Overview of the Lawsuit
Jefferson Health, a Philadelphia-based nonprofit health system, has filed a federal lawsuit against Aetna over a controversial Medicare Advantage payment policy. The complaint was filed on April 6, 2026, in the U.S. District Court for the Eastern District of Pennsylvania. Joining Jefferson in the lawsuit is Lehigh Valley Physician Hospital Organization (LVPHO), also known as Valley Preferred.
Together, they argue that Aetna’s new payment policy violates federal law and breaches the terms of their existing provider contracts. This marks Jefferson Health’s second major dispute with a large insurer in just a few months, following a separate conflict with UnitedHealthcare over Medicare Advantage contracts.
What Is the Level of Severity Inpatient Payment Policy?
How Aetna’s New Policy Works
Aetna launched its “Level of Severity Inpatient Payment Policy” on January 1, 2026. Under this policy, the insurer reserves the right to pay certain approved inpatient hospital stays at a lower rate if it determines the patient was not sick enough to warrant full inpatient reimbursement.
Specifically, the policy applies to urgent or emergency admissions lasting between one and four midnights. Aetna approves these stays as inpatient but then pays hospitals at a rate comparable to an observation stay — roughly 30% lower than the standard inpatient rate. Stays lasting five midnights or more continue to receive full inpatient reimbursement.
A Two-Tier System Never Negotiated
Jefferson Health argues that Aetna unilaterally created a two-tier payment structure that hospitals never agreed to during contract negotiations. Provider contracts with Aetna set a single inpatient rate — not two rates from which Aetna can freely choose. By paying some qualifying inpatient stays at the lower observation rate, Jefferson says Aetna is effectively rewriting its contracts without consent.
The American Hospital Association has also weighed in, sending a letter urging Aetna to withdraw the policy. The hospital trade group called it a modern substitute for the historical practice of denying inpatient claims outright and then paying at a reduced observation level instead.
How the Two Midnight Rule Applies
Understanding the CMS Standard
The Two Midnight Rule, established by the Centers for Medicare and Medicaid Services (CMS), determines when a hospital stay qualifies for inpatient reimbursement under Medicare Part A. Under this rule, if a physician expects a patient to need hospital care spanning at least two midnights, the stay must be covered and paid as an inpatient admission.
Medicare Advantage Must Follow the Same Rules
Jefferson’s lawsuit asserts that Medicare Advantage plans cannot apply coverage criteria that are more restrictive than traditional Medicare. Therefore, Aetna’s policy — which pays approved inpatient admissions at the lower observation rate based on its own internal severity criteria — directly conflicts with the Two Midnight Rule. By substituting Aetna’s internal guidelines for the physician’s clinical judgment, the policy undermines the standard the federal government established.
Why Jefferson Health Says This Is Illegal
Three Core Legal Claims
Jefferson Health’s complaint rests on three central arguments. First, Aetna’s policy violates CMS’s Two Midnight Rule by using internal severity criteria to override a physician’s admission decision. Second, the policy breaches negotiated provider contracts, which specify a single inpatient rate rather than a tiered payment structure. Third, the policy shifts financial risk onto hospitals without their knowledge or agreement.
Administrative and Financial Harm
Beyond the legal violations, Jefferson also highlights the real-world strain this policy creates. Hospitals must spend time and resources appealing lower payments, diverting staff from patient care. Moreover, Aetna simultaneously tells its Medicare Advantage members that inpatient stays are “covered” while actually paying hospitals at outpatient rates — creating confusion for patients about their coverage and benefits.
Aetna’s Response to the Lawsuit
Aetna has firmly denied any wrongdoing. In a public statement, the insurer said its Level of Severity Inpatient Payment Policy complies fully with all applicable federal laws, regulations, and the terms of its provider contracts. Aetna added that it intends to respond to the allegations through the appropriate legal channels.
Aetna further described the policy as a tool designed to speed up payment approvals for inpatient stays. However, providers argue the faster approvals come at the cost of receiving far less money than they are contractually owed.
Broader Impact on Hospitals and Patients
A National Fight Over Medicare Advantage
This lawsuit reflects a wider and intensifying conflict between hospitals and Medicare Advantage insurers across the country. Hospitals consistently argue that MA plans apply stricter medical-necessity criteria than traditional Medicare, and frequently reduce payments after claims are filed. Insurers, in turn, say they are managing costs and preventing unnecessary hospital admissions.
What This Means for Patients
For Medicare Advantage patients — particularly those in Pennsylvania — this dispute carries direct implications. Patients admitted for short hospital stays may find their insurer classifying the stay differently than their doctor intended. Additionally, ongoing conflicts between Jefferson and both Aetna and UnitedHealthcare mean that some patients in the Philadelphia and Lehigh Valley regions face network disruptions and out-of-pocket uncertainty.
Industry-Wide Attention
Multiple organizations have called for federal intervention. The Hospital and Healthsystem Association of Pennsylvania has urged Aetna to immediately withdraw the policy. Furthermore, physician groups including the Society of Hospital Medicine have written to CMS requesting agency oversight of Aetna’s approach.
What Happens Next
Jefferson Health is asking the court for two specific forms of relief. First, it wants a court declaration confirming that Aetna must follow Medicare’s inpatient coverage standards, including the Two Midnight Rule. Second, it is seeking an injunction that would block Aetna from continuing to implement the policy while the case proceeds.
If the court grants the injunction, Aetna would be temporarily barred from applying the lower-severity payment rate across its Medicare Advantage network. A favorable ruling for Jefferson could also limit how all Medicare Advantage plans adjust hospital payments for short stays — setting a significant precedent for the broader industry.
Jefferson Health currently operates 33 hospitals across the Philadelphia region and South Jersey. Its outcome in this case could reshape how Medicare Advantage insurers negotiate and enforce payment terms with hospitals nationwide.
