Medicare sequestration has reduced reimbursements for providers by more than $150 billion since 2013, according to the Congressional Budget Office. This 2% drop is frequently reported as CO 253 on EOBs and ERAs. However, many billing teams continue to miscode or neglect it. Is your clinic losing revenue without knowing why Medicare is paying less?
Understanding sequestration in medical billing is crucial for hospital administrators, billing professionals, and claims analysts working with Medicare Fee-for-Service (FFS) claims. Sequestration adjustments are applied after all other reductions, such as coinsurance and deductibles, and affect inpatient, outpatient, DME, and lab payments. According to the Office of Inspector General (OIG), more than 30% of procedures misclassify sequestration-related adjustments, resulting in disparities between AR aging reports and financial audits.
This blog addresses the real effect of sequestration on Medicare billing, how to compute the adjustment correctly, and when to apply CO 253. We’ll also explain how Medicare Advantage plans differ, what’s excluded, and how to comply with federal payment standards without underreporting or facing an audit.
What is sequestration in medical billing?
Medicare sequestration is a 2% cut in Medicare payments imposed by law. This regulation has a direct influence on healthcare reimbursement and shows on EOBs as CO 253. Providers that fail to account for it properly risk underpayments and misapplied write-offs.
Background and policy origin
Sequestration, which was implemented by the Budget Control Act of 2011, was used to reduce government spending. It went into effect for Medicare Fee-For-Service (FFS) claims on April 1, 2013, and reduced payments by 2% overall. The decrease is applied after coinsurance, deductibles, and Medicare Secondary Payment Adjustments have been determined.
This implies that if Medicare ordinarily paid $80 for a claim after patient responsibility, they will now pay $78.40. The policy will continue unless Congress passes new laws. Between 2013 and 2025, sequestration cut Medicare payments by more than $150 billion (CBO, 2024).
Who is affected
The sequestration reduction pertains to:
- Physicians and hospitals’ outpatient departments
- Ambulatory Surgery Centers (ASCs)
- DMEPOS providers and pharmacies.
- Independent laboratories and SNFs
- Home health and hospice agencies
What is sequestration reduction in medical billing?
The sequestration decrease is a 2% required drop in Medicare payments that directly reduces provider compensation.
Sequestration reduction in federal payments
The Budget Control Act of 2011 mandated government expenditure cutbacks to lower the deficit. Medicare payments were included in the reduction beginning April 1, 2013. Following coinsurance, deductibles, and Medicare Secondary Payment (MSP) modifications, the regulation imposes a flat 2% reduction. This sequestration adjustment applies to all Medicare fee-for-service (FFS) payments.
Federal Payment Cuts for 2025
The CY 2025 Physician Fee Schedule (PFS) reduces Medicare rates by 2.93%, reflecting the expiration of interim modifications and statutory expenditure reduction.
This reduction is in addition to the regular 2% sequestration, which is applied after deductibles, coinsurance, and fee schedule calculations.
Total Provider Impact
Initial reduction: 2.93% decrease in conversion factor (from $33.29 to $32.35).
Sequestration: An additional 2% is deducted from the remaining payment amount.
During the effect, providers will get roughly 5% less money for Medicare Part B services in 2025 than they did in 2024.
Does sequestration apply to Medicare Advantage?
Yes, but indirectly. Sequestration affects Medicare Advantage (Part C) plan payments, not provider claims. CMS decreases payments to Medicare Advantage Organizations (MAOs) and Part D sponsors by 2%. These reductions may have an impact on how those plans compensate providers, but MAOs set their contract conditions with each provider.
To ensure accuracy, billers should:
- Identify CO 253 on the EOBs
- Confirm that the 2% reduction is solely applicable to the Medicare component after patient responsibility.
- Exclude it from patient billing.
How to Calculate Sequestration Reductions in Medical Billing
Understanding how to compute sequester adjustments helps to avoid underreporting and incorrect revenue posting. Many billing teams miss the precise date or base amount for applying the 2% discount.
Calculation Method
Step 1: After applying deductibles and coinsurance, calculate the Medicare-approved amount.
Step 2: Determine 80% of the allowed amount – this is the Medicare share.
Step 3: Apply a 2% sequestration cut to this Medicare share.
