CO-253: The 2 Percent Medicare Sequestration Cut, Worked Through

CO-253 shows up on nearly every Medicare remittance, and it looks like a denial. It isn’t one. It’s a 2 percent cut to what Medicare pays, set by federal law, and nothing on your claim caused it.

Medicare calls it sequestration. CMS’s own sample remittance describes code 253 as sequestration, “a reduction in federal payment,” and pairs it with group code CO, “Contractual obligations.” That group code is the part that matters most: the amount is yours to absorb.

CO-253 at a glance

Where the 2 percent comes from

The Budget Control Act of 2011 required across the board cuts in federal spending, known as sequestration, and capped the cut to Medicare benefit payments at 2 percent. The first order took effect April 1, 2013.

The pandemic paused it, and Congress brought it back in steps. By date of service, or date of discharge for an inpatient stay:

Under current law the 2 percent runs into 2032.

A second cut was expected on top of it. The 2025 budget reconciliation law would have triggered an extra reduction of up to 4 percent under the statutory PAYGO rules, starting in January 2026. The November 2025 law that reopened the government wiped those PAYGO balances to zero, so that cut never took effect. For 2026 dates of service, the reduction is still 2 percent.

The math, in Medicare’s order

The cut comes last. Medicare works out its normal payment first, deductible, coinsurance and any secondary payer adjustment included, and then takes 2 percent off what is left.

First Coast, the Medicare contractor for Florida, publishes the standard example:

In First Coast’s words, that results “in a payment of $39.20 instead of $40.”

Two things follow. The patient still owes $60, the $50 deductible plus $10 coinsurance. And the cut is 2 percent of Medicare’s payment, not of your charge or the allowed amount, which is why it looks so small on a single line.

Once the deductible is met, Medicare’s share is larger and so is the cut. On the same $100 allowed amount, Medicare’s payment is $80, the cut is $1.60, and Medicare pays $78.40.

The sequestration calculator works any claim line through the same steps, picks the rate from the date of service, and shows how the line will read on your remittance.

Why you can’t bill it to the patient

The cut comes off Medicare’s payment only. First Coast puts it plainly: “beneficiary payments toward deductibles and coinsurance are not subject to the 2% payment reduction.” The patient’s share is worked out before the cut and doesn’t move.

On an assigned claim, the 2 percent can’t be passed to the patient. It carries group code CO for that reason, the same group as CO-45, which the CO-45 post explains.

Don’t expect a supplemental plan to pick it up either. Those plans pay the patient’s share, and CO-253 isn’t part of it.

The one exception is an unassigned claim from a provider who doesn’t participate in Medicare. There, Medicare pays the patient, and that payment is reduced by 2 percent.

Medicare Advantage: the contract decides

Medicare Advantage plans take the same cut on what CMS pays them. CMS applies the 2 percent to each plan’s monthly capitation payment.

Whether a plan passes it on to you is a different question. CMS says that for contracted providers, the effect is “governed by the terms of the contract between the MAO and the provider,” MAO meaning the Medicare Advantage organization.

If you have no contract with the plan, the plan pays based on what Original Medicare would pay. CMS leaves the 2 percent up to the plan: “it is at the MAOs’ discretion as to whether to impose a reduction due to sequestration for these payments.”

So the same service can carry CO-253 from one Medicare Advantage plan and not from another. Before you treat it as an underpayment, check the plan’s contract or its published sequestration policy.

Posting CO-253

• Post it as a contractual adjustment on its own line, separate from CO-45. Lumped together, the two hide what sequestration costs you each month.
• Don’t move it to the patient or to a secondary claim. It isn’t patient responsibility.
• Don’t work it as a denial. Nothing on the claim caused it, and nothing on a corrected claim will change it.
• Check the amount, not just the code. For dates of service since July 1, 2022, it should be 2 percent of Medicare’s payment on that line, give or take a cent. A larger amount deserves a look.
• Look in the right place. Part A institutional claims report it once at the claim level. Part B claims report it line by line.
• Budget for 98 percent. Expected Medicare payments should be 98 percent of Medicare’s share, not 100.

For how adjustment groups and reason codes fit together on the 835, see how to read an ERA.

Sources

• First Coast Service Options, federal sequestration payment reductions.
• CGS, sequestration questions and answers.
• CMS, sample standard paper remittance showing CO-253, 2018.
• CMS MLN Connects, December 16, 2021.
• CGS, sequestration suspension extended, April 2021.
• Congressional Research Service, Medicare and Budget Sequestration, R45106, November 2023.
• CMS, mandatory payment reductions in Medicare Advantage and Part D, May 2013.
• Reed Smith, Government reopens, what now?, November 2025, on the PAYGO cut.

Reference information only. Not billing advice. Sequestration is set by federal law and can change. Confirm current rules with your Medicare contractor, and Medicare Advantage terms with each plan.