2% Medicare Sequester Back in Full Effect July 1

Why does it feel like another Medicare cut is always looming?

Sarah Hohman, Deputy Director of Government Affairs


Key Takeaways

  • The pre-COVID (2%) Medicare sequester policy was fully re-implemented beginning July 1 via another 1% reduction on top of the 1% already in effect that began on April 1, 2022. RHCs, and all of healthcare, should now expect to receive 78.4% of allowable costs.
  • A similar, 4% “pay as you go” or “PAYGO” Medicare reduction is currently scheduled to kick in on January 1, 2023, however there is industry-wide expectation that Congress will again waive this payment reduction.

If you follow health policy closely, it seems as if we’re always approaching some financial cliff that could result in cuts to Medicare reimbursement. As soon as one cut is avoided a new deadline emerges and thus, we are constantly waiting to see if Congress will allow us to fall off the cliff or rescue things at the last second. In this article, we will provide a brief summary of how Medicare sequestration began, and how cuts like it continue to be used as chess pieces in the federal budget.

Broadly, sequestration has been used since Congress passed the Balanced Budget and Emergency Deficit Control Act of 1985. This legislation automatically reduces federal spending when Congress passes other legislation that adds to the deficit.

The Medicare reimbursement sequester (the 2% cut) that has impacted payments for over a decade is the result of a negotiation to raise the debt ceiling between the Obama Administration and the Republican House led by then Speaker of the House John Boehner. On one side, Speaker Boehner demanded that any increase to the debt ceiling be matched equally by reductions in federal spending over the next ten years. On the other side, President Obama wanted a “clean” vote where the increase was not tied to any other conditions. After a long game of political chicken that downgraded the United States’ AAA credit rating, a compromise was struck, and the Budget Control Act of 2011 (BCA) was passed.

The legislation allowed for a significant increase to the debt ceiling in exchange for caps to federal spending and additional budget cuts for the following ten-year period. As a whole, Congress had been unable to identify large cuts to federal spending and thus passed the responsibility to a 12-person Congressional “Super Committee.” Established in the BCA, the Joint Select Committee on Deficit Reduction was tasked with proposing a plan for a $1.5 trillion reduction of the budget deficit over ten years. The committee was intended to force a bipartisan compromise, without requiring a full vote in a gridlocked Congress. If they were unsuccessful, the BCA contained a provision that resulted in automatic sequestration across all applicable federal spending.

The “Super Committee” approach immediately had its critics. Representative Michael Burgess described his feelings on the committee as the following, “I hate it, I hate it, I hate it with a passion,” explaining to the New York Times that “In this new 12-member committee, a seven-person vote can change the world.”

Bruce Bartlett, who served an economic adviser for two former Presidents told reporters that committees like these lead to “lots of talk, lots of congratulations and no actual changes.”

While composed equally of 6 Democrats and 6 Republicans, some criticized the selection process in that it gave too much power to House and Senate leadership, while others expressed frustration that the committee alone could not understand the nuances of the critically important programs for which they could be cutting spending.

Many observers saw the “Super Committee” as doomed from the start, while others like then-Representative Mike Pompeo shared at a POLITICO event that “It’s going to be a home run. We’re doing what the American people asked the United States House of Representatives to do.” Ultimately, and perhaps unsurprisingly, the committee failed at the task and the “unthinkable” scenario of automatic sequestration cuts kicked in in 2014.

The Medicare Sequester
When sequestration is “triggered,” the Office of Management and Budget (OMB) identifies the percentage reductions that each non-exempt federal program will face. In the case of the BCA, half of the spending cuts needed to come from defense spending and the other 50% from domestic spending. As a part of the domestic spending cuts, OMB cut Medicare reimbursement by 2% for 10 years.

The 10-year sequester was set to expire in 2021, but between 2011 and today, 7 separate pieces of legislation have gradually extended the 2% Medicare cut, thus extending it until 2031. Every time that Congress extends the sequester policy, the Congressional Budget Office (CBO) scores that extension as “saving” money. In this way, Congress uses the Medicare sequester as a budget gimmick to “pay” for certain things by simply tacking on additional time to the length of the sequester. Due to this dynamic, Medicare can no longer be expected to pay for 80% of the allowable, 78.4% is now essentially the new baseline.

The notable exception to this new reality was during the COVID-19 pandemic when Congress passed the CARES Act. It returned Medicare reimbursement to 80% of the allowable by temporarily suspending Medicare sequestration. This 2% relief lasted for two years, until Congress began phasing back in the sequester with a 1% cut in April followed by another 1% cut beginning July 1, 2022. Congress “paid” for this relief by, you guessed it, extending the sequester until 2031!

Statutory PAYGO Sequester
A similar but separate reimbursement issue is the 4% additional "pay as you go” or PAYGO Medicare reduction currently scheduled to go into effect on January 1, 2023.

The current version of PAYGO in its simplest terms, requires that if any given piece of legislation does not “pay for” itself, then however much that legislation increases the budget deficit must be “sequestered” from mandatory spending programs (such as Medicare) to offset that increase to the deficit. Some programs, like Medicaid and unemployment insurance, are exempt from across-the-board sequestration, but the Medicare spending reduction is limited to 4%. If this policy were strictly adhered to, deficit spending would be severely constrained, which of course is the intent!

However, it's important to note that there was a massive flaw with this policy from the very beginning. Congress can simply waive their own PAYGO policy any time they pass spending bills that they cannot find a way to pay for! That is exactly what they have opted to do in nearly every piece of major legislation over the last several decades. The reason we're discussing PAYGO now; however, is because the $1.9 trillion allocation as part of the American Rescue Plan Act of 2021 suspiciously did not waive PAYGO, perhaps on purpose or perhaps by accident, meaning that a 4% cut would kick in the following year (2022).

This 4% Medicare cut, or reimbursement cliff, created entirely by Congressional budget games was averted at the last second when Congress punted for one year by temporarily waiving the cut through the Protecting Medicare and American Farmers from Sequester Cuts Act in late 2021. While there is expectation across the industry that Congress will once again waive PAYGO, it currently stands to go into effect on January 1, 2023, so add it to your radar as another looming Medicare reimbursement cut.

What’s to Come
With Medicare expenditures projected to total $912 billion in 2022 and $1.8 trillion in 2031 (CRS Report, 2022), it is not altogether surprising that Medicare spending is a component of conversations about federal deficit reduction. While perhaps not the best way to create health care policy, these games of political/budget chicken have long since and will continue to be played with Medicare reimbursement. As such you can always expect a Medicare cut to be somewhere in the distance as politicians struggle to find the intricate balance between paying for these essential programs and controlling overall federal spending.