INTRODUCTION
In American healthcare, Medicaid presents significant challenges, particularly regarding inpatient stay approvals. In recent years, Medicare and the Two-Midnight Rule have dominated discussions around inpatient admission criteria and reimbursement, while Medicaid—another major government payer—has received considerably less attention despite serving a substantial portion of the population. This tension between medical necessity, legal requirements, and administrative processes significantly impacts Medicaid inpatient admission approvals. A combined clinical and legal perspective reveals both the patient care implications and regulatory aspects of Medicaid policies.
Utilizing Medicaid legislation to ensure appropriate inpatient stay approvals addresses a pressing practical problem. Children’s hospitals and hospital pediatric wards frequently face denials of medically necessary inpatient claims from Medicaid managed care organizations. Inability to secure appropriate compensation for this care is 1 of the many challenges pediatric facilities face to maintain funding. As a pediatric hospitalist with over 2 decades of bedside care and an attorney versus in healthcare law, I have witnessed firsthand the interplay between medical necessity, legal requirements, and administrative hurdles that often cause challenges with Medicaid inpatient stay approval. This led me to review the relevant legislative and regulatory landscape relevant to this population. This issue was first presented at the National Association of Physician Advisors meeting in San Diego in spring 2024. The response from colleagues nationwide indicated that these challenges are widespread rather than isolated occurrences, requiring comprehensive legislative solutions.
This paper expands on that initial presentation by examining Medicaid legislation, the differences between Medicaid and Medicare reimbursements, and the interactions between federal law, state regulations, and managed care organization contracts. Through both clinical and legal analysis, it explores paths toward a more effective and equitable Medicaid system. The discussion covers Medicaid’s history, current challenges in inpatient stay approvals, and potential legislative improvements. These policies directly affect children and families whose healthcare depends on proper Medicaid coverage and reimbursement. While my original interest was addressing challenges with inpatient Pediatrics days, for the most part, the topics discussed here will also apply to adult Medicaid patients as well.
THE HISTORICAL FOUNDATION AND STRUCTURE OF MEDICAID
Medicaid’s inception dates back to July 30, 1965, when President Lyndon B. Johnson signed the Social Security Amendments into law, establishing both Medicare and Medicaid. Authorized by Title XIX of the Social Security Act, Medicaid was designed as a joint federal and state program to provide health coverage to low-income individuals.[1] A significant expansion came in 1997 with the creation of the Children’s Health Insurance Program (CHIP) under Title XXI of the Social Security Act. CHIP extended coverage to children in families with incomes too high to qualify for Medicaid but too low to afford private insurance. This program has been instrumental in reducing the number of uninsured children in the United States.[2] The most recent major expansion of Medicaid occurred under the Affordable Care Act (ACA) of 2010, which provided states with the option to expand Medicaid eligibility to all adults under 65 with incomes up to 133% of the Federal Poverty Level.[3]
The significance of Medicaid for pediatric care cannot be overstated. In 2020, Medicaid provided payments for services for 29.1 million children, constituting 41.1 percent of all Medicaid beneficiaries, with an average expenditure of $4,137 per child.[4] This substantial pediatric population makes understanding the nuances of pediatric-specific Medicaid provisions critical for children’s hospitals and healthcare administrators. While pediatric inpatient stays are disproportionately impacted by inappropriate denials and administrative barriers, the legislative framework and regulatory protections discussed throughout this paper apply equally to the adult Medicaid population. The principles governing medical necessity determinations, inpatient admission criteria, and managed care organization oversight extend across all age groups enrolled in Medicaid.
A key feature of Medicaid is its federal-state partnership structure, particularly in terms of funding. The federal government provides matching funds to states for their Medicaid programs, with the percentage of federal contribution varying based on each state’s economic conditions.[5] The Federal Medical Assistance Percentage (FMAP) is defined in the Social Security Act at 42 U.S.C. § 1396d(b) and is determined annually for each state using the following principles: If a state’s per capita income equals the national average, the federal government covers 55% of Medicaid costs. States with per capita income higher than the national average receive a lower federal share, with a statutory minimum of 50%, while states with per capita income lower than the national average receive a higher federal share, up to a statutory maximum of 83%.[6] In 2021, Medicaid spending totaled $728 billion, with the federal government contributing 69% and states contributing 31%.[7]
FEDERAL REGULATIONS GOVERNING MEDICAID SERVICES
Federal preemption is a legal doctrine in the United States that allows federal law to supersede or take precedence over state law when there is a conflict between the two. Federal preemption is constitutional when it aligns with the powers granted to the federal government by the U.S. Constitution, specifically under the Spending Clause found in Article I, Section 8, Clause 1.[8] The most important consideration regarding federal matching provisions is that the federal government funds at least 50% of Medicaid dollars in every state and contributes over two-thirds of all Medicaid dollars nationally. In the context of Medicaid, this means that while states have flexibility in designing and implementing their Medicaid programs, they must comply with federal Medicaid laws and regulations. States cannot implement policies that are more restrictive than federal requirements.
