Pennsylvania health system sues Aetna over alleged ‘downcoding’ of inpatient hospital care

A health system in Pennsylvania has filed a lawsuit against Aetna, alleging that the insurer’s policy of paying outpatient rates for inpatient hospital care—a tactic known as “downcoding”—violates federal law.

Jefferson Health, which operates 30 hospitals and more than 700 care sites in Pennsylvania and New Jersey, filed a complaint in a federal district court on Monday, calling into question Aetna’s reimbursement practices. The policy of billing inpatient hospital stays of less than five days as if they are instances of outpatient observation went into effect on Jan. 1, and is something the managed care company has been transparent about, announcing the shift last year.

The policy is limited to Medicare Advantage plans, a key point central to Jefferson Health’s complaint. The health system argues that the "level of severity inpatient payment policy" stands in contrast to traditional Medicare, which has rules for when an encounter is billed as inpatient or outpatient, based on a patient's condition and length of stay. 

Medicare Advantage, also known as Medicare Part C, is a privately managed form of the federal health insurance program. However, it is supposed to follow the same rules for coverage as the traditional form, which Jefferson Health believes to mean that Aetna cannot be setting its own definition for outpatient monitoring. 

"As a result, Aetna is able to tell its Medicare Advantage members—and the Centers for Medicare & Medicaid Services—that it is 'covering' the inpatient admission, while simultaneously paying the hospitals for the equivalent of outpatient observation care," the lawsuit reads.

Notably, when Aetna unveiled this policy shift in 2025, it received vocal pushback from hospitals and provider groups which delayed implementation for a couple of months to help those groups to prepare for the change.

Vocal opponents included the American Hospital Association (AHA), the industry trade lobby, which responded in an open letter, urging the publicly traded insurance giant to rescind the policy.

“America’s hospitals and health systems are deeply concerned about Aetna’s recently announced ‘level of severity inpatient payment policy. This policy could erode the transparency consumers rely on to make informed decisions about their care, undermine important regulatory protections that safeguard patients’ coverage, and jeopardize the ability of hospitals to provide high-quality, accessible care to all who need it,” the AHA wrote.

Aetna had argued that the policy shift of labeling certain hospital stays as low severity, thus reimbursing them at outpatient rates, was meant to reduce the number of denials it issued for patient admissions.

Instead, it would approve all stays but sometimes at lower rates. The AHA said this is a violation of long-standing contractual obligations the insurer has with health systems, where reimbursement rates were previously established.

Taking a similar tone, Jefferson Health is asking a federal court to issue an injunction to stop the practice. If successful, it could impact hospitals and health systems all over the country and force Aetna to roll back the change, once again leaving providers to seek prior authorization for hospital admissions and inpatient care delivery.