Introduction

Sequestration is the automatic reduction (i.e., cancellation) of certain federal spending, generally by a uniform percentage.¹ The sequester is a budget enforcement tool that Congress established in the Balanced Budget and Emergency Deficit Control Act of 1985 (BBEDCA, also known as the Gramm-Rudman-Hollings Act; P.L. 99-177, as amended) intended to encourage compromise and action, rather than actually being implemented (also known as triggered).² Generally, this budget enforcement tool has been incorporated into laws to either discourage or encourage certain budget objectives or goals. When these goals are not met, either through the enactment of a law or lack thereof, a sequester is triggered and certain federal spending is reduced.

Sequestration is currently used as a budget enforcement mechanism as part of the Statutory Pay-As-You-Go Act of 2010 (Statutory PAYGO; P.L. 111-139), the Budget Control Act of 2011 (BCA; P.L. 112-25), and the Fiscal Responsibility Act of 2023 (FRA; P.L. 118-5). At this time, only the BCA mandatory spending sequester is in effect; it is scheduled to continue each year through FY2031 for non-Medicare benefit payment spending and through FY2032 for Medicare benefit payments. However, the Statutory PAYGO sequester and the FRA discretionary sequester are current law and can be triggered if the budget enforcement rules are broken (and Congress does not take action to change or waive these rules).

Medicare, which is a federal program that pays for covered health care services of qualified beneficiaries,³ is subject to a reduction in federal spending associated with the implementation of these sequesters, although special rules limit the extent to which sequestered expenditures can be reduced.

This report begins with an overview of budget sequestration and Medicare before discussing how budget sequestration has been implemented across the different parts of the Medicare program. Additionally, this report provides appendixes that include references to additional Congressional Research Service (CRS) resources related to this report and budget terminology definitions, as defined by BBEDCA.

Budget Sequestration

Under current law, sequestration is a budget enforcement tool that occurs because certain budgetary goals have not been met. When a sequester is triggered, all applicable budget accounts, unless exempted by law, are reduced by a certain percentage amount for a fiscal year.⁴ The percentage reduction varies between and within budget accounts depending on the categories of funding, as described below, contained within each budget account.

After identifying each category of funding within a budget account, sequestration reductions are applied evenly across all budget account subcomponents referenced in committee reports, budget justifications, and/or Presidential Detailed Budget Estimates—also known as programs, projects or activities.⁵ For budget accounts that contain only one category of funding, all sequestrable funds are reduced by the same corresponding percentage. For accounts that contain multiple categories of funding, the total amount of each category of sequestrable funds is reduced by its corresponding percentage. The reduced budget resources usually are permanently cancelled.⁶

A sequester can apply to either discretionary or mandatory spending. Discretionary spending is associated with most funds provided by annual appropriations acts. While all discretionary spending is subject to the annual appropriations process, only a portion of mandatory spending is provided in appropriations acts.⁷ Mandatory spending is generally provided by permanent laws, such as the Social Security Act, which made indefinite budget authority permanently available for Medicare benefit payments.⁸ Some federal programs, including Medicare, can receive both discretionary and mandatory funding.

In the event that a sequester is triggered, the Office of Management and Budget (OMB) is responsible for calculating the across-the-board percentage reductions and calculates separate percentages for Medicare, certain other health programs, and other nondefense and defense funding.⁹ Due to sequestration rules, which are covered later in this report, mandatory Medicare benefit payments receive a specific percentage reduction different from other types of federal spending.¹⁰

The methodologies used to calculate these percentages and the sequestered amounts are published in a report produced by OMB. Once the President issues a sequestration order, the associated report is made available to the public and transmitted to Congress.¹¹

Budget Enforcement Rules

At present, there are three budget enforcement rules that could trigger sequestration. One was established by the BCA, one was established by Statutory PAYGO, and one was established by the FRA. The three rules and their corresponding sequesters can be summarized as follows (and are presented in Table 1):

Budget Control Act

The BCA established a bipartisan Joint Select Committee on Deficit Reduction (Joint Committee), which was responsible for developing legislation that would reduce the deficit by at least $1.2 trillion from FY2012 to FY2021.¹² However, the Joint Committee was unable to achieve this goal; therefore, Congress and the President were unable to enact corresponding deficit reduction legislation by a date specified in the law. As a result, the sequestration of certain mandatory spending initially from FY2013 to FY2021 was automatically triggered.¹³ (This report refers to these spending reductions as the BCA mandatory sequester.)

