What Does Sequestration Mean in Medical Billing?

Sequestration in medical billing refers to a mandated reduction in payments to healthcare providers for services rendered to beneficiaries of certain federal programs. This financial mechanism directly impacts the revenue cycle for many healthcare organizations, making understanding it important for proper financial management.

Defining Sequestration

Sequestration is a provision of United States law that triggers automatic, across-the-board reductions in certain federal government spending. Its primary purpose is to serve as a budget enforcement tool, typically enacted to reduce the national deficit. Sequestration was prominently featured in the Budget Control Act of 2011. This legislation aimed for significant deficit reduction, and when a bipartisan committee failed to agree on a plan, automatic spending cuts, including sequestration, were triggered.

Sequestration’s Impact on Federal Healthcare Programs

For healthcare, sequestration primarily impacts payments made under federal programs like Medicare, including Parts A, B, and Medicare Advantage (Part C) plans.

The mandated reduction for Medicare payments is 2%. This 2% reduction applies to all payments for services with dates of service or discharge on or after April 1, 2013. While originally scheduled to expire, subsequent legislation has extended this mandatory sequestration for Medicare benefit payments, currently through fiscal year 2032. This reduction applies to the Medicare payment itself, not to the beneficiary’s coinsurance or deductibles.

During the COVID-19 pandemic, Medicare sequestration was temporarily suspended. The Coronavirus Aid, Relief, and Economic Security (CARES) Act initially suspended the 2% cut, with further legislative actions extending this suspension until March 2022. The full 2% cut was reinstated on July 1, 2022.

Specifics of Billing Adjustments

When sequestration is applied, the 2% reduction directly affects the allowed amount paid by Medicare to providers. After Medicare determines the approved amount for a service and calculates any beneficiary cost-sharing, the remaining Medicare-paid portion is reduced by 2%. For example, if Medicare’s approved amount for a service is $100 and the beneficiary has a $20 coinsurance, Medicare would typically pay $80. With sequestration, the $80 payment is reduced by 2% ($1.60), resulting in a payment of $78.40 to the provider. The patient’s responsibility for the $20 coinsurance remains unchanged.

Providers will observe these adjustments on their Explanation of Benefits (EOB) or Electronic Remittance Advice (ERA) documents. The sequestration reduction is identified by claim adjustment reason code (CARC) 253, which denotes “Sequestration – reduction in federal payment.” This code, appearing as CO 253 on the Remittance Advice, indicates the payment portion curtailed by sequestration.

Provider Responsibilities

Healthcare providers and their billing departments must understand how sequestration impacts their revenue. Accurate financial forecasting is essential to account for the consistent 2% reduction in Medicare reimbursements. Providers should incorporate this reduction into their budgeting and financial planning processes to avoid unexpected shortfalls.

Internal accounting systems need to be configured to correctly process and report these payment reductions. This includes ensuring that billing software recognizes and applies the CARC 253 adjustment. Regular reconciliation of Explanation of Benefits (EOBs) and Electronic Remittance Advice (ERAs) is important to verify that the correct sequestration amount has been applied and that no other discrepancies exist. Proactive monitoring of these adjustments allows providers to manage their revenue cycle effectively and maintain financial stability amidst these mandated reductions.