Sequestration ‑ reduction in federal payment is a crucial issue for U.S. medical billers and coders in 2025. This mandatory 2% cut to Medicare Fee‑for‑Service (FFS) payments affects both Part A and Part B claims. Understanding its impact—and how to navigate ongoing legislative changes—is essential for accurate claim processing and revenue integrity.
Introduction
Sequestration ‑ reduction in federal payment refers to mandatory across‑the‑board cuts to federal healthcare reimbursements. Since April 1, 2013, Medicare claims for both physician (Part B) and institutional (Part A) services have been subject to a 2% reduction on the allowed amount after applying deductibles and coinsurance. However, as of 2025, new budget reconciliation legislation may trigger deeper cuts in upcoming years.
What Is Sequestration and How It Works
Under the Budget Control Act of 2011, sequestration requires automatic federal spending reductions when budget thresholds are exceeded. For Medicare FFS, this means:
- Claims with dates of service or discharge on or after April 1, 2013, receive a 2% reduction to Medicare payment (CARC 253: “Sequestration – reduction in federal payment”). :contentReference[oaicite:0]{index=0}
- The reduction applies after coinsurance and deductible calculations. Beneficiary liability is not reduced, but Medicare’s part of unassigned claims is affected. :contentReference[oaicite:1]{index=1}
2025 Policy Updates and Financial Implications
Additionally, recent budget reconciliation legislation passed in mid‑2025 increases concerns about future sequestration impacts:
- The law is projected to raise the federal deficit by approximately $3.4 trillion over ten years, which could automatically trigger additional mandatory Medicare cuts of up to 4% per year starting in 2026. :contentReference[oaicite:2]{index=2}
- According to CMS and budget watchers, if no legislative relief occurs, hospitals and physician services may face significant payment reductions post‑2025. :contentReference[oaicite:3]{index=3}
Impact on Billing and Coding
For professionals handling claim edits or reconciling remittance advice:
- You’ll see a line‑level or claim‑level adjustment labeled CO 253 or CARC 253 reflecting the sequestration cut.
- Ensure your revenue cycle systems deduct correctly post‑deductible/coinsurance. Coding edits should reflect the reduced allowed amount.
- Monitor for higher sequestration rates in 2026 onward unless Congress acts.
How to Adapt in 2025
Verify ERA/RA Adjustments
Confirm that CARC 253 appears properly on EOBs or ERAs. Some systems may require manual updates to mapping logic to account for sequestration reductions.
Update Your Financial Forecasting
Therefore, forecast reimbursement under both current 2% sequestration and potential deeper cuts. Communicate projected shortfalls to leadership and clinical teams.
Optimize Coding and Documentation
Additionally, focus on maximizing allowable revenue by ensuring accurate, complete coding—especially for services with new valuation codes or add‑on codes (e.g., caregiver training, social determinant services). CMS updated the Physician Fee Schedule for 2025, reducing the conversion factor by 2.93%, which compounds the effect of sequestration. :contentReference[oaicite:4]{index=4}
Example Scenario
For example, if a provider submits a Part B claim with an approved amount of $100:
- Deductible leaves $50 remaining.
- Medicare reimburses 80% → $40.
- Sequestration reduces Medicare payment by 2% → $39.20 (CARC 253 adjustment).
- Patient still pays $10 coinsurance.
Internal and External Resources
For further guidance:
- Refer to CMS 2025 Physician Fee Schedule Final Rule for details on conversion factor changes and new codes. :contentReference[oaicite:5]{index=5}
- Use KFF tracking of Medicare provisions for updates on reconciliation bill effects. :contentReference[oaicite:6]{index=6}
FAQ
What exactly triggers the sequestration cut?
The Budget Control Act mandates automatic across‑the‑board cuts when federal spending exceeds set thresholds. Medicare FFS payment reductions apply unless Congress intervenes.
How long will the 2% reduction continue?
The 2% sequestration cut has applied since April 1, 2013, and remains in effect today. Additional deeper cuts could begin in 2026 if deficit thresholds aren’t addressed. :contentReference[oaicite:7]{index=7}
Where does CARC 253 appear on the RA?
For Part A institutional claims, it appears at the claim level. For Part B physician/provider or outpatient claims, it appears at the line level. Ensure your clearinghouse or billing software recognizes it. :contentReference[oaicite:8]{index=8}
Conclusion
Sequestration ‑ reduction in federal payment remains a steady 2% Medicare reimbursement cut for 2025. However, the new federal budget and potential PAYGO triggers may bring deeper cuts starting in 2026. By verifying CARC 253 adjustments, updating forecasting models, and optimizing documentation and coding, billing and coding professionals can safeguard revenue and maintain compliance in this evolving payment landscape.
Stay proactive: monitor CMS and payer updates, and review your internal claim processing logic regularly. For more insights on managing denials or ICD‑10 coding best practices, visit your internal guides on ICD‑10 coding tips, common denial reasons, and prior authorization basics.