Medicare sequestration is an automatic 2% reduction that Medicare takes off nearly every payment it sends to providers and health plans. It has been running since April 2013, it is still in effect in 2026, and it is scheduled to continue through fiscal year 2032. The cut comes out of Medicare’s share of the payment, not the patient’s, so if you are a beneficiary, your deductible, coinsurance, and premium are unaffected.
How the 2% Cut Is Applied
The reduction happens at the end of the claim calculation, after Medicare has determined the approved amount and subtracted whatever the beneficiary owes. Medicare then takes 2% off the remaining payment before sending it to the provider. On a $100 approved service with standard 20% coinsurance, the math works like this:
- Medicare-approved amount: $100
- Beneficiary coinsurance (20%): $20
- Medicare’s share before sequestration: $80
- 2% sequestration reduction: $1.60
- Provider receives from Medicare: $78.40
For traditional Medicare (Parts A and B), the cut applies to each individual claim payment. For Medicare Advantage (Part C) and prescription drug plans (Part D), it applies to the monthly capitation payment CMS sends the plan for each enrolled member.1Centers for Medicare & Medicaid Services. Additional Information Regarding the Mandatory Payment Reductions in the Medicare Advantage, Part D, and Other Programs
What Beneficiaries Owe Does Not Change
This is the point that matters most if you are enrolled in Medicare. Sequestration does not increase your deductible, your coinsurance, your premium, or any other out-of-pocket cost. Your cost-sharing is calculated on the full approved amount, exactly as if the reduction did not exist.
Providers also cannot bill you for the missing 2%. On assigned claims, the provider accepts Medicare’s payment as payment in full and absorbs the cut. On unassigned claims, the limiting charge still caps what the provider can collect from you, and the sequestration reduction cannot be added on top.2Noridian Medicare. Sequestration – JF Part A The same protection extends to Medicare Advantage and Part D enrollees: CMS has prohibited plans from raising premiums, increasing cost-sharing, or trimming benefits to make up for the reduction in their capitation payments.1Centers for Medicare & Medicaid Services. Additional Information Regarding the Mandatory Payment Reductions in the Medicare Advantage, Part D, and Other Programs
What It Means for Providers and Plans
A 2% cut sounds small until you apply it to every Medicare claim a practice or hospital submits. The reduction touches office visits, hospital stays, outpatient procedures, lab work, durable medical equipment, home health, skilled nursing, and hospice. For large systems, the annual revenue loss can run into millions.
Part B Drugs
The math is especially tight on Part B drugs, the physician-administered medications like chemotherapy infusions. Medicare normally reimburses these at the average sales price plus 6%. Because the 2% sequestration is taken from Medicare’s 80% share of that amount, the effective reimbursement drops to roughly ASP plus 4.3%. For oncology practices, where drug acquisition costs dominate the ledger, that 1.7-point compression noticeably squeezes the margin between what the practice pays for a drug and what Medicare pays back.
Hospitals
Hospitals sit under stacked reductions. The Hospital Value-Based Purchasing Program already withholds 2% of base Medicare payments and redistributes it based on quality scores.3Centers for Medicare & Medicaid Services. The Hospital Value-Based Purchasing (VBP) Program Sequestration then takes its own 2% from what remains. A hospital that scores poorly on quality and also absorbs sequestration can see a combined effect larger than either policy produces alone.
Medicare Advantage and Part D
Whether a Medicare Advantage or Part D plan passes its own 2% capitation cut through to contracted providers depends entirely on the terms of each provider contract. CMS does not regulate those private arrangements.
Payments That Are Exempt
A handful of Medicare-related payments are shielded from sequestration by statute:
- Part D low-income subsidies that help low-income beneficiaries afford prescription coverage
- Part D catastrophic subsidies paid to plans for enrollees who reach the catastrophic threshold
- Qualified Individual (QI) premium payments to states that cover Part B premiums for certain low-income beneficiaries4Office of the Law Revision Counsel. 2 USC Chapter 20, Subchapter I: Elimination of Deficits in Excess of Maximum Deficit Amount
Everything else across Parts A through D is subject to the 2% cut. The statute also caps the Medicare reduction at 4%, and every sequestration order since 2013 has set it at 2%.5Office of the Law Revision Counsel. 2 USC 906 – General and Special Sequestration Rules
How Long the Cut Lasts
Sequestration took effect on April 1, 2013, and has run almost continuously since. The one significant pause came during COVID-19, when Congress suspended the cuts from May 1, 2020, through March 31, 2022. The reduction then phased back in at 1% from April through June 2022, with the full 2% resuming on July 1, 2022.
Congress has repeatedly extended the mandatory-spending portion of sequestration that covers Medicare. The Infrastructure Investment and Jobs Act pushed the end date to FY2031 for most mandatory spending, and the Consolidated Appropriations Act of 2023 added one more year specifically for Medicare benefit payments. The Congressional Budget Office has estimated that FY2032 will be the last year, with the 2% reduction applying through September 30, 2032.
The Separate PAYGO Threat
A different law can trigger additional Medicare cuts on top of the 2%. The Statutory Pay-As-You-Go Act of 2010 requires the Office of Management and Budget to issue across-the-board reductions whenever new legislation adds to the deficit without offsets. Under PAYGO, Medicare can be cut by up to 4%.6Congressional Research Service. Statutory PAYGO and Budget Reconciliation Legislation
This is not hypothetical. CBO estimated that legislation adding $2.3 trillion to deficits over 2025–2034 would trigger a PAYGO order cutting Medicare spending by 4%, roughly $45 billion, in FY2026 alone.7Congressional Budget Office. Potential Statutory Pay-As-You-Go Effects of a Bill to Provide Reconciliation Pursuant to H. Con. Res 14 If a PAYGO sequestration ever hit at the same time as the ongoing Budget Control Act sequestration, providers would face a combined 6% reduction.
Congress has historically avoided that stacking by zeroing out the PAYGO scorecards through later legislation, and it did so again in late 2025 to neutralize the threat heading into 2026.6Congressional Research Service. Statutory PAYGO and Budget Reconciliation Legislation The PAYGO statute has no expiration date, so the same pressure returns with every major deficit-increasing bill.