Subsequent legislation extended this sequestration through FY2031 for non-Medicare benefit payment spending and through FY2032 for Medicare benefit payments. Legislation that extended the BCA mandatory sequester includes the following:

• The Bipartisan Budget Act of 2013 (BBA 2013; P.L. 113-67) extended the BCA mandatory sequester through FY2023;
• A law modifying the cost-of-living adjustment (COLA) for certain military retirees (P.L. 113-82) extended it through FY2024;
• The Bipartisan Budget Act of 2015 (BBA 2015; P.L. 114-74) extended it through FY2025;
• The Bipartisan Budget Act of 2018 (BBA 2018; P.L. 115-123) extended it through FY2027;
• The Bipartisan Budget Act of 2019 (BBA 2019; P.L. 116-37) extended it through FY2029;
• The Coronavirus Aid, Relief, and Economic Security Act (CARES Act; P.L. 116-136) extended it through FY2030;
• The Infrastructure Investment and Jobs Act (P.L. 117-58) extended it through FY2031; and
• The Consolidated Appropriations Act, 2023 (P.L. 117-328) extended it through FY2032, but only with respect to Medicare benefit payments.

Additional legislation suspended the application of the BCA mandatory sequester to Medicare during the Coronavirus Disease 2019 (COVID-19) pandemic from May 2020 through March 2022 and limited the reductions to 1% from April 2022 through June 2022. (See "Temporary Suspension of Medicare Sequestration.")

Statutory PAYGO

The Statutory PAYGO Act established a budget enforcement mechanism generally requiring that legislation affecting direct (mandatory) spending and revenues does not have the effect of increasing the deficit over a 5- and/or 10-year period. If such legislation were to become law, a sequester of certain mandatory spending would be required. This budget enforcement rule does not have a sunset date and therefore remains in effect under current law. (This reduction is referred to in this report as Statutory PAYGO sequester.)

Although legislation estimated to increase the deficit has been enacted since 2010 (when the Statutory PAYGO Act was enacted), a Statutory PAYGO sequester has never been triggered. To avoid any potential sequester, such legislation has often included a provision effectively exempting it from the PAYGO requirements.¹⁴

A recent exception to this practice, however, was the American Rescue Plan Act of 2021 (ARPA; P.L. 117-2), which did not include any provision that excluded its budgetary effects from the Statutory PAYGO requirements. Therefore, its estimated deficit increases of over $1.9 trillion and over $2.0 trillion were placed on the 5-year and 10-year PAYGO scorecards, respectively.¹⁵ To avoid a sequester, however, the balances on the scorecards for FY2022 were transferred to FY2023 by the Protecting Medicare and American Farmers from Sequester Cuts Act (P.L. 117-71). The Consolidated Appropriations Act, 2023 (P.L. 117-328), subsequently transferred the balances on the scorecards for FY2023 to FY2025 and will transfer the balances on the scorecards for FY2024 to FY2025 after the first session of the 118^th Congress adjourns.

A PAYGO sequester, including the 4% reduction to Medicare benefit payments, could be triggered in 2025 unless similar legislative action is taken before then.

If a PAYGO sequester were to be triggered, neither the Statutory PAYGO Act nor the Budget Control Act include any explicit directions as to how the two sequesters would be implemented alongside each other.

Fiscal Responsibility Act

The FRA established statutory limits on discretionary spending for FY2024-FY2025.¹⁶ These discretionary spending limits (caps) restrict the amount of spending permitted through the annual appropriations process for defense and nondefense programs. Any breach of these discretionary caps would result in the sequestration of nonexempt discretionary funding within the applicable category (defense and/or nondefense). (This reduction is referred to in this report as the FRA sequester.)

For more information on budget sequestration, see CRS Report R42050, Budget "Sequestration" and Selected Program Exemptions and Special Rules; CRS Report R42972, Sequestration as a Budget Enforcement Process: Frequently Asked Questions; and CRS Report R45941, The Annual Sequester of Mandatory Spending through FY2029.

