Medicare and Budget Sequestration

February 16, 2018 – November 14, 2023 R45106

Medicare and Budget Sequestration
November 14, 2023
Sequestration is the automatic reduction (i.e., cancellation) of certain federal spending, generally
by a uniform percentage. The sequester is a budget enforcement tool that was established by
Ryan J. Rosso
Congress in the Balanced Budget and Emergency Deficit Control Act of 1985 (BBEDCA, also
Analyst in Health Care
known as the Gramm-Rudman-Hollings Act; P.L. 99-177, as amended) and was intended to
Financing
encourage compromise and action, rather than actually being implemented (also known as

triggered). Generally, this budget enforcement tool has been incorporated into laws to either
discourage or encourage certain budget objectives or goals. When these goals are not met, either

through the enactment of a law or the lack thereof, a sequester is triggered and certain federal
spending is reduced.
Sequestration is of congressional interest due to its current use as an enforcement mechanism for three budget enforcement
rules created by the Statutory Pay-As-You-Go Act of 2010 (Statutory PAYGO; P.L. 111-139), the Budget Control Act of
2011 (BCA; P.L. 112-25), and the Fiscal Responsibility Act of 2023 (FRA; P.L. 118-5).
At present, only the BCA sequester has been triggered and is in effect. Under the BCA, the sequestration of mandatory
spending was originally scheduled to occur in FY2013 through FY2021. However, subsequent legislation extended
sequestration for mandatory spending through FY2031 and the sequestration of only Medicare benefit payments spending
through FY2032. (The sequestration to Medicare was temporarily suspended from May 1, 2020, through March 30, 2022,
and was limited to 1% from April 1, 2022, through June 30, 2022.)
The Statutory PAYGO sequester applies to mandatory funding, is current law, and can be triggered if associated budget
enforcement rules are broken. Due to the potential impact of the American Rescue Plan Act of 2021 (ARPA; P.L. 117-2) on
deficits, sequestration under PAYGO was expected to be triggered in early 2022. However, the Protecting Medicare and
American Farmers from Sequester Cuts Act (P.L. 117-71) deferred the impact of ARPA to 2023. Subsequently, the
Consolidated Appropriations Act, 2023, deferred the impact of ARPA and other legislation estimated to impact the deficit
under PAYGO. Without related congressional action, reductions to Medicare under PAYGO could occur in 2025. The FRA
sequester applies to discretionary funding, is current law, and can be triggered if associated budget enforcement rules are
broken (and Congress does not take action to change or waive this rule).
Medicare is a federal program that pays for certain health care services of qualified beneficiaries. The program is funded
using both mandatory and discretionary spending and is impacted by any sequestration order issued in accordance with the
aforementioned laws. Medicare benefit payments (the majority of Medicare expenditures) are considered mandatory
spending and therefore are subject to the sequestration of mandatory funds. Special sequestration rules limit the extent to
which Medicare benefit spending can be reduced in a given fiscal year. This limit varies depending on the type of
sequestration order.
Under a BCA mandatory sequestration order, Medicare benefit payments and Medicare Integrity Program spending cannot be
reduced by more than 2%. Under a Statutory PAYGO sequestration order, Medicare benefit payments and Medicare Program
Integrity spending cannot be reduced by more than 4%. These limits do not apply to mandatory administrative Medicare
spending under either type of sequestration order. These limits also do not apply to discretionary administrative Medicare
spending under an FRA sequestration order.
Generally, Medicare’s benefit structure remains unchanged under a mandatory sequestration order and beneficiaries see few
direct impacts. However, Medicare plans, providers, and suppliers see reductions in payments. Due to varying plan and
provider payment mechanisms among the four parts of Medicare, sequestration is implemented somewhat differently across
the program.
Congressional Research Service

Medicare and Budget Sequestration

Congressional Research Service

Medicare and Budget Sequestration

Introduction
Sequestration is the automatic reduction (i.e., cancellation) of certain federal spending, generally
by a uniform percentage.1 The sequester is a budget enforcement tool that Congress established in
the Balanced Budget and Emergency Deficit Control Act of 1985 (BBEDCA, also known as the
Gramm-Rudman-Hollings Act; P.L. 99-177, as amended) intended to encourage compromise and
action, rather than actually being implemented (also known as triggered).2 Generally, this budget
enforcement tool has been incorporated into laws to either discourage or encourage certain budget
objectives or goals. When these goals are not met, either through the enactment of a law or lack
thereof, a sequester is triggered and certain federal spending is reduced.
Sequestration is currently used as a budget enforcement mechanism as part of the Statutory Pay-
As-You-Go Act of 2010 (Statutory PAYGO; P.L. 111-139), the Budget Control Act of 2011
(BCA; P.L. 112-25), and the Fiscal Responsibility Act of 2023 (FRA; P.L. 118-5). At this time,
only the BCA mandatory spending sequester is in effect; it is scheduled to continue each year
through FY2031 for non-Medicare benefit payment spending and through FY2032 for Medicare
benefit payments. However, the Statutory PAYGO sequester and the FRA discretionary sequester
are current law and can be triggered if the budget enforcement rules are broken (and Congress
does not take action to change or waive these rules).
Medicare, which is a federal program that pays for covered health care services of qualified
beneficiaries,3 is subject to a reduction in federal spending associated with the implementation of
these sequesters, although special rules limit the extent to which sequestered expenditures can be
reduced.
This report begins with an overview of budget sequestration and Medicare before discussing how
budget sequestration has been implemented across the different parts of the Medicare program.
Additionally, this report provides appendixes that include references to additional Congressional
Research Service (CRS) resources related to this report and budget terminology definitions, as
defined by BBEDCA.
Budget Sequestration
Under current law, sequestration is a budget enforcement tool that occurs because certain
budgetary goals have not been met. When a sequester is triggered, all applicable budget accounts,
unless exempted by law, are reduced by a certain percentage amount for a fiscal year.4 The

1 Section 250(c)(2) of the Balanced Budget and Emergency Deficit Control Act of 1985 (BBEDCA; P.L. 99-177)
defines the terms sequestration and sequester as “the cancellation of budgetary resources provided by discretionary
appropriations or direct spending law.” Budgetary resources are subject to sequestration unless exempted by law. For
further information on sequestration, see Office of Management and Budget (OMB), OMB Circular A-11 (2022),
Section 100, at https://www.whitehouse.gov/wp-content/uploads/2018/06/s100.pdf.
2 U.S. Congress, Senate Committee on Finance, Budget Enforcement Mechanisms, Oral and Written Testimony of the
Honorable Phil Gramm, 112th Cong., 1st sess., May 4, 2011.
3 For more information on Medicare, see CRS Report R40425, Medicare Primer.
4 Sequestration does not apply to every account, since many budget accounts are either exempted from sequestration or
governed by special rules under sequestration, the latter of which can vary depending on the sequestration trigger. See
BBEDCA §255 and §256, as amended. Since OMB is responsible for the execution and legal interpretations of
sequestration orders, some accounts not listed in these sections may also be exempt from sequestration. For a complete
list of exempted accounts, see CRS Report R42050, Budget “Sequestration” and Selected Program Exemptions and
Special Rules.
Congressional Research Service

1

Medicare and Budget Sequestration

percentage reduction varies between and within budget accounts depending on the categories of
funding, as described below, contained within each budget account.
After identifying each category of funding within a budget account, sequestration reductions are
applied evenly across all budget account subcomponents referenced in committee reports, budget
justifications, and/or Presidential Detailed Budget Estimates—also known as programs, projects
or activities.5 For budget accounts that contain only one category of funding, all sequestrable
funds are reduced by the same corresponding percentage. For accounts that contain multiple
categories of funding, the total amount of each category of sequestrable funds is reduced by its
corresponding percentage. The reduced budget resources usually are permanently cancelled.6
A sequester can apply to either discretionary or mandatory spending. Discretionary spending is
associated with most funds provided by annual appropriations acts. While all discretionary
spending is subject to the annual appropriations process, only a portion of mandatory spending is
provided in appropriations acts.7 Mandatory spending is generally provided by permanent laws,
such as the Social Security Act, which made indefinite budget authority permanently available for
Medicare benefit payments.8 Some federal programs, including Medicare, can receive both
discretionary and mandatory funding.
In the event that a sequester is triggered, the Office of Management and Budget (OMB) is
responsible for calculating the across-the-board percentage reductions and calculates separate
percentages for Medicare, certain other health programs, and other nondefense and defense
funding.9 Due to sequestration rules, which are covered later in this report, mandatory Medicare
benefit payments receive a specific percentage reduction different from other types of federal
spending.10
The methodologies used to calculate these percentages and the sequestered amounts are published
in a report produced by OMB. Once the President issues a sequestration order, the associated
report is made available to the public and transmitted to Congress.11

