What is Software as a Medical Service (SaMS) under the 2027 OPPS Proposed Rule?
The Next Frontier for Digital Health: CMS Proposes Independent Payment for Software as a Medical Service (SaMS)
For much of the past decade, the legal and regulatory frameworks governing digital health have evolved far more rapidly than the legacy payment systems supporting them. The same can be said for the advent of artificial intelligence (AI) and machine learning (ML) clinical, imaging, and diagnostic tools. While the FDA has developed sophisticated approaches to regulating Software as a Medical Device (SaMD), Medicare reimbursement has historically remained tethered to traditional models. These models are built around physicians furnishing professional services, brick-and-mortar care, and manufacturers supplying tangible medical products.
This mismatch created a central commercialization hurdle for digital health founders: FDA clearance demonstrates that a product is safe and effective, but it does not guarantee that a hospital or clinic will get paid for using that product.
The Centers for Medicare & Medicaid Services (CMS) has taken its most significant steps yet to bridge this gap. In the newly proposed Calendar Year (CY) 2027 Hospital Outpatient Prospective Payment System (OPPS) proposed rule (CMS-1850-P) and the Calendar Year (CY) 2027 Medicare Physician Fee Schedule proposed rule (CMS-1848-P), CMS is proposing to establish a dedicated Medicare payment pathway for qualifying Software as a Medical Service (“SaMS”) product. Rather than treating clinical AI solely as an administrative practice expense, a built-in feature of a physical device, or an uncompensated input, CMS is proposing to recognize that certain software products independently furnish a distinct clinical service worthy of independent payment.
This change also highlights CMS’s continued acknowledgement that the traditional valuation methods used for determining reimbursement rates for physician services, lab services, and institutional care costs do not work for software-based clinical tools such as SaMS. This has been a longstanding issue for the industry and this shift by CMS represents a valuable step forward in creating a separate reimbursement valuation methodology for SaMS.
The Current Reimbursement Landscape for Clinical AI
Most AI-enabled healthcare software is not reimbursed directly by Medicare. Instead, developers have generally relied upon one of several imperfect payment models.
Healthcare AI monetization currently relies on three primary models, each of which present predictability challenges for digital health companies:
Traditional Enterprise Software: Hospitals and clinics purchase AI via subscriptions or licenses as an operational expense. The return on investment is tied to workflow efficiency, productivity, and administrative relief rather than direct reimbursement.
Indirect Reimbursement (CPT Codes): AI enhances existing clinical services—such as Remote Physiologic Monitoring (RPM) or Chronic Care Management (CCM), but Medicare reimburses the professional service itself, not the underlying software.
Contractor-Priced Codes: For newer AI applications without a national Medicare payment rate, local Medicare Administrative Contractors (MACs) determine pricing independently. This allows for earlier market access but results in highly variable reimbursement rates depending on the region and creates significant burden on AI product developers to engage with each MAC through laborious pricing negotiations.
The Bottom Line: Because direct reimbursement is rare, digital health companies are forced to navigate a fragmented, unpredictable patchwork of revenue strategies.
How Will Software as a Medical Service (SaMS) Be Reimbursed Under the 2027 Proposed Rules?
Historically, the industry has referred to reimbursable software algorithms as "Software as a Service" (SaaS). However, in the CY 2027 proposed rule, CMS proposes a deliberate conceptual pivot to SaMS.
The agency noted that "SaaS" carries a broad commercial connotation in the broader tech sector (encompassing everything from cloud storage to CRM platforms). By adopting the term SaMS, CMS is establishing a unique Medicare vocabulary specifically for software-based technologies that support clinical decision-making through algorithmic analysis, producing independent diagnostic or treatment-related outputs.
Under the current proposal, CMS's interim CY 2027 bridge policy is built around five key operational pillars:
The Creation of Status Indicator "O1"
CMS proposes a new OPPS payment status indicator specifically for SaMS: Status Indicator O1 (defined as Software as a Medical Service, paid under OPPS; separate APC payment). For CY 2027, O1-designated services will receive separate payment and will not be subject to multiple-procedure discounting.
Strategic Note: While CMS proposes that O1 will pay like Status Indicator S (meaning no discounting), the agency is actively soliciting comments on whether a "T-like" status indicator, which would subject the software to multiple-procedure discounting when performed alongside other procedures, is more appropriate.
Transitioning Clinical AI to New Technology APCs
CMS proposes designating 36 HCPCS codes as SaMS technologies (listed in Table 61 of the proposed rule). Under this interim framework, CMS is reassigning 21 clinical codes currently paid under standard clinical APCs into New Technology APCs.
CMS candidly acknowledges that legacy clinical APCs are fundamentally designed around "material resources" (clinical labor, physical supplies, space, and equipment overhead). Because SaMS delivers value through non-material resources, proprietary models, cloud infrastructure, and clinical performance, New Technology APCs will serve as a testing ground to gather accurate cost and utilization data before establishing permanent clinical rates.
Protection from the "Reimbursement Cliff" (Equitable Adjustment)
Recognizing that early-stage software services often suffer from low initial claims volume, CMS is leveraging its equitable adjustment authority under Section 1833(t)(2)(E) of the Social Security Act to maintain rate stability.
For several key SaMS technologies with zero or low claims volume (such as Atherosclerosis Imaging-QCT, LiverMultiScan, and Optellum Lung Cancer Prediction), CMS is bypassing standard rate-setting mathematical models that would otherwise slash reimbursement rates due to low data volume. Instead, the agency proposes to freeze and maintain their CY 2026 payment rates under New Technology APCs (such as APC 1508 and APC 1511), protecting developers from a drop in pricing.