Medicare Overview

Medicare, which is a federal program that pays for covered health care services of qualified beneficiaries, is subject to sequestration, although special rules limit the extent to which it is applied. Due to the varying payment structures of the four parts of the program, sequestration is applied differently across Medicare.

Medicare was established in 1965 under Title XVIII of the Social Security Act to provide hospital and supplementary medical insurance to Americans aged 65 and older. Over time, the program has been expanded to also include certain disabled persons, including those with end-stage renal disease. In CY2022, the program covered an estimated 65.0 million persons (57.3 million aged and 7.7 million disabled).¹⁷

The Congressional Budget Office (CBO) estimated that total Medicare spending in FY2023 will be about $1 trillion and will increase to about $1.9 trillion in FY2032.¹⁸ Almost all Medicare spending is mandatory spending that is used primarily to cover benefit payments (i.e., payments to health care providers for their services), administration, and the Medicare Integrity Program (MIP). The remaining Medicare outlays are discretionary and used almost entirely for other administrative activities that are described in more detail later in this report.

Medicare consists of four distinct parts:

• 1. Part A (Hospital Insurance, or HI) covers inpatient hospital services, skilled nursing care, hospice care, and some home health services. Persons aged 65 and older are entitled to premium-free Part A if they or their spouse paid Medicare payroll taxes for at least 40 quarters (about 10 years) on earnings covered by either the Social Security or the Railroad Retirement systems.¹⁹ Part A services are paid for out of the Hospital Insurance Trust Fund, which is mainly funded by a dedicated 2.9% payroll tax on earnings of current workers, shared equally between employers and workers.
• 2. Part B (Supplementary Medical Insurance, or SMI) covers a broad range of medical services, including physician services, laboratory services, durable medical equipment, and outpatient hospital services. Enrollment in Part B is optional, but most beneficiaries with Part A also enroll in Part B. Part B benefits are paid for out of the Supplementary Medical Insurance Trust Fund, which is primarily funded through Part B beneficiary premiums and federal general revenues.
• 3. Part C (Medicare Advantage, or MA) is a private plan option that covers all Parts A and B services, except hospice. Individuals choosing to enroll in Part C must be enrolled in Parts A and B. About one-third of Medicare beneficiaries are enrolled in MA. Part C is funded through both the HI and SMI trust funds.
• 4. Part D is a voluntary private plan option that covers outpatient prescription drug benefits. About three-quarters of Medicare beneficiaries are enrolled in Medicare Part D or have coverage through an employer retiree plan subsidized by Medicare. Part D benefits are also paid for out of the Supplementary Medical Insurance Trust Fund and are primarily funded through Part D beneficiary premiums, federal general revenues, and state transfer payments.

For more information on the Medicare program, see CRS Report R40425, Medicare Primer.

Beneficiary Costs

Beneficiaries are responsible for paying Medicare Parts B and D premiums, as well as other out-of-pocket costs, such as deductibles and coinsurance,²⁰ for services provided under all parts of the Medicare program.²¹ Under Medicare Parts A, B and D, there is no limit on beneficiary out-of-pocket spending, and most beneficiaries have some form of supplemental insurance through private Medigap plans, employer-sponsored retiree plans, or Medicaid to help cover a portion of their Medicare premiums and/or deductibles and coinsurance.²² Medicare Advantage has limits on beneficiary out-of-pocket spending.

Provider and Plan Payments

Under Medicare Parts A and B, the government generally pays providers directly for services on a fee-for-service basis using different prospective payment systems and fee schedules.²³ Under Parts C and D, Medicare pays private insurers a monthly capitated per person amount to provide coverage to enrollees, regardless of the amount of services used. The capitated payments are adjusted to reflect differences in the relative cost of sicker beneficiaries with different risk factors including age, disability, or end-stage renal disease.

Health Care Fraud and Abuse Control Program

The Health Care Fraud and Abuse Control Program (HCFAC) was established by the Health Insurance Portability and Accountability Act (HIPAA; P.L. 104-191) and is responsible for activities that fight health care fraud and waste.²⁴ HCFAC is funded using both mandatory and discretionary funds and consists of three programs: (1) the HCFAC program, which finances the investigative and enforcement activities undertaken by the Department of Health and Human Services (HHS), the HHS Office of Office of Inspector General, the Department of Justice, and the Federal Bureau of Investigation, (2) Medicaid Oversight, and (3) Medicare Integrity Program (MIP).

