Budget Sequestration: What DPMs Need to Know | APMA
Budget Sequestration: What DPMs Need to Know

Adapted in part with permission from Hart Health Strategies

Updated March 6, 2013

As APMA members know, due to partisan gridlock in Washington, DC, the federal government will encounter an automatic budget "sequester" starting March 1, which was put in place by previous budget reduction agreements between President Obama and Congress.

The bottom line for APMA members—who are classified as physicians under Medicare—is that the sequester will result in a 2 percent reduction in Medicare reimbursement payments for services provided on or after April 1. Physicians will likely start seeing the reductions mid-April. The actual date depends on the time CMS typically takes between the submission of claims and the actual payment of claims.

Although APMA has in the past and will continue to urge lawmakers to avert these cuts, the issue is primarily a national political game of chicken between Congressional Republicans and President Obama. Though they somewhat agree that the blunt, across-the-board sequester is not a desirable way to reduce the country's federal budget deficits, President Obama insists that tax increases should be a part of any deal to alter the sequestration path, while Congressional Republicans largely say that higher taxes should be off the table. 

FAQ About the Federal Budget Sequester

What is the sequester?

Sequestration, or across-the-board cuts in the face of annual budget deficits, is the result of the failed negotiation of the so-called "Super Committee," which was tasked in 2011 to develop a comprehensive proposal to reduce the federal debt by some $1.5 trillion over 10 years. Sequestration was put into place as a back-up plan in the Budget Control Act (Pub. L. 112-25) and reduces the overall debt through automatic, across-the-board spending cuts. Sequestration is a blunt and objective instrument. The sequester was intended to be so harsh it would prompt Congress to act. It was modeled on a bipartisan budget enforcement measure from the 1980s.

Because of the failure of Congress and the White House to reach an agreement on reducing federal budget deficits by an amount ($1.2 trillion over 10 years) and date established under the latest fiscal-cliff deal reached in early January 2013, a total of approximately $85 billion in across-the-board cuts will be imposed on federal programs between March 1 and September 30, 2013—half from Defense and half from domestic accounts. These cuts will take effect unless Congress and President Obama reach a deal to stop or alter them.

By how much will Medicare payments be reduced?

The sequester was designed by Congress back in the 2011 Budget Control Act to exempt the major entitlement programs from the kind of serious pain inflicted on discretionary funding. Cuts to most of the Medicare program are capped at 2 percent. For payments made under Medicare Parts A and B, the percentage reductions are to be made to individual payments to providers for services (e.g., hospital and physician services).

This is our latest understanding of how it would work, but it could change as federal agencies may have some leeway/wiggle room, and we will apprise you of any announcements along these lines.

These 2-percent payment reductions would apply to services provided starting on or after April 1. Therefore, whenever CMS would pay for those services, they would be reduced by the 2 percent. So, if CMS would normally pay $50 for an office visit, the visit on March 31 would be reimbursed at that rate, but the same service provided on April 1 would be reimbursed at $49.

In the case of Medicare Parts C and D, reductions are to be made to the monthly payments to the private plans that administer these parts of Medicare. Reductions are to be made at a uniform rate and are not to exceed 2 percent. In the case of inpatient services, the 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, the reduction is to be applied to payments for such services incurred at any time during each cost reporting period 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, the reduced payment would be considered payment in full and the Medicare beneficiary would not pay higher copayments to make up for the reduced amount.

Mandatory administrative expenses for an otherwise exempt program are subject to sequestration, but not discretionary administrative expenses. For instance, while the special rule (2.0 percent) applies to the Medicare program, discretionary funding for the Federal Supplementary Medical Insurance (Part B) Trust Fund and the Federal Hospital Insurance (Part A) Trust Fund would be fully subject to the annual sequestration at a rate of 8.2 percent.

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When would I start experiencing these reductions?

Our latest understanding is that physicians will likely start seeing their reductions mid-April for services provided on or after April 1. The actual date depends on the time CMS typically takes between the submission of claims and the actual payment of claims.

When/if the sequester is stopped or altered, will the 2 percent Medicare payment reductions be retroactively reimbursed?

That is not known at this time. It’s entirely up to Congress whether or not it wants to make any sequester fix retroactive (so Medicare providers remain “whole” or unaffected on a net cash basis). However, Congress did enact a retroactive fix with at least one of its Medicare/SGR “patches” in late June 2010 to address a SGR Medicare cut that began June 1.

