The Centers for Medicare and Medicaid Services (CMS) has formally proposed a significant regulatory pivot that would reinstate the "substantial clinical improvement" (SCI) requirement for medical devices seeking expedited reimbursement through the New Technology Add-on Payment (NTAP) program. This move, detailed in the recently released proposed rule for the fiscal year 2026 Inpatient Prospective Payment System (IPPS), marks a departure from a policy established in 2020 intended to accelerate the adoption of breakthrough technologies. By reintroducing a rigorous clinical evaluation process, CMS aims to ensure that the Medicare Trust Fund is utilized only for technologies that demonstrate a measurable benefit over existing standards of care for the elderly and disabled populations.
The proposal represents a direct challenge to the medical technology industry, which has relied on the "alternative pathway" for Food and Drug Administration (FDA) designated breakthrough devices to bypass certain administrative hurdles. Under the current framework, devices that receive the FDA’s breakthrough designation—a program designed to speed the development and review of technologies for life-threatening or irreversibly debilitating conditions—are automatically deemed to meet the "substantial clinical improvement" criterion for Medicare reimbursement. CMS now contends that this automatic alignment may be insufficient to protect the interests of Medicare beneficiaries and the financial integrity of the program.
The Framework of Medicare Add-on Payments
To understand the implications of the proposed rule, it is necessary to examine the foundational structure of Medicare’s reimbursement system. In the inpatient setting, Medicare typically pays hospitals a flat rate based on a patient’s diagnosis, known as a Diagnosis-Related Group (DRG). These rates are calculated based on historical data. However, when a groundbreaking and expensive new technology is introduced, the standard DRG payment may not cover the cost, potentially discouraging hospitals from adopting the innovation.
To mitigate this, CMS created the New Technology Add-on Payment (NTAP) program. To qualify for these additional payments, a technology must traditionally meet three strict criteria:
- Newness: The technology must be within its first two to three years of market availability.
- Cost: The cost of the technology must be high enough that the standard DRG payment is inadequate.
- Substantial Clinical Improvement: The technology must offer a significant clinical advantage over existing treatments for the Medicare population.
In 2020, CMS introduced an "alternative pathway" for devices that received FDA breakthrough designation. This pathway waived the SCI requirement, assuming that the FDA’s designation was a sufficient proxy for clinical improvement. The logic at the time was to harmonize the regulatory and reimbursement cycles, ensuring that "breakthrough" status at the FDA translated immediately into financial viability within the Medicare system.
CMS Re-evaluates the Alternative Pathway
After five years of operating under this alternative pathway, CMS officials report that their experience has revealed systemic gaps. The agency stated that the limited evaluation process for these applications has led to concerns regarding the actual clinical utility of some devices receiving add-on payments. While the FDA’s breakthrough program focuses on the potential for a device to be "more effective" than the current standard of care to facilitate faster market entry, CMS’s mandate is to ensure that treatments are "reasonable and necessary" for the specific Medicare demographic, which often involves older patients with multiple comorbidities.
The proposed rule would also repeal the alternative pathway for device pass-through payments under the Outpatient Prospective Payment System (OPPS). CMS wrote in the proposal, “After further consideration, we believe it is in the best interest of Medicare patients to refine our approach. By requiring all technologies to demonstrate that they offer a substantial clinical improvement as part of our evaluation process, we believe we will be better able to make evidence-based decisions on which technologies should receive these additional payments.”
This shift signals a return to a more cautious, evidence-based reimbursement strategy. CMS argues that the previous policy may have inadvertently allowed for additional payments to technologies that, while innovative in design, did not necessarily translate to better outcomes for the specific patient populations served by Medicare.
Chronology of the Breakthrough Reimbursement Landscape
The relationship between the FDA breakthrough program and CMS reimbursement has evolved through several distinct phases over the last decade:
- 2016: The 21st Century Cures Act is signed into law, formally establishing the FDA’s Breakthrough Devices Program.
- 2018-2019: Industry leaders and policymakers argue that "the valley of death"—the gap between FDA approval and CMS reimbursement—is stifling innovation.
