What Is Sequestration in Medical Billing?

Medicare payments are a major source of revenue for many providers. But a policy called sequestration reduces these payments, creating challenges for practices that rely on timely reimbursements.

In This Blog, We Will Cover:

•    What Is Sequestration in Medical Billing
•    Understanding the 2% Sequestration Cut in Medicare Payments
•    Financial Impact for Providers
•    How Revenue Is Reduced
•    Effects on Budgeting and Cash Flow Forecasts
•    Example Calculations
•    What Claim Types Sequestration Affects
•    How to Identify Sequestration on a Claim
•    How to Calculate Sequestration Reductions in Medical Billing
•    Practical Ways to Manage Sequestration
•    Latest Policy Status of Medicare Sequestration

What Is Sequestration in Medical Billing?

Sequestration in medical billing refers to the mandatory 2% cut in Medicare Fee-for-Service (FFS) payments that began under the Budget Control Act of 2011. This law was passed to reduce federal spending, and one of the ways it was enforced was by reducing Medicare reimbursements across the board starting in April 2013.

Understanding the 2% Sequestration Cut in Medicare Payments

The sequestration cut is a mandatory reduction of 2 percent applied to all Medicare Fee-for-Service (FFS) payments. It began on April 1, 2013, as part of the federal government’s effort to control spending under the Budget Control Act of 2011.

The reduction is applied after Medicare calculates the patient’s deductible, coinsurance, and any other claim-level adjustments. This means the patient portion is not reduced, only the Medicare payment to the provider.
These reductions are not recoverable, and providers cannot bill patients for the difference. Over time, sequestration affects cash flow, profit margins, and financial planning, especially in specialties with high Medicare patient volumes.

Financial Impact of Sequestration for Providers

For practices that rely heavily on Medicare reimbursements, even a 2 percent cut can change how revenue flows and how finances are managed. These reductions affect daily operations as well as long-term planning, making it important for providers to understand the specific challenges sequestration creates. Below are the main financial impacts it has on providers:

1. Direct Reduction in Medicare Payments

Sequestration lowers reimbursements by 2 percent on every Medicare FFS claim. This creates a consistent revenue loss that cannot be billed to patients or appealed.

2. Revenue Loss Adds Up Over Time

Even a small cut becomes significant when applied across hundreds or thousands of claims. High-volume practices can lose tens of thousands of dollars annually.

3. Strain on Cash Flow Management

Because sequestration reduces expected payments, providers may face shortfalls when managing payroll, overhead, or vendor costs.

4. Challenges in Budgeting and Forecasting

Practices that do not account for sequestration in their financial models often overestimate revenue, leading to gaps between projected and actual collections.

5. Pressure on Small and Mid-Sized Practices

Smaller practices, where Medicare patients make up a large percentage of visits, feel the impact most. The cut reduces already thin operating margins.

6. Impact on Long-Term Financial Planning

Healthcare organizations must factor sequestration into long-term planning, as the adjustment affects contracts, staffing decisions, and overall revenue strategy.

Claim Types Affected by Sequestration

• Medicare Part A - Includes inpatient hospital stays, skilled nursing facility care, hospice services, and home health. All payments under Part A are reduced by 2 percent.
• Medicare Part B - Covers physician visits, outpatient services, therapy, lab tests, and imaging. These professional claims are also subject to the 2 percent cut.
• Durable Medical Equipment (DME) - Payments for equipment such as wheelchairs, oxygen supplies, and infusion pumps are reduced, creating added strain for suppliers with thin margins.

Not Affected by Sequestration

• Patient responsibility - Deductibles and coinsurance owed by patients remain unchanged. The cut applies only to Medicare’s portion of the payment.
• Medicare Advantage (Part C) and Part D - These managed care and prescription drug plans are not directly subject to sequestration adjustments.

How to Identify Sequestration on a Claim?

Sequestration does not mean a claim was denied or processed incorrectly. Instead, it appears as a mandatory adjustment on Medicare remittance advice (RA) or electronic remittance advice (ERA). The most common indicator is the adjustment code CO-253 or CARC 253, which signals that a federal payment reduction has been applied. This adjustment always comes after other calculations such as deductibles, coinsurance, and contractual write-offs. 

For example, if a Medicare Part B claim has an allowed amount of $100, and the patient owes $20 in coinsurance, Medicare’s portion would normally be $80. With sequestration, the RA will show a CO-253 adjustment of $1.60, reducing the final payment to $78.40. 

How to Calculate Sequestration Reductions in Medical Billing?

Calculating sequestration is straightforward once you understand when the reduction is applied. The 2 percent cut is taken after Medicare has determined the allowed amount and after deductibles and coinsurance are subtracted. Patient responsibility is not affected, so the reduction only applies to Medicare’s share of the payment.

The formula is:

Sequestration Reduction = (Medicare Payment Portion × 2%)

Can Sequestration Be Avoided Completely?

No. Sequestration is a federally mandated adjustment under the Budget Control Act of 2011, and providers cannot appeal or bypass it. The 2 percent cut applies to all Medicare Fee-for-Service payments, regardless of specialty, claim type, or billing accuracy. Even clean claims that meet every payor requirement will still be subject to sequestration.

What you can do

• Plan for sequestration’s impact by factoring the 2 percent reduction into financial projections and revenue forecasts.
• Monitor CO-253 adjustments on remittance advices regularly to track the exact reduction applied to Medicare claims.
• Strengthen clean claim rates so more claims are paid correctly the first time, offsetting sequestration-related losses.
• Reduce denials through accurate coding, complete documentation, and payer-specific compliance checks.
• Tighten A/R follow-up to ensure outstanding claims are resolved quickly and cash flow remains steady.
• Maintain predictable revenue by treating sequestration as a standard adjustment in financial planning rather than an unexpected loss.

Latest Policy Status of Medicare Sequestration

The 2 percent sequestration cut for Medicare Fee-for-Service claims is still active in 2025. It is applied after deductibles and coinsurance are calculated and shows up on remittance advice with code CO-253. While sequestration was temporarily suspended during the COVID-19 public health emergency, it has since been fully reinstated. There are currently no policy changes or legislation in place to end it, so providers should plan for the reduction to continue.

Conclusion

Sequestration is a federal payment adjustment that reduces Medicare Fee-for-Service reimbursements by 2 percent. While it may look minor on a single claim, the impact compounds quickly for providers who handle large Medicare volumes. Since sequestration cannot be appealed or avoided, the best way to manage it is by ensuring every other part of the billing process runs smoothly. Accurate claim submission, proper payment posting, and timely reporting help prevent additional revenue loss and keep cash flow steady.

At OneMed Billing, our Claim Submission Services are designed to ensure that your claims are error-free and meet payer requirements the first time, so the only reduction you see is the mandatory sequestration cut. 

Frequently Asked Questions

1. What does sequestration mean on an EOB?

Sequestration on an Explanation of Benefits (EOB) means Medicare reduced its payment by 2 percent as required by federal law. It appears as adjustment code CO-253.

2. How do you calculate 2% sequestration?

Take the Medicare payment portion after deductibles and coinsurance, then multiply by 2 percent. Example: $160 × 2% = $3.20 reduction.

3. What is the Medicare sequestration rate for 2025?

The Medicare sequestration rate for 2025 remains at 2 percent for all Fee-for-Service claims.

4. How does sequestration work?

Medicare processes the claim normally, applies deductibles and coinsurance, then reduces its share of the payment by 2 percent before issuing payment.