New Health Tech Bill Requires Medicare to Pay AI Services Based on Manufacturer’s Costs Starting 2026

This bill, the Health Tech Investment Act, is all about how Medicare pays for cutting-edge medical services that use Artificial Intelligence (AI) and machine learning. Starting January 1, 2026, if an outpatient service relies on an algorithm—think sophisticated software helping a doctor diagnose or treat you—and it’s classified as a ‘new technology’ under Medicare, the payment rules change significantly. The goal is to make sure these high-tech services get paid enough to actually be used in hospitals and clinics.

The Algorithm Advantage: Cost-Plus Payment

The biggest change here is the payment mechanism. For these algorithm-based services that fall into the special New Technology Ambulatory Payment Classification (NTAP), Medicare won’t set the price based on historical averages or complex formulas. Instead, the Secretary of Health and Human Services must set the payment rate based on the actual costs submitted by the technology’s manufacturer. This includes everything from the invoice price and subscription fees to staff time, overhead, and even “any other costs related to providing the service.” Think of it like a cost-plus contract for your new AI diagnostic tool. This cost-based approach is intended to ensure that innovative tech gets paid what it’s worth right out of the gate, encouraging hospitals to adopt it.

For manufacturers, this is huge: they get a guaranteed payment structure early on. But for taxpayers and the Medicare Trust Fund, this is where you raise an eyebrow. When payment is based purely on manufacturer-submitted costs—including broad categories like “overhead”—there’s a real risk of inflated initial prices. If a company overstates its overhead or staff time, Medicare could end up paying a premium for a few years until enough data is collected to move the service to a standard payment rate. This is a direct trade-off between fostering innovation and protecting the public purse.

Loosening the Entry Requirements

Beyond the payment structure, the bill makes it easier for new AI services to qualify for this special NTAP status. Currently, it can be tough for a new procedure to qualify if it's bundled with an existing service. This bill directs the Secretary to update the rules so that algorithm-based services can qualify for NTAP even if they are performed as part of, or at the same time as, another main service, provided they require extra resources. This means if a new AI tool is used to analyze a scan that’s already being done, the hospital can still get special, higher reimbursement for the AI part.

This provision is practical because many AI tools are designed to integrate seamlessly into existing workflows. For a busy clinic, this means less administrative headache and a clearer path to getting paid for using the new technology. The bill also provides payment stability, requiring Medicare to keep the service in the NTAP category—and thus subject to the cost-based payment—until there is enough claims data to move it to a standard classification. This removes the uncertainty that often plagues the adoption of new medical tech.

Finally, the Act locks in a policy regarding Software as a Service (SaaS) payment rules for outpatient care, making permanent the policy established in late 2022. This brings regulatory certainty to how cloud-based health software subscriptions are paid for under Medicare, which is good news for the tech companies and hospitals relying on subscription models.