5 See CRS Report R42972, Sequestration as a Budget Enforcement Process: Frequently Asked Questions, and CRS
Report 98-721, Introduction to the Federal Budget Process.
6 “In some circumstances current law allows for budget authority sequestered in one fiscal year to become available to
the agencies again in a subsequent fiscal year. OMB refers to these amounts as ‘pop ups.’” See U.S. Government
Accountability Office (GAO), 2014 Sequestration Opportunities Exist to Improve Transparency of Progress Toward
Deficit Reduction Goals, GAO-16-263, April 2016, p. 20, at https://www.gao.gov/assets/680/676565.pdf.
7 Some mandatory entitlements are provided through the annual appropriations process and are considered
appropriated entitlements (e.g., Medicaid). Although these entitlements are appropriated, the federal government is
legally obligated to make payments to those deemed eligible for the entitlement. (Medicaid is explicitly exempt from
sequestration.)
8 Indefinite budget authority is federal spending that, at the time of enactment, is for an unspecified amount that will be
determined at a later date. See GAO, A Glossary of Terms Used in the Federal Budget Process, GAO-05-734SP,
September 1, 2005, p. 23, at https://www.gao.gov/assets/80/76911.pdf.
9 All funds are first classified as discretionary or mandatory. Within each of these categories, funds are further
classified as Medicare, certain other health programs, defense, or nondefense. During a sequestration order, each
subcomponent of discretionary and/or mandatory funds receives a sequestration percentage based on the necessary
amount of savings for that category, and any applicable special rules. Each of these categories receives a different
percentage reduction under a sequestration order.
10 For sequestration purposes, Medicare benefit payments are defined by BBEDCA as all payments for programs and
activities under Title XVIII of the Social Security Act. See BBEDCA §256(d).
11 For more information about the methodologies associated with calculating the sequester percentage in a given year,
see OMB Report to the Congress on the BBEDCA 251A Sequestration for Fiscal Year 2022, May 28, 2021, at
https://www.whitehouse.gov/wp-content/uploads/2021/05/BBEDCA_251A_Sequestration_Report_FY2022.pdf.
Congressional Research Service

2

link to page 9 Medicare and Budget Sequestration

Budget Enforcement Rules
At present, there are three budget enforcement rules that could trigger sequestration. One was
established by the BCA, one was established by Statutory PAYGO, and one was established by
the FRA. The three rules and their corresponding sequesters can be summarized as follows (and
are presented in Table 1):
Budget Control Act
The BCA established a bipartisan Joint Select Committee on Deficit Reduction (Joint
Committee), which was responsible for developing legislation that would reduce the deficit by at
least $1.2 trillion from FY2012 to FY2021.12 However, the Joint Committee was unable to
achieve this goal; therefore, Congress and the President were unable to enact corresponding
deficit reduction legislation by a date specified in the law. As a result, the sequestration of certain
mandatory spending initially from FY2013 to FY2021 was automatically triggered.13 (This report
refers to these spending reductions as the BCA mandatory sequester.)
Subsequent legislation extended this sequestration through FY2031 for non-Medicare benefit
payment spending and through FY2032 for Medicare benefit payments. Legislation that extended
the BCA mandatory sequester includes the following:
• The Bipartisan Budget Act of 2013 (BBA 2013; P.L. 113-67) extended the BCA
mandatory sequester through FY2023;
• A law modifying the cost-of-living adjustment (COLA) for certain military
retirees (P.L. 113-82) extended it through FY2024;
• The Bipartisan Budget Act of 2015 (BBA 2015; P.L. 114-74) extended it through
FY2025;
• The Bipartisan Budget Act of 2018 (BBA 2018; P.L. 115-123) extended it
through FY2027;
• The Bipartisan Budget Act of 2019 (BBA 2019; P.L. 116-37) extended it through
FY2029;
• The Coronavirus Aid, Relief, and Economic Security Act (CARES Act; P.L. 116-
136) extended it through FY2030;
• The Infrastructure Investment and Jobs Act (P.L. 117-58) extended it through
FY2031; and
• The Consolidated Appropriations Act, 2023 (P.L. 117-328) extended it through
FY2032, but only with respect to Medicare benefit payments.
Additional legislation suspended the application of the BCA mandatory sequester to Medicare
during the Coronavirus Disease 2019 (COVID-19) pandemic from May 2020 through March
2022 and limited the reductions to 1% from April 2022 through June 2022. (See “Temporary
Suspension of Medicare Sequestration.”)

12 See Title IV of the BCA.
13 Additionally, the BCA established statutory limits on discretionary spending for FY2012-FY2021. For more
information about the discretionary spending limits established under the BCA, see CRS Report R42506, The Budget
Control Act of 2011 as Amended: Budgetary Effects.
Congressional Research Service

3

Medicare and Budget Sequestration

Statutory PAYGO
The Statutory PAYGO Act established a budget enforcement mechanism generally requiring that
legislation affecting direct (mandatory) spending and revenues does not have the effect of
increasing the deficit over a 5- and/or 10-year period. If such legislation were to become law, a
sequester of certain mandatory spending would be required. This budget enforcement rule does
not have a sunset date and therefore remains in effect under current law. (This reduction is
referred to in this report as Statutory PAYGO sequester.)
Although legislation estimated to increase the deficit has been enacted since 2010 (when the
Statutory PAYGO Act was enacted), a Statutory PAYGO sequester has never been triggered. To
avoid any potential sequester, such legislation has often included a provision effectively
exempting it from the PAYGO requirements.14
A recent exception to this practice, however, was the American Rescue Plan Act of 2021 (ARPA;
P.L. 117-2), which did not include any provision that excluded its budgetary effects from the
Statutory PAYGO requirements. Therefore, its estimated deficit increases of over $1.9 trillion and
over $2.0 trillion were placed on the 5-year and 10-year PAYGO scorecards, respectively.15 To
avoid a sequester, however, the balances on the scorecards for FY2022 were transferred to
FY2023 by the Protecting Medicare and American Farmers from Sequester Cuts Act (P.L. 117-
71). The Consolidated Appropriations Act, 2023 (P.L. 117-328), subsequently transferred the
balances on the scorecards for FY2023 to FY2025 and will transfer the balances on the
scorecards for FY2024 to FY2025 after the first session of the 118th Congress adjourns.
A PAYGO sequester, including the 4% reduction to Medicare benefit payments, could be
triggered in 2025 unless similar legislative action is taken before then.
If a PAYGO sequester were to be triggered, neither the Statutory PAYGO Act nor the Budget
Control Act include any explicit directions as to how the two sequesters would be implemented
alongside each other.
Fiscal Responsibility Act
The FRA established statutory limits on discretionary spending for FY2024-FY2025.16 These
discretionary spending limits (caps) restrict the amount of spending permitted through the annual
appropriations process for defense and nondefense programs. Any breach of these discretionary
caps would result in the sequestration of nonexempt discretionary funding within the applicable
category (defense and/or nondefense). (This reduction is referred to in this report as the FRA
sequester.)

