Federal budget sequestration was a prominent topic of discussion in healthcare through most of 2021 as providers and health plans faced a potential 6% reduction in payments.¹ On December 9, 2021, Congress passed the Protecting Medicare and American Farmers from Sequester Cuts Act (The Act) to reduce significant payment cuts that would have taken effect in 2022.² These payment changes have significant financial implications to health plans and healthcare providers in 2022 and beyond.

While Medicare providers and health plans will still see reductions in payments in 2022 relative to 2021, the cuts are reduced significantly, as shown in Figure 1.

Figure 1: Federal Medicare payments as a percentage of fee schedules before and after passage of The Act

Note: 4% PAYGO sequestration takes effect following a report produced by the White House Office of Management and Budget in late January of each year.

Additionally, physician payments under the Medicare Physician Fee Schedule (PFS) will be about 0.75% lower than 2021 payment levels, as illustrated in Figure 2.

Figure 2: Changes in payments under the Medicare Physician Fee Schedule before and after The Act

Note: Excludes the impact of sequestration.

How did we get here?

Budget sequestration has been a significant feature of federal financing discussions since the passage of the Statutory Pay As You Go (PAYGO) Act in 2010 and the Budget Control Act (BCA) in 2011. Under PAYGO rules, federal funding for a variety of federal programs is reduced whenever legislation passed during a Congressional session results in a net increase in the deficit (PAYGO sequestration). Under the BCA, a wide variety of federal spending was reduced to achieve mandatory savings targets (mandatory sequestration). Medicare is one of the programs affected by these cuts, and lawmakers put caps on the amount that Medicare payments could be reduced—4% for PAYGO sequestration, and 2% for mandatory sequestration.³ Most payments made by the federal government under the Medicare program are subject to sequestration, whether to providers under Part A and Part B or to health plans under Part C or Part D. The only exceptions are in Part C and Part D: low-income subsidies, the Part D risk corridor, and Part D federal reinsurance.

Federal legislators have engaged in a variety of actions to enhance provider payments in the wake of significant market disruptions caused by the COVID-19 pandemic. Figure 3 outlines three key Medicare payment policy developments in 2020 and 2021.

Figure 3: Key policy developments that affected Medicare payments in 2020 and beyond

With provisions set to expire in 2022 (or, in the case of PAYGO sequestration, take effect), most providers and health plans participating in the Medicare program were on course for a 6% payment reduction, with physicians shouldering a nearly 10% reduction in Medicare revenue. While Congress was widely expected to waive the 4% sequestration of Medicare payments required by statutory PAYGO rules, the fate of physician payments and the 2% mandatory Medicare sequester was unclear until Congress took legislative action.

Congress steps in

On December 7, 2021, the House passed The Act, which reduces or postpones these major cuts to Medicare payments, and paired this legislation with a must-pass measure that would permit Democrats to bypass the filibuster and lift the federal borrowing limit. This bill was taken up by the Senate and passed on December 9, 2021, and includes the following major provisions:

• The Act postpones PAYGO sequestration until 2023, delaying a 4% reduction to most Medicare payments as well as across-the-board cuts to many other federal programs.
• The Act provides for a phase-in period for the 2% mandatory Medicare sequester, extending the moratorium on payments through March 2022 and applying a reduced rate of 1% for April 2022 through June 2022. These reductions are offset by increases to sequestration in 2030.
• The Act provides for an across-the-board 3% payment increase for physicians in 2022 to follow the end of the 3.75% payment increase which applied in 2021. This means physicians will see on average about a 0.75% payment reduction in nominal payment rates in 2022 relative to 2021.
• The Act also postpones to 2023 the effective date for the Radiation Oncology Model and delays by one year the phase-in of new private payer rates in the clinical lab fee schedule.

While these changes primarily serve to mitigate payment reductions that would otherwise have occurred in 2022, they will have significant implications for health plans, providers, and employers.

Implications for key stakeholders

In addition to financial implications for providers participating in the Medicare program, this legislation will have significant impacts on Medicare Advantage organizations and Part D plan sponsors, commercial insurers, employers, and patients.

