Christopher FlynnPeter RoanMike LiebermanHarsh P. Parikh

On November 2, President Obama signed the Bipartisan Budget Act of 2015. As an offset for near-term increases in federal spending, the new law extends by one year – to 2025 – two-percent sequestration reductions in federal spending for mandatory federal programs including Medicare.  The end result is that Medicare Advantage Organizations (MAOs) can expect their capitated payments from Centers for Medicare and Medicaid Services (“CMS”) to continue to be reduced, and Medicare fee-for-service providers can also expect to have sequestration reductions on their CMS reimbursements until at least 2025.

First established by the Balanced Budget and Emergency Deficit Control Act of 1985 (BBEDCA), “sequestration” is a process of automatic, largely across-the-board reductions enacted to constrain federal spending. Sequestration in its current form began on March 1, 2013, when President Obama, pursuant to the Budget Control Act of 2011, ordered cuts to federal spending effective April 1, 2013, after Congress and the President failed to reach a budget compromise.

Under the Budget Control Act of 2011, the size of reductions to the Medicare program is limited to two-percent. As required by President Obama’s sequestration executive order, on March 8, 2013, CMS notified providers that a “2 percent reduction in Medicare payment[s]” would apply to “Medicare FFS claims with dates-of-service or dates-of-discharge on or after April 1, 2013.” In other words, due to sequestration, as of April 1, 2013, CMS reduced the amount it pays to providers for fee-for-service Medicare claims by two-percent.

The reductions have also impacted the Medicare Advantage Program (also known as Medicare Part C). For one, sequestration reduced net capitated payments made to MAOs by two-percent.  For another, many contracts between MAOs and health care providers incorporate Medicare’s reimbursement methodology, or a percentage thereof, as their contractual payment amount.  On May 1, 2013, CMS reiterated its position that “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.” The application of sequestration under specific MAO and provider contracts is already the subject of disputes.

Pursuant to the Budget Control Act of 2011, sequestration was initially set to expire in Fiscal Year 2021. This expiration date has already been extended twice – to 2023 in the Bipartisan Budget Act of 2013, and to 2024 by another law that provided financing for military benefits.  The Bipartisan Budget Act of 2015 passed last month extends sequestration for mandatory programs like Medicare by yet another year to 2025.

The bottom line takeaway from the latest extension of sequestration is that sequestration appears here to stay in the near term, and likely for at least the next decade.