14 For more information, see CRS Congressional Distribution Memorandum, “Budgetary Effects Excluded or
Eliminated from the Statutory Pay-As-You-Go (Stat-PAYGO) Scorecards,” May 9, 2023, by Bill Heniff Jr. Available
from the author upon request.
15 OMB, 2021 Statutory Pay-As-You-Go Act Annual Report, p. 10, at https://www.whitehouse.gov/wp-content/uploads/
2022/01/annualpaygoreport2021.pdf.
16 For more information on these discretionary spending caps, see CRS Insight IN12168, Discretionary Spending Caps
in the Fiscal Responsibility Act of 2023, and CRS Insight IN12183, The FRA’s Discretionary Spending Caps Under a
CR: FAQs.
Congressional Research Service

4

link to page 9 link to page 9 link to page 9 link to page 14 Medicare and Budget Sequestration

Table 1. Medicare Budget Enforcement Rules Summary
Sequester
Medicare
Percentage
Funding Types
Programs
Enforcement Rule
Cap
Current Status
Statutory PAYGO
Mandatory
Parts A, B, C,
If revenue and/or mandatory
4% for Medicare
Current law but not
and D Benefits;
spending legislation that
benefit payments
triggered.
MIP HCFAC;
projects to increase the
and MIP HCFAC.
Non-MIP
deficit over a 5- and/or 10-
None for other
HCFAC;
year period were enacted, a
spending.
Administration
sequester of certain
mandatory spending would
be ordered.
BCA Mandatory Sequester
Mandatory
Parts A, B, C,
If the Joint Select Committee 2% for Medicare
Currently triggered
and D Benefits;
were to be unsuccessful at
benefit payments
and in effect through
MIP HCFAC;
reducing the federal deficit
and MIP HCFAC. FY2031, or with
Non-MIP
by $1.2 trillion from FY2012-
None for other
respect to Medicare
HCFAC;
FY2021, mandatory
spending.a
benefit payments and
Administration
sequestration would be
MIP HCFAC,
implemented.a
through FY2032.b
FRA Sequester
Discretionary
Non-MIP
If discretionary
None.
Current law but not
HCFAC;
appropriations were enacted
triggered.
Administration
that exceed specified limits, a
sequester would be
triggered.
Source: CRS.
Notes: Programs that appear in both categories are funded using mandatory and discretionary spending
authority. In addition to the Medicare sequestration cap, other sequestration rules prohibit sequestration effects
from being included in the determination of adjustments to Medicare payment rates, and explicitly exempt Part
D low-income subsidies, Part D catastrophic subsidies (reinsurance) and Qualified Individual premiums from
sequestration. BCA refers to Budget Control Act. FRA refers to the Fiscal Responsibility Act. Discretionary
Administration includes amounts for payments to contractors to process providers’ claims, beneficiary
outreach and education, and maintenance of Medicare’s information technology infrastructure. HCFAC refers
to the Health Care Fraud and Abuse Control Program, which is responsible for activities that fight health care
fraud and waste and is funded through discretionary and mandatory resources. Mandatory Administration
includes, among other things, amounts for quality improvement organizations. Medicare Benefit Payments
are defined by BBEDCA as all payments for programs and activities under Title XVIII of Social Security Act,
including the Medicare Integrity Program. MIP HCFAC refers to the Medicare Integrity Program, which focuses
on combating fraud in Medicare. Non-MIP HCFAC refers to all HCFAC spending other than MIP.
a. Additionally, the BCA established statutory limits on discretionary spending for FY2012-FY2021. For more
information about the discretionary spending limits established under the BCA, see CRS Report R42506,
The Budget Control Act of 2011 as Amended: Budgetary Effects. Per the Consolidated Appropriations Act, 2023
(P.L. 117-328), the FY2032 Medicare sequester percentages will be 2% during the first six months of the
FY2032 sequestration order and 0% for the next six months. See 2 U.S.C. §901a(6). For more information,
see “Timing.”
b. The Bipartisan Budget Act of 2013 (BBA 2013; P.L. 113-67) extended the BCA mandatory sequester
through FY2023. A law modifying the cost-of-living adjustment (COLA) for certain military retirees (P.L.
113-82) extended the sequester through FY2024. The Bipartisan Budget Act of 2015 (BBA 2015; P.L. 114-
74) extended the sequester through FY2025. The Bipartisan Budget Act of 2018 (BBA 2018; P.L. 115-123)
extended the sequester through FY2027, the Bipartisan Budget Act of 2019 (BBA 2019; P.L. 116-37)
extended the sequester through FY2029, the CARES Act (P.L. 116-136) extended it through FY2030, and
the Protecting Medicare and American Farmers from Sequester Cuts Act (P.L. 117-71) extended it through
Congressional Research Service

5

Medicare and Budget Sequestration

FY2031. The Consolidated Appropriations Act, 2023 (P.L. 117-328), extended it to FY2032 but only for
Medicare benefit payments and MIP HCFAC. The CARES Act, as amended by the Consolidated
Appropriations Act, 2021 (P.L. 116-260), an Act to Prevent Across-the-Board Direct Spending Cuts, and for
Other Purposes (P.L. 117-7), and the Protecting Medicare and American Farmers from Sequester Cuts Act
(P.L. 117-71) also suspended the sequestration of Medicare from May 2020 through March 2022. P.L. 117-7
also limited the Medicare reductions to 1% during April 2022 through June of 2022.
For more information on budget sequestration, see CRS Report R42050, Budget “Sequestration”
and Selected Program Exemptions and Special Rules; CRS Report R42972, Sequestration as a
Budget Enforcement Process: Frequently Asked Questions; and CRS Report R45941, The Annual
Sequester of Mandatory Spending through FY2029.
Medicare Overview
Medicare, which is a federal program that pays for covered health care services of qualified
beneficiaries, is subject to sequestration, although special rules limit the extent to which it is
applied. Due to the varying payment structures of the four parts of the program, sequestration is
applied differently across Medicare.
Medicare was established in 1965 under Title XVIII of the Social Security Act to provide hospital
and supplementary medical insurance to Americans aged 65 and older. Over time, the program
has been expanded to also include certain disabled persons, including those with end-stage renal
disease. In CY2022, the program covered an estimated 65.0 million persons (57.3 million aged
and 7.7 million disabled).17
The Congressional Budget Office (CBO) estimated that total Medicare spending in FY2023 will
be about $1 trillion and will increase to about $1.9 trillion in FY2032.18 Almost all Medicare
spending is mandatory spending that is used primarily to cover benefit payments (i.e., payments
to health care providers for their services), administration, and the Medicare Integrity Program
(MIP). The remaining Medicare outlays are discretionary and used almost entirely for other
administrative activities that are described in more detail later in this report.
Medicare consists of four distinct parts:
1. Part A (Hospital Insurance, or HI) covers inpatient hospital services, skilled
nursing care, hospice care, and some home health services. Persons aged 65 and
older are entitled to premium-free Part A if they or their spouse paid Medicare
payroll taxes for at least 40 quarters (about 10 years) on earnings covered by
either the Social Security or the Railroad Retirement systems.19 Part A services
are paid for out of the Hospital Insurance Trust Fund, which is mainly funded by
a dedicated 2.9% payroll tax on earnings of current workers, shared equally
between employers and workers.
2. Part B (Supplementary Medical Insurance, or SMI) covers a broad range of
medical services, including physician services, laboratory services, durable
medical equipment, and outpatient hospital services. Enrollment in Part B is
optional, but most beneficiaries with Part A also enroll in Part B. Part B benefits
are paid for out of the Supplementary Medical Insurance Trust Fund, which is

17 CMS, “Fast Facts,” March 2023, at https://data.cms.gov/sites/default/files/2023-03/CMSFastFactsMar2023.pdf.
18 Congressional Budget Office (CBO), May 2022 Medicare Baseline, at https://www.cbo.gov/system/files/2022-05/
51302-2022-05-medicare.pdf.
19 Individuals who do not meet this requirement may obtain Medicare Part A coverage by paying a premium.
Congressional Research Service

6

Medicare and Budget Sequestration

primarily funded through Part B beneficiary premiums and federal general
revenues.
3. Part C (Medicare Advantage, or MA) is a private plan option that covers all
Parts A and B services, except hospice. Individuals choosing to enroll in Part C
must be enrolled in Parts A and B. About one-third of Medicare beneficiaries are
enrolled in MA. Part C is funded through both the HI and SMI trust funds.
4. Part D is a voluntary private plan option that covers outpatient prescription drug
benefits. About three-quarters of Medicare beneficiaries are enrolled in Medicare
Part D or have coverage through an employer retiree plan subsidized by
Medicare. Part D benefits are also paid for out of the Supplementary Medical
Insurance Trust Fund and are primarily funded through Part D beneficiary
premiums, federal general revenues, and state transfer payments.
For more information on the Medicare program, see CRS Report R40425, Medicare Primer.
Beneficiary Costs
Beneficiaries are responsible for paying Medicare Parts B and D premiums, as well as other out-
of-pocket costs, such as deductibles and coinsurance,20 for services provided under all parts of the
Medicare program.21 Under Medicare Parts A, B and D, there is no limit on beneficiary out-of-
pocket spending, and most beneficiaries have some form of supplemental insurance through
private Medigap plans, employer-sponsored retiree plans, or Medicaid to help cover a portion of
their Medicare premiums and/or deductibles and coinsurance.22 Medicare Advantage has limits on
beneficiary out-of-pocket spending.
Provider and Plan Payments
Under Medicare Parts A and B, the government generally pays providers directly for services on a
fee-for-service basis using different prospective payment systems and fee schedules.23 Under
Parts C and D, Medicare pays private insurers a monthly capitated per person amount to provide
coverage to enrollees, regardless of the amount of services used. The capitated payments are
adjusted to reflect differences in the relative cost of sicker beneficiaries with different risk factors
including age, disability, or end-stage renal disease.
Health Care Fraud and Abuse Control Program
The Health Care Fraud and Abuse Control Program (HCFAC) was established by the Health
Insurance Portability and Accountability Act (HIPAA; P.L. 104-191) and is responsible for

