Introduction
Medicare sequestration refers to automatic spending cuts to Medicare payments that were put in place by the Budget Control Act of 2011. The goal was to reduce the federal budget deficit through the sequestration (withholding) of funds from various government programs, including Medicare.
For Medicare providers, this has resulted in across-the-board cuts to payments for services provided to Medicare beneficiaries. While there have been short term suspensions of the cuts, sequestration is still in effect and impacts Medicare reimbursement amounts each year.
History and Context of Medicare Sequestration
Medicare sequestration was implemented as part of the Budget Control Act of 2011, passed by Congress, and signed into law by President Obama. It was intended to reduce spending and control the federal deficit. Specifically, it triggered $1.2 trillion in automatic spending cuts over 10 years if Congress failed to enact deficit reduction legislation.
Congress did not put forth deficit reduction packages necessary to avoid the triggered cuts. As a result, Medicare sequestration took effect April 1, 2013, applying a 2% reduction to Medicare payments for all services.
These across-the-board cuts to Medicare providers came on top of $716 billion in Medicare payment reductions over 10 years included in the Affordable Care Act of 2010.
The sequestration cuts were originally only supposed to be in effect through 2021. However, they have been extended multiple times, most recently through 2030 under the Bipartisan Budget Act of 2019.
Impact on Provider Reimbursement
According to estimates by the Congressional Budget Office (CBO), Medicare sequestration results in a total reduction in payments to providers of about $123 billion between 2013 and 2023.
To put the 2% reduction into perspective, consider that in 2019, Medicare spent $644 billion on fee-for-service claims under Parts A and B. A 2% sequestration cut would amount to about $12.9 billion in lower reimbursement to providers that year.
An analysis by the American Medical Association estimated that sequestration cuts will reduce payments to physicians by more than $43 million over the next five years (2020-2024) Specialists who depend more heavily on Medicare revenue, such as oncologists, cardiologists, and orthopedic surgeons, are likely to see a larger impact.
Hospitals also face significant revenue reductions, which could lead to eliminating services or jobs. According to the American Hospital Association, Medicare sequestration cuts will cost hospitals an estimated $323 billion from 2018 to 2027. Rural hospitals with small margins are at especially high risk of financial strain due to sequestration cuts.
Impact on Providers by Type
Because the sequestration reduction is uniform across all Medicare services, some types of providers who rely more on Medicare revenue are hit harder than others. Here is an overview of impacts on key provider segments:
Physician Practices: Mayo Clinic estimated it would lose $250 million from 2013-2021 due to the 2% Medicare cut. Small and solo practices may be less equipped to absorb the reductions.
Hospitals: Moody’s Investors Service reported that larger hospital systems expect revenue reductions of around $2 million annually from sequestration cuts.
Skilled Nursing Facilities: Medicare accounts for over half of all skilled nursing facility revenue nationally. The sequester cuts compound reimbursement reductions from other policies such as the Patient Driven Payment Model.
Home Health Agencies: Analysis indicates sequestration cuts will reduce home health payments by nearly 10% from 2020-2029, threatening access for vulnerable patients.
Rural Providers: One study found rural hospitals expect estimated annual revenue losses of 2-3% due to sequestration. Hospitals running on thin margins could be forced to cut services or close.
Effects on Medicare Beneficiaries
Importantly, sequestration cuts do not directly increase costs for Medicare beneficiaries through higher premiums, copays, or coinsurance. However, there may be indirect effects on access to services and providers:
Reduced availability of providers who accept Medicare due to lower reimbursement rates.
Discontinuation of unprofitable service lines or locations.
Longer wait times for appointments among remaining Medicare providers.
Transportation challenges reaching providers located farther away after closures.
Hospital readmission rate increases if post-discharge care is disrupted.
The extent to which sequestration cuts have limited services or impacted outcomes is not fully clear yet from research. But the risks of these effects persisting long-term has advocates concerned about maintaining healthcare access for the 65+ million Americans on Medicare.
Legislative Efforts to Repeal Sequestration
Lawmakers on both sides of the aisle have put forward legislation to eliminate Medicare sequestration cuts, but so far none have succeeded. Some recent examples:
Protecting Medicare and American Farmers from Sequester Cuts Act (S.262, 2019) - bipartisan bill introduced by Senators Carper (D-DE) and Grassley (R-IA).
Medicare Sequester COVID Moratorium Act (S. 3686, 2020) - introduced by Senator Casey (D-PA) to provide temporary relief during COVID-19 public health emergency.
Sequester Delay Act (S.274, 2021) - bipartisan bill from Senators Capito (R-WV) and Manchin (D-WV) to pause sequestration cuts.
While Medicare providers have lobbied heavily against payment cuts, legislators remain deadlocked on budget issues and a broader agreement has not emerged to replace or end Medicare sequestration.
Long-Term Implications for Medicare
Looking ahead, if Medicare sequestration continues through 2030 and beyond, what could be the long-term effects on Medicare providers and the program as a whole?
Potential implications include:
Accelerated move away from fee-for-service - Financial pressure could push more physicians to leave traditional Medicare for value-based arrangements with downside risk.
Supply shortages for certain specialties or services - Lower Medicare payment rates could exacerbate shortages of providers in key fields like oncology and geriatrics.
More providers opting out of Medicare - A 2021 Medscape survey found 22% of physicians planned to start accepting fewer Medicare patients. This number could increase with ongoing cuts.
Shift in healthcare access and capacity to privately insured - As Medicare reimbursement declines, providers may devote more resources to higher-paying private payer patients.
Increased stress on the Medicare Trust Fund - Lower revenues for providers may lead to increased healthcare costs in the future, adding pressure to the Medicare Trust Fund expected to deplete by 2028.
While sequestration reduces federal spending today, unresolved cuts could have unintended long-term effects on providers and Medicare enrollee access and outcomes.
Conclusion
In summary, Medicare sequestration is having far-reaching impacts on healthcare providers, patients, and the overall Medicare program that will likely persist for years to come given the extended timeframe. All stakeholders are challenged to adjust to the reality of reduced Medicare reimbursement.
Providing high quality, affordable care will require innovative strategies and successful advocacy to establish a truly sustainable solution for supporting the Medicare system and protecting access for its beneficiaries. Policymakers have many factors to weigh as they consider the future of Medicare sequestration and attempt to address America’s long-term deficit challenges.
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