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What is Medicare sequestration?

Just the essentials...
  • Medicare sequestration is a penalty created during The Budget Control Act of 2011
  • Sequestration required Medicare providers to reduce costs by 2 percent
  • Medicare sequestration was made to create savings and prevent further debt, but it had some negative repercussions on hospitals, physicians, and health care
  • Beneficiaries are not responsible for the price difference caused by the sequestration

In 2011, The Budget Control Act increased the debt limit. The ability to raise the debt limit was contingent upon Congress enacting targeted spending reductions. Penalties were created for any targeted group that failed to provide detailed plans on how they would reduce spending.

Sequestration was the penalty for failing to provide a method on how they would comply. Medicare received sanctions for failing to comply in the form of sequestration.

Some believe Medicare failed to meet the deadline because economists and financial analysts predicted Congress would step in and squash the Budget Control Act of 2011. When Congress didn’t step in, it gave little time for entities such as Medicare to outline a plan before the deadline.

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Medicare sequestration was created as a way for the Super Committee to develop a plan that would lead to substantial savings and allow for an increased debt limit. It is required under the Budget Control Act that was signed into law in 2011.

The changes created by sequestration affected both, policyholders and physicians. The American Taxpayer Relief Act was signed in January 2013. It was able to delay the sequestration for two months.

Sequestration officially began in the US on April 1, 2013. Thus, the Defense and Discretionary programs in place now are less severe than they will be in the future.

How Medicare Sequestration Affects Physicians

Doctor holding up finger

Physicians payments were reduced under Medicare sequestration. Under these budget cuts, any claim received by Medicare after April 1, 2013 was subject to a 2 percent payment cut. Any drugs that were administered as part of the claim were also reimbursed with a 2 percent cut implemented.

The reduction in payment applies to the payment itself and not the “allowed charge” published by Medicare as part of their fee schedule.

How Medicare Sequestration Affects Hospitals, Home Health Services, and Medical Equipment Suppliers


The reduction in payment applied to physicians also applies to hospitals, home health services, and durable medical equipment companies. When the agencies listed above provide services to patients with Medicare, they will receive the same 2-percent reduction in payment.

The reduction applies to medical equipment rentals, prosthetic, and similar services. However, the decrease for some services only applies if the service began after April 1, 2013.

If the rental or durable good services began before April 1, 2013, payments might be exempt from reductions. Payments for physician-administered drugs, such as chemotherapy, are subject to the 2 percent reduction.

What this Means for the Future of Medicare Payments to Providers

Although some federal spending will be reduced even more in future years, Medicare spending will never be cut more than the current 2-percent. The 2 percent cut to Medicare payments is also not cumulative. This means is payments will not continually be reduced by 2 percent year after year.

Instead, they will only be subject to the initial 2-percent reduction until 2022. The only way this reduction could be removed or changed is if Congress voted to change it.

How Medicare Sequestration Affects Beneficiaries

A person getting their blood pressure taken


Because the reduction in payments doesn’t affect the allowed charge, there were no changes in policy holder’s copay or deductible amounts.

Beneficiaries themselves are not responsible for making up the difference between what Medicare pays and what was charged.

Some analyst believe Medicare sequestration has caused a trickledown effect in healthcare. For instance, some cancer centers have stopped offering some chemotherapy services because the reduced payment makes it impossible to operate with financial responsibility.

Chemotherapy drugs are expensive. Chemo is administered in a clinical setting by a physician, so it is a covered charge under Medicare Part B. Part B drugs are subject to a 2 percent reduction, which made it impossible for some expensive chemotherapy sessions to be canceled or moved to facilities that could absorb the loss in payment.

How Medicare Sequestration Affects Non-Medical Entities


Medicare sequestration affected many non-medical entities. The Budget Control Act required half of the budget savings must be acquired through defense spending cuts.

Providers were limited to a 2 percent reduction in reimbursement. This meant that most money needed to meet budget needs had to be obtained through domestic discretionary programs.

In total, the 2013 Medicare Sequestration saved $85.4 billion. The savings were acquired by doing the following:

  • 7.9 percent cuts to defense spending; a $43 billion savings
  • 5.3 percent reduction in domestic discretionary spending; a savings of $29 billion
  • 2 percent cut in Medicare provide payments; a $10 billion savings
  • 5.8 percent cut to defense and nondefense mandatory programs; a $4 billion savings

What Payments Aren’t Affected by Sequestration from Medicare Sequestration?

Some government programs are exempt from Medicare Sequestration. Examples of payments that can’t be affected by these cuts include:

  • Military salaries
  • Medicaid programs

How Long will Medicare Sequestration Last?


Medicare Sequestration began in 2013. Per the Budget Control Act, $1.2 trillion in federal spending cuts must be achieved over the period of nine years. Unless changes are made by Congress, Medicare Sequestration will limit federal spending until 2022.

Only time will tell if the cuts made to Medicare reimbursement will continue until 2022. With a new President-Elect, it’s impossible to say what changes will be made to the budget and if Congress will act to remove the sequestration order from Medicare.

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