Historically, MIP has focused on combating fee-for-service fraud in Medicare Parts A and B. However, increases in private Medicare enrollment—Parts C and D—have expanded program integrity efforts into capitated payment systems as well.

While HCFAC is not a part of the Medicare program, MIP is authorized by the same title of the Social Security Act as Medicare and focuses entirely on the program. As a result, this portion of HCFAC is treated as a part of Medicare benefit payments under a sequestration order and is subject to the Medicare mandatory sequestration percentage limits.²⁵

Administrative Spending

The administration of Medicare is funded through a combination of discretionary and mandatory resources that are subject to reductions under a discretionary or mandatory sequestration order, respectively. Discretionary administration funding includes amounts for payments to contractors to process providers' claims, beneficiary outreach and education, and maintenance of Medicare's information technology infrastructure. Mandatory administration funding includes amounts for quality improvement organizations and Part B premium payments for Qualifying Individuals (QI).²⁶

Medicare Sequestration Rules

Special rules limit the total effect of budget sequestration on Medicare (see Table 1). Most notably, BBEDCA, as amended by the BCA, prohibits Medicare benefit payments from being reduced by more than 2% under a BCA mandatory sequestration order. Similarly, Statutory PAYGO prohibits Medicare benefit payments from being reduced by more than 4% under a Statutory PAYGO sequestration order.²⁷ The caps do not apply to Medicare mandatory and discretionary administrative spending, which is subject to the unrestricted percentage reduction under both BCA and Statutory PAYGO sequestration orders.

Under the current mandatory sequestration process triggered by the BCA, the Medicare sequestration percentage is capped at 2%.²⁸ Therefore, regardless of the percentage reduction applied to other mandatory spending, Medicare benefit payments cannot be reduced by more than 2%.

For the FY2013-FY2021 sequestration orders, the reduction percentages were determined under the following method. If OMB were to determine that total nonexempt, nondefense mandatory funds needed to be reduced by a percentage larger than 2% in order to achieve necessary savings under a BCA sequestration order for a given year, then a 2% reduction would be made to Medicare benefit spending, and a uniform reduction percentage for the remaining non-Medicare benefit, nonexempt, nondefense mandatory programs would be recalculated and increased by an amount to achieve the necessary level of reductions.²⁹ If the uniform percentage reduction needed to achieve the total amount of savings were less than 2%, then the determined percentage would be applied to Medicare as well as to all other nonexempt non-Medicare nondefense mandatory spending.

If a mandatory sequestration order were to be triggered by Statutory PAYGO, the process would be the same as above, but the reduction of payments for Medicare benefits would be capped at 4%.³⁰

Beyond FY2021, there is no statutory requirement that the BCA mandatory sequester achieve a certain level of budgetary savings in defense and nondefense spending and, consequently, no specific amounts to apportion to the different spending categories. The statutes extending the BCA mandatory sequester (see "Budget Control Act") therefore required that the applicable percentage reductions for FY2022 through FY2031 be the same as those under the FY2021 sequestration order. (See Table 2.) The statute extending sequestration only for Medicare benefit payments for FY2032 required a 2% reduction for the first six months of the FY2032 sequestration order and 0% for the next six months.

In addition to the Medicare percentage caps, BBEDCA also prohibits Statutory PAYGO and BCA mandatory sequestration effects from being included in the determination of annual adjustments to Medicare payment rates established under Title XVIII of the Social Security Act, including the Part C growth percentage and the Part D annual growth rate.³¹ (See "Reductions in Benefit Spending.")

Certain Medicare programs and activities are explicitly exempted from Statutory PAYGO and BCA sequestration orders. Specifically, Part D low-income subsidies,³² Part D catastrophic subsidies (reinsurance),³³ and QI premiums cannot be reduced under a mandatory sequestration order.³⁴

Medicare Sequester Execution

Timing

Once a sequester is triggered, OMB issues a sequestration order for, at most, one fiscal year, and additional orders are issued for each subsequent fiscal year, as necessary. These orders can be issued either before or during the fiscal year in which they apply, depending on the trigger.