Title 42, Chapter IV, Subchapter C of the Code of Federal Regulations outlines crucial guidelines for implementing Medicaid programs across the United States.[9] This regulatory framework provides essential definitions and provisions that shape the delivery of healthcare services under Medicaid. Under 42 CFR § 440.2, federal regulations provide specific definitions that are fundamental to understanding authorization requirements.
“Inpatient is defined as a patient who has been admitted to a medical institution as an inpatient on recommendation of a physician or dentist and who (either)
- (r)eceives room, board and professional services in the institution for a 24-hour period or longer, or
- (i)s expected by the institution to receive room, board and professional services in the institution for a 24-hour period or longer even though it later develops that the patient dies, is discharged or is transferred to another facility and does not actually stay in the institution for 24 hours.” [10]
“Outpatient services are characterized by professional services for less than a 24-hour period regardless of the hour of admission, whether or not a bed is used, or whether or not the patient remains in the facility past midnight.” [11]
The critical distinction lies in the expectation at the time of admission. If a physician expects the stay to exceed 24 hours at the time of admission, the patient must be classified as inpatient from the start, even if the actual stay ends up being shorter. This expectation-based standard is fundamental to understanding proper inpatient authorization and represents a principle that managed care organizations frequently violate through retrospective application of actual length-of-stay criteria.
Under 42 CFR § 438.210(a)(5), managed care organizations must specify what constitutes “medically necessary services” in a manner that is no more restrictive than that used in the State Medicaid program, including quantitative and non-quantitative treatment limits, as indicated in State statutes and regulations, the State Plan, and other State policy and procedures.[12] Furthermore, 42 CFR § 438.210(b)(3) requires that all decisions to deny, limit, or terminate authorization requests or payment must be made by a licensed physician or other appropriate health care professional who has the appropriate clinical expertise in treating the enrollee’s condition or disease.[13] This requirement is particularly significant in the pediatric context, where many denials are inappropriately made by physicians with no training or experience in pediatric hospital medicine.
Beyond these general medical necessity standards, pediatric Medicaid beneficiaries receive additional protections through specialized federal provisions.
The Early and Periodic Screening, Diagnostic, and Treatment Services (EPSDT) program, established under Section 1905(r) of the Social Security Act (42 U.S.C. § 1396d(r)), provides enhanced protections specifically for pediatric Medicaid beneficiaries. Under EPSDT, services that are within the scope of mandatory or optional services under federal law must be covered even if those services are not included as part of the covered services in the state’s plan.[14] Section 1905(r)(5) specifically includes “such other necessary health care, diagnostic services, treatment, and other measures described in section 1905(a) to correct or ameliorate defects and physical and mental illnesses and conditions discovered by the screening services, whether or not such services are covered under the State plan.”[15] This provision creates a significantly broader coverage mandate for pediatric patients than exists for adult Medicaid beneficiaries, yet managed care organizations frequently fail to apply these enhanced protections when reviewing authorization requests for pediatric patients.
