Medicare Overhauls Payments for AI Health Tools and Software Starting 2026

This legislation, the Health Tech Investment Act, sets new rules for how Medicare pays for certain high-tech healthcare services that rely on algorithms, artificial intelligence (AI), and machine learning (ML). Starting January 1, 2026, it establishes a specific payment pathway for these services, aiming to ensure reimbursement rates reflect the actual costs involved, including technology development, software subscriptions, staffing, and overhead.

New Payment Lane for High-Tech Health

The core change involves creating a "new technology ambulatory payment classification" specifically for what the bill calls "algorithm-based healthcare services." Think of software using AI or similar tech, cleared or approved by the FDA, that helps doctors screen, detect, diagnose, or treat conditions by analyzing data and providing clinical insights. Under Section 2(a)(H)(i), Medicare payments for these services, when assigned to this new classification, will be calculated based on cost information submitted by the manufacturers. The bill also directs regulators to adapt the application process (Sec 2(a)(H)(ii)) so that these algorithm-based services qualify even if they run alongside or as part of another existing medical procedure, provided they are distinct and require extra resources. Additionally, the act formally recognizes and codifies existing payment rules for "software as a service" (SaaS) used in hospital outpatient settings, effective retroactively to January 1, 2023, aligning with previous regulatory guidance (Sec 2(b)).

From Bill Text to Bedside

What does this mean practically? Imagine a new AI-powered tool that analyzes medical images with greater speed or accuracy, potentially catching diseases earlier. This bill aims to create a clearer route for Medicare to pay for the use of that specific tool in an outpatient setting, like a clinic or hospital department. The payment would factor in the unique costs associated with developing and running that advanced software. The goal is to remove financial hurdles that might prevent doctors and hospitals from adopting potentially beneficial technologies simply because the old payment codes didn't adequately cover their costs. By basing payments on submitted costs, the system intends to better match reimbursement to the resources needed for these advanced services.

Balancing Innovation and Implementation

The push here is to encourage innovation in health tech by providing a more predictable and potentially more generous payment structure under Medicare. This could lead to wider availability of cutting-edge diagnostic or treatment tools for patients. However, setting payments based on manufacturer costs (Sec 2(a)(H)(i)) requires careful oversight to ensure accuracy and prevent inflated pricing. Defining exactly when an algorithm-based service is "distinct" enough to qualify (Sec 2(a)(H)(ii)) will also be crucial. While proponents hope this spurs technological advancement and improves care, the system will need robust checks to ensure value and prevent potential misuse, like unnecessary upcoding or reliance on overly expensive tech when simpler options suffice. It might also subtly shift the landscape, potentially favoring tech-heavy providers over more traditional practices.