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PFM

What You Need to Know: Medicare + Sequestration

What is sequestration?

Sequestration, or “the sequester,” is a set of automatic spending cuts authorized by the Budget Control Act, which Congress passed and President Obama signed into law in August 2011.  Sequestration mandates $1.2 trillion in across-the-board spending cuts over the next 10 years, with roughly $85 billion slated for this year.

The $1.2 trillion in cuts will be applied evenly to both defense and discretionary domestic spending. The Department of Defense will face $550 billion in cuts, and domestic programs, including education, law enforcement, scientific research and many others will absorb the remainder of cuts.  However, the sequester does protect certain areas of spending from the cuts; spending on wars and military personnel, as well as money allocated for Medicaid, Social Security, Pell grants, veterans' benefits and certain low-income programs will be exempt.

Why is sequestration happening?

Sequestration was never intended to be the law of the land, but rather was enacted as a political maneuver as Democrats and Republicans struggled to reconcile differences over how and to what degree to address the growth of the U.S. national debt.   Sequestration was meant to apply pressure on Congress to come up with a longer term plan for deficit reduction.  The law stipulated that if Congress found a way to achieve the same level of savings ($1.2 trillion over 10 years), sequestration could be avoided.

Congress formed what is known as the "Super Committee," to find a less painful way to cut spending, but famously failed to do so by its initial deadline in November 2011.  In failing to reach a deal, sequestration was set to take effect January 2013, however Congress reached a last minute deal to avert the sequester (which coupled with the expiration of the Bush era tax cuts and the payroll tax cut was better known as the “fiscal cliff”). Congress essentially postponed sequestration, giving themselves two more months to try and reach a deal.  However, after two months’ time, Congress again failed to reach a deal and sequestration went into effect on March 1, 2013.

How is Medicare implicated?

While most non-discretionary spending, including Medicaid, is exempt from sequestration’s cuts, Medicare is not exempt.  Under sequestration, Medicare is a facing a 2 percent across-the-board cut to provider payments, effective April 1.  

Sequestration’s cuts to provider payments include payments for individual services under Medicare Parts A and B and monthly contractual payments to Part C (Medicare Advantage) and Part D (Prescription Drug) providers. In 2013, Medicare providers face approximately $11 billion in reimbursement cuts, and total reductions will total $123 billion through 2021 when sequestration ends.  

Date: 
Friday, March 15, 2013