Uncertainties around payment rules cloud Medicare’s future
The One Big Beautiful Bill Act (OBBBA), passed by Congress and signed into law by President Donald Trump on July 4, 2025, clearly will have profound effects on the nation’s healthcare system. But how much the legislation will affect Medicare remains to be seen. Its proponents can legitimately assert that, consistent with the President’s stated policies, it will not “touch” the Medicare program. And indeed, the law’s explicit Medicare provisions are scant, reconfirming by statute that undocumented immigrants are not eligible for Medicare, and rescinding a Biden-era nursing home staffing regulation.
Nonetheless, the law does have significant implications for the future of Medicare, including Medicare Advantage (MA), and of providers serving Medicare beneficiaries, which could soon become apparent. Because the OBBBA adds substantially to the federal budget deficit, it triggers a process created by the Statutory Pay-As-You-Go (PAYGO) Act of 2010, which, if left to run its statutorily prescribed course, will result in a sequester (i.e., reduction) of mandatory federal spending — including Medicare — in early 2026.
Potential role of PAYGO
PAYGO requires that two weeks after the end of the current Congress (Jan. 23, 2026), the Office of Management and Budget must issue its annual PAYGO report, and if it shows a PAYGO debit (i.e., a deficit increase), it must include a sequestration order from the President that “shall reduce budgetary resources of direct spending programs by enough to offset that debit.” (PAYGO also interacts with the Balanced Budget and Emergency Deficit Control Act of 1985 in ways not yet tested in practice.)
This sequester would go into effect “first day of the first month beginning after the date the order is issued” (i.e., Feb. 1, 2026). The magnitude of such reductions could be substantial. In scoring the OBBBA, CBO suggested Medicare cuts of 4% annually through 2034 ($45 billion in fiscal year 2026 and adding up to nearly half a trillion dollars in total) would be necessary to comply with the applicable statutory requirements.a
Possible PAYGO consequences
In recent years when PAYGO has been implicated, Congress waived the required sequestration of federal funds. And while past performance is no guarantee of future returns, it seems unlikely Congress would let next year’s expected PAYGO-driven Medicare cuts go into effect. Such a move would ignore years of negative Medicare margins for hospitals and miniscule updates to payment rates under Medicare’s physician fee schedule since the passage of the Affordable Care Act.b And another consideration is the current below-the-waterline 2% Medicare sequester imposed by the Budget Control Act of 2011.
Indeed, rumors currently abound in Washington regarding an end-of-year legislative package that might undo some of the Medicaid policies just enacted under OBBBA. Such a legislative package could also be a vehicle for a PAYGO override, and it is not a stretch to think that Congress could be looking for offsets to pay for such an override. The MA program would be a good place to start.
MA as a paygo pay-for
The March 2025 report by MedPAC noted that Medicare spent $84 billion more on MA than it would have spent had MA enrollees remained in the traditional program in 2025 alone. Many policy analysts are concerned that these excess payments stem from plans’ coding practices and favorable selection, and have nothing to do with the costliness of MA enrollees relative to beneficiaries in traditional Medicare.
MedPAC has made a series of recommendations to address these excess payments, many of which are embodied in the No UPCODE (No Unreasonable Payments, Coding, or Diagnoses for the Elderly) Act introduced by Senators Bill Cassidy (R-La.) and Jeff Merkley (D-Ore.). According to press reports, the No UPCODE Act could be included in an end-of-year package. While the bill does not yet have a CBO score, it’s worth noting that roughly half of the $84 billion in 2025 excess payments to MA plans identified by MedPAC is attributable to plans’ coding intensity, which the No UPCODE Act strives to correct. The savings attributable to stopping coding-related MA overpayments alone would go a long way toward eliminating the need for PAYGO-driven payment reductions for the multitude of hospitals, physicians and other providers who care for Medicare beneficiaries.
While MA may be the future of Medicare given current enrollment trends, it must contribute to the long-term viability of the program (and it can, but that’s a subject of a future column), not detract from it. Helping to avoid sequester-driven payment cuts to providers would be a good first step.
Footnotes
a. Swagel, P.L., “Re: CBO’s estimates of the statutory pay-as-you-go effects of public law 119-21,” CBO letter,
Aug. 15, 2025.
b. Medicare Payment Advisory Commission (MedPAC), Medicare payment policy, Report to the Congress, March 2025.
About OBBBA and its potential impact
Much has been written about Public Law 119-21, also known as the “One Big Beautiful Bill Act,” and its myriad healthcare-related provisions. Yet the majority of its provisions don’t begin to take hold until after the 2026 mid-term Congressional elections, despite its having been passed by Congress and signed into law by the President on July 4.
Given the Congressional charge to find savings, the law’s Medicaid provisions are extensive but unsurprising. Among its most widely publicized provisions are that it:
- Winds down state provider taxes
- Imposes work requirements on Medicaid recipients
- Directs HHS to issue regulations to limit state-directed payments
- Restricts the use of Medicaid funds for abortion providers and certain non-citizens
The law also makes changes to eligibility for, and subsidies under, the Affordable Care Act (ACA) insurance exchanges.
The policy merits of these changes will no doubt be debated as the provisions begin to take hold. Intuition suggests the law will inevitably affect providers, Medicaid recipients and exchange enrollees. But whether its $900 billion in Medicaid spending reductions are all directed at fraud and abuse, in a program with a $7.5 trillion 10-year baseline, is open to question.a
There also are widespread concerns about the 10 million Medicaid recipients who CBO estimates will lose their Medicaid coverage by 2034. Some will perhaps find employer-sponsored insurance, and some may find their way to the ACA exchanges. But it’s likely others will simply become uninsured, thereby adding to providers’ and the nation’s uncompensated care burden.
Time will tell how much these concerns portend the future for our healthcare system.
Footnote
a. Congressional Budget Office, Medicaid, Baseline Projections, June 2024.