- 2020: CMS implements the alternative pathway for breakthrough devices in the FY 2020 IPPS final rule, removing the SCI requirement for these technologies to qualify for NTAP.
- 2021: The Medicare Coverage of Innovative Technology (MCIT) rule, which would have granted four years of immediate national coverage for breakthrough devices, is proposed but later repealed by the Biden administration due to concerns over clinical evidence.
- 2023-2024: CMS introduces the Transitional Coverage for Emerging Technologies (TCET) pathway as a more measured alternative to MCIT, emphasizing the need for post-market data collection.
- 2025: CMS proposes the complete reinstatement of the SCI requirement for NTAP and OPPS pass-through payments, effectively ending the "shortcut" for breakthrough devices.
Supporting Data and the Scale of Innovation
The volume of technologies impacted by this change is substantial. According to FDA data, the agency granted 164 breakthrough device designations in fiscal year 2025 alone. As of December 31, 2024, the Center for Devices and Radiological Health (CDRH) had granted a cumulative total of 1,226 breakthrough device designations since the program’s inception.
While only a fraction of these designated devices eventually reach the commercial stage and apply for NTAP, the program has seen a steady increase in applications. For fiscal year 2025, CMS received dozens of NTAP applications across various categories, including cardiovascular implants, neurological monitors, and AI-driven diagnostic tools.
Under the current "alternative pathway," many of these applications were approved without the rigorous SCI review that involves a deep dive into clinical trial data, peer-reviewed literature, and comparative effectiveness studies. Reinstating the requirement means that manufacturers will once again need to invest heavily in clinical evidence generation specifically tailored to show improved outcomes—such as reduced mortality, shorter hospital stays, or fewer complications—within the Medicare population.
Industry Reaction and Economic Concerns
The medtech industry, represented largely by the trade association AdvaMed, has expressed significant concern over the proposed rule. In a statement, AdvaMed emphasized that the current NTAP policy was a cornerstone for incentivizing medical innovation, particularly for smaller companies that lack the capital to survive long delays in reimbursement.
"Under this policy, small medtech companies and innovators could see a path toward new diagnostics and treatments," the group stated. "We are working closely with CMS leadership on what we hope is a misunderstanding of this program and its critical role in American medtech leadership."
Industry analysts suggest that if the rule is finalized, it could lead to a "cooling effect" on venture capital investment in the medical device sector. Investors often look for clear "exit ramps" or pathways to revenue; if the path to Medicare reimbursement becomes more arduous and unpredictable, the risk profile for early-stage breakthrough technologies increases significantly.
Furthermore, there is a concern that this change could exacerbate the "reimbursement gap." If a device is cleared by the FDA but cannot secure NTAP status due to the SCI requirement, hospitals may be financially unable to offer the device to patients, leading to a two-tier healthcare system where only well-funded academic medical centers can afford to use the latest innovations.
Broader Impact and Future Implications
The proposed change by CMS reflects a broader trend in federal healthcare policy toward "value-based care." By demanding proof of substantial clinical improvement, CMS is asserting its role as a prudent purchaser of healthcare rather than just a payer.
For manufacturers, the implication is clear: the bar for evidence is rising. Future applications for NTAP will likely require more robust data from randomized controlled trials (RCTs) or large-scale real-world evidence (RWE) studies. This may lead to longer development timelines and higher costs for medtech firms, as they must prove not just that a device works, but that it works significantly better than what is already available.
There is also the question of how this will interact with the recently finalized TCET (Transitional Coverage for Emerging Technologies) pathway. While TCET focuses on national coverage determinations (NCDs), NTAP focuses on the specific payment amounts for inpatient stays. The reinstatement of the SCI requirement for NTAP suggests that CMS is aligning all its "innovation" pathways under a single philosophy: innovation is only worth a premium if it yields superior clinical results.
The public comment period for the proposed rule is currently open, and CMS is expected to receive a high volume of feedback from hospital associations, medical societies, and industry stakeholders. A final rule is typically issued in August, with changes taking effect at the start of the new fiscal year on October 1. If finalized, the medtech landscape will face a new era of clinical scrutiny, forcing a recalibration of how breakthrough technologies are developed, tested, and brought to the American public.