20 A deductible is the amount an enrollee is required to pay for health care services or products before his or her
insurance plan begins to provide coverage. Coinsurance is the percentage share that an enrollee in a health insurance
plan pays for a product or service covered by the plan.
21 Beneficiaries enrolled in a Medicare Advantage (MA, Part C) plan must pay Part B premiums as well as any
additional premium required by the MA plan.
22 For more information on Medigap, see CRS Report R47552, Medigap: Background and Statistics.
23 Under a prospective payment system (PPS), Medicare payments are made using a predetermined, fixed amount based
on the classification system for a particular service. The Centers for Medicare & Medicaid Services (CMS) uses
separate PPSs to pay acute inpatient hospitals, home health agencies, hospice, hospital outpatient departments, inpatient
psychiatric facilities, inpatient rehabilitation facilities, long-term care hospitals, and skilled nursing facilities. A fee
schedule is a listing of fees used by Medicare to pay doctors or other providers/suppliers. Fee schedules are used to pay
for physician services; ambulance services; clinical laboratory services; and durable medical equipment, prosthetics,
orthotics, and supplies in certain locations.
Congressional Research Service

7

link to page 9 link to page 14 Medicare and Budget Sequestration

activities that fight health care fraud and waste.24 HCFAC is funded using both mandatory and
discretionary funds and consists of three programs: (1) the HCFAC program, which finances the
investigative and enforcement activities undertaken by the Department of Health and Human
Services (HHS), the HHS Office of Office of Inspector General, the Department of Justice, and
the Federal Bureau of Investigation, (2) Medicaid Oversight, and (3) Medicare Integrity Program
(MIP).
Historically, MIP has focused on combating fee-for-service fraud in Medicare Parts A and B.
However, increases in private Medicare enrollment—Parts C and D—have expanded program
integrity efforts into capitated payment systems as well.
While HCFAC is not a part of the Medicare program, MIP is authorized by the same title of the
Social Security Act as Medicare and focuses entirely on the program. As a result, this portion of
HCFAC is treated as a part of Medicare benefit payments under a sequestration order and is
subject to the Medicare mandatory sequestration percentage limits.25
Administrative Spending
The administration of Medicare is funded through a combination of discretionary and mandatory
resources that are subject to reductions under a discretionary or mandatory sequestration order,
respectively. Discretionary administration funding includes amounts for payments to contractors
to process providers’ claims, beneficiary outreach and education, and maintenance of Medicare’s
information technology infrastructure. Mandatory administration funding includes amounts for
quality improvement organizations and Part B premium payments for Qualifying Individuals
(QI).26
Medicare Sequestration Rules
Special rules limit the total effect of budget sequestration on Medicare (see Table 1). Most
notably, BBEDCA, as amended by the BCA, prohibits Medicare benefit payments from being
reduced by more than 2% under a BCA mandatory sequestration order. Similarly, Statutory
PAYGO prohibits Medicare benefit payments from being reduced by more than 4% under a
Statutory PAYGO sequestration order.27 The caps do not apply to Medicare mandatory and
discretionary administrative spending, which is subject to the unrestricted percentage reduction
under both BCA and Statutory PAYGO sequestration orders.
Under the current mandatory sequestration process triggered by the BCA, the Medicare
sequestration percentage is capped at 2%.28 Therefore, regardless of the percentage reduction

24 For additional information, see U.S. Department of Health and Human Services, Office of Inspector General, Health
Care Fraud and Abuse Control Program Report, at https://oig.hhs.gov/reports-and-publications/hcfac/index.asp.
25 For sequestration purposes, BBEDCA defines Medicare benefit payments as all payments for programs and activities
under Title XVIII of Social Security Act. This includes the Medicare Integrity Program (MIP). See BBEDCA §256(d).
26 The Qualifying Individuals (QI) program is a state program that helps pay Part B premiums for people who have Part
A and limited income and resources. See CMS, “Medicare Savings Programs,” at https://www.medicare.gov/medicare-
savings-programs.
27 Medicare benefit payments are considered mandatory budgetary resources and would not be subject to a FRA
sequestration order.
28 See 2 U.S.C. §901a(6). P.L. 117-71. Per the P.L. 117-58 Consolidated Appropriations Act, 2023 [P.L. 117-328], the
Medicare sequester percentage in FY2032 will be 2% during the first six months of the FY2032 sequestration order
(April 2032 through September 2032) and 0% for the next six months (October 2032 through March 2033). See 2
U.S.C. §901a(6). For more information, see “Timing.”
Congressional Research Service

8

link to page 7 link to page 20 link to page 15 link to page 15 Medicare and Budget Sequestration

applied to other mandatory spending, Medicare benefit payments cannot be reduced by more than
2%.
For the FY2013-FY2021 sequestration orders, the reduction percentages were determined under
the following method. If OMB were to determine that total nonexempt, nondefense mandatory
funds needed to be reduced by a percentage larger than 2% in order to achieve necessary savings
under a BCA sequestration order for a given year, then a 2% reduction would be made to
Medicare benefit spending, and a uniform reduction percentage for the remaining non-Medicare
benefit, nonexempt, nondefense mandatory programs would be recalculated and increased by an
amount to achieve the necessary level of reductions.29 If the uniform percentage reduction needed
to achieve the total amount of savings were less than 2%, then the determined percentage would
be applied to Medicare as well as to all other nonexempt non-Medicare nondefense mandatory
spending.
If a mandatory sequestration order were to be triggered by Statutory PAYGO, the process would
be the same as above, but the reduction of payments for Medicare benefits would be capped at
4%.30
Beyond FY2021, there is no statutory requirement that the BCA mandatory sequester achieve a
certain level of budgetary savings in defense and nondefense spending and, consequently, no
specific amounts to apportion to the different spending categories. The statutes extending the
BCA mandatory sequester (see “Budget Control Act”) therefore required that the applicable
percentage reductions for FY2022 through FY2031 be the same as those under the FY2021
sequestration order. (See Table 2.) The statute extending sequestration only for Medicare benefit
payments for FY2032 required a 2% reduction for the first six months of the FY2032
sequestration order and 0% for the next six months.
In addition to the Medicare percentage caps, BBEDCA also prohibits Statutory PAYGO and BCA
mandatory sequestration effects from being included in the determination of annual adjustments
to Medicare payment rates established under Title XVIII of the Social Security Act, including the
Part C growth percentage and the Part D annual growth rate.31 (See “Reductions in Benefit
Spending.”)
Certain Medicare programs and activities are explicitly exempted from Statutory PAYGO and
BCA sequestration orders. Specifically, Part D low-income subsidies,32 Part D catastrophic
subsidies (reinsurance),33 and QI premiums cannot be reduced under a mandatory sequestration
order.34

29 In making the sequestration amount determinations during the CARES Act, as amended, suspension of Medicare
sequestration, OMB’s estimates reflected the full amount of sequestrable Medicare resources even though resources
expended during that period were not reduced. For additional information, see OMB Report to the Congress on the
BBEDCA 251A Sequestration for Fiscal Year 2022, May 28, 2021, at https://www.whitehouse.gov/wp-content/uploads/
2021/05/BBEDCA_251A_Sequestration_Report_FY2022.pdf.
30 See BBEDCA, §256(d)(2).
31 See BBEDCA §256(d)(6).
32 Medicare Part D provides subsidies to assist low-income beneficiaries with premiums and cost sharing. For more
information on Medicare Part D, see CRS Report R40611, Medicare Part D Prescription Drug Benefit.
33 Part D pays nearly all drug costs above a catastrophic threshold, except for nominal beneficiary cost sharing.
Medicare subsidizes 80% of each plan’s costs for this catastrophic coverage. For more information on Medicare Part D,
see CRS Report R40611, Medicare Part D Prescription Drug Benefit.
34 See BBEDCA §256(d)(7).
Congressional Research Service

