A Pennsylvania health system filed suit this week against Aetna, challenging a policy around "downcoding" that has drawn ire from providers.
Philadelphia-based Jefferson Health said in a complaint filed Monday in Pennsylvania's Eastern District that the insurer's "level of severity inpatient payment policy" violates Medicare's decade-old two midnights rule, which determines when a hospital stay should be billed to the program as inpatient, or under Part A, or observational, under Part B.
Medicare Advantage plans are required to provide the same level of coverage as traditional Medicare, so if the policy leads to denials for inpatient services to MA enrollees, then it would be in violation of the regulation, Jefferson argues.
"As a result, Aetna is able to tell its Medicare Advantage members (and CMS) that it is 'covering' the inpatient admission, while simultaneously paying the hospitals for the equivalent of outpatient observation care," the health system said in the complaint.
Aetna first unveiled the policy in the back half of 2025, with providers immediately pushing back. Amid the controversy, the insurer said it would delay implementation from mid-November until Jan. 1, 2026.
Under the policy, inpatient hospital stays that included at least one midnight but fewer than five would be subject to a severity review. Emergency and urgent admissions will be automatically approved for payment at an inpatient rate, while those that do not meet MCG, operated by Hearst, recommendations will instead be reimbursed as observation stays.
The American Hospital Association urged the health plan to rescind the policy, warning that it could reduce transparency for patients and also undermine providers.
Jefferson Health is seeking an injunction against the policy, as well as attorney's fees and costs, along with any other judgment deemed fit by the courts.
"Aetna’s 'policy' has resulted in administrative burden, financial strain and confusion at the Hospitals, resulting in time spent in dealing with Aetna’s 'policy' instead of providing patient care," the health system said.
An Aetna spokesperson said the insurer "disagrees with the allegations in the lawsuit and will respond in the appropriate forum."
"Aetna’s policies, including the Level of Severity Inpatient Payment Policy, comply with all applicable federal law and regulations and with the terms of our provider contracts," the spokesperson said.
Editor's note: This story was updated to reflect that MCG is owned by Hearst.