Overview: Aetna’s Controversial Inpatient Payment Policy
As the Centers for Medicare & Medicaid Services (CMS) continues to clarify existing Medicare policies — including the critically important Two-Midnight Rule — some Medicare Advantage (MA) plans are moving in the opposite direction. Rather than aligning with federal standards, certain MA insurers are implementing new internal policies designed to reduce payments for hospital services, effectively protecting profit margins at the expense of patient care.
One such policy that has drawn sharp criticism from the American Hospital Association (AHA) and multiple hospital organizations is Aetna’s Level of Severity Inpatient Payment Policy. This policy has left hospital administrators feeling frustrated and powerless, raising serious questions about whether it is legally compliant with Medicare regulations.
What Is Aetna’s Level of Severity Policy?
Aetna’s Level of Severity Inpatient Payment Policy applies to Medicare Advantage beneficiaries who are admitted to the hospital on an urgent or emergent basis. Under this policy, Aetna will approve inpatient stays that cross at least one midnight. However, for stays of fewer than five midnights, Aetna subjects the claim to a level-of-severity review using MCG (Milliman Care Guidelines) criteria.
How Payment Is Determined Under This Policy
If the inpatient stay meets MCG severity criteria, the claim is reimbursed at a higher severity rate. If the stay does not meet MCG criteria, the claim is paid at a lower rate described as “comparable to the observation rate.” This effectively creates a hybrid category of hospital services — one that falls somewhere between outpatient observation and full inpatient admission — a category that does not exist anywhere within Medicare regulations.
Does Aetna’s Policy Comply with the Two-Midnight Rule?
The short answer is no. The Two-Midnight Rule states that an inpatient admission is generally appropriate for Medicare Part A payment when the admitting physician expects the patient to require hospital care crossing at least two midnights. This standard is based on physician clinical judgment — not on a commercial screening tool like MCG or InterQual.
What Medicare Rules Actually Say
Medicare has been explicit on this point. CMS guidance states that “it is not necessary for a beneficiary to meet an inpatient ‘level of care,’ as may be defined by a commercial screening tool, in order for Part A payment to be appropriate.” Furthermore, CMS regulation CMS-4021-F explicitly states that MA plans may not use InterQual, MCG criteria, or similar products to change coverage or payment criteria already established under Traditional Medicare law.
Aetna’s policy directly contradicts this guidance by tying full inpatient reimbursement to MCG compliance — a standard that CMS has expressly forbidden.
How the Policy Subverts Patient Protections
Bypassing Adverse Organization Determinations
By approving most urgent and emergent inpatient admissions outright but downgrading payment based on severity, Aetna is effectively bypassing key patient protections that are triggered when an inpatient admission is formally denied. When a payer issues an inpatient denial, the patient receives an adverse organization determination (AOD), which carries formal appeal rights.
Under Aetna’s approach, no denial is issued — only a reduced payment. This strips hospitals and patients of the same protections they would receive under a formal inpatient denial and downgrade to observation status. Hospitals are forced to appeal the severity determination separately, increasing administrative burden without providing equivalent protections.
Why Physician Judgment Must Be Protected
Clinical Decision-Making Is the Foundation of Inpatient Admissions
CMS guidance is clear that “inpatient hospital admission determinations are unique among covered items or services in that they are dependent on physician judgment at the time of the inpatient order.” The Two-Midnight Rule was specifically designed to place the authority for admission decisions in the hands of the treating physician — not a payer’s algorithmic tool.
MCG’s Own Guidelines Acknowledge This
Even MCG itself recognizes this principle. The company’s own documentation states that patient status “depends on individual patient assessments by clinicians, and as such, MCG decision support tools are designed to be used in conjunction with the clinical judgment of a healthcare professional.” By using MCG criteria as the determining factor for payment rates, Aetna is applying this tool in direct contradiction to its intended use.
If Aetna wants to account for patient severity in reimbursement, the appropriate framework already exists: Medicare Severity Diagnosis-Related Groups (MS-DRGs), the payment methodology used by Traditional Medicare, which was specifically developed to differentiate patients based on resource needs and clinical complexity.
Medicare Regulations Define Inpatient Payment Criteria
The Distinction Between Payment Rates and Payment Criteria
A critical mischaracterization has emerged in discussions around this policy: that Aetna’s severity determination is a “contractual” or “payment rate” issue rather than a coverage issue. This distinction matters enormously. While Medicare cannot establish payment rates for MA plans — which is a contractual matter — it absolutely can and does establish inpatient payment criteria, i.e., the conditions under which Medicare Part A payment is appropriate.
Aetna’s policy does not simply adjust payment rates. It introduces new criteria that hospitals must meet to receive full inpatient reimbursement. This falls squarely within the scope of coverage criteria that CMS regulates under Section 1852(a)(1) of the Act, and under CMS-4201-F and CMS-4208-F. Treating it as a contractual matter allows Aetna to circumvent these federal protections.
The Broader Threat to Hospitals and Medicare Advantage Plans
A Troubling Industry-Wide Trend
Aetna’s policy does not exist in a vacuum. The U.S. Department of Health and Human Services (HHS) Office of Inspector General (OIG) has identified a systemic pattern within Medicare Advantage plans, finding that “a central concern about capitated payment models is the potential incentive for insurers to deny access to services and payment in an attempt to increase profits.” Annual CMS audits have repeatedly found widespread and persistent problems related to inappropriate service and payment denials by Medicare Advantage Organizations (MAOs).
What Options Do Hospitals Have?
Currently, hospitals facing this policy have limited recourse. Some have already reached the conclusion that terminating their contracts with Aetna MA plans is the only viable path to receiving appropriate reimbursement under Traditional Medicare as out-of-network providers. While this is not a course of action being advocated here, it reflects the serious operational and financial pressures this policy is creating across the healthcare industry.
Conclusion: CMS Must Act
Aetna’s Level of Severity Inpatient Payment Policy violates the Two-Midnight Rule. It introduces MCG-based payment criteria that CMS has explicitly prohibited. It creates a non-existent hybrid category of hospital service. And it strips patients and hospitals of the protections they are entitled to under federal law.
Medicare does not set MA payment rates — that is a contractual matter. But it does regulate when inpatient payment under Medicare Part A is appropriate. Hospital stays crossing two midnights meet that standard. Full stop. Requiring that MCG criteria also be satisfied — or that a stay extend to five midnights — adds unauthorized barriers to full payment.
CMS must reconsider its current stance. If Aetna’s policy is allowed to stand without challenge, other MA payers are likely to replicate it, further eroding the already strained relationship between hospitals and Medicare Advantage plans and undermining the protections built into Medicare law.