Moving Lab-Based Algorithms Off the CLFS
CMS is also proposing to transition 10 laboratory-based algorithmic analysis codes (such as certain oncology recurrence and tumor profiling tests) off the Clinical Laboratory Fee Schedule (CLFS) and place them under the OPPS New Technology APC framework.\
According to CMS, these downstream analyses are performed purely by software on data that has already been generated, they do not require analysis inside a CLIA-regulated physical laboratory. Consequently, they should be paid under the same unified framework as imaging-based SaMS.
Packaging Continuity
To prevent immediate operational disruptions, SaMS codes that are currently conditionally packaged under legacy indicators (like Q1) will retain their current clinical APC and packaging assignments for CY 2027.
What are the Strategic Implications of SaMS for Digital Health Executives and Investors?
While the CY 2027 proposed rule represents an interim "holding pen," the long-term writing is on the wall. For digital health innovators, this rule changes the commercialization playbook in three distinct ways:
Developers: Reimbursement Strategy is Regulatory Strategy
For digital health developers, reimbursement and regulatory strategies are now inseparably intertwined. To qualify for emerging Medicare payment structures, products must perform sufficiently independent clinical functions. For developers partnering with health networks, this shift offers a prime window to secure separate outpatient Medicare reimbursement for SaMS tools, creating a powerful value proposition to accelerate hospital adoption.
Investors: De-Risking Venture Capital Investments
One of the persistent investment challenges facing digital health companies has been demonstrating sustainable reimbursement beyond enterprise software licensing. A dedicated Medicare payment pathway does not eliminate commercialization risk, but it materially strengthens the argument that qualifying software can generate recurring reimbursement independent of provider subscription budgets.
Providers: Accelerated Hospital Adoption
Healthcare providers are far more willing to adopt cutting-edge clinical AI tools when they represent a source of separate outpatient reimbursement. While the current shift is limited to the hospital outpatient setting, it sets the precedent of establishing separate valuation methodologies for SaMS that could filter down to direct reimbursement of SaMS for independent practices in the future.
How Can Nixon Law Group Can Help?
At Nixon Law Group, we operate at the intersection of healthcare law, commercial strategy, and technology. We understand that clinical AI developers cannot look at FDA clearance in a vacuum from reimbursement opportunities. Our digital health legal team provides proactive, preventive counsel to help innovators navigate the complex and evolving healthcare regulatory landscape. We work closely with early-stage and growth-stage companies to:
Evaluate SaMS Eligibility: Analyze whether your technology’s clinical functionality, intent, and workflow align with the emerging SaMS definition and Table 61/62 designations.
Structure Compliant Business Models: Draft software licensing, distribution, and commercial contracting agreements that reflect the unique regulatory risks of clinical software.
Formulate Regulatory Comment Strategies: Help your organization draft and submit tailored public comments on proposed rules like CMS-1850-P before the August 31, 2026 deadline, protecting your commercial interests.
De-Risk Go-to-Market Pathways: Review privacy (HIPAA), data-use, corporate practice of medicine (CPOM), and fraud and abuse (Anti-Kickback/Stark) compliance to ensure your venture is scaling safely.
The proposed rule represents a pivotal structural shift. If your company is developing or investing in AI-driven diagnostics, clinical decision support software, or algorithmic laboratory tools, the time to prepare is now.
Contact Nixon Law Group today to schedule a consultation with our healthcare innovation attorneys and align your regulatory strategy with the future of Medicare reimbursement.
Frequently Asked Questions (FAQs)
What is Software as a Medical Service (SaMS) under Medicare?
Software as a Medical Service (SaMS) is a proposed Medicare payment category introduced in the CY 2027 OPPS proposed rule (CMS-1850-P). It refers to software-based technologies that support clinical decision-making through algorithmic analysis, producing independent diagnostic or treatment-related outputs. It replaces the term "Software as a Service" (SaaS) in Medicare outpatient billing.
What is the new "O1" Status Indicator?
Status Indicator O1 is a proposed OPPS payment indicator designated for Software as a Medical Service (SaMS) products. It indicates that the software service is paid separately under the OPPS and is not subject to multiple-procedure discounting, similar to Status Indicator S.
Why is CMS moving lab-algorithm analyses to the OPPS?
CMS is proposing to move certain downstream, algorithm-only laboratory test analyses off the Clinical Laboratory Fee Schedule (CLFS) and onto the OPPS. Because these services involve software analyzing already-generated data without requiring physical, CLIA-regulated laboratory processes, CMS believes they are structurally identical to imaging-based SaMS and should be paid under a single, unified algorithmic framework.
How does the CY 2027 rule protect low-volume software tools from payment cuts?
Under its Section 1833(t)(2)(E) equitable adjustment authority, CMS is proposing to freeze and maintain the CY 2026 payment rates for several low-volume SaMS codes currently assigned to New Technology APCs (such as APC 1508 and APC 1511). This prevents mathematically driven payment cuts caused by a temporary lack of nationwide claims data, giving early-stage innovators a stable "bridge" period.
When do the proposed SaMS changes take effect?
The proposed changes are part of the CY 2027 OPPS proposed rule. Public comments must be submitted to CMS by August 31, 2026, referencing file code CMS-1850-P. If finalized, the policies will take effect on January 1, 2027.