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Sequestration in Medical Billing

The mandatory 2% federal cut to Medicare payments that appears on your remittance as CO-253. What it means, why it is not 2% of the allowed amount, and a calculator for any claim.

Example: 100.00 The contracted allowed amount for the service, not your billed charge.
Example: 20.00 Leave at 0 if the deductible is met and there is no coinsurance on this service.
Pre-filled with 2%, the rate in force since July 2022. Change it only if you are reconciling an older payment. 2% has applied since July 2022. The rate is set by federal legislation — confirm with your MAC if you are reconciling exact amounts.
Sequestration reduction
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Medicare actually pays
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Enter the allowed amount to see the reduction.

What Is Sequestration in Medical Billing?

Sequestration is a mandatory 2% reduction to what Medicare pays providers. It is not a denial, not a payer decision about your claim, and not an error. It is a federal spending cut written into law by the Budget Control Act of 2011, applied automatically to every Medicare payment.

On your remittance it appears as CO-253 — reduction in federal payment. Three consequences follow from that, and each one saves time:

  • It cannot be appealed. There is no argument to make. It is statutory, not a judgement about your coding or documentation.
  • It cannot be billed to the patient. The CO group code makes it a contractual obligation, so it is a mandatory write-off.
  • It is not 2% of the allowed amount. The cut applies only to Medicare’s share after patient responsibility is removed — which usually works out to about 1.6% of the allowed amount, not 2%. That difference is why practices forecasting a flat 2% never reconcile.

The calculator above works out the exact figure for any claim. The sections below explain the maths and where the rule comes from.

Sequestration Is Not 2% of the Allowed Amount

This is the point almost everyone gets wrong, and it matters whenever you reconcile a remittance against what you expected. Sequestration is 2 percent of what Medicare pays — not 2 percent of the allowed amount, and never anything from patient responsibility.

Work through a standard claim. The allowed amount is $100 and the patient owes $20 in coinsurance. Medicare's share is $80. Sequestration takes 2 percent of that $80, which is $1.60. Medicare pays $78.40, the patient still owes their full $20, and you receive $98.40 in total.

So the reduction against the allowed amount is 1.6 percent, not 2 percent. Practices that model sequestration as a flat 2 percent of allowed consistently under-forecast their Medicare revenue, and reconciliations never quite tie out. The gap is small per claim and substantial across a year.

The corollary matters too: patient responsibility is never reduced. Sequestration does not lower the deductible or the coinsurance, so you still collect the full patient portion. And where the deductible is unmet and the patient owes the entire allowed amount, Medicare pays nothing — so there is nothing for sequestration to reduce, and the adjustment is zero.

CO-253 on Your Remittance — Write It Off, Do Not Work It

Sequestration appears on the remittance as CO-253, a reduction in federal payment. Two things follow from that code, and both save time.

The CO group code makes it a contractual obligation, which means it is a mandatory write-off. You cannot bill the beneficiary for it. Attempting to is prohibited and puts your participation agreement at risk for an amount of a dollar or two per claim.

And it is not appealable. Sequestration is a statutory reduction imposed by federal legislation, not a payer judgement about your claim, your coding or your documentation. There is no argument to make and no documentation that changes it. Any time an A/R team spends working CO-253 as though it were a denial is time taken from denials that can actually be recovered — which is why it belongs in an automatic write-off rule in your practice management system rather than in a work queue.

Where Sequestration Comes From, and Where It Applies

Sequestration is a mandatory across-the-board reduction in federal spending originating in the Budget Control Act of 2011. Medicare payments were capped at a 2 percent reduction, which is why the figure has been 2 percent rather than the deeper cuts applied elsewhere.

It was suspended from May 2020 through March 2022 during the COVID-19 public health emergency, phased back at 1 percent from April to June 2022, and returned to the full 2 percent in July 2022. That history matters if you are reconciling older claims or auditing historical A/R, because the correct rate depends on the date of the payment rather than the date of service.

It applies to Medicare Part A and Part B payments. Medicare Advantage organisations also receive reduced federal payments, and many pass that reduction through to contracted providers — whether it reaches your remittance depends on your contract with the plan, so check the agreement rather than assuming it does not apply.

More Free Billing Tools & Guides

Reconciling Medicare payments usually means several of these together: the RVU calculator for what the allowable should have been, the patient responsibility calculator for the deductible and coinsurance split, CO-253 for the adjustment itself, and how to read an ERA for the remittance fields these values come from. See also Medicare billing.

Frequently Asked Questions

How do I calculate Medicare sequestration?
Take the Medicare allowed amount, subtract the patient's deductible and coinsurance, then reduce what is left by 2 percent. The 2 percent applies to the Medicare payment portion only, never to the full allowed amount and never to patient responsibility.
Is sequestration 2% of the allowed amount?
No, and this is the most common misunderstanding. It is 2 percent of what Medicare pays after patient responsibility is removed. On a 100 dollar allowed amount with 20 dollars of coinsurance, Medicare pays 80 dollars, sequestration takes 1.60, and the effective reduction is 1.6 percent of the allowed amount rather than 2 percent.
What denial code is sequestration?
CO-253, described as a reduction in federal payment. Because it carries the CO group code it is a contractual obligation, which means it must be written off and cannot be billed to the patient.
Can I appeal a sequestration reduction?
No. Sequestration is a statutory reduction mandated by federal law, not a payer decision about your claim. There is nothing to appeal, and time spent working CO-253 as a denial is wasted.
Can I bill the patient for the sequestration amount?
No. CO-253 is a contractual obligation, so the amount is a mandatory write-off. Billing it to the beneficiary is prohibited and puts your participation agreement at risk.
Does sequestration apply if the deductible has not been met?
No. If the patient owes the entire allowed amount because the deductible is unmet, Medicare pays nothing and there is nothing to reduce. Sequestration only applies to the portion Medicare actually pays.
Does sequestration apply to Medicare Advantage plans?
Medicare Advantage organisations receive reduced federal payments under sequestration, and many pass the reduction through to contracted providers. Whether it reaches your remittance depends on your contract with that plan, so check the agreement rather than assuming it does not apply.
Is sequestration still 2% in 2026?
The 2 percent rate has applied since July 2022, following the COVID-era suspension and a 1 percent phase-in period. Because the rate is set by federal legislation and can change, the calculator lets you edit it - confirm the current figure with your MAC if you are reconciling exact amounts.
What does sequestration mean in medical billing?
It is the mandatory 2 percent reduction applied to Medicare payments under the Budget Control Act of 2011. It appears on the remittance as CO-253, reduction in federal payment. It is not a denial and not a judgement about your claim - it is an automatic statutory cut applied to every Medicare payment.
What is a sequestration adjustment on a remittance?
The dollar amount Medicare withheld under the 2 percent reduction, reported with adjustment code CO-253. Because it carries the CO group code it is a contractual obligation, so it must be written off and cannot be transferred to the patient.
How much is the sequestration reduction?
Two percent of the Medicare payment - not two percent of the allowed amount. On a 100 dollar allowed amount with 20 dollars of patient coinsurance, Medicare's share is 80 dollars and the reduction is 1.60, an effective cut of 1.6 percent of the allowed amount.
Is sequestration the same as a contractual adjustment?
It behaves like one on the remittance - CO group code, mandatory write-off, not billable to the patient - but it is not a contractual term you negotiated. It is a federal reduction applied on top of your contracted rate, and no contract renegotiation removes it.

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