9

Medicare and Budget Sequestration

Medicare Sequester Execution
Timing
Once a sequester is triggered, OMB issues a sequestration order for, at most, one fiscal year, and
additional orders are issued for each subsequent fiscal year, as necessary. These orders can be
issued either before or during the fiscal year in which they apply, depending on the trigger.
Reductions in budget resources are to be made during the effective period of a sequestration
order; however, special rules differentiate when a sequestration order is implemented for benefit
payments. As a result, sequestration orders are applied to Medicare benefit payments on a
different timeline than other mandatory and discretionary Medicare funds (i.e., Medicare
administration and HCFAC).
Once OMB issues a sequestration order, Medicare benefit payments are sequestered beginning on
the first date of the following month and remain in effect for all services furnished during the
following one-year period.35 In the event that a subsequent sequester order is issued prior to the
completion of the first order, the subsequent order begins on the first month after the initial order
has been completed.36 As an example, the first BCA mandatory sequester order (FY2013) was
issued on March 1, 2013, and took effect April 1, 2013. It remained in effect through March 31,
2014. The FY2014 order was issued on April 10, 2013 (corrected on May 20, 2013), and was in
effect from April 1, 2014, to March 31, 2015. Subsequent sequestration orders have followed this
timeline (i.e., have been in effect from April of the designated fiscal year through March of the
subsequent fiscal year). With future sequestration orders required to be issued prior to the
completion of preceding orders, the first six months of the FY2032 sequester order, which has a
required 2% reduction, would be in effect from April 1, 2032, through September 30, 2032, and
the second six months of the FY2032 sequestration order, which has a 0% reduction, would be in
effect from October 1, 2032, through March 31, 2032.
All other sequestrable funding is reduced only during the fiscal year associated with the sequester
report. For example, the first BCA mandatory sequester order (FY2013) reduced appropriate
administrative spending from March 1, 2013, to September 30, 2013. The second order for
FY2014 sequestered funds from October 1, 2013, to September 30, 2014.
While OMB uses current law to determine the amount of funds available to be sequestered and
corresponding percentage reductions, actual Medicare outlays will not be known until after the
end of the fiscal year. Since sequestration orders are issued either before or during the fiscal year
in which they are applicable, OMB estimates the total sequestrable budget authority for Medicare,
and other accounts with indefinite budget authority, in order to determine necessary sequestration
percentages.37
If Medicare outlays exceed the estimated amount included in a sequestration order for that fiscal
year, the additional outlays are sequestered at the established percentage for that fiscal year. If
Medicare outlays are determined to be less than the estimated amount, no adjustments are made
to the sequestration order. In other words, OMB does not adjust sequestration percentages for any
category of budget authority once actuals are realized for accounts with indefinite budget

35 See BBEDCA §256(d)(1).
36 See BBEDCA §256(d)(4).
37 GAO, 2014 Sequestration Opportunities Exist to Improve Transparency of Progress Toward Deficit Reduction
Goals, GAO-16-263, April 2016, p. 27, at https://www.gao.gov/assets/680/676565.pdf.
Congressional Research Service

10

Medicare and Budget Sequestration

authority. Similarly, OMB does not adjust future orders to account for any previous discrepancies
between estimates and actuals.
Temporary Suspension of Medicare Sequestration
During the COVID-19 pandemic, Congress took a number of actions to address financial
challenges faced by health care providers. This included suspending the application of the BCA
mandatory spending sequestration to the Medicare program. Specific legislation included the
following:
• The Coronavirus Aid, Relief, and Economic Security Act (CARES Act; P.L. 116-
136) initially suspended Medicare sequestration from May 2021 through
December 2021
• The Consolidated Appropriations Act, 2021 (P.L. 116-260), extended the
suspension through March 2021
• An Act to Prevent Across-the-Board Direct Spending Cuts, and for Other
Purposes (P.L. 117-7), extended the suspension through December 2021
• The Protecting Medicare and American Farmers from Sequester Cuts Act (P.L.
117-71) extended the suspension through March 2022 and limited the Medicare
reductions under sequestration to 1% from April 2022 through June 2022
Beginning July 1, 2022, the full 2% sequester was re-implemented.
Reductions in Benefit Spending
Parts A and B
Under Medicare Parts A and B, participating providers, such as hospitals and physicians, are paid
by the federal government on a fee-for-service basis for services provided to a beneficiary.
According to guidance issued by the Centers for Medicare & Medicaid Services (CMS), any
sequestration reductions are to be made to claims after determining coinsurance, deductibles, and
any applicable Medicare Secondary Payment adjustments.38 Therefore, sequestration applies only
to the portion of the payment paid to providers by Medicare; the beneficiary cost-sharing amounts
and amounts paid by other insurance are not reduced.
As an example, if the total allowed payment for a particular service is $100 and the beneficiary
has a 20% co-insurance, the beneficiary would be responsible for paying the provider the full $20
in co-insurance. The remaining 80% that is paid by Medicare would be reduced by 2% under the

38 During the suspension of sequestration of Medicare under the CARES Act, as amended, fee-for-service provider
payments were not subject to the 2% reduction in Medicare payments. CMS, Medicare FFS Provider e-News, March 8,
2013, Monthly Payment Reductions in the Medicare Fee-for-Service (FFS) Program – “Sequestration,” at
https://www.cms.gov/Outreach-and-Education/Outreach/FFSProvPartProg/Downloads/2013-03-08-standalone.pdf. See
April 10, 2020, CMS MLNConnects Newsletter, “COVID-19: Infection Control, Maximizing Workforce, Updated
Q&A, CS Modifier for Cost-Sharing, Payment Adjustment Suspended,” at https://www.cms.gov/outreach-and-
educationoutreachffsprovpartprogprovider-partnership-email-archive/2020-04-10-mlnc-se; January 7, 2021, CMS
MLNConnects Newsletter, “Physician Fee Schedule Update,” at https://www.cms.gov/outreach-and-
educationoutreachffsprovpartprogprovider-partnership-email-archive/2021-01-07-mlnc-se; April 16, 2021, CMS
MLNConnects Newsletter, “Medicare FFS Claims: 2% Payment Adjustment (Sequestration) Suspended Through
December,” at https://www.cms.gov/outreach-and-educationoutreachffsprovpartprogprovider-partnership-email-
archive/2021-04-16-mlnc; and December 16, 2021, CMS MLNConnects Newsletter, “Medicare FFS Claims: 2%
Payment Adjustment (Sequestration) Changes,” at https://www.cms.gov/outreach-and-
educationoutreachffsprovpartprogprovider-partnership-email-archive/2021-12-16-mlnc.
Congressional Research Service

11

Medicare and Budget Sequestration

FY2023 sequestration order, or $1.60 in this example, resulting in a total Medicare payment of
$78.40. In total, the provider would receive a payment of $98.40. This reduced payment is
considered payment in full and the Medicare beneficiary is not expected to pay higher
copayments to make up for the reduced Medicare payment.39
Part A inpatient services are considered to be furnished on the date of the individual’s discharge
from the inpatient facility. For services paid on a reasonable cost basis,40 the reduction is to be
applied to payments for such services incurred at any time during the sequestration period for the
portion of the cost reporting period that occurs during the effective period of the order. For Part B
services provided under assignment,41 the reduced payment is to be considered payment in full
and the Medicare beneficiary will not pay higher copayments to make up for the reduced
amount.42
Medicare nonparticipating providers, which are providers that do not elect to accept Medicare’s
allowed payments as payment in full on all claims for services furnished to program beneficiaries
in a given year, are not subject to the same rules. Medicare nonparticipating providers receive a
Medicare payment based on a lower maximum allowable charge under the fee schedule on all
services provided and may charge beneficiaries a limited amount in addition to the fee schedule
amount (balance bill charge) on nonassigned claims.43 In these instances, instead of the Medicare
check being sent to the provider, a check that incorporates the 2% reduction is mailed to the
patient. The patient must then pay the provider an amount that incorporates the sequestered
amount. More specifically, as payment, the beneficiary is responsible for paying the provider the
amount listed on the check, any cost sharing, balance bill charges, and the sequestered amounts
taken out of the provider check.44 This contrasts with payment for Part B services provided under
assignment, where the Medicare participating provider cannot charge the beneficiary for revenue
lost due to sequestration.
Annual adjustments to Medicare payment rates are determined without incorporating
sequestration.45 However, the Medicare Payment Advisory Commission does incorporate the
effects of sequestration when assessing the adequacy of provider payments.46 The commission