Example:
Approved amount: $100
Patient deductible: $10
Remaining: $90
Medicare pays 80% of $90 = $72
2% of $72 = $1.44
Final payment from Medicare: $70.56
Common Missteps to Avoid
The following are the missteps to avoid:
- Applying a discount to the whole fee rather than the Medicare share.
- Ignoring secondary payers who may pay the lower part.
- CO 253 is missing from the remittance. This number indicates sequestration on EOBs.
- Improper system configuration results in frequent write-off problems.
- Overwriting the real reimbursement and confusing it with contract modifications.
CO 253 Denial Code or Adjustment?
Understanding how CO 253 works into Medicare sequester billing will assist in preventing disputes and revenue loss. This section outlines the coding rules and handling processes to help billing teams avoid missing essential modifications.
CARC 253 Coding Standard
CARC 253 is the official Claim Adjustment Reason Code that denotes sequestration. Medicare uses this number for reporting the mandated 2% federal payment decrease enacted by the Budget Control Act of 2011.
- CO 253 indicates the drop due to sequestration.
- It applies to Medicare Fee-for-Service (FFS) claims with dates of service or discharge on or after April 1, 2013.
- It is not a refusal, but rather a required payment decrease.
- This adjustment is made after coinsurance, deductibles, and secondary payer contributions have been applied.
How to Handle CO 253 in Billing Systems
Billing software should identify CO 253 and label it as a non-applicable, federally required decrease. To prevent misclassification:
- Map CO 253 appropriately as contractual adjustments, not write-offs or denials.
- Ensure that sequestration logic is included in your billing system for all Medicare FFS claims.
- Create reports to track the effect of sequestration on CPT, NPI, and facility.
- Inform billing teams that CO 253 is not appealable and should not result in rework.
Sequestration Medicare Policy Updates (2025) and Timelines
Medicare sequestration will continue to affect payouts in 2025. This section discusses critical dates, suspension periods, and projected federal revisions.
Timeline and Suspension History
The 2% Medicare sequestration decrease started on April 1, 2013, as required by the Budget Control Act of 2011. It applies to all Medicare Fee-for-Service (FFS) claims after the deductibles and coinsurance have been determined.
- From May 2020 until March 2022, sequestration was postponed under the CARES Act owing to the COVID-19 emergency.
- April 2022 to June 2022: A gradual increase was implemented, and a 1% reduction was restarted in April, reverting to the full 2% by July 1, 2022.
- As of 2025, the 2% sequestration cut is operational and in place, with no current federal action to halt or remove it.
Future Outlook and Budget Impact
The CMS Office of the Actuary expects sequestration will lower Medicare expenses by more than $25 billion between 2023 and 2031. These measures assist the federal government in reaching long-term savings targets.
- There is no scheduled end date unless Congress approves repeal or modification measures.
- Sequestration impacts not just medical services, but also hospital outpatient payments, DMEPOS, and critical access facilities.
- Providers must continue applying precise contractual allowances to avoid revenue overstatement.
Conclusion
Medicare sequestration remains a mandated state cut that has a long-term impact on provider reimbursement. Accurate CO 253 coding and adjustment handling are critical to avoiding underpayments and reporting gaps. When billing teams handle FFS claims, failure to apply the 2% reduction appropriately might result in revenue errors. Although the effects of Medicare Advantage are indirect, they still demand expertise. Misclassifying this adjustment might result in audit difficulties and misaligned AR. Understanding sequestration is not an option—it is necessary for accurate Medicare billing in 2025.
FAQs
What is sequestration in medical billing?
Sequestration is a 2% mandatory reduction in Medicare payments, shown as CO 253 on EOBs. It applies after coinsurance, deductibles, and MSP adjustments.
How is the sequestration reduction calculated?
The 2% cut applies only to Medicare’s share after patient responsibility. It’s not based on the total allowed or billed amount.
What does CO 253 mean on an EOB?
CO 253 indicates the federally mandated sequestration adjustment. It’s not a denial, but a reduction that must be coded as a contractual adjustment.
Does sequestration affect Medicare Advantage plans?
Yes, but indirectly. Medicare reduces payments to Advantage plans, which may impact provider compensation depending on the plan contract.
Can sequestration adjustments be appealed?
No, sequestration cuts are mandated by law and not subject to appeal. Billing teams must apply CO 253 correctly to avoid reporting errors.