STATE-LEVEL IMPLEMENTATION: THE FLORIDA EXAMPLE
While federal regulations provide the overarching framework for Medicaid, individual states have the flexibility to implement and administer their own Medicaid programs within these guidelines. Florida’s approach illustrates how states operationalize federal requirements and, importantly, where managed care organizations often deviate from these requirements. Florida Medicaid defines medical necessity with specific criteria requiring that medical or allied care, goods, or services furnished or ordered must be necessary to protect life, to prevent significant illness or significant disability, or to alleviate severe pain; be individualized, specific, and consistent with symptoms or confirmed diagnosis of the illness or injury under treatment; be consistent with generally accepted professional medical standards as determined by the Medicaid program and not experimental or investigational; be reflective of the level of service that can be safely furnished, and for which no equally effective and more conservative or less costly treatment is available statewide; and be furnished in a manner not primarily intended for the convenience of the recipient, the recipient’s caretaker, or the provider.[16]
Florida Medicaid’s Inpatient Hospital Coverage Policy provides clear guidance that is directly aligned with federal regulations. Section 1.1.2 explicitly states: “The provision of services to recipients in a Florida Medicaid managed care plan must not be subject to more stringent service coverage limits than specified in Florida Medicaid policies.”[17] Section 4.2 establishes the authorization standard: “Florida Medicaid reimburses for inpatient hospital services when: The recipient is admitted to the hospital as an inpatient by a licensed physician or dentist with the expectation that the recipient will stay in excess of 24 hours and occupy an inpatient bed.”[18] This language mirrors the federal expectation-at-admission standard and explicitly prohibits managed care plans from imposing more restrictive criteria.
Florida’s Agency for Health Care Administration (AHCA) Authorization Requirements policy permits managed care plans to use national standardized criteria (such as InterQual) or other evidence-based guidelines approved by AHCA as a guide for authorizations at the first review level. However, the policy clearly states that if services cannot be approved at the first level review, the physician peer reviewer will determine medical necessity using his or her clinical judgment, acceptable standards of care, state and federal laws, and AHCA’s medical necessity definition.[19] The AHCA managed care core contract provisions further clarify that managed care plans may utilize national standardized criteria to approve services, but such criteria and guidelines shall not solely be used to deny, reduce, suspend or terminate a good or service. Rather, they may only be used as evidence of generally accepted medical practices that support the basis of a medical necessity determination. Most importantly, in no instance may the managed care plan impose coverage and service limitations or exclusions more stringent than those specified in state Medicaid policies.[20]
Despite these clear regulatory requirements and contractual provisions, managed care organizations in Florida and other states ignore these standards through various mechanisms including rigid application of proprietary criteria, retrospective denials based on actual length of stay rather than expectation at admission, and use of non-pediatric reviewers for pediatric cases.
THE CHALLENGES FACING CHILDREN’S HOSPITALS AND WARDS
Despite Medicaid’s comprehensive coverage goals and robust regulatory framework, significant challenges persist in the reimbursement for pediatric services and the approval process for inpatient stays. These challenges stem from several systemic factors that create a perfect storm of financial and operational pressures on children’s hospitals. A critical aspect of the Medicaid system that significantly impacts healthcare delivery, particularly for inpatient stays, is the disparity in reimbursement rates between Medicaid and Medicare. On average, Medicaid reimbursement rates are significantly lower than those of Medicare. According to various studies, Medicaid payments for physician services average around 78% of Medicare rates nationally, though this varies widely by state and DRGs.[21] This disparity creates financial strain on children’s hospitals, particularly when inappropriate denials further erode already-thin margins on pediatric care.
Different states, and even different managed care plans within states, interpret and apply medical necessity criteria differently. This leads to disparities in care and frustration for children’s hospitals, providers, and patients. Many managed care plans either misinterpret federal and state regulations or apply them in overly restrictive ways, leading to inappropriate denials of inpatient stays. Some managed care plans have implemented “short stay” policies, either explicitly or implicitly, that conflict with federal and state Medicaid regulations. These policies lead to inappropriate denials of inpatient stays under a predetermined length of stay, disproportionately affecting pediatric patients who are more likely to have rapid recoveries due to their physiologic resilience. These policies fundamentally misunderstand the federal definition of inpatient status, which is based on the expectation at admission, not the actual duration of stay. A child admitted with the expectation of requiring more than 24 hours of inpatient care meets the definition of an inpatient admission, regardless of whether they recover more quickly than anticipated.
Children often require specialized care that may not fit neatly into adult-oriented criteria for inpatient stays. Furthermore, denials are frequently made by physicians who have no training or experience in pediatric hospital medicine, in violation of 42 CFR § 438.210(b)(3), which requires that denials be made by professionals with appropriate clinical expertise in treating the enrollee’s condition. The EPSDT mandate provides broader coverage requirements for children than for adults, yet many managed care organizations fail to apply these enhanced protections when reviewing authorization requests for pediatric patients. This systematic disregard for pediatric-specific regulatory requirements represents not merely an operational failing but a violation of federal law that has real consequences for children’s access to necessary care.