39 Ibid.
40 Most providers are paid under a prospective payment system or fee schedule. Some types of providers, such as
Critical Access Hospitals, are paid on a reasonable cost basis under which payments are based on actual costs incurred.
Reasonable cost is defined at Social Security Act §1861(v).
41 Assignment is an agreement by a doctor, provider, or supplier to be paid directly by Medicare, to accept the payment
amount Medicare approves for the service, and not to bill the beneficiary for any more than the Medicare deductible
and coinsurance (if applicable). Providers that don't accept assignment may charge more than the Medicare-approved
amount.
42 CMS, Medicare FFS Provider e-News, March 8, 2013, Monthly Payment Reductions in the Medicare Fee-for-Service
(FFS) Program – “Sequestration,” at https://www.cms.gov/Outreach-and-Education/Outreach/FFSProvPartProg/
Downloads/2013-03-08-standalone.pdf.
43 CMS, Medicare Provider Utilization and Payment Data: Physician and Other Supplier PUF: Frequently Asked
Questions, updated May 23, 2019, p. 4, at https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-
Trends-and-Reports/Medicare-Provider-Charge-Data/Downloads/Physician_FAQ.pdf.
44 CMS, Medicare FFS Provider e-News, March 8, 2013, Monthly Payment Reductions in the Medicare Fee-for-Service
(FFS) Program – “Sequestration,” at https://www.cms.gov/Outreach-and-Education/Outreach/FFSProvPartProg/
Downloads/2013-03-08-standalone.pdf.
45 BBEDCA §256(d)(6).
46 Medicare Payment Advisory Commission (MedPAC), Medicare Payment Policy Report to Congress, March 2018, p.
60, at https://www.medpac.gov/wp-content/uploads/import_data/scrape_files/docs/default-source/reports/
mar18_medpac_entirereport_sec_rev_0518.pdf.
Congressional Research Service

12

Medicare and Budget Sequestration

uses these annual assessments to develop payment adjustment recommendations to the HHS
Secretary and/or Congress.
Part C (Medicare Advantage)
Under Medicare Advantage, private health plans are paid a per-person monthly amount to provide
all Medicare-covered benefits, except hospice, to beneficiaries who enroll in their plans. These
capitated monthly payments are made to MA plans regardless of how many or how few services
are furnished to enrolled beneficiaries. The plan is at risk if costs for all of its enrollees exceed
program payments and beneficiary cost sharing; conversely, the plan can generally retain savings
if aggregate enrollee costs are less than program payments and cost sharing.
In general, CMS payments to the private plans administering Medicare Advantage (Medicare
Advantage Organizations, or MAOs) comprise amounts to cover medical costs, administrative
expenses, private plan profits, risk adjustments, and plan rebates to beneficiaries.47 These fixed
payments are determined every year with CMS approval through an annual “bid process,” and the
amounts can vary depending on the private plan.48
With respect to sequestration, reductions are made uniformly to the monthly capitated payments
to MAOs.49 MAOs have discretion on how to distribute any sequestration cut but must adhere to
their legal obligations.50
Some MAOs have attempted to pass the reduction in their capitation rates onto providers through
lower payment rates; however, MAOs may be limited in their ability to do so.51 CMS has
provided instructions regarding the treatment of contract and noncontract providers that provide
services under Part C. Specifically, “whether and how sequestration might affect an MAO’s
payments to its contracted providers are governed by the terms of the contract between the MAO
and the provider.”52 Therefore, in order for MAOs to reduce provider payments by the

47 A plan rebate is the difference between a plan’s bid and a statutorily specified benchmark amount. It is included in
the plan payment and must be returned to enrollees in the form of additional benefits, reduced cost sharing, reduced
Medicare Part B or Part D premiums, or some combination of these options.
48 For more information on the annual bid process, see CRS Report R45494, Medicare Advantage (MA)–Proposed
Benchmark Update and Other Adjustments for CY2020: In Brief.
49 During the temporary suspension of sequestration from May 2020 through March 2022, the 2% payment reduction
did not apply. CMS also indicated that the 2% reduction did not apply to retroactive adjustments made to payments for
beneficiaries enrolled within the sequestration suspension period. See April 22, 2020, memorandum from Jennifer R.
Shapiro, CMS, Medicare Advantage/Prescription Drug System (MARx) May 2020 Payment Information, at
https://www.hhs.gov/guidance/sites/default/files/hhs-guidance-documents/
marx%20plan%20payment%20letter_may%204.22.2020_7.pdf; March 30, 2021, memorandum from Jennifer R.
Shapiro, CMS, Medicare Advantage/Prescription Drug System (MARx) April 2021 Payment Information, at
https://www.cms.gov/httpseditcmsgovresearch-statistics-data-and-systemscomputer-data-and-systemshpmshpms-
memos-archive/hpms-memos-week-5-march-29-31-2021; and January 28, 2022, memorandum from Jennifer R.
Shapiro, CMS, Medicare Advantage/Prescription Drug System (MARx) February 2022 Payment Information, at
https://www.cms.gov/files/document/marxplanpaymentletterfeb2022508.pdf.
50 May 1, 2013, memorandum from Cheri Rice and Danielle Moon, CMS, Additional Information Regarding the
Mandatory Payment Reductions in the Medicare Advantage, Part D, and Other Programs, at https://www.cms.gov/
Medicare/Medicare-Advantage/Plan-Payment/Downloads/PaymentReductions.pdf.
51 As a result of the initial BCA sequester, some Medicare Advantage Organizations (MAOs) attempted to reduce
provider payments by 2%. The courts ultimately determined that MAOs were subject to the terms in the contracts with
providers. See Baptist Hosp. of Miami, Inc. v. Humana Health Ins. Co. of Florida, Inc. and Butler Healthcare Providers
et al. v. Highmark Inc. et al.
52 May 1, 2013, memorandum from Cheri Rice and Danielle Moon, CMS, Additional Information Regarding the
Mandatory Payment Reductions in the Medicare Advantage, Part D, and Other Programs, at https://www.cms.gov/
Medicare/Medicare-Advantage/Plan-Payment/Downloads/PaymentReductions.pdf.
Congressional Research Service

13

Medicare and Budget Sequestration

sequestered amount, specific language within a contract must allow the reduction or the contract
would need to be renegotiated.53
In certain instances, such as when beneficiaries receive emergency out-of-network care, MAOs
need to reimburse the noncontracted providers; in such cases, the MAOs are required to pay at
least the rate providers would have received if the beneficiaries had been enrolled in original
Medicare. However, MAOs have the discretion of whether or not to incorporate sequestration
cuts into payments to noncontracted providers for those services.54 Noncontracted providers must
accept any payments reduced by the sequestration percentage as payment in full.
In addition, regulations in the annual bid process restrict MAO’s potential responses to
sequestration. Specifically, MAOs are limited to “reasonable” revenue margins and a set
Medicare/non-Medicare profit margin discrepancy, among other requirements.55 MAOs are also
restricted from allowing sequestration to impact a beneficiary’s plan benefits or liabilities.56
As HHS computes annual adjustments to Medicare payment rates, the Secretary cannot take into
account any reductions in payment amounts under sequestration for the Part C growth
percentage.57 In other words, plan payment updates are to be determined as if the reductions
under sequestration have not taken place. This results in larger annual adjustments compared to
baselines that incorporate sequestration cuts.
Part D
Under Medicare Part D, each plan receives a base capitated monthly payment, called a direct
subsidy, which is adjusted to incorporate three risk-sharing mechanisms (low-income subsidies,
individual reinsurance, and risk corridor payments). While each plan receives the same direct
subsidy amount for each enrollee regardless of how many benefits an enrollee actually receives,
plans receive different risk-sharing adjustments in their monthly payments. With respect to