A lot depends on how long the sequester lasts, and what is the real-world slow-down in patient access and/or uptick in physician frustration. Also, Congress may decide to try to make up for any Medicare sequester hit on doctors in a SGR fix later this year.

At this point in time, we do not have a more definitive answer. APMA will keep all members apprised of latest developments.

What other government programs will be affected by sequestration?

The automatic sequestration cuts will affect many corners of the government, but big portions of the government were made exempt by Congress.

Medicare's benefit structure would generally remain unchanged (i.e., beneficiaries would not see a change in their Medicare coverage). Additionally, spending for certain Medicare programs and activities are exempt from sequestration and would therefore not be reduced under a sequestration order. These include: 1) Part D low-income subsidies; 2) the Part D catastrophic subsidy; and 3) Qualified Individual (QI) premiums.

The Budget Control Act of 2011, which created the automatic cuts, singles out the exempt programs from sequester cuts, including Social Security benefits, Veteran Affairs' services, refundable tax-credit payments, some economic recovery programs, and some child-nutrition programs. Additionally, several programs under CMS's direction would be exempt from sequestration, including the Pre-Existing Condition Insurance Plan Program, the Consumer Operated and Oriented Plan Program, Medicare Health Information Technology Incentive Payments, Grants to States for Medicaid, Quality Improvement Organizations, and the Independent Payment Advisory Board (IPAB).

Everything else must be cut, program by program, line by line, with little flexibility. Agencies, Congressional offices, and the president's own staff will have only seven months to make these cuts to their full-year budgets. Recent estimates suggest that such cuts would require reductions of about 5.0 percent in fiscal year 2013 for the total budget for non-exempt, non-defense programs, and those reductions must occur sometime between March 1 and September 30, 2013.

The White House Office of Management and Budget may have some leeway in implementing the cuts, depending on how it interprets the law, but it won't be able to touch the programs specified as off-limits.

Is this like a government "shut down"?

Unlike a shutdown, a sequester is more like a government slowdown. Interactions with the federal government that are labor intensive and time consuming—like obtaining approval for a drug through the Food and Drug Administration (FDA) or receiving a grant from the National Institutes of Health (NIH)—will become even more challenging as delays become more inevitable.

The effects of the March 1 sequester would phase in slowly over the next two months. The law generally requires 30 days notice before absences, which will be required of employees across the government—from FDA inspectors and NIH clinicians to CDC disease outbreak investigators. Other actions, such as hiring freezes and a slowdown in contracting, could happen much more quickly.

Agencies have some discretion on when to make the cuts. However, delaying cuts upfront means deeper cuts later in the year if Congress is unable to develop a deal to address sequestration.

Additionally, other budget and fiscal issues must soon be addressed by Congress and the White House. On March 27, the current continuing resolution, which keeps the government funded, expires. Congress will have to hash out a plan to fund the government by then or else the government slowdown would turn into a full-blown shutdown. As part of the American Taxpayer Relief Act of 2012, the total amount of funding for fiscal year 2013 must be equivalent to fiscal year 2012 funding or an additional sequestration goes into effect. Without a grand bargain, it is unlikely that the appropriations process would be able to fully offset the cuts from the sequestration beginning on March 1.

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Whose idea was the sequester?

According to Washington Post journalist Bob Woodward, who reported extensively on the 2011 fiscal cliff negotiations in his book, The Price of Politics, the sequester was the White House’s idea. Congress agreed to support the concept by incorporating it into the Budget Control Act, with neither party believing it would ever be necessary. Woodward's reporting shows the White House developed the idea and presented it to Democratic leadership on July 28 and to House Speaker John Boehner's team on July 30.

Both sides saw it as a way to force further negotiations later, according to Woodward. The Obama team thought there was "no chance" Republicans would allow defense cuts to happen, while Boehner said Democrats would cave to save domestic programs. Woodward quotes Boehner predicting the sequester "is never going to happen."

Republicans have repeatedly said the sequester was President Obama's idea, but they supported it early on and provided the votes needed to put it into law.


As always, should you have additional questions or would like additional information on this or any federal/state policymaking issue, please contact us at advocacy@apma.org or call 800-ASK-APMA/800-275-2762.

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