THE LEGAL HIERARCHY: CONTRACTS SUBORDINATE TO LAW
A fundamental principle that must be emphasized to hospital executives, physician advisors, and healthcare attorneys is that managed care organization contracts are subordinate to federal and state law. While MCOs play a significant role in administering Medicaid benefits, including approvals for inpatient stays, their contractual agreements with healthcare providers cannot override statutory and regulatory requirements. Federal and state Medicaid statutes and regulations establish minimum standards for coverage, authorization processes, and beneficiary protections. MCO contracts must comply with these legal requirements. Any contract provision that conflicts with federal or state Medicaid law is unenforceable.
This legal hierarchy has profound implications for how children’s hospitals and healthcare providers should approach denials and contract negotiations. First, MCOs cannot enforce contract provisions that are more restrictive than federal or state Medicaid requirements. For example, if an MCO contract contains a provision limiting inpatient stays based on length of stay criteria that conflict with the federal definition of inpatient services, that provision is invalid and cannot serve as a basis for denial. Second, hospitals and providers can challenge denials based on statutory and regulatory grounds, regardless of contract language. The existence of a contract provision does not immunize an MCO from compliance with governing law. Third, state Medicaid agencies have enforcement authority over MCOs. When MCOs fail to comply with federal or state Medicaid requirements, state agencies can impose corrective action plans, sanctions, or terminate contracts.
Understanding this hierarchy is essential for effective advocacy. Too often, hospitals accept denials or negotiate unfavorable contract terms based on a misunderstanding of the legal landscape. The law provides powerful tools for challenging inappropriate MCO conduct, but these tools are only effective when providers understand and assertively invoke their legal rights and the legal protections afforded to their patients.
A ROADMAP FOR STRENGTHENING MEDICAID PROTECTIONS
To address the systemic challenges in Medicaid inpatient stay approvals, a multi-pronged approach is necessary. Hospitals and physician advisors must systematically challenge denials that violate federal and state requirements. Each appeal should explicitly reference 42 CFR § 440.2’s definition of inpatient services based on expectation at admission, 42 CFR § 438.210(a)(5)’s prohibition on more restrictive medical necessity definitions, 42 CFR § 438.210(b)(3)’s requirement for appropriate clinical expertise, state-specific policies prohibiting more stringent coverage limits, and EPSDT requirements for pediatric patients under 42 U.S.C. § 1396d(r). This systematic, legally-grounded approach to appeals serves multiple purposes: it improves individual case outcomes, creates a documented record of MCO violations, and educates MCO staff about applicable legal requirements.
Healthcare organizations should provide detailed feedback to the Centers for Medicare & Medicaid Services (CMS) and state Medicaid agencies documenting patterns of inappropriate denials. This data should include specific instances where MCOs applied criteria more restrictive than federal or state standards, cases where denials were made by reviewers without appropriate pediatric expertise, examples of “short stay” policies that conflict with the expectation-at-admission standard, and documentation of EPSDT violations. CMS and state agencies cannot effectively enforce Medicaid requirements without data from providers about systematic violations. Hospitals have both a business interest and a patient advocacy obligation to ensure that regulatory agencies have the information necessary to take corrective action.
Like Medicare, federal legislation should explicitly codify the principles already present in regulations but frequently violated in practice. This legislation should clarify that the inpatient definition can be based solely on expectation at admission, in addition to the actual length of stay; strengthen enforcement mechanisms for MCO violations; establish specific penalties for systematic violations of authorization requirements; mandate transparency in MCO denial rates and reasons; and require specialized pediatric expertise for all pediatric authorization denials. While the current regulatory framework is robust, the persistent pattern of violations suggests that stronger statutory language and enhanced enforcement mechanisms are necessary to ensure compliance.
Children’s hospitals and healthcare organizations must work collectively through professional associations to coordinate advocacy efforts with state and federal legislators, develop model contract language that explicitly incorporates federal and state protections, and support litigation challenging systematic MCO violations. Individual hospitals have limited leverage against large managed care organizations, but advocacy with professional associations can drive meaningful changes in MCO practices and public policy.
CONCLUSION
While Medicaid managed care organizations play a significant role in administering Medicaid benefits, including approvals for inpatient stays, their contractual agreements with healthcare providers are firmly subordinate to federal and state Medicaid laws. This legal hierarchy ensures that the fundamental protections and standards established by Medicaid legislation are maintained, regardless of the specific managed care arrangements in place. The robust federal framework including the clear definition of inpatient services based on expectation at admission, the prohibition on medical necessity criteria more restrictive than state standards, the requirement for appropriate clinical expertise in denials, and the enhanced EPSDT protections for pediatric patients provides powerful tools for challenging inappropriate denials. Yet these protections are only as strong as their enforcement.
