMS category will require a strategic pivot in how claims are constructed.

If your facility utilizes AI models or MAAAs, you must prepare for new coding pathways. For example, consider a laboratory running an AI-driven predictive risk score for prostate cancer or breast cancer. Currently, a coder might report the patient's condition using specific ICD-10-CM codes such as C61 (Malignant neoplasm of prostate) or Z12.39 (Encounter for other screening for malignant neoplasm of breast), paired with a Proprietary Laboratory Analyses (PLA) code or a CPT code like 81599 (Unlisted multianalyte assay with algorithmic analysis).

Similarly, for acute care settings using AI algorithms to predict clinical deterioration, such as severe sepsis, coders frequently rely on R65.20 (Severe sepsis without septic shock).

Under the CY 2027 framework, billing these algorithmic analyses will require navigating the new O1 status indicator and ensuring that the high-value HCPCS level II codes are mapped to the correct New Technology APCs.

This shift also aligns with broader industry movements. The American Medical Association (AMA) recently introduced a proposed billing framework called "Clinically Meaningful Algorithmic Analyses" (CMAA) to allow healthcare facilities to seek reimbursement for AI-driven clinical outputs. As the global medical community prepares for the eventual ICD-11 transition, the granularity of capturing algorithm-assisted diagnoses will only become more critical for accurate reimbursement.

Preparing for the Future

The CY 2027 OPPS proposed rule is currently just that—a proposal. CMS has framed this as an interim policy while it develops a more permanent payment methodology for digital diagnostics. However, the writing is on the wall: Medicare is rapidly evolving to treat software and algorithms as distinct medical devices.

Revenue cycle management (RCM) leaders and laboratory billing departments must proactively audit their test menus. Identify any algorithm-only tests, MAAAs, or AI diagnostic tools currently billed under the CLFS, and begin modeling the financial impact of moving them to OPPS New Technology APCs. Adapting to the SaMS category now will ensure your facility isn't left scrambling when the final rule takes effect.