How the Health Tech Investment Act Could Reshape Medicare Reimbursement for Algorithm-Based Services

As AI transforms medicine, some of the most promising healthcare innovations are at risk of exclusion by Medicare’s outdated and complex reimbursement structures. The Health Tech Investment Act, or S. 1399, introduced in April 2025, aims to address this by establishing a dedicated pathway for Medicare to reimburse algorithm-based healthcare services (ABHS), which the legislation currently defines as a service delivered through FDA-authorized, AI-enabled medical devices that provide clinical outputs or conclusions for use by a healthcare practitioner. If enacted, the legislation would mark a major shift in how Medicare supports and pays for digital innovation in healthcare.

REIMBURSEMENT: A HURDLE TO DEVELOPMENT OF INNOVATIVE TECHNOLOGY

Under existing Medicare policy, artificial intelligence (AI) driven services must fit into traditional benefit categories—diagnostic tests, imaging, or physician services—making them subject to ad hoc or bundled payment approaches. These services often lack clear billing codes and are absorbed into broader procedures, leaving innovators and many medical devices with no predictable pathway for reimbursement. Digital health companies have long struggled to obtain a clear reimbursement pathway, which has meant that promising technologies that had successfully obtained US Food and Drug Administration (FDA) authorization fail to reach patients.

The Health Tech Investment Act (HTIA) would change this by:

• Defining ABHS as a distinct, eligible service category under Medicare
• Requiring the Centers for Medicare & Medicaid Services (CMS) to place qualifying AI services into a “New Technology” Ambulatory Payment Classification (APC)
• Establishing payments based on manufacturer-submitted cost data, including expenses like subscription fees, invoices, clinical staffing, and overhead
• Guaranteeing at least five years of separate reimbursement before CMS may transition a service into standard classifications
• Allowing reimbursement for AI services even when performed concurrently with or adjunctive to other medical procedures

This structure replaces a reactive, piecemeal reimbursement system for AI-enabled medical devices with one that is streamlined, consistent, and innovation friendly.

WHAT IT MEANS FOR STAKEHOLDERS

Medical Device Companies

The HTIA could offer clarity and predictability to medical device companies. Instead of navigating years of uncertainty in coding and coverage, AI-enabled devices could obtain a much more straightforward path to reimbursement. Notably, the HTIA would apply only to medical devices that FDA has authorized (cleared or approved). Not all devices require FDA premarket review and many digital health technologies are not FDA-regulated devices.

Clinical decision support software, which is implicated by the definition of ABHS in the draft legislation, is a technology category for which FDA regulation is not guaranteed. Clinical decision support software that meets certain criteria is not a device and not subject to FDA regulation. One such criterion is that a healthcare practitioner can independently review the basis of the recommendation made by the software such that the practitioner does not “rely primarily” on the recommendations of the software. FDA has indicated in guidance that it is possible for software enabled with AI to satisfy this requirement—which means, assuming the software also met the other criteria in the statute, that such software would not be an FDA-regulated device and as such would not be able to obtain FDA authorization. Consequently, the proposed funding pathway in the HTIA, while certainly a helpful step, may not solve reimbursement woes for all digital health companies.

For the devices that would fall under the HTIA, having an established reimbursement pathway could unlock private investment, accelerate product development, and reduce the financial risk of launching novel technologies. That said, medical device companies will still be accountable for demonstrating real-world effectiveness and cost value during the five-year provisional coverage period.

FDA REGULATION OF AI-ENABLED DEVICES

FDA has already authorized more than 1,000 devices enabled with AI. The vast majority are used in radiology, but FDA is seeing an uptick of AI-enabled cardiovascular and other devices. To date, FDA has issued final guidance on the use of Predetermined Change Control Plans for AI-enabled devices and draft guidance on recommendations for lifecycle management and marketing submission requirements for AI-enabled devices. Although the executive order requiring the removal of 10 policy documents for every new document issued may hamper FDA’s ability to finalize its draft guidance or to issue new formal policy statements, FDA may find other avenues to communicate its recommendations for AI-enabled devices as digital health, AI, access, and home health are likely to continue to be top of mind for the US administration.

PROVIDER AND PATIENT IMPACT

• Clinicians and hospitals could benefit from dedicated reimbursement for AI-enabled medical devices, especially those that enhance existing services. Rather than absorbing the cost of AI-enabled services within bundled payments, providers would be permitted to bill separately for them, potentially accelerating adoption.
• Patients stand to gain access to faster, more accurate diagnostics, as well as targeted treatment recommendations. AI-enabled medical devices that assist with early detection of conditions like cancer or heart disease could become more widely available across care settings. By encouraging adoption across the healthcare system, the act also promotes more equitable access to advanced technologies—regardless of geography or institutional size.
• In the short term, the legislation may increase costs for Medicare as new services are reimbursed. However, with a structured, time-limited pathway and data-driven reevaluation after five years, over time, improved diagnostic accuracy and care efficiency may reduce unnecessary procedures and downstream costs, offsetting the initial investment in AI-enabled tools.

CONCLUSION

The HITA, if enacted, would modernize Medicare’s reimbursement model to not only recognize the value of AI and algorithm-based services as mainstream tools for delivering timely, effective care but also help ensure that technological innovations reach patients. If enacted, the legislation could accelerate the adoption of life-changing technologies while ensuring they remain accessible, clinically valuable, and responsibly funded.

HOW WE CAN HELP

Morgan Lewis guides and provides strategic counseling for life sciences, medtech, and digital health companies, assisting them in assessing, anticipating, and navigating regulatory and legal changes, with broad experience in the regulation of the regulation of medical devices, including devices enabled with artificial intelligence, and other digital health technologies, as well as drug and device reimbursement.