Article
The ruling
On Aug. 5, Judge John M. Gallagher of the U.S. District Court for the Eastern District of Pennsylvania granted the AHA and the Hospital and Healthsystem Association of Pennsylvania permission to file an amicus brief and rejected Aetna’s motion to exclude it. The court reasoned that if the policy directly affects member hospitals, particularly by creating administrative and financial burdens, the associations can claim a special interest in the outcome. It also noted the AHA’s years of work helping members hold Medicare Advantage plans to the Two-Midnight Rule.
What is at stake
Under Aetna’s level of severity policy, inpatient stays the insurer classifies as low severity are paid at rates Aetna describes as comparable to observation. For hospitals, that means a patient admitted and treated as an inpatient can be reimbursed closer to an outpatient observation rate.
The case, brought by Jefferson Health and Lehigh Valley Physician Hospital Organization, is still at an early stage. Aetna has asked the court to send the dispute to arbitration and pause the lawsuit. The associations’ brief, filed in June, supports Jefferson’s opposition to that motion. Whether the dispute is heard in open court or private arbitration matters beyond Pennsylvania: a public ruling would offer guidance to every hospital facing similar policies, while arbitration would keep the outcome confidential.
Why boards should pay attention
Policies that reclassify inpatient care as observation-level payment can quietly reduce revenue without any change in rates on the contract face. They also add work for utilization review, case management and appeals teams. As more payers adopt similar approaches, the issue moves from a revenue cycle problem to a governance question about payer strategy and contract risk.
Practical steps
- Quantify exposure: Ask finance to identify inpatient claims paid at reduced or observation-equivalent rates by payer over the past year.
- Review contracts: Check whether agreements allow payers to adopt payment policies unilaterally and whether disputes must go to arbitration.
- Strengthen documentation: Make sure physician advisors and case managers document medical necessity for inpatient status in terms payers cannot easily recast.
- Negotiate protections: In upcoming renewals, seek notice periods, limits on midterm policy changes and payment for inpatient stays that meet agreed criteria.
- Coordinate: Share data with your state hospital association, which may be tracking similar payer policies.
Archive entry for Aug 5, 2026, added Nov. 11, 2026.