As efforts to strengthen Medicaid legislation on inpatient stay approvals move forward, it is crucial to recognize that we are not starting from scratch. The legal framework already exists. What is needed is the collective will to enforce these requirements, the systematic documentation of violations, the strategic use of administrative and legal remedies, and ultimately, and the use of state hospital associations to lobby to enforce these rules. Central to this effort is the critical role of hospitalists in providing robust clinical documentation that clearly establishes the medical necessity of inpatient stays. Detailed documentation of the patient’s clinical condition, the expectation at the time of admission that care would extend beyond midnight, the intensity of services required, and the clinical reasoning supporting inpatient level care creates the evidentiary foundation necessary to defend against inappropriate denials and to support successful appeals. Without comprehensive documentation by the treating physicians, even the strongest legal protections become difficult to enforce.
For children’s hospitals facing the daily reality of inappropriate denials, for physician advisors tasked with navigating complex authorization processes, and for healthcare attorneys advising on these matters, the message is clear: the law is on our side. Federal and state Medicaid statutes and regulations establish protections that MCOs must follow. Our responsibility and our opportunity is to ensure these protections are enforced for the benefit of the pediatric patients who depend on us for their care.
Stronger enforcement mechanisms for Medicaid are overdue. The legal foundation is solid. Now we must build upon it through rigorous enforcement of existing requirements, systematic documentation and reporting of violations, collective advocacy for enhanced statutory protections, and unwavering commitment to the children and families who depend on Medicaid for their healthcare. The challenges are significant, but the tools for addressing them are already in our hands. What remains is the determination to use them effectively.
ACKNOWLEDGEMENT
The author gratefully acknowledges Michael Keyes, MD, for his thoughtful review and assistance with revisions to this article.
REFERENCES
[1] Social Security Amendments of 1965, Pub. L. No. 89-97, Title XIX, 79 Stat. 286, 343-52 (1965) (codified as amended at 42 U.S.C. § 1396 et seq.).
[2] Balanced Budget Act of 1997, Pub. L. No. 105-33, Title XXI, 111 Stat. 251, 552-74 (1997) (codified as amended at 42 U.S.C. § 1397aa et seq.).
[3] Patient Protection and Affordable Care Act, Pub. L. No. 111-148, § 2001, 124 Stat. 119, 271-83 (2010) (codified as amended at 42 U.S.C. § 1396a(a)(10)(A)(i)(VIII)).
[4] [Statistical source citation would be inserted here based on specific government report]
[5] 42 U.S.C. § 1396b(a) (2024).
[6] 42 U.S.C. § 1396d(b) (2024); Congressional Research Service, Medicaid’s Federal Medical Assistance Percentage (FMAP) (2023).
[7] Elizabeth Williams, Robin Rudowitz & Alice Burns, Medicaid Financing: The Basics, Kaiser Family Foundation (Apr. 13, 2023).
[8] U.S. Const. art. I, § 8, cl. 1.
[9] 42 C.F.R. § 430.1 (2024).
[10] 42 C.F.R. § 440.2 (2024) (definition of “Inpatient”).
[11] 42 C.F.R. § 440.2 (2024) (definition of “Outpatient”).
[12] 42 C.F.R. § 438.210(a)(5)(i) (2024).
[13] 42 C.F.R. § 438.210(b)(3) (2024).
[14] 42 U.S.C. § 1396d(a) (2024); 42 C.F.R. § 441.56(c) (2024).
[15] 42 U.S.C. § 1396d(r)(5) (2024).
[16] [Florida Medicaid medical necessity definition citation would be inserted here]
[17] Florida Medicaid Inpatient Hospital Coverage Policy, § 1.1.2 (2024).
[18] Florida Medicaid Inpatient Hospital Coverage Policy, § 4.2 (2024).
[19] Florida Agency for Health Care Administration, Authorization Requirements Policy (2024).
[20] Florida Agency for Health Care Administration, Managed Care Core Contract Provisions (2024).
[21] Medicaid and CHIP Payment and Access Commission (MACPAC), Medicaid Hospital Payment: A Comparison across States and to Medicare (2023), available at <https://www.macpac.gov>.