Reductions in budget resources are to be made during the effective period of a sequestration order; however, special rules differentiate when a sequestration order is implemented for benefit payments. As a result, sequestration orders are applied to Medicare benefit payments on a different timeline than other mandatory and discretionary Medicare funds (i.e., Medicare administration and HCFAC).

Once OMB issues a sequestration order, Medicare benefit payments are sequestered beginning on the first date of the following month and remain in effect for all services furnished during the following one-year period.³⁵ In the event that a subsequent sequester order is issued prior to the completion of the first order, the subsequent order begins on the first month after the initial order has been completed.³⁶ As an example, the first BCA mandatory sequester order (FY2013) was issued on March 1, 2013, and took effect April 1, 2013. It remained in effect through March 31, 2014. The FY2014 order was issued on April 10, 2013 (corrected on May 20, 2013), and was in effect from April 1, 2014, to March 31, 2015. Subsequent sequestration orders have followed this timeline (i.e., have been in effect from April of the designated fiscal year through March of the subsequent fiscal year). With future sequestration orders required to be issued prior to the completion of preceding orders, the first six months of the FY2032 sequester order, which has a required 2% reduction, would be in effect from April 1, 2032, through September 30, 2032, and the second six months of the FY2032 sequestration order, which has a 0% reduction, would be in effect from October 1, 2032, through March 31, 2032.

All other sequestrable funding is reduced only during the fiscal year associated with the sequester report. For example, the first BCA mandatory sequester order (FY2013) reduced appropriate administrative spending from March 1, 2013, to September 30, 2013. The second order for FY2014 sequestered funds from October 1, 2013, to September 30, 2014.

While OMB uses current law to determine the amount of funds available to be sequestered and corresponding percentage reductions, actual Medicare outlays will not be known until after the end of the fiscal year. Since sequestration orders are issued either before or during the fiscal year in which they are applicable, OMB estimates the total sequestrable budget authority for Medicare, and other accounts with indefinite budget authority, in order to determine necessary sequestration percentages.³⁷

If Medicare outlays exceed the estimated amount included in a sequestration order for that fiscal year, the additional outlays are sequestered at the established percentage for that fiscal year. If Medicare outlays are determined to be less than the estimated amount, no adjustments are made to the sequestration order. In other words, OMB does not adjust sequestration percentages for any category of budget authority once actuals are realized for accounts with indefinite budget authority. Similarly, OMB does not adjust future orders to account for any previous discrepancies between estimates and actuals.

Temporary Suspension of Medicare Sequestration

During the COVID-19 pandemic, Congress took a number of actions to address financial challenges faced by health care providers. This included suspending the application of the BCA mandatory spending sequestration to the Medicare program. Specific legislation included the following:

• The Coronavirus Aid, Relief, and Economic Security Act (CARES Act; P.L. 116-136) initially suspended Medicare sequestration from May 2021 through December 2021
• The Consolidated Appropriations Act, 2021 (P.L. 116-260), extended the suspension through March 2021
• An Act to Prevent Across-the-Board Direct Spending Cuts, and for Other Purposes (P.L. 117-7), extended the suspension through December 2021
• The Protecting Medicare and American Farmers from Sequester Cuts Act (P.L. 117-71) extended the suspension through March 2022 and limited the Medicare reductions under sequestration to 1% from April 2022 through June 2022

Beginning July 1, 2022, the full 2% sequester was re-implemented.

Reductions in Benefit Spending

Parts A and B

Under Medicare Parts A and B, participating providers, such as hospitals and physicians, are paid by the federal government on a fee-for-service basis for services provided to a beneficiary. According to guidance issued by the Centers for Medicare & Medicaid Services (CMS), any sequestration reductions are to be made to claims after determining coinsurance, deductibles, and any applicable Medicare Secondary Payment adjustments.³⁸ Therefore, sequestration applies only to the portion of the payment paid to providers by Medicare; the beneficiary cost-sharing amounts and amounts paid by other insurance are not reduced.

