The diagnostics industry is caught between rapid AI-driven innovation and a regulatory system designed decades ago, forcing policymakers to rethink how they code, price, and oversee laboratory tests. As artificial intelligence increasingly powers disease detection and drug discovery, the Food and Drug Administration (FDA), Centers for Medicare and Medicaid Services (CMS), and American Medical Association (AMA) are grappling with fundamental questions about how to regulate, reimburse, and prevent fraud in a landscape that didn't exist when current rules were written.

What's Driving the Regulatory Confusion Around AI Diagnostics?

The core tension stems from a technological leap that outpaced policy. AI-powered diagnostic tests now interrogate digital images of human specimens rather than the specimens themselves, creating a gray zone in how they should be classified and paid for. The question sounds technical, but it has real consequences: should an AI pathology tool be coded as a laboratory service or a physician service? The answer determines reimbursement rates and which regulatory pathway applies.

Brian Carey, a healthcare attorney specializing in FDA law and diagnostics regulation at Hogan Lovells, noted that genomic assays have always included bioinformatics components, but now more tests are purely AI-driven. "The debate goes public during a public meeting in June," Carey explained, referring to the AMA's ongoing discussion about how to code autonomous AI services in laboratory testing.

The stakes are significant. The AMA has already incorporated AI directly into its CPT 2026 code set, which heavily emphasizes AI-augmented services, digital health, and remote patient monitoring. Last year, the FDA granted de novo authorization (a pathway for novel medical devices) to Artera, a multimodal AI software tool that analyzes digital images from prostate cancer biopsies to predict long-term patient outcomes. It was among the first approved AI-powered digital pathology tools of its kind.

How Is Medicare Tackling Fraud in AI-Driven Testing?

While innovation accelerates, fraud concerns are mounting. The CMS issued a request for information in late February for the CRUSH Initiative, short for Comprehensive Regulations to Uncover Suspicious Healthcare. This aggressive new program aims to detect and prevent fraud, waste, and abuse across federal health programs, with particular focus on genetic testing and laboratory diagnostics.

The CRUSH Initiative targets specific high-risk behaviors in laboratory testing:

• Phantom Testing: Providers billing for tests never performed or labs that don't even exist.
• Volume Anomalies: Newly established labs with unusually high testing volumes compared to industry norms.
• Ordering Patterns: Individual physicians who order more or different combinations of tests than their peers.
• Upcoding: Facilities that maximize reimbursement by billing for higher-complexity tests than clinically justified.

Fraud is a heightened concern, particularly in genetic testing. The Office of Inspector General posts public settlements whenever it resolves fraud cases, and those involving genetic testing labs occur at least once monthly, according to Carey. Most cases involve straightforward fraud, such as labs fraudulently billing the government for millions of dollars for tests never performed.

The CMS may announce a pilot project later in 2026 that employs data analytic tools to identify and limit fraudulent payments for laboratory tests. At launch, the CRUSH Initiative emphasized durable medical equipment, prosthetics, orthotics, and supplies, but it is now seeking input on expanding the scope to include laboratory tests.

What Changes Are Coming to Laboratory Test Pricing?

A separate regulatory challenge involves the Protecting Access to Medicare Act (PAMA), which fundamentally changed how Medicare prices laboratory tests. Historically, CMS priced tests on a clinical lab fee schedule that rarely changed except for inflation adjustments, regardless of technological advances or competitive shifts. PAMA, enacted in 2010, tied fee updates to private payer payment rates reported by laboratories to CMS, based on the median of those amounts.

Congress updated PAMA in January 2026, mandating a new reporting window from May 1 through July 31, 2026, for rates that take effect in 2027. The reporting requirement has been delayed multiple times since 2019, primarily to address flaws in the methodology. Some labs and providers have vocally opposed the reporting process as burdensome and unfair.

The AMA developed proprietary laboratory analyses (PLA) codes that specifically identify and price unique FDA-cleared tests or laboratory-developed tests under the PAMA framework. These codes are essential for laboratories to report payment rates accurately, but they also highlight the challenge of keeping pace with innovation. As AI tests proliferate, the coding system must evolve to accommodate them.

Steps Regulators Are Taking to Modernize Diagnostics Oversight

• FDA Approval Pathways: The FDA continues to grant de novo authorizations for novel AI-powered diagnostic tools, establishing precedent for how these devices should be evaluated and approved for clinical use.
• AMA Coding Updates: The AMA is actively debating the role of AI in laboratory tests and whether autonomous AI services require new CPT codes, with public meetings scheduled to finalize guidance.
• Medicare Coverage Expansion: Legislation passed in February creates a dedicated statutory benefit category for FDA-approved, blood-based multi-cancer early detection tests, enabling Medicare coverage starting in 2029.
• Fraud Detection Technology: CMS is leveraging AI and advanced analytics through the CRUSH Initiative to identify suspicious ordering and billing patterns, using the same technology that powers diagnostics to prevent abuse of diagnostic services.

The big news on the FDA front is that CMS will soon be paying for FDA-approved, blood-based multi-cancer early detection tests. Legislation that passed in February creates a dedicated statutory benefit category for these tests, enabling Medicare to cover them starting in 2029. The program only pays for what is defined in the Social Security Act, which was previously amended to expand Medicare coverage for preventive screening tests such as mammograms, colonoscopies, and PSA tests.

Overall, happenings at the FDA are relatively low-key from the perspective of clinical laboratories, according to Carey. Many test developers continue to opt for FDA clearance or approval for the marketing advantages. Many tests, such as cancer screening tests, continue to pursue FDA approval.

The diagnostics industry stands at a crossroads. Innovation is accelerating, driven by AI and multi-biomarker tests that enable first-ever detection milestones. But the regulatory system, designed decades ago, is struggling to keep pace. The next few months will be critical, as the AMA finalizes AI coding guidance, CMS potentially launches fraud-detection pilots, and laboratories navigate new PAMA reporting requirements. The outcome will shape how quickly AI-powered diagnostics reach patients and how effectively regulators can prevent fraud without stifling innovation.