53 Similarly, during the May 2020 through March 2022 CARES Act, as amended, suspension of sequestration, the
decision to suspend the application of the 2% reduction to provider payments may have depended on the
reimbursement language in MAO-provider contracts. Two of the nation’s largest commercial insurers, Aetna and
UnitedHealthcare, indicated that they temporarily eliminated the 2% sequestration cuts in payments to providers in
their Medicare Advantage plans during the suspension period. Additional detail may be found at
https://www.uhcprovider.com/en/resource-library/news/Novel-Coronavirus-COVID-19/covid19-practice-
administration/covid19-practice-administration-cares-act.html (as of the date of this report, this site had not yet been
updated to reflect the suspension extensions), and https://www.aetna.com/health-care-professionals/covid-faq/billing-
and-coding.html.
54 May 1, 2013, memorandum from Cheri Rice and Danielle Moon, CMS, Additional Information Regarding the
Mandatory Payment Reductions in the Medicare Advantage, Part D, and Other Programs.
55 CMS, Actuarial Bid Training, at https://www.cms.gov/medicare/medicare-advantage-rates-statistics/actuarial-bid-
training; and 42 C.F.R. Part 422, Subpart X.
56 CMS, User Group Call 05/07/2015, May 7, 2015, at https://www.cms.gov/Medicare/Health-Plans/
MedicareAdvtgSpecRateStats/Downloads/ActuarialBidQuestions2016.pdf.
57 BBEDCA §256(d)(6)(A). The Secretary uses an estimate of the growth in overall spending in Medicare when
calculating updated payments to MA plans. See CRS Report R45494, Medicare Advantage (MA)–Proposed Benchmark
Update and Other Adjustments for CY2020: In Brief.
Congressional Research Service

14

Medicare and Budget Sequestration

sequestration, the 2% reductions are made only to the direct subsidy amounts.58 Part D risk-
sharing adjustments are exempt from sequestration and are therefore not reduced.59
In addition, similar to provider payments made by MAOs, whether and how sequestration affects
a Part D plan sponsor’s payment to its contracted providers is “governed by the payment terms of
the contract between the plan sponsor and its network pharmacy providers.”60
Part D also contains a Retiree Drug Subsidy Program, which pays subsidies to qualified
employers and union groups that provide prescription drug insurance to Medicare-eligible, retired
workers. Instead of a capitated monthly payment, each sponsor receives a federal subsidy at the
end of the year to cover a portion of gross prescription drug costs for each retiree during that year.
Under this program, sequestration reductions are applied to the annual subsidy amount.61
Similar to Part C, the HHS Secretary is prohibited from taking into account any reductions in
payment amounts under sequestration for purposes of computing the Part D annual growth rate.62
Health Care Fraud and Abuse Control Program
As noted, the HCFAC program is not part of Medicare but does receive mandatory and
discretionary funds to ensure the programmatic integrity of the Medicare program. Under a BCA
sequestration order of mandatory funds, MIP funds are treated as a part of Medicare benefit
payments and are therefore subject to the Medicare 2% sequester limit.63 HCFAC mandatory
funding that does not exclusively address Medicare is reduced by the nondefense mandatory
sequester rate (5.7% in FY2023), when applicable.

58 During the May 2020 through March 2022 CARES Act, as amended, sequestration suspension period, the 2%
payment reductions to Part D plans did not occur. Payment adjustments during the suspension period for Part D plans
were applied similarly to payments to MAOs under Medicare Advantage. See April 22, 2020, memorandum from
Jennifer R. Shapiro, CMS, Medicare Advantage/Prescription Drug System (MARx) May 2020 Payment Information, at
https://www.hhs.gov/guidance/sites/default/files/hhs-guidance-documents/
marx%20plan%20payment%20letter_may%204.22.2020_7.pdf; March 30, 2021, memorandum from Jennifer R.
Shapiro, CMS, Medicare Advantage/Prescription Drug System (MARx) April 2021 Payment Information, at
https://www.cms.gov/httpseditcmsgovresearch-statistics-data-and-systemscomputer-data-and-systemshpmshpms-
memos-archive/hpms-memos-week-5-march-29-31-2021; and January 28, 2022, memorandum from Jennifer R.
Shapiro, CMS, Medicare Advantage/Prescription Drug System (MARx) February 2022 Payment Information, at
https://www.cms.gov/files/document/marxplanpaymentletterfeb2022508.pdf.
59 This is different from Medicare Part C risk-sharing adjustments, which are included in the capitated payments and
are subject to sequestration.
60 May 1, 2013, memorandum from Cheri Rice and Danielle Moon, CMS, Additional Information Regarding the
Mandatory Payment Reductions in the Medicare Advantage, Part D, and Other Programs.
61 CMS, “Mandatory Payment Reduction in CMS’ Retiree Drug Subsidy Reconciliation Payments,” April 19, 2014, at
https://www.rds.cms.hhs.gov/sites/default/files/webfiles/documents/mandatorypaymentreduction.pdf; and CMS,
“Extension to Suspension of Sequestration for Retiree Drug Subsidy (RDS) Program,” December 30, 2020, at
https://www.hhs.gov/guidance/document/extension-suspension-sequestration-retiree-drug-subsidy-rds-program.
62 BBEDCA §256(d)(6)(B).
63 The sequestration of this portion of HCFAC funding was suspended by the CARES Act, as amended, from May
2020 through March 2022.
Congressional Research Service

15

link to page 20 Medicare and Budget Sequestration

Administrative Expenses
Under either a mandatory or discretionary sequestration order, administrative spending within
nonexempt Medicare and HCFAC programs is reduced by the applicable nondefense rate
determined by OMB.64
Medicare and the BCA Mandatory Sequester
With the exception of the CARES Act, as amended, May 2020 through March 2022 suspension
(and the 1% limit from April through June 2022), Medicare benefit payments have been subject to
the 2% annual reduction limit established by the BCA since the first BCA mandatory sequester
order was issued in FY2013.65 Nondefense mandatory budget authority reductions, which have
applied to mandatory Medicare administrative spending, fluctuated between 5.1% and 7.3% from
FY2013 through FY2021. (See Table 2.) Under the sequestration orders that have been issued
since (FY2022-FY2024), mandatory Medicare administrative expenses have been and are to be
sequestered by the FY2021 nondefense mandatory percentage, 5.7%.66
Table 2. Mandatory Percentage Reductions Under Budget Control Act
Sequestration Orders
FY2013-FY2024
FY2021
–

FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 FY2019 FY2020 FY2024
Medicare
(Benefit Payments
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
and MIP HCFAC)
Nondefense
Mandatory
(Medicare
5.1%
7.2%
7.3%
6.8%
6.9%
6.6%
6.2%
5.9%
5.7%
administrative
spending and
non-MIP HCFAC)
Defense
7.9%
9.8%
9.5%
9.3%
9.1%
8.9%
8.7%
8.6%
8.3%
Mandatory
Source: OMB Reports to Congress on the Joint Committee Sequestration for FY2013 to FY2024.
Notes: Reductions to Medicare benefit and mandatory administrative spending did not occur during the CARES
Act, as amended, temporary suspension of Medicare sequestration from May 2020 through March 2022, in effect
during the period of the FY2020 through FY2021 sequestration orders. Reductions to Medicare benefit
payments also were limited to 1% from April 2022 through June 2022. Defense Mandatory is any funding

64 Mandatory Medicare administrative spending authorized under Title XVIII of the Social Security Act was exempt
from the sequester during the CARES Act, as amended, suspension period. Department of Health and Human Services,
Agency Financial Report: Fiscal Year 2021, p. 154, at https://www.hhs.gov/sites/default/files/fy-2021-hhs-agency-
financial-report.pdf.
65 Certain other health programs were also subject to a 2% reduction in FY2013, FY2014, FY2015, FY2017, FY2022,
and FY2023.
66 CMS receives administrative funding for the Medicare program through the Medicare trust funds and the CMS
program management account. Since the OMB Report to the Congress on the BBEDCA 251A Sequestration for Fiscal
Year 2023 shows the amount of mandatory administrative funding sequestered at the account level and CMS funds
other programs through the program management account, the total amount of mandatory administrative funding for
the Medicare program cannot be determined from the source.
Congressional Research Service

