Medicare and Budget Sequestration

Summary

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 Congress in the Balanced Budget and Emergency Deficit Control Act of 1985 (BBEDCA, also known as the Gramm-Rudman-Hollings Act; P.L. 99-177) and was intended to 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 Congress from violating specific budget objectives or encourage Congress to fulfill specific budget objectives. When Congress breaks these types of rules, either through the enactment of a law or the lack thereof, a sequester is triggered and certain federal spending is reduced.

Sequestration is of recent 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) and the Budget Control Act of 2011 (BCA; P.L. 112-25). At present, only the BCA mandatory sequester is triggered. Under the BCA, the sequestration of mandatory spending was originally scheduled to occur in FY2013 through FY2021; however, subsequent legislation, including the Bipartisan Budget Act of 2018 (BBA 18; P.L. 115-123), extended sequestration for mandatory spending through FY2027. The Statutory PAYGO sequester and BCA discretionary sequester are current law and can be triggered if associated budget enforcement rules are broken (and Congress does not take action to change or waive these rules).

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 is mainly impacted by the sequestration of mandatory funds since Medicare benefit payments are considered mandatory spending. 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 a BCA discretionary sequestration order.

Generally, Medicare’s benefit structure remains unchanged under a mandatory sequestration order and beneficiaries see few direct impacts. However, due to varying plan and provider payment mechanisms among the four parts of the program, sequestration is implemented somewhat differently across the program.