Most practices watch coding accuracy, claim submission and denials closely. Yet one small, steady cut to Medicare payments often goes unexplained: sequestration in medical billing. If every Medicare remittance shows a payment about 2% lower than the allowed math suggests, you are seeing it. It is not a billing error, and it is not a denial you can appeal. Instead, it is a federally required reduction that applies no matter how clean your claims are.
Quick answer: Medicare sequestration is a 2% cut to the Medicare-paid portion of fee-for-service claims, required by federal budget law. Medicare applies it after the deductible and coinsurance, it does not change what the patient owes, and it appears on the remittance as adjustment code CO-253. Post it as a contractual adjustment; do not appeal or bill the patient for it.
What Is Sequestration in Medical Billing?
Sequestration in medical billing is a federally mandated reduction in Medicare payments to providers. It began under the Budget Control Act of 2011 as an automatic spending cut, and Congress has extended it several times since. After a short pause during the COVID-19 public health emergency, the full 2% cut returned in July 2022.
In practice, sequestration does not change how you code or bill a claim. It only changes the final payment. Once Medicare sets the allowed amount and subtracts the patient’s share, it reduces the remaining payment by 2% before it pays you. Its key traits are:
- Covers Medicare fee-for-service (FFS) payments.
- Current rate: 2% of the Medicare-paid amount.
- Medicare calculates it after the deductible and coinsurance.
- Shows as a separate adjustment on the remittance advice.
- Not a billing error or a denial, so there is nothing to appeal.
Sequestration Reduction, Adjustment and Amount: Key Terms
Billing teams use three related terms. They describe the same cut from slightly different angles:
- Sequestration reduction: the percentage cut (2%) that Medicare applies to its payment after adjudication.
- Sequestration adjustment: the line item on the remittance advice (RA) that shows the cut, usually with CARC 253.
- Sequestration amount: the actual dollars deducted on a claim, which change with the size of the Medicare payment.
Sequestration posts as a contractual adjustment, because it arrives as CO-253. Still, track it under its own adjustment code, apart from fee-schedule write-offs. If your team blends them, reports hide what the cut really costs. For more on how these categories differ, see our guide to write-offs in medical billing.
Where Sequestration Applies in Healthcare
Federal sequestration covers many programs, but in medical billing it mainly hits Medicare. Specifically, it reduces:
- Medicare Part B payments for physician and outpatient services
- Medicare Part A payments to hospitals and other facilities
- Durable medical equipment (DME) and supplier claims
By contrast, Medicaid is exempt from sequestration, and commercial plans are not subject to it. CMS applies the cut automatically, uniformly and without negotiation.
Does Sequestration Apply to Medicare Advantage?
Not directly at the claim level, but often in practice. Sequestration reduces what CMS pays Medicare Advantage (MA) plans. Many MA plans then pass the same 2% cut on to providers, if their contracts allow it. As a result, some MA remittances show CO-253 and others do not. So review each MA contract for sequestration language, and check that the plan applies the cut only as the contract permits.
How Is Medicare Sequestration Calculated?
The formula is simple. Sequestration amount = Medicare payment (allowed amount minus patient responsibility) Ă— 2%. Follow these steps:
- Find the Medicare allowed amount.
- Subtract the patient’s deductible and coinsurance.
- Multiply the remaining Medicare payment by 2%.
- Subtract that amount to get the final payment.
Here are three worked examples using the standard 80% Medicare share after the deductible is met:
| Allowed amount | Patient coinsurance (20%) | Medicare payment before cut | Sequestration (2%) | Final payment |
|---|---|---|---|---|
| $150 | $30 | $120 | $2.40 | $117.60 |
| $200 | $40 | $160 | $3.20 | $156.80 |
| $250 | $50 | $200 | $4.00 | $196.00 |
Note that the patient still owes the full coinsurance. The cut comes only out of Medicare’s share, never out of the patient’s.
CO-253: The Sequestration Code in Medical Billing
On the remittance, sequestration appears as group code CO (contractual obligation) with claim adjustment reason code 253, “Sequestration – reduction in federal payment.” Although people often call it the “CO-253 denial code,” it is not a denial. The claim was processed and paid; the law simply requires a smaller payment.
- Claim is paid, just 2% less
- Required by federal law
- No appeal or resubmission
- Never billed to the patient
- Post as a contractual adjustment
- Claim is unpaid or partly unpaid
- Caused by coding, coverage or documentation issues
- Needs correction or appeal
- May shift to the patient in some cases
- Work in the denial queue
So train staff to spot CO-253 quickly. Otherwise, they may waste time appealing it or, worse, leave a small balance open on every Medicare claim.
How to Post Sequestration Adjustments Correctly
Correct posting keeps your A/R clean and your reports honest. When you post a Medicare remittance:
- Post the CO-253 amount as a contractual adjustment, using a dedicated sequestration adjustment code.
- Check that the cut equals 2% of the Medicare payment, not of the billed charge.
- Make sure no sequestration balance moves to the patient statement.
- Do not resubmit or appeal the claim for the sequestration amount.
- Include the adjustment in net collection rate calculations.
If your team struggles to keep Medicare and MA remittances straight, a dedicated payment posting team can post every adjustment to the right code and flag true underpayments for follow-up.
Impact of Sequestration on Healthcare Providers
A 2% cut looks small on one claim. However, it adds up fast for practices with many Medicare patients. For example, a practice that receives $500,000 a year in Medicare payments loses about $10,000 a year to sequestration. Over time, that gap affects margins, staffing and growth plans.
It also adds work. Teams need accurate net revenue forecasts, careful reconciliation and tight collections, because the margin for other losses is smaller. In short, sequestration makes every other leak in the revenue cycle more costly.
Best Practices to Manage Sequestration in Medical Billing
You cannot remove sequestration, but you can control its effect. Focus on these five habits:
- Review remittances closely: confirm the CO-253 amount on each Medicare and MA payment.
- Raise your clean claim rate: since every paid claim loses 2%, avoid losing more to rejections and delays.
- Track sequestration monthly: report the total cut so budgets and forecasts stay realistic.
- Train your billing team: make sure everyone knows CO-253 is not a denial and how to post it.
- Tighten the rest of the cycle: submit faster, cut A/R days and work real denials promptly.
Conclusion
Sequestration in medical billing is small per claim but large over a year. Once your team understands how the 2% cut is calculated, where it applies and how CO-253 should be posted, it stops causing confusion. The goal is not to fight sequestration. Rather, it is to account for it correctly and recover every other dollar through strong medical billing and coding support.
