How Aetna’s “Level of Severity” Payment Policy Could Fundamentally Alter Hospital Reimbursement
For years, hospitals have relied on the two-midnight rule as both a gatekeeper and a safety net in Medicare reimbursement. The rule established that inpatient services were only appropriate when physicians expected patients to require hospital stays spanning two midnights, while simultaneously providing hospitals with a benchmark of medical necessity for stays exceeding that threshold. This delicate balance has served as a cornerstone of hospital revenue protection, but Aetna’s latest policy announcement threatens to remove that safety net while keeping the gatekeeper restrictions firmly in place.
The Policy That Changes Everything
Effective November 15, 2025, Aetna announced it will implement its “Level of Severity Inpatient Payment Policy” under Medicare Advantage and Medicare Special Needs plans, fundamentally altering how emergency and urgent inpatient admissions are processed. Under this new framework, Aetna would automatically approve inpatient stays of more than one midnight without conducting traditional medical necessity reviews. However, here’s the catch: if the patient doesn’t meet Milliman Care Guidelines (MCG) criteria for inpatient admission, Aetna would only reimburse hospitals at observation service rates, regardless of the actual level of care provided.
This represents a seismic shift from traditional claim processing approaches. Previously, when Aetna disagreed with a hospital’s level of care determination, they would issue formal denials that hospitals could appeal through established processes. Now, they’re essentially saying, “We’ll pay you immediately, but at a lower rate,” and because these appear as “payment in full.” Hospitals may not identify these scenarios as denials on the remittance advice and may effectively lose their appeal rights, as well as their ability to do peer-to-peer reviews.
The Silent Downgrade Problem
Perhaps the most insidious aspect of this policy is how it transforms denied claims into what experts are calling “silent downgrades.” Instead of receiving clear denials that trigger standard billing workflows, hospitals will see these underpayments appearing as routine contractual adjustments. For revenue-strapped hospitals already struggling with complex billing systems, this creates a perfect storm where significant underpayments could easily slip through unnoticed.
As this Healthcare Financial Management Association article noted, “billing systems will interpret the difference between the payment and the billed amount as a contractual adjustment and thus will consider the admission fully paid.” This means hospitals could miss out entirely on opportunities to contest significantly lower reimbursements, even though Aetna maintains that appeals will still be permissible.
Regulatory Concerns and the Two-Midnight Rule
Aetna attempts to characterize its use of MCG criteria as a measure of “severity” rather than a medical necessity determination, but this appears to be a distinction without a meaningful difference. The practical effect remains the same: hospitals providing inpatient services may only receive observation-level payments, effectively denying the medical necessity of the inpatient service regardless of how it’s characterized.
More troubling is how this policy potentially undermines CMS’s Two-Midnight Rule requirements. The rule was specifically reaffirmed for Medicare Advantage plans beginning January 1, 2024, and was designed to ensure appropriate reimbursement when criteria are met. By using commercial MCG criteria to determine payment rates while technically “approving” admissions, Aetna may be attempting to sidestep federal regulations while maintaining a veneer of compliance.
The Operational Challenge
The implementation challenges are significant. Hospital billing systems aren’t always equipped to identify these types of underpayments, making detection much more difficult than traditional denials. Furthermore, it’s unclear how Aetna would accurately apply MCG criteria to claims, since hospitals’ standard claim submissions typically don’t include all the clinical information necessary for proper evaluation.
This means Aetna could very often pay inpatient claims at observation levels despite patients being appropriately admitted for inpatient services. Hospitals seeking full payment at the inpatient service level will be forced to submit more clinical appeals—a process that’s both time-consuming and expensive, and could lead to even more denials.
Strategic Response for Hospitals
Healthcare providers facing this policy change need to act swiftly and strategically. First and most critically, hospitals must modify their billing systems to flag Aetna claims where billed levels of care don’t match paid levels, leveraging their revenue integrity, contract management, or other analytic tools to catch these discrepancies. Also, Aetna inpatient claims could be manually reviewed for payment accuracy, rather than accepting automatic payment postings.
Training becomes essential across multiple departments. Billing, coding, utilization review, and appeals teams all need to understand this policy and recognize silent downgrades when they occur. Most importantly, these adjustments cannot be allowed to slip through as routine contractual write-offs—they represent real money that hospitals may be entitled to under existing regulations and contracts.
Looking Forward
Aetna justifies this policy as helping hospitals get paid faster since their current process involves denying non-compliant stays, which requires appeals. However, this purported benefit rings hollow for hospitals that may remain unaware of systematic underpayments buried within routine contractual adjustments.
The broader concern is whether other payers will adopt similar approaches. As one industry expert warned in the HFMA article, this policy could be “catastrophic” for hospitals if other health plans follow suit. The precedent Aetna is setting could fundamentally alter the hospital reimbursement landscape, transforming the two-midnight rule from a protective safety net into a one-way street that benefits payers at hospitals’ expense.
For healthcare providers, the message is clear: the traditional assumptions about claim processing and appeal rights are changing rapidly. Success in this new environment will require vigilance, updated processes, and potentially new partnerships with vendors who have the expertise and tools to identify and contest these silent downgrades cost-effectively.
As hospitals face these complex policy shifts, developing robust detection systems and strategic response frameworks will be essential to safeguarding both revenue integrity and quality patient care. Contact Aspirion today to learn how we can help.
