Aetna Introduces a Five-Midnight Medicare Payment Policy

As discussed in my prior articles, Medicare Advantage (MA) organization payments incorporate a beneficiary’s health risk, as determined by diagnoses that map to Centers for Medicare & Medicaid Services (CMS) Hierarchical Condition Categories (HCCs).

The reporting of risk-adjusting diagnoses can increase the average monthly payment of $1,100 per month per beneficiary. Last week, I wrote about audit findings suggesting that some MA plans may artificially inflate beneficiary risk-adjustment scores to increase revenue. This week, my focus is on how MA plans are implementing strategies to reduce costs by reducing payments to hospitals – an approach that appears to be inconsistent with Medicare regulations.

When an MA beneficiary is hospitalized, it is the MA plan that pays the hospital, not Medicare Part A, which only pays if a traditional Medicare beneficiary is admitted as an inpatient. Most MA plans reimburse hospitals for inpatient services using Medicare Severity Diagnosis-Related Groups (MS-DRGs), just like Medicare Part A.

Recently, Aetna, which ranks third among healthcare companies offering MA plans by enrollment, with about 12 percent of the MA population, announced that they are implementing a new payment policy that ties inpatient reimbursement to MCG inpatient criteria.

The typical process is for payment to be determined by patient status. Outpatient observation stays are typically paid at a lower rate, compared to an inpatient stay, which is why they usually require less oversight from a utilization review (UR) perspective. Outpatient services can include a variety of charges in addition to observation services, like separately payable diagnostic tests (CT, MRI, stress test, etc.).

However, inpatient payments under MS-DRGs are all-inclusive, even those services that occurred immediately prior to the inpatient admission, like an emergency department visit.

MCG is a commercial screening tool that is used by UR staff to determine if they can approve inpatient status for a non-Medicare beneficiary, or if they should refer the case for physician review. Medicare has been clear that severity is not a determining factor for medical necessity; instead, Medicare uses the Two-Midnight Rule. Even MCG states that their tools are “designed for use in conjunction with a provider’s clinical judgement.”

Under Aetna’s new policy, urgent and emergent hospital stays of one midnight and greater with a valid inpatient admission order will be authorized as inpatient admissions. However, some claims may be paid at a reduced rate. This approach conflicts with the Medicare Two-Midnight Rule, which uses two or more midnights of hospital services to support inpatient medical necessity.

Additionally, severity is already considered within the inpatient payment methodology, due to the nature of MS-DRGs. As most clinical documentation integrity (CDI) professionals know, a base MS-DRG rate may be increased when a diagnosis classified as a complication/comorbidity (CC) or major complication/comorbidity (MCC) is reported on the inpatient claim.

A key distinction between screening criteria like MCG and MS-DRG reimbursement methodology is the importance of diagnoses. Clinical evidence must be interpreted by a treating provider into a corresponding diagnosis to be reported on a claim, after which the inpatient payment may be risk-adjusted.

MCG inpatient determinations are not based upon clinically significant diagnoses documented by an independent licensed treating provider. In fact, the criteria used to approve an inpatient admission may not match the reported principal diagnosis. These types of discrepancies can actually contribute to medical necessity denials.

Another significant difference is the timing of when inpatient medical necessity screening occurs, compared to when MS-DRG assignment occurs. UR screening occurs as early as possible during the hospital encounter following the inpatient order. Aetna’s “severity” determination will be based upon what the provider plans to do, based on how the patient presented. In contrast, MS-DRG assignment occurs after the inpatient admission is complete. This different perspective is evident within the Uniform Hospital Discharge Data Set (UHDDS) definition of the principal diagnosis, which is reported on an inpatient claim as “that condition established after study to be chiefly responsible for occasioning the admission of the patient to the hospital for care (ICD-10-CM Official Guidelines for Coding and Reporting FY 2026).”

Under the new Severity Payment Policy, Aetna will approve hospital stays of at least one midnight as inpatient. This is in conflict with Medicare’s Two-Midnight Rule that requires either:

• Provider expectation that two or more midnights of hospital services will be required to appropriately treat the beneficiary’s condition; or
• That the patient received medically necessary hospital services that crossed two midnights without any significant delays in the delivery of services.

Of course, there are some exceptions to the two-midnight threshold, but in general, this is the basic requirement. CMS has stated numerous times that it should be rare for a one-day hospital stay to meet medical necessity criteria for an inpatient stay (unless a Medicare-defined exception is met), yet Aetna will approve these short stays as inpatient. Aetna is spinning this as a “win” for patients, and healthcare providers are claiming it will expedite payments. However, taking patient status out of the equation will upend current hospital UR processes, as traditional status appeal processes, like peer-to-peer discussions, will no longer be available. It may also blur the lines between UR functions and those associated with CDI.

Yes, there will be more inpatient admissions, which initially appears to benefit hospitals, but Aetna plans to offset potentially increased beneficiary costs by screening inpatient stays of fewer than five midnights using MCG criteria. Admissions that meet MCG criteria will be paid using an inpatient rate, referred to by Aetna as a higher-severity rate, compared to those that do not – which will be paid at a reduced severity rate, “comparable” to their observation rate.

Aetna has not explained how it arrived at a five-midnight threshold, but this has the potential to reduce the majority of inpatient payments. Hospitals have made considerable progress reducing the length of inpatient stays. The median geometric mean length of stay (GMLOS) across all MS-DRGs for FY 2026 is 3.0 days, with a cluster of MS-DRGs around 2.8 to 3.2 days. In other words, most MS-DRGs are not associated with a five-day length of stay, so many valid inpatient stays could see reduced payments. It will also make it more difficult to predict future revenue using case mix index (CMI), since the payment shortfalls will not be reflected by the billed relative wight.

It is important to note that Medicare has no such payment policy for traditional Medicare beneficiaries. If an inpatient claim is billed, reimbursement is based on the billed MS-DRG. The bottom line is that MA plans are not permitted to impose more restrictive coverage, which CMS has qualified to include payment policies, than what applies to traditional Medicare beneficiaries.

Yet, outcry from the hospital industry has not resulted in intervention by CMS. There is still time before this policy is scheduled to go into effect, so let us hope that with the reopening of the government, CMS will take action to prevent this policy or ones like it from ever being implemented.