As an example, if the total allowed payment for a particular service is $100 and the beneficiary has a 20% co-insurance, the beneficiary would be responsible for paying the provider the full $20 in co-insurance. The remaining 80% that is paid by Medicare would be reduced by 2% under the FY2023 sequestration order, or $1.60 in this example, resulting in a total Medicare payment of $78.40. In total, the provider would receive a payment of $98.40. This reduced payment is considered payment in full and the Medicare beneficiary is not expected to pay higher copayments to make up for the reduced Medicare payment.³⁹

Part A inpatient 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,⁴⁰ the reduction is to be applied to payments for such services incurred at any time 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,⁴¹ the reduced payment is to be considered payment in full and the Medicare beneficiary will not pay higher copayments to make up for the reduced amount.⁴²

Medicare nonparticipating providers, which are providers that do not elect to accept Medicare's allowed payments as payment in full on all claims for services furnished to program beneficiaries in a given year, are not subject to the same rules. Medicare nonparticipating providers receive a Medicare payment based on a lower maximum allowable charge under the fee schedule on all services provided and may charge beneficiaries a limited amount in addition to the fee schedule amount (balance bill charge) on nonassigned claims.⁴³ In these instances, instead of the Medicare check being sent to the provider, a check that incorporates the 2% reduction is mailed to the patient. The patient must then pay the provider an amount that incorporates the sequestered amount. More specifically, as payment, the beneficiary is responsible for paying the provider the amount listed on the check, any cost sharing, balance bill charges, and the sequestered amounts taken out of the provider check.⁴⁴ This contrasts with payment for Part B services provided under assignment, where the Medicare participating provider cannot charge the beneficiary for revenue lost due to sequestration.

Annual adjustments to Medicare payment rates are determined without incorporating sequestration.⁴⁵ However, the Medicare Payment Advisory Commission does incorporate the effects of sequestration when assessing the adequacy of provider payments.⁴⁶ The commission uses these annual assessments to develop payment adjustment recommendations to the HHS Secretary and/or Congress.

Part C (Medicare Advantage)

Under Medicare Advantage, private health plans are paid a per-person monthly amount to provide all Medicare-covered benefits, except hospice, to beneficiaries who enroll in their plans. These capitated monthly payments are made to MA plans regardless of how many or how few services are furnished to enrolled beneficiaries. The plan is at risk if costs for all of its enrollees exceed program payments and beneficiary cost sharing; conversely, the plan can generally retain savings if aggregate enrollee costs are less than program payments and cost sharing.

In general, CMS payments to the private plans administering Medicare Advantage (Medicare Advantage Organizations, or MAOs) comprise amounts to cover medical costs, administrative expenses, private plan profits, risk adjustments, and plan rebates to beneficiaries.⁴⁷ These fixed payments are determined every year with CMS approval through an annual "bid process," and the amounts can vary depending on the private plan.⁴⁸

With respect to sequestration, reductions are made uniformly to the monthly capitated payments to MAOs.⁴⁹ MAOs have discretion on how to distribute any sequestration cut but must adhere to their legal obligations.⁵⁰

Some MAOs have attempted to pass the reduction in their capitation rates onto providers through lower payment rates; however, MAOs may be limited in their ability to do so.⁵¹ CMS has provided instructions regarding the treatment of contract and noncontract providers that provide services under Part C. Specifically, "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."⁵² Therefore, in order for MAOs to reduce provider payments by the sequestered amount, specific language within a contract must allow the reduction or the contract would need to be renegotiated.⁵³

In certain instances, such as when beneficiaries receive emergency out-of-network care, MAOs need to reimburse the noncontracted providers; in such cases, the MAOs are required to pay at least the rate providers would have received if the beneficiaries had been enrolled in original Medicare. However, MAOs have the discretion of whether or not to incorporate sequestration cuts into payments to noncontracted providers for those services.⁵⁴ Noncontracted providers must accept any payments reduced by the sequestration percentage as payment in full.

In addition, regulations in the annual bid process restrict MAO's potential responses to sequestration. Specifically, MAOs are limited to "reasonable" revenue margins and a set Medicare/non-Medicare profit margin discrepancy, among other requirements.⁵⁵ MAOs are also restricted from allowing sequestration to impact a beneficiary's plan benefits or liabilities.⁵⁶

As HHS computes annual adjustments to Medicare payment rates, the Secretary cannot take into account any reductions in payment amounts under sequestration for the Part C growth percentage.⁵⁷ In other words, plan payment updates are to be determined as if the reductions under sequestration have not taken place. This results in larger annual adjustments compared to baselines that incorporate sequestration cuts.

