As we near the end of the calendar year, the Medicare sequester will reemerge as an important topic for Congress. A sequester is a budgetary tool that automatically cuts federal spending across all issue areas. This client alert will discuss the two sequesters that have direct implications for providers, hospitals and health plans: the Budget Control Act of 2011 (BCA) and the Pay-As-You-Go (PAYGO) sequester, as well as when these potential cuts could take effect without congressional action.
BCA Sequester
The Balanced Budget and Emergency Deficit Control Act of 1985 established the sequester as a budget enforcement tool. The sequester was intended to encourage lawmakers to work together and has been used as an enticement to achieve budget goals. When these goals are not met, the sequester is triggered, resulting in a reduction of certain federal spending. There are specific rules governing which federal accounts are subject to the sequester. For Medicare, beneficiaries see little to no impact, whereas plans and providers see the majority of an impact with reductions in payments.
The BCA established the sequester by creating a process to increase the debt ceiling by a total of $2.1 trillion in exchange for reductions in spending. The reductions in spending were to be determined by the formation of the Joint Select Committee on Deficit Reduction. When the committee did not come up with an agreement, it triggered (1) caps on discretionary spending (funding provided through the annual appropriations process) and (2) an annual sequester to mandatory spending programs. Most of the reductions come from payments to Medicare providers, capped at a 2% reduction, but over 200 other budget accounts are impacted including compensation and services for crime victims, citizenship and immigration services, fish and wildlife restoration and conservation, and Drug Enforcement Administration operations. There is an exemption for Social Security, Medicaid, civil and military employee pay and veterans programs. The BCA sequester was originally set to end in 2021, but has been extended six different times:
- The Bipartisan Budget Act of 2013 extended the sequester through FY2023.
- A law modifying the cost-of-living adjustment (COLA) for certain military retirees extended the sequester through FY2024.
- The Bipartisan Budget Act of 2015 extended the sequester through FY2025.
- The Bipartisan Budget Act of 2018 extended the sequester through FY2027
- The Bipartisan Budget Act of 2019 extended the sequester through FY2029.
- The Coronavirus Aid, Relief, and Economic Security Act extended the sequester through FY2030.
- The CARES Act, as amended by the Consolidated Appropriations Act, 2021, and an Act to Prevent Across-the-Board Direct Spending Cuts, and for Other Purposes also temporarily suspended the application of sequestration to Medicare from May 1, 2020, through Dec. 31, 2021.
Additionally, the bipartisan infrastructure package that passed the Senate, but awaits action in the House, included an extension of the Medicare sequester until FY2031 as a way to pay for the legislation.
PAYGO
The Statutory Pay-As-You-Go Act of 2010 established the PAYGO sequester. The law requires that new legislation does not change taxes, fees or mandatory spending that would increase the deficit. At the end of each congressional session, the Office of Management and Budget (OMB) sums enacted legislation, known as the scorecard. If the enacted legislation increased the deficit, then the PAYGO sequestration would be triggered to reduce the deficit by the annual amount of increased deficit. The same 200-plus budget accounts that are sequestered by the BCA sequester are also used for the PAYGO sequester. However, the Medicare accounts are capped at a 4% reduction for the PAYGO sequester.
The PAYGO sequester has never been triggered. Although Congress has passed legislation that has been estimated to increase the deficit, Congress has always voted on a bipartisan basis to reduce the sum of the legislation enacted that impacts the deficit to zero. For example, the enactment of the Tax Cuts and Jobs Act of 2017 (TCJA) would have resulted in an increase to the deficit that would trigger PAYGO starting in 2018. However, included in the Continuing Resolution in December 2017 was a section to not include the TCJA from the PAYGO scorecard.
As mentioned above, at the end of this congressional session, OMB will total the budget effects of all legislation enacted during the session to see if the budget deficit was increased either over the next five or 10 years. This congressional session will show that legislation increased the deficit primarily due to the enactment of the American Rescue Plan Act of 2021. The budgetary effect of the bill, as determined by the Congressional Budget Office (CBO), shows that over 10 years the bill increased the deficit by roughly $1.9 trillion and thus will trigger PAYGO sequester. OMB will be required to eliminate the $1.9 trillion over the next five years, or $381 billion per year. Medicare would receive a 4% reduction to payments, or roughly $36 billion a year, and the remaining mandatory spending accounts outside of Medicare would be responsible for $345 billion a year in reductions. However, according to CBO $80‒$90 billion is all that is available in the non-Medicare accounts, significantly lower than what is necessary. Therefore, the target reduction amount would not be met within the five years, and would be extended for another five years resulting in the 4% Medicare reductions to occur for 10 years.
Potential Congressional Action
The BCA sequester is set to restart Jan. 1, 2022. While Congress suspended the BCA for Medicare from May 2020 through December 2021 due to the COVID-19 pandemic, it will likely go back into effect and won’t be delayed again. This will result in a 2% cut to Medicare to payments to health care providers for hospitalizations, physician services, prescription drugs, skilled nursing facility care, home health visits and hospice care. In traditional fee-for-service Medicare, the 2% sequester reduction is applied directly to provider payments; whereas for Medicare Advantage and prescription drug benefits (Part D plans), the 2% sequester is applied to Medicare’s monthly capitation payment to the provider. The PAYGO sequester would be triggered two weeks following the start of the new Congress, mid-January 2022. As mentioned above, the PAYGO sequester has never been triggered. If it is triggered, then a 4% cut will occur, on top of the 2% BCA cut, resulting in a 6% cut to Medicare plans and providers. We expect Congress to pass either a continuing resolution or an omnibus spending bill in December, and it is likely that Congress will come together on a bipartisan basis to avert the 4% PAYGO cut in this end-of-year legislation.
This document is intended to provide you with general information regarding the Medicare sequester. The contents of this document are not intended to provide specific legal advice. If you have any questions about the contents of this document or if you need legal advice as to an issue, please contact the attorneys listed or your regular Brownstein Hyatt Farber Schreck, LLP attorney. This communication may be considered advertising in some jurisdictions. The information in this article is accurate as of the publication date. Because the law in this area is changing rapidly, and insights are not automatically updated, continued accuracy cannot be guaranteed.