Medicare Sequester Suspension Should Not Continue without Offsets

The March 2020 CARES Act and December 2020 Response and Relief Act temporarily suspended the 2 percent Medicare sequester, which has been in effect since the beginning of 2013. With the sequester scheduled to return on April 1, a new House bill (H.R 1868) would extend the suspension through the end of 2021. We estimate this suspension would cost $10 billion, or roughly $150 billion if made permanent. Lawmakers should not continue the suspension without offsets.

The Medicare sequester originated as part of an enforcement mechanism to encourage the 2011 Joint Selection Committee on Deficit Reduction to agree to a fiscal plan (importantly, this differs from the pay-as-you-go sequester scheduled to occur as a result of deficit increases from the American Rescue Plan). While the reduction itself is relatively blunt -- a 2 percent across-the-board reduction in scheduled provider payments and Medicare Advantage plan reimbursements -- it has proved an effective mechanism to modestly reduce the cost of Medicare for the federal government as well as beneficiaries. Indeed, lawmakers have extended the Medicare sequester several times, so it is now in place through 2030 as opposed to the original 2021 expiration date.

Congress temporarily suspended the Medicare sequester last spring, when the pandemic caused hospital revenues to "fall off a cliff" and consumption of health care services fell by 17 percent in just one quarter. This relief made sense then, but it isn't clear it makes sense now.

Based on to our COVID Money Tracker, Congress and the Executive Branch have already allocated nearly $400 billion of gross support and $300 billion of net support to health care providers. By the fourth quarter of last year, economy-wide health care spending was already as high as in the (mostly pre-pandemic) first quarter. Total provider revenue itself has largely recovered. Hospital revenue in particular appears to have recovered, and major health systems have been reporting continued profitability. While rural providers might still be suffering some revenue loss, the American Rescue Plan just set aside an additional $8.5 billion for support.

If lawmakers do continue the sequester suspension, they should fully offset the cost. A bipartisan Senate bill introduced by Sens. Jeanne Shaheen (D-NH) and Susan Collins (R-ME) would do just that, extending the suspension for the duration of the public health emergency while extending the sequester by a year to 2031. A number of other health-related offsets could also be considered. The table below includes a number of options proposed in the Trump and Obama budgets or elsewhere.

Policy Ten-Year Savings
Extend Medicare sequester by one year to 2031 ~$25 billion
Encourage entry of generic drugs and biosimilars $5 billion
Increase Medicare Part B deductible for new beneficiaries $10 billion
Reform physician self-referral rule $5 billion
Reduce add-on payments to rural hospitals <$5 billion
Reduce payments for hospice care $5 billion
Modify Part B drug payments to encourage use of lower-cost drugs $10 billion
Encourage use of generic drugs by low-income Medicare beneficiaries $20 billion
Reduce indirect medical education payments $10 billion
Expand competitive bidding for durable medical equipment $5 billion

Sources: Congressional Budget Office, CRFB calculations

The sequester was put in place as a backstop to try to ensure that lawmakers enacted more targeted deficit reduction. In this case, it should serve that purpose: any further suspension of the Medicare sequester should be fully offset. Allowing further extensions without offsets could set the stage for a longer-term sequester repeal that would be significantly more costly.