What Is Sequestration in Medical Billing?

A Complete Guide for Billing Teams and Practice Leaders

Sequestration might sound like a complex financial term, but for healthcare practices working with Medicare, it has a real and measurable effect on revenue. Every Medicare payment processed under this rule is slightly reduced — and understanding it can help your team manage expectations, track adjustments correctly, and maintain accurate financial reporting.

This blog explains everything you need to know about sequestration in medical billing.

You will learn:

What sequestration means in the medical billing context
How and where it appears on your remittance advice
How to calculate the sequestration amount
Whether it applies to Medicare Advantage plans
How to post and report it correctly in your revenue cycle

Understanding the Policy Background

Why Does Sequestration Exist?

Sequestration is a mandatory reduction applied to certain federal payments. It was created under the Budget Control Act of 2011 as part of federal spending control measures.

For Medicare Fee-for-Service (FFS) claims, sequestration began in April 2013 and continues to apply today. The reduction rate is two percent of the Medicare payment portion.

Key facts to remember:

The reduction does not affect the Medicare allowable amount.
The patient’s deductible and coinsurance remain unchanged.
It applies to all Medicare Part A and Part B FFS claims, including hospital and professional services.

Sequestration on Remittance Advice

What Code Will You See?

The sequestration reduction appears on your remittance advice (RA) or electronic remittance advice (ERA) as:
Group Code: CO
Reason Code: 253
Description: Sequestration – Reduction in Federal Payment

This adjustment represents a mandatory payment reduction, not a denial. The patient should never be billed for this amount.

Where It Appears in the Workflow

It can appear either at the service line level or the claim level, depending on the payer setup.
Your posting rules must map CO 253 as a contractual adjustment, not as patient responsibility.
It should not appear in your denial queue or be appealed unless misapplied.

How Is Sequestration Calculated?

Step-by-Step Calculation

Each step below uses aligned phrasing for clarity and balance.

Identify the Medicare allowed amount for the billed service or claim.
Subtract the patient deductible that applies for the date of service.
Deduct the coinsurance portion owed by the patient as standard.
Calculate the Medicare payment share after cost-sharing amounts.
Apply a two percent reduction to that Medicare payment portion only.
The result equals the final payment remitted to the provider.

Example of Sequestration Math

Allowed amount: 1000 dollars
Deductible: 0 dollars
Coinsurance: 200 dollars (20 percent)
Medicare payment share: 800 dollars
Sequestration reduction: 2 percent of 800 = 16 dollars
Final payment: 784 dollars

In this example, the patient still owes 200 dollars in coinsurance, and the 16-dollar reduction is absorbed by the provider as a contractual write-off.

Does Sequestration Apply to Medicare Advantage?

Medicare Advantage (MA) Contracts

Medicare Advantage plans are not automatically required to follow sequestration rules. However, many plans apply similar reductions when their contracts allow it.

What to check in your MA contract:

Language referencing “Medicare payment methodologies” or “federal payment reductions.”
Clauses that allow payment adjustments due to “budget control reductions” or “federal sequestration.”
Phrases indicating payment as a “percentage of Medicare allowable net of sequestration.”

If your contract is unclear, request clarification or negotiate language that defines whether the reduction applies.

Other Payers

Commercial payers: Usually do not apply sequestration unless explicitly written into the contract.
State Medicaid: Some states implement similar reductions, but this varies widely and must be confirmed individually.

Why Sequestration Matters for Your Practice

Even though two percent may sound small, it can significantly affect cash flow over time, especially in Medicare-heavy specialties.

Main Impacts

Reduces total Medicare collections by two percent of eligible claims.
Does not change patient responsibility or increase out-of-pocket cost.
Can distort financial reports if not tracked and posted accurately.

By acknowledging sequestration in forecasts and reports, practices can avoid discrepancies between expected and actual cash.

How to Post and Manage Sequestration

Posting Best Practices

Use these equal-length guidelines for consistent process alignment:

Map CO 253 as a non-billable contractual adjustment in your system.
Configure auto-posting for both claim-level and line-level CO 253 entries.
Exclude CO 253 amounts from patient statements and appeal queues.
Review posting rules after software updates to ensure accuracy.

Reporting and KPIs to Track

Monitor these metrics regularly:

Total Medicare cash and CO 253 totals each month.
CO 253 as a percentage of Medicare collections (target two percent).
Variance between forecasted and actual sequestration write-offs.
Trend by payer, provider, and service type to detect anomalies.

Internal Control Checklist

Educate billing staff that CO 253 is not a denial.
Audit remittance samples monthly for correct posting.
Review Medicare Advantage contracts quarterly.
Exclude CO 253 from avoidable denial metrics.

Final Thoughts

Sequestration in medical billing is not an error or a denial — it is a federal payment reduction policy. Understanding how it appears on remittances, how to post it correctly, and how to forecast its impact ensures that your financial reports remain clean and consistent.

By training your billing team, maintaining clear mapping in your system, and monitoring the CO 253 adjustment each month, you can turn this mandated reduction into a predictable and manageable part of your revenue cycle.

A well-structured sequestration process means no confusion, no billing errors, and complete transparency across your financial statements.