On March 1, 2013, President Obama issued a sequestration order directing the Office of Management and Budget (OMB) to administer across-the-board cuts to federal spending.  Concurrently, OMB issued a report to Congress providing few details about the mechanics of sequestration.  CMS also has not yet announced how it will administer the two-percent cut to Medicare payments to hospitals, physicians and Medicare Advantage plans.  (Medicaid provider payments are exempt.)  Due to a provision in the 1980s-era sequestration statute, cuts to Medicare provider payments are not likely to begin until April 1, 2013 – the first day of the first full month after the president’s sequestration order.  And while CMS has not issued instructions, we believe that the two-percent cut will be applied to each claim with a date of service beginning on or after April 1, and not to older claims paid on or after April 1.  If CMS follows its procedures from the 1980s, the cuts will be applied only to the Medicare payment amount (i.e., the net DRG amount after deducting all beneficiary copayments, deductibles and secondary payor amounts).

In addition to the two-percent payment cut to claims, CMS and HHS program budgets will face cuts of between 5 and 8 percent.  For example, the OMB report estimates that CMS’s budget for demonstration projects will fall by $27 million for FY 2013, and grants for Affordable Care Act insurance exchanges will incur a cut of $44 million.  Neither OMB nor CMS has specifically detailed how these cuts will be administered, or to what extent Medicare administrative contractor budgets and claims processing times will be affected.

The OMB report does not list the account from which Medicare EHR Incentive payments are made as subject to sequestration.  In September, OMB had listed that specific account as exempt from sequestration because it is part of an “intragovernmental” payment.  The dollars used to make EHR incentive payments originate in a different account, and are transferred into a receiving account that distributes incentive payments to providers.  OMB has said that such “funds are generally exempt in the receiving account . . . so the same dollars are not sequestered twice.”  The OMB report does not identify the account from which incentive payments originate and if that paying account — and thus, potentially, the incentive payments themselves — are subject to sequestration.

King & Spalding is closely monitoring these developments and will publish updates as they become available.  The OMB report is available by clicking here.