Understanding Medicare Sequestration: The Silent Revenue Haircut in Medical Billing
For healthcare executives, finance directors, and private practice owners, maintaining a healthy cash flow requires knowing exactly where every penny goes. While a great deal of focus is placed on avoiding commercial insurance denials or optimizing front-desk collections, one of the most consistent drains on reimbursement comes directly from the federal government.
It’s called Medicare sequestration.
Because it is applied automatically behind the scenes, sequestration can easily distort your accounts receivable (A/R) forecasting and lead to month-end reconciliation headaches if your revenue cycle team isn't accounting for it proactively.
What is Medicare Sequestration?
In medical billing, sequestration is a mandatory, automatic federal budget reduction that reduces the net payment amount sent to healthcare providers for Medicare services.
Rather than a penalty for poor performance or a coding error, sequestration is a macroeconomic budget-balancing tool. It was initially triggered by the Budget Control Act (BCA) of 2011, which mandated across-the-board cuts to federal spending to reduce the national deficit.
Current Status: The current statutory Medicare sequestration rate stands at 2% for all Medicare Part A and Part B fee-for-service (FFS) claims. Congress has continually extended this cut, and under current federal budget guidelines, it is projected to remain in effect through February 2033.
How Sequestration is Calculated: The Math Behind the Cut
The most critical nuance of Medicare sequestration is where the 2% reduction is applied.
Sequestration is a post-adjudication cut. It does not lower Medicare’s allowable fee schedule rates, nor does it touch the patient's financial responsibility. Instead, it is applied strictly to the final balance that Medicare is legally responsible for paying after deductibles and coinsurance have been determined.
Tracking Sequestration on Your Remittance Advice
Because the 2% cut is mandatory, it won't arrive as a traditional denial. When your billing team reviews an Electronic Remittance Advice (ERA) or Standard Paper Remittance (SPR), the sequestration adjustment will be explicitly identified by a standard insurance code:
Claim Adjustment Reason Code (CARC) 253: This is the universal code that stands for "Sequestration – Reduction in Federal Payment."
If your practice management (PM) software is not configured to automatically recognize CARC 253 as a contractual adjustment, your system will leave that 2% lingering in your accounts receivable as an uncollected balance. Over time, this inflates your A/R metrics and distorts your practice's true financial standing.
Navigating Changing Sequestration Risks
While the standard BCA 2% cut is a predictable line item, federal budget standoffs occasionally introduce severe financial wildcards.
For instance, a separate federal deficit law—the Statutory Pay-As-You-Go (PAYGO) Act of 2010 carries a mechanism that can trigger an additional 4% emergency cut to Medicare payments. While Congress successfully passed stopgap legislation to waive the 4% PAYGO cut, the threat of sudden legislative adjustments highlights why revenue cycle leaders must remain adaptive.
For a high-volume health system or a clinic with a heavy Medicare payer mix, a shift in sequestration percentages represents a massive bottom-line vulnerability:
How to Insulate Your Revenue Cycle
Since you cannot legally avoid or appeal a sequestration adjustment, protecting your margins requires optimizing the operational steps you can control.
Audit Your Managed Medicare Contracts: Many private Medicare Advantage (MA) plans include clauses that mirror traditional Medicare sequestration cuts, while others do not. Have your contracting team audit your payer agreements to ensure commercial payers aren't taking a 2% deduction unless it is explicitly written into their contract.
Configure Automated Posting Rules: Ensure your billing software automatically writes off CARC 253 adjustments immediately upon payment posting. This prevents "ghost" balances from artificially expanding your Days in A/R.
Maximize Chart Specificity: Because you are losing 2% off the top of every clean claim, you cannot afford additional losses from under-coding or down coding. Implementing ambient AI scribing or clinical documentation improvement (CDI) programs ensures your providers document to the highest level of medical necessity, capturing every legitimate dollar.
By understanding how federal budget policies interact with daily medical billing, healthcare organizations can build more accurate financial models, keep accounts receivable clean, and maintain a highly resilient bottom line.