The following is a guest article by Missy Harbert, Senior Solution Advisor at Revecore
For years, hospitals have built denial management programs around a predictable premise: when a payer disputes a claim, it sends a denial. There is a code, a process, a path to appeal. That premise is no longer reliable.
Payers have been engineering workarounds to formal denial obligations for some time: severity downgrades, retrospective coding challenges, clinical validation audits that sidestep regulatory scrutiny. Aetna’s Level of Severity (LLS) inpatient payment policy, effective January 1, 2026, is the most refined expression of that pattern yet.
What the LLS Policy Does
Aetna approves urgent and emergent inpatient admissions for Medicare Advantage (MA) and Special Needs Plan members as usual. But for stays of one to four midnights, it conducts a severity review using Milliman Care Guidelines, which CMS does not sanction for medical necessity determinations. If the stay doesn’t meet those proprietary thresholds, Aetna pays at a reduced rate comparable to observation, regardless of the contracted inpatient Diagnosis-Related Group (DRG) rate.
The critical design choice is what the policy avoids: a formal denial. A traditional observation downgrade generates a denial code, triggering federal appeal rights and CMS oversight. Here, the admission is approved. The payment is simply repriced unilaterally, outside the contract negotiation process.
As the American Hospital Association noted in its September 2025 letter urging Aetna to rescind the policy, hospitals are being paid at rates determined outside the good-faith contracting process. Disputes route to arbitration rather than standard appeals, a more burdensome and far less transparent process, and the resulting adjustments post as paid rather than denied. Without a denial code to trigger a work queue, most of these underpayments go undetected.
A Recurring Pattern with Rotating Targets
This pressure has been building for years. Medicare Advantage claim denials rose 55.7% between 2022 and 2023, according to the AHA. A peer-reviewed study in Health Affairs found initial denial rates of 17% across MA-submitted claims; that figure likely understates the real impact, because partial adjustments, including DRG downgrades, were not captured in the analysis.
DRG downgrades deserve particular attention because of how they compound. Repeated DRG adjustments suppress a hospital’s case mix index, which informs prospective payment rates, meaning artificially lowered severity designations today reduce reimbursement for years to come. Data from Ballad Health puts the share of inpatient discharges affected by level-of-care changes, including DRG downgrades, at up to 10%. Among millions of accounts audited by insurers, analysis published in The Hospitalist found adjustments run almost exclusively in one direction: downward.
Where Hospitals are Most Exposed
The LLS policy creates the sharpest exposure in service lines where patients stabilize quickly and where clinical decision-making intensity is hard to quantify in the first days of a stay: congestive heart failure exacerbations, chronic obstructive pulmonary disease admissions, pneumonia, syncope, chest pain, and acute kidney injury without dialysis. These are admissions where initial presentation justifies inpatient care but where subsequent clinical stability can be used retroactively to argue lower severity, even when the escalation risk that was managed, or the failed outpatient treatment that preceded admission, tells a different story.
There is also a regulatory dimension to this. Because LLS adjustments don’t generate formal denials, they don’t generate formal appeals. Aetna’s denial and appeal metrics could appear to improve even as payment reductions continue, potentially creating an artificial boost to the Star Ratings measures CMS uses to evaluate plan quality. That is a structural integrity issue for the Medicare Advantage program with implications well beyond any single hospital’s balance sheet.
Health Systems are Voting with Their Contracts
Across the country, health systems have been severing ties with major MA plans, citing the LLS policy and persistent reimbursement shortfalls that have made certain contracts financially untenable. In South Carolina, one health system formally requested Aetna remove the policy, and when Aetna declined, allowed its contracts to expire rather than accept the revised terms — taking both its Medicare Advantage and commercial plans out of network simultaneously. The opposition has also reached federal court: at least one health system has filed a federal lawsuit arguing the policy violates CMS’s two-midnight rule and breaches its Aetna contract, seeking an injunction to block implementation. The court has not yet ruled. In public statements, Aetna has maintained that the policy complies with all applicable federal law and the terms of its provider contracts, and that its stated intent is to speed up inpatient approvals by removing the upfront medical necessity review.
What’s driving these decisions across health systems is the widening gap between contracted payment and actual payment after payer review. The AHA has documented that Medicare pays hospitals 82 cents for every dollar spent on care. When MA plans layer post-approval repricing on top of that baseline, the arithmetic becomes untenable for a growing number of organizations.
The Contagion Risk
Whether Aetna’s LLS policy survives legal and regulatory scrutiny remains to be seen. For revenue cycle leaders, though, the litigation outcome may matter less than the signal the policy sends to every other MA plan watching. Aetna has demonstrated that a payer may be able to reduce payments significantly on a large subset of admissions while sidestepping the regulatory, transparency, and appeal obligations that attach to formal denials. If that model holds, others could replicate it — adjusting criteria to fit different clinical scenarios while keeping the same underlying structure intact.
What to Do Now
The operational response requires more than adding LLS to a denial work queue. Because these adjustments post as paid, standard denial-tracking workflows won’t surface them. Revenue cycle teams need a dedicated monitoring layer for short-stay MA claims, specifically watching for payment variances against expected contractual rates on one-to-four midnight admissions. Organizations should also pursue formal written confirmation of LLS rate determinations from Aetna; without knowing the rate that should have been applied, variance analysis is impossible.
On the clinical documentation side, CDI teams need to understand that establishing severity matters more than ever. Capturing organ dysfunction, failed outpatient treatment, escalation risk, and the clinical uncertainty that justifies inpatient-level care creates the evidentiary record that protects reimbursement when Aetna conducts its severity review after discharge. That documentation needs to happen early, if not at admission, not days into the stay when the note has shifted in tone from acute management to monitoring. Vague stability documentation without that severity context is an invitation for a downgrade.
It’s critical not to wait for a new payment model to launch. Hospitals that haven’t locked down contract language prohibiting post-approval repricing will find payers far less willing to negotiate after the fact.
The Bottom Line
With retrospective payer audits, a familiar sequence tends to play out: payment is restructured, hospitals detect it late, and revenue erodes before any systematic response is in place. Revecore’s analysis of the LLS policy and its implications points to one common trait in organizations that respond effectively: monitoring infrastructure that treats payment variances as signals, not noise, and clinical teams that understand the direct line between documentation and reimbursement. The organizations that recognize these signals early and build their response accordingly will be better positioned for whatever iteration of this playbook comes next.
Missy Harbert is an experienced revenue cycle executive with a proven track record of leading end-to-end operations, driving revenue growth, and improving profitability across complex healthcare environments. As Senior Solution Advisor at Revecore, she leads strategic initiatives spanning business development, client management, and operational performance.
Missy brings deep expertise across home infusion, hospital-based infusion, inpatient, and outpatient services, with a strong focus on denial prevention and revenue recovery. She is known for leading performance turnarounds, developing new service lines, and building high-impact client partnerships.
She also has extensive experience in mergers and acquisitions across both public and privately held organizations, consistently aligning operational execution with growth strategy to deliver measurable financial outcomes.
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