Sequestration in Medical Billing: CO-253 and the 2% Medicare Cut Explained (2026)

Sequestration in medical billing is the mandatory 2% reduction to Medicare’s share of each fee-for-service payment, reported on the remittance as reason code 253, written off by the provider and never billed to the patient.

If your Medicare payments are always a little short of 80% of the allowed amount, sequestration is usually why. It does not change the fee schedule, the allowed amount or the patient’s deductible and coinsurance. It only trims the final check Medicare sends.

Two percent sounds small, but it applies to almost every Medicare fee-for-service claim you file. It also affects how you post remittances, how you read Medicare Advantage contracts, and how you forecast cash.

This guide explains where sequestration comes from, how long current law keeps it in place, how to calculate and post CO-253, and what happened to the separate 4% statutory PAYGO threat.

What Is Medicare Sequestration?

Sequestration is an automatic, across-the-board cut to certain federal spending. The Budget Control Act of 2011 created the mandatory spending sequester, and it caps the reduction to Medicare at 2%. The first order took effect on April 1, 2013, and later laws have extended it many times.

For providers, the effect is simple. Medicare prices the claim normally, applies the deductible and coinsurance, and then cuts its own payment by 2%. As First Coast and CGS, both Medicare contractors, explain, fee schedules and pricers are unchanged by sequestration; only the final payment amount is reduced.

How Long Will Medicare Sequestration Last?

Congress has extended the Medicare reduction repeatedly, usually to offset the cost of other legislation. According to the Congressional Research Service, the most recent extension came in the Consolidated Appropriations Act, 2026 (P.L. 119-75), enacted February 3, 2026.

Medicare reductions run for one year beginning the month after each sequestration order. CRS gives the FY2025 order as an example: its Medicare reductions took effect April 1, 2025, and run through March 31, 2026. In practice, plan on the 2% cut staying in place for years, unless Congress changes the law again.

How Is Sequestration Calculated?

1. Start with the allowed amount. Use the Medicare fee schedule amount for the code, locality and place of service.
2. Apply the deductible. Subtract any Part B deductible the patient still owes for the year.
3. Apply coinsurance. Medicare’s share is usually 80% of the remaining allowed amount; the patient owes the rest.
4. Apply any MSP adjustment. If Medicare is the secondary payer, calculate its secondary payment first.
5. Take 2% of Medicare’s payment. That amount is the CO-253 adjustment. The rest is what Medicare pays you.

Formula. Sequestration = 2% × (allowed amount − deductible − coinsurance), after any MSP calculation. Medicare payment = that same amount × 0.98.

Worked example: assigned claim

The line balances: $200.00 − $75.00 − $25.00 − $20.00 − $1.60 = $78.40. The patient owes $45.00 in deductible and coinsurance, exactly as without sequestration. The $75.00 contractual adjustment and the $1.60 sequestration are both provider write-offs. For how the CO-45 part works, see our guide to the contractual adjustment in medical billing and the CO-45 code.

Unassigned claims

On an unassigned claim, Medicare pays the beneficiary, and CGS explains that this reimbursement is also reduced by 2%. The patient’s own deductible and coinsurance are not reduced, and the provider still cannot collect more than the limiting charge from the beneficiary.

Where CO-253 Appears on the Remittance

CARC 253 reads “Sequestration – reduction in federal payment.” Medicare contractors report it on both the electronic remittance advice (ERA) and the standard paper remittance. Most ERAs pair it with group code CO, because the provider absorbs it.

• Part B professional and supplier claims: the reduction appears at the service-line level.
• Institutional outpatient claims: also reported at the line level.
• Institutional Part A claims: reported at the claim level.
• Drugs, DME and supplies: not exempt; all fee-for-service claim payments are subject to the reduction.

Because CO-253 is a payment reduction and not a denial, it should never land in your denial queue. Our guide to how inaccurate payment posting warps practice financials shows how CO-253 fits into the line-balancing formula.

Does Sequestration Apply to Medicare Advantage, Medicaid and Commercial Plans?

The Medicare Advantage row causes the most confusion. CRS explains that plans decide how to distribute the cut, but your provider contract governs whether they can pass it on. Look for clauses that pay “a percentage of the Medicare allowable,” refer to “federal payment reductions,” or follow “Medicare payment methodology.” Our payer contract management guide explains how to review these terms, and our payer contract management services can audit them for you.

How to Post and Monitor Sequestration

1. Map CARC 253 to its own adjustment code. Keep it separate from CO-45, so you can audit each one.
2. Exclude it from patient balances. Make sure CO-253 never transfers to patient responsibility or to a secondary payer.
3. Exclude it from denial metrics. It is a payment reduction, not an avoidable denial.
4. Check the math on a sample. Each month, divide CO-253 by Medicare’s payment plus CO-253 on sampled lines. The result should be 2%.
5. Watch Medicare Advantage remits. If an MA plan takes CO-253 and your contract does not allow it, dispute the reduction.

Also measure the 2% correctly. CO-253 equals 2% of Medicare’s payment before the reduction, so as a share of the cash you actually receive it is slightly higher, about 2.04%. A report showing exactly 2% of collections is usually computed on the wrong base. For how adjustments affect your A/R reports, see what A/R is in medical billing.

The Separate 4% Statutory PAYGO Sequester

Statutory PAYGO is a different law from the 2% Budget Control Act sequester. The Statutory Pay-As-You-Go Act of 2010 requires the Office of Management and Budget (OMB) to order a sequester if new laws increase the deficit on its scorecards, and it caps Medicare cuts at 4%.

In August 2025, the Congressional Budget Office estimated that the 2025 reconciliation law (P.L. 119-21) would trigger a PAYGO sequester for FY2026, with Medicare reductions limited to 4%, or an estimated $45 billion. Congress then reset the scorecards to zero in Section 8001 of P.L. 119-37, the continuing appropriations law enacted in November 2025. OMB’s annual PAYGO report, issued in January 2026, concluded that a sequestration order is not required, and OMB’s mid-2026 scorecards still show zero balances.

Sequestration vs Other Payment Reductions

Patients sometimes ask about the reduction on their Medicare Summary Notice. Our guide to patient balance billing rules explains what can and cannot be billed after Medicare pays.

Frequently Asked Questions