Physician Claims Under the Sequestration Rules for Medicare

(Update March 19, 2013)

"Sequestration" is a process of automatic, largely across-the-board spending reductions under which budgetary resources are permanently canceled to enforce certain budget policy goals. It was first authorized by the Balanced Budget and Emergency Deficit Control Act of 1985 (BBEDCA, Title II of P.L. 99-177, commonly known as the Gramm-Rudman-Hollings Act). It was applied again by Congress to affect current budgetary policy through the Budget Control Act of 2011 and the American Taxpayer Relief Act (ATRA) of 2012.

The sequester began officially on March 1, 2013. However, some of its effects will not be felt immediately. The Centers for Medicare and Medicaid Service announced on March 8, 2013 that if Congress does not act to stop the spending cuts before April 1, payments for all Medicare services provided on or after that date will be reduced by 2 percent. ACP is hopeful that Congress will arrive at a solution to avoid the cuts before hospitals and physicians feel them.

However, it is important to note that the Medicare provider cuts are treated differently under this law than they would be for a typical January 1st change to the physician fee schedule conversion factor. According to the Congressional Research Service, percentage payment reductions made under Medicare Parts A and B will be made to individual payments to providers for services (e.g., hospital and physician services) rather than to fee schedule allowable charges. Therefore, it has been ACP's understanding, which has now been confirmed by CMS, that for Part B services provided under assignment (i.e., when the patient agrees to have Medicare pay the physician directly), the reduced Medicare payment would be considered payment in full to the physician (meaning that the physician's payment receives the 2 percent reduction), but the patient's cost sharing amount remains unchanged. That is, the physician would continue to collect from the Medicare beneficiary the usual 20 percent co-insurance that applies despite the 2 percent cut. To illustrate, for a service for which Medicare allows $100, the physician would continue to collect $20 from the beneficiary (20 percent of $100). But during sequestration, the physician's payment from Medicare will be $80.00 (or 80 percent of $100) minus the 2 percent reduction, resulting in a physician payment of $78.40.

  Allowed amount   $100
  Beneficiary coinsurance   ($100 × 20%) = $20
  Payment to physician   ($100 × 80%) — 2% = $78.40


It should be noted that Medicare's payment to beneficiaries for unassigned Part B claims is subject to the 2 percent reduction. CMS encourages Medicare physicians, practitioners, and suppliers who bill claims on an unassigned basis to discuss with beneficiaries the impact of sequestration on Medicare's reimbursement.


While physician payments (and payment to other Medicare providers, such as hospitals, health plans, and drug plans) will be cut, Medicare's benefit structure generally remains unchanged (i.e., beneficiaries would not see a change in their Medicare coverage). Spending for certain Medicare programs and activities is exempt from sequestration and are therefore not reduced under a sequestration order. These include (1) Part D low-income subsidies; (2) the Part D catastrophic subsidy; and (3) Qualified Individual (QI) premiums.

The College is waiting to receive additional formal clarification and instructions from CMS regarding how physician claims will be affected by sequestration. In addition to claim payments, the College has raised questions regarding a number of additional payment issues that will likely be affected. For example, the College has recently learned that Elizabeth Holland, Director of the HIT Initiatives Group in CMS' Office of E-Health Standards & Services, has confirmed that Medicare meaningful use payments will be subject to the 2 percent mandatory cut to Medicare under budget sequestration. Participants receiving these payments under Medicaid will not be subject to the reduction. Other issues that continue to require clarification from the agency include:

  • How will sequestration affect the following programs linked to Medicare Part B claims—the Medicare Primary Care Bonus Program, the Electronic Prescribing (eRx) Incentive Program, and the Physician Quality Reporting System (PQRS) Program?
  • How will sequestration effect the Medicaid Parity payments that began this year for physicians delivering designated primary care services?

ACP is continuing to wait for further details of the Medicare sequester implementation and its impact on our members; the College will update this article as more information becomes available.

What Internists Should Do in Their Practices

Unfortunately, threats of payment cuts are nothing new in physician practices and a 2 percent cut may seem small compared to much larger cuts threatened each year due to the sustainable growth rate (SGR). However, under sequestration the "trickle down" effect may have deeper ramifications due to the other impacts patients may face, such as job losses and/or furloughs, hospitals having to reduce services due to payment cuts, and more. Practices should keep an eye on payments from all sources and should consider adjusting their annual budget to account for possible revenue shortfalls.

This represents the best information ACP has now; we will work with CMS to confirm all details and to obtain more guidance for physicians.