16

link to page 22

Medicare and Budget Sequestration

coded with a budget function of 050. Medicare Benefit Payments are defined by BBEDCA as all payments for
programs and activities under Title XVIII of Social Security Act. The Health Care Fraud and Abuse Control
Program (HCFAC) is responsible for activities that fight health care fraud and waste. Nondefense
Mandatory includes all other government spending not defined as Medicare or Defense Mandatory. MIP refers
to the Medicare Integrity Program, which is under HCFAC and focuses on combating fraud in Medicare. Certain
other heath programs were also subject to a 2% reduction in FY2013, FY2014, FY2015, FY2017, FY2022, and
FY2023.
Traditionally, Medicare benefit payments comprise the largest single source of funds available to
be sequestered and the largest single source of funds that are sequestered in a given mandatory
sequestration order, as shown in Figure 1 and Figure 2, respectively. Under the FY2024 BCA
mandatory sequester order, the estimated $952.2 billion in Medicare benefit payments subject to
sequestration (not including administration) were expected to represent about 87.3% of all
Medicare and non-Medicare resources available to be sequestered.67 Of the funds expected to be
sequestered, the estimated Medicare benefit sequestration amounts of $19.0 billion were expected
to account for about 69.2% of all sequestered funds.68 The smaller percentage of Medicare
sequestered amounts relative to the percentage of Medicare amounts available to be sequestered
is a reflection of Medicare being subject to a 2% reduction limit, while nondefense mandatory
and defense mandatory amounts are not.
Figure 1. Sequestrable Budget Authority Under Mandatory Budget Control Act
Sequestration Orders: Amounts by Category and Medicare Percentage Share
FY2013-FY2024
Figure is interactive in the HTML version of this report.

Source: CRS analysis of OMB Reports to the Congress on the Joint Committee Sequestration for FY2013 to
FY2024.

67 For a list of sequestrable budget authority by budget account, see OMB Report to the Congress on the BBEDCA
251A Sequestration for Fiscal Year 2024, March 13, 2023, at https://www.whitehouse.gov/wp-content/uploads/2023/
03/BBEDCA_Sequestration_Report_and_Letter_3-13-2024.pdf.
68 Ibid.
Congressional Research Service

17

Medicare and Budget Sequestration

Notes: Each fiscal year refers to amounts sequestered in accordance with that fiscal year’s sequestration order.
Sequestrable budget authority refers to all resources estimated to be available to be sequestered.
Administrative funding is not included in Medicare benefit payment totals. All percentages are estimates. The
fiscal years with asterisks in the Medicare percentage of total do not reflect the CARES Act, as amended,
temporary suspension of Medicare sequestration from May 2020 through March 2022, or the 1% limit in effect
from April 2022 through June 2022.
Figure 2. Sequestered Amounts Under Mandatory Budget Control Act
Sequestration Orders: Amounts by Category and Medicare Percentage Share
FY2013-FY2024
Figure is interactive in the HTML version of this report.

Source: CRS analysis of OMB Reports to the Congress on the Joint Committee Sequestration for FY2013 to
FY2024.
Notes: Each fiscal year refers to amounts sequestered in accordance with that fiscal year’s sequestration order.
Sequestered Amounts refers to all resources estimated to be sequestered. Administrative funding is not
included in Medicare benefit payment totals. All percentages are estimates. The fiscal years with asterisks in the
Medicare percentage of total do not reflect the CARES Act, as amended, temporary suspension of Medicare
sequestration from May 2020 through March 2022, or the 1% limit in effect from April 2022 through June 2022.
CBO estimates that Medicare benefit payment outlays will almost double from FY2022 to
FY2032 (from $983 billion to $1.9 trillion), the last year of BCA mandatory sequestration for
Medicare benefit payments.69 Most of this expected increase is due to an aging population and
rising health care costs per person.70 Most of this increased amount would be subject to
sequestration.

69 CBO, May 2022 Medicare Baseline, at https://www.cbo.gov/system/files/2022-05/51302-2022-05-medicare.pdf.
70 CBO, The 2022 Long-Term Budget Outlook, July 2022, p. 19, at https://www.cbo.gov/publication/57971.
Congressional Research Service

18

Medicare and Budget Sequestration

Appendix A. Additional CRS Resources
To gain a deeper understanding of the topics covered in this report, readers may also wish to
consult the following CRS reports:
CRS Report R40425, Medicare Primer
CRS Report R43122, Medicare Financial Status: In Brief
CRS Report R45494, Medicare Advantage (MA)–Proposed Benchmark Update and Other
Adjustments for CY2020: In Brief
CRS Report R40611, Medicare Part D Prescription Drug Benefit
CRS Report R46240, Introduction to the Federal Budget Process
CRS Report R41965, The Budget Control Act of 2011
CRS Report R42506, The Budget Control Act of 2011 as Amended: Budgetary Effects
CRS Report RL34424, The Budget Control Act and Trends in Discretionary Spending
CRS Report R46752, Expiration of the Discretionary Spending Limits: Frequently Asked
Questions
CRS Insight IN11148, The Bipartisan Budget Act of 2019: Changes to the BCA and Debt Limit
CRS Report R42050, Budget “Sequestration” and Selected Program Exemptions and Special
Rules
CRS Report R42972, Sequestration as a Budget Enforcement Process: Frequently Asked
Questions
CRS Report R45941, The Annual Sequester of Mandatory Spending through FY2029
CRS Report R41157, The Statutory Pay-As-You-Go Act of 2010: Summary and Legislative
History
CRS Insight IN12168, Discretionary Spending Caps in the Fiscal Responsibility Act of 2023
CRS Insight IN12183, The FRA’s Discretionary Spending Caps Under a CR: FAQs
Congressional Research Service

19

Medicare and Budget Sequestration

Appendix B. Budget Terminology Definitions
As defined by the Balanced Budget and Emergency Deficit Control Act of 1985 (BBEDCA; P.L.
99-177, as amended) and simplified where appropriate
Budget Authority—Authority provided by federal law to enter into financial obligations that will
result in immediate or future outlays involving federal government funds.
Budgetary Resources—Amounts available to enter into new obligations and to liquidate them.
Budgetary resources are made up of new budget authority (including direct spending authority
provided in existing statute and obligation limitations) and unobligated balances of budget
authority provided in previous years.
Discretionary Appropriations—Budgetary resources (except to fund direct-spending programs)
provided in appropriation Acts.
Mandatory Spending—Also known as direct spending, refers to budget authority that is
provided in laws other than appropriation acts, entitlement authority, and the Supplemental
Nutrition Assistance Program.
Medicare Benefit Payments—All payments for programs and activities under Title XVIII of the
Social Security Act.
Revised Nonsecurity Category—Discretionary appropriations other than in budget function 050,
often referred to as nondefense category.
Revised Security Category—Discretionary appropriations in budget function 050, often referred
to as defense category.
Sequestration—The cancellation of budgetary resources provided by discretionary
appropriations or direct spending laws.
For definitions of other budget terms mentioned in this report but not defined by BBEDCA, see
U.S. Government Accountability Office, A Glossary of Terms Used in the Federal Budget
Process, GAO-05-734SP, September 1, 2005, at https://www.gao.gov/assets/80/76911.pdf.

Author Information

Ryan J. Rosso

Analyst in Health Care Financing

Acknowledgments
Patricia Davis, former Specialist in Health Care Financing, was responsible for recent updates to this
report. Bill Heniff Jr., Analyst on Congress and the Legislative Process, made significant contributions to
this report.
Congressional Research Service

20

Medicare and Budget Sequestration

Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan
shared staff to congressional committees and Members of Congress. It operates solely at the behest of and
under the direction of Congress. Information in a CRS Report should not be relied upon for purposes other
than public understanding of information that has been provided by CRS to Members of Congress in
connection with CRS’s institutional role. CRS Reports, as a work of the United States Government, are not
subject to copyright protection in the United States. Any CRS Report may be reproduced and distributed in
its entirety without permission from CRS. However, as a CRS Report may include copyrighted images or
material from a third party, you may need to obtain the permission of the copyright holder if you wish to
copy or otherwise use copyrighted material.

Congressional Research Service
R45106 · VERSION 18 · UPDATED
21

Download PDF

Download EPUB

Revision History

Nov. 14, 2023

HTML · PDF

11% changed

Sep. 26, 2023

HTML · PDF

33% changed

Mar. 29, 2022

HTML · PDF

5% changed