Part D

Under Medicare Part D, each plan receives a base capitated monthly payment, called a direct subsidy, which is adjusted to incorporate three risk-sharing mechanisms (low-income subsidies, individual reinsurance, and risk corridor payments). While each plan receives the same direct subsidy amount for each enrollee regardless of how many benefits an enrollee actually receives, plans receive different risk-sharing adjustments in their monthly payments. With respect to sequestration, the 2% reductions are made only to the direct subsidy amounts.⁵⁸ Part D risk-sharing adjustments are exempt from sequestration and are therefore not reduced.⁵⁹

In addition, similar to provider payments made by MAOs, whether and how sequestration affects a Part D plan sponsor's payment to its contracted providers is "governed by the payment terms of the contract between the plan sponsor and its network pharmacy providers."⁶⁰

Part D also contains a Retiree Drug Subsidy Program, which pays subsidies to qualified employers and union groups that provide prescription drug insurance to Medicare-eligible, retired workers. Instead of a capitated monthly payment, each sponsor receives a federal subsidy at the end of the year to cover a portion of gross prescription drug costs for each retiree during that year. Under this program, sequestration reductions are applied to the annual subsidy amount.⁶¹

Similar to Part C, the HHS Secretary is prohibited from taking into account any reductions in payment amounts under sequestration for purposes of computing the Part D annual growth rate.⁶²

Health Care Fraud and Abuse Control Program

As noted, the HCFAC program is not part of Medicare but does receive mandatory and discretionary funds to ensure the programmatic integrity of the Medicare program. Under a BCA sequestration order of mandatory funds, MIP funds are treated as a part of Medicare benefit payments and are therefore subject to the Medicare 2% sequester limit.⁶³ HCFAC mandatory funding that does not exclusively address Medicare is reduced by the nondefense mandatory sequester rate (5.7% in FY2023), when applicable.

Administrative Expenses

Under either a mandatory or discretionary sequestration order, administrative spending within nonexempt Medicare and HCFAC programs is reduced by the applicable nondefense rate determined by OMB.⁶⁴

Medicare and the BCA Mandatory Sequester

With the exception of the CARES Act, as amended, May 2020 through March 2022 suspension (and the 1% limit from April through June 2022), Medicare benefit payments have been subject to the 2% annual reduction limit established by the BCA since the first BCA mandatory sequester order was issued in FY2013.⁶⁵ Nondefense mandatory budget authority reductions, which have applied to mandatory Medicare administrative spending, fluctuated between 5.1% and 7.3% from FY2013 through FY2021. (See Table 2.) Under the sequestration orders that have been issued since (FY2022-FY2024), mandatory Medicare administrative expenses have been and are to be sequestered by the FY2021 nondefense mandatory percentage, 5.7%.⁶⁶

Traditionally, Medicare benefit payments comprise the largest single source of funds available to be sequestered and the largest single source of funds that are sequestered in a given mandatory sequestration order, as shown in Figure 1 and Figure 2, respectively. Under the FY2024 BCA mandatory sequester order, the estimated $952.2 billion in Medicare benefit payments subject to sequestration (not including administration) were expected to represent about 87.3% of all Medicare and non-Medicare resources available to be sequestered.⁶⁷ Of the funds expected to be sequestered, the estimated Medicare benefit sequestration amounts of $19.0 billion were expected to account for about 69.2% of all sequestered funds.⁶⁸ The smaller percentage of Medicare sequestered amounts relative to the percentage of Medicare amounts available to be sequestered is a reflection of Medicare being subject to a 2% reduction limit, while nondefense mandatory and defense mandatory amounts are not.

FY2013-FY2024

Figure is interactive in the HTML version of this report.

Source: CRS analysis of OMB Reports to the Congress on the Joint Committee Sequestration for FY2013 to FY2024.