Providers participating in the Medicare program

Providers are spared by this legislation from significant cuts to Medicare payments in the midst of a pandemic. While many Medicare providers have tolerated the ongoing 2% reduction to nominal Medicare payments, an additional 4% cut due to PAYGO sequestration would have put significant additional pressure on provider operations. Instead, nonphysician providers will be given a slower glide path back to recent Medicare payment levels in the first half of 2022 given the phase-in of the 2% mandatory sequester. In addition to the sequester phase-in, physicians paid under the PFS will see about a 0.75% reduction in base payment levels as The Act’s 3% bump is slightly lower than the 3.75% boost provided in 2022. The Act does nothing to modify last year’s significant shift in the PFS toward higher payments for evaluation and management services with offsetting reductions to payments for other services paid under the PFS.⁴ While providers still face the prospect of significant payment cuts in 2023, they have been granted valuable additional time to prepare for potential future payment reductions.

Medicare Advantage organizations and Part D Plan sponsors

Sequestration also affects most payments to health plans under Medicare Advantage and Part D.⁵ Many health plans participating in these programs pass sequestration adjustments through to the payments they make to their network providers, though this is highly dependent on the specific terms of each provider contract. This same dynamic does not apply in the case of the 3% PFS payment increase, which was not factored into the benchmark payment rates that drive Medicare Advantage plan revenue. Medicare Advantage organizations were required to make an assumption regarding whether or not the 3.75% payment increase for PFS services would continue into 2022. If an organization developed its 2022 bids with an expectation that the 3.75% payment increase would not continue, this legislation establishes an increased level of provider reimbursement relative to the assumptions underlying those bid projections.

Other health programs and payers

While the scope of sequestration adjustments is typically limited to Medicare, the 3% increase to the PFS will filter through to Medicaid and commercial health coverages whenever physician payments are determined as a multiple of Medicare payment rates. This practice of using Medicare payment rates as a reference price for other lines of business such as the commercial market has grown increasingly common in recent years. As with Medicare Advantage, how this affects plans will largely be based on how a potential extension of the 3.75% increase in 2021 was anticipated in 2022 cost projections and rate filings. If payers assumed the 3.75% increase would continue, then this could create some modest benefit as the actual increase is only 3%. On the other hand, payers that did not assume a continuation of this transitional increase will pay 3% more for physician services than expected. Because commercial healthcare costs tend to be more focused on physician services than Medicare without any real increase to margins, the increased 2022 physician payment rates could have a larger relative impact on commercial health plans that determine payments as a multiple of current Medicare payment rates.

What comes next?

While The Act avoids most of the cuts that were scheduled to take place in 2022, the remaining cuts are still in play for calendar year 2023—an additional 4% to most Medicare payments and 7% for payments under the PFS. It is all but certain that stakeholders will lobby for further delays or elimination of these payment reductions, but Congress historically has not addressed similar issues in a proactive fashion. Health plans in particular should consider how any potential full or partial extensions of the 3% PFS update may affect provider payments as they develop rates for plans in 2023. Meanwhile, eyes will remain on our nation’s capital to see if federal legislators will pass legislation to avoid these future payment reductions to health plans and providers.

¹ The American Medical Association advocated on this issue starting in March 2021. See https://www.ama-assn.org/practice-management/medicare-medicaid/medicare-sequester-stakes-rise-6-doctor-pay-cut-store.

² S.610, The Protecting Medicare and American Farmers from Sequester Cuts Act, passed December 9, 2021. For more detail, please see https://www.congress.gov/bill/117th-congress/senate-bill/610/text.

³ The Congressional Research Service published a report in May 2021 that addresses this topic. See https://crsreports.congress.gov/product/pdf/R/R45106.

⁴ For more detail on the physician fee schedule changes in 2021 and federal action to phase in these changes, please see this Milliman article: https://www.milliman.com/-/media/milliman/pdfs/2021-articles/4-8-21-emerging-payment-rates.ashx.

⁵ As discussed previously, sequestration is not applied to Part D risk corridors, low-income premium and cost-sharing subsidies, or federal reinsurance in Part D.