Notes: Each fiscal year refers to amounts sequestered in accordance with that fiscal year's sequestration order. Sequestrable budget authority refers to all resources estimated to be available to be sequestered. Administrative funding is not included in Medicare benefit payment totals. All percentages are estimates. The fiscal years with asterisks in the Medicare percentage of total do not reflect the CARES Act, as amended, temporary suspension of Medicare sequestration from May 2020 through March 2022, or the 1% limit in effect from April 2022 through June 2022.

FY2013-FY2024

Figure is interactive in the HTML version of this report.

Source: CRS analysis of OMB Reports to the Congress on the Joint Committee Sequestration for FY2013 to FY2024.

Notes: Each fiscal year refers to amounts sequestered in accordance with that fiscal year's sequestration order. Sequestered Amounts refers to all resources estimated to be sequestered. Administrative funding is not included in Medicare benefit payment totals. All percentages are estimates. The fiscal years with asterisks in the Medicare percentage of total do not reflect the CARES Act, as amended, temporary suspension of Medicare sequestration from May 2020 through March 2022, or the 1% limit in effect from April 2022 through June 2022.

CBO estimates that Medicare benefit payment outlays will almost double from FY2022 to FY2032 (from $983 billion to $1.9 trillion), the last year of BCA mandatory sequestration for Medicare benefit payments.⁶⁹ Most of this expected increase is due to an aging population and rising health care costs per person.⁷⁰ Most of this increased amount would be subject to sequestration.

Appendix A. Additional CRS Resources

To gain a deeper understanding of the topics covered in this report, readers may also wish to consult the following CRS reports:

CRS Report R40425, Medicare Primer

CRS Report R43122, Medicare Financial Status: In Brief

CRS Report R45494, Medicare Advantage (MA)–Proposed Benchmark Update and Other Adjustments for CY2020: In Brief

CRS Report R40611, Medicare Part D Prescription Drug Benefit

CRS Report R46240, Introduction to the Federal Budget Process

CRS Report R41965, The Budget Control Act of 2011

CRS Report R42506, The Budget Control Act of 2011 as Amended: Budgetary Effects

CRS Report RL34424, The Budget Control Act and Trends in Discretionary Spending

CRS Report R46752, Expiration of the Discretionary Spending Limits: Frequently Asked Questions

CRS Insight IN11148, The Bipartisan Budget Act of 2019: Changes to the BCA and Debt Limit

CRS Report R42050, Budget "Sequestration" and Selected Program Exemptions and Special Rules

CRS Report R42972, Sequestration as a Budget Enforcement Process: Frequently Asked Questions

CRS Report R45941, The Annual Sequester of Mandatory Spending through FY2029

CRS Report R41157, The Statutory Pay-As-You-Go Act of 2010: Summary and Legislative History

CRS Insight IN12168, Discretionary Spending Caps in the Fiscal Responsibility Act of 2023

CRS Insight IN12183, The FRA's Discretionary Spending Caps Under a CR: FAQs

Appendix B. Budget Terminology Definitions

As defined by the Balanced Budget and Emergency Deficit Control Act of 1985 (BBEDCA; P.L. 99-177, as amended) and simplified where appropriate

Budget Authority—Authority provided by federal law to enter into financial obligations that will result in immediate or future outlays involving federal government funds.

Budgetary Resources—Amounts available to enter into new obligations and to liquidate them. Budgetary resources are made up of new budget authority (including direct spending authority provided in existing statute and obligation limitations) and unobligated balances of budget authority provided in previous years.

Discretionary Appropriations—Budgetary resources (except to fund direct-spending programs) provided in appropriation Acts.

Mandatory Spending—Also known as direct spending, refers to budget authority that is provided in laws other than appropriation acts, entitlement authority, and the Supplemental Nutrition Assistance Program.

Medicare Benefit Payments—All payments for programs and activities under Title XVIII of the Social Security Act.

Revised Nonsecurity Category—Discretionary appropriations other than in budget function 050, often referred to as nondefense category.

Revised Security Category—Discretionary appropriations in budget function 050, often referred to as defense category.

Sequestration—The cancellation of budgetary resources provided by discretionary appropriations or direct spending laws.

For definitions of other budget terms mentioned in this report but not defined by BBEDCA, see U.S. Government Accountability Office, A Glossary of Terms Used in the Federal Budget Process, GAO-05-734SP, September 1, 2005, at https://www.gao.gov/assets/80/76911.pdf.