CBO Warns of Nearly $500B Medicare Cuts from New Tax and Spending Law
The Congressional Budget Office (CBO) has issued a warning that recent tax and spending legislation under the "One Big Beautiful Bill Act" could lead to automatic Medicare spending cuts nearing $500 billion over the next decade. This potential reduction is linked to the Statutory Pay-As-You-Go Act of 2010 (S-PAYGO), a budget mechanism that mandates automatic spending cuts, known as sequestration, when deficit thresholds are exceeded. The CBO projects that a $2.3 trillion increase in deficits from the legislation would trigger $230 billion in annual sequestration cuts starting in fiscal year 2026.
Under S-PAYGO, Medicare spending cuts are capped at 4% per year, which could severely impact providers participating in traditional Medicare. Already facing payment rates below care costs, a 4% cut could prompt many providers to limit or cease accepting Medicare patients. Medicare physician fees have undergone real-term reductions totaling 33% since 2001, while medical practice costs increased by 59%, compounding the financial strain on providers.
Medicare Advantage (MA) plans, covering over 34 million beneficiaries, are also responding to cost pressures with plan reductions. Major insurers like UnitedHealthcare have announced discontinuations affecting over 600,000 beneficiaries, a trend likely to intensify with the enforcement of PAYGO cuts. Dual-eligible individuals, who qualify for both Medicare and Medicaid and represent a vulnerable demographic totaling 12.2 million, could experience compounded effects from reduced program funding.
Rural healthcare providers face significant challenges, with nearly half of rural hospitals operating at a loss and a decade-long pattern of hospital closures. The intersection of Medicare and Medicaid cuts may result in an estimated $70 billion funding reduction for rural hospitals over ten years, further jeopardizing access to care in underserved regions. Additionally, the CBO predicts that the legislation could increase the number of uninsured individuals by 10 to 16 million by 2034.
Historically, S-PAYGO sequestration has been avoided through Congressional waivers or delays, especially during key legislative moments. However, excluding this legislation from PAYGO rules would require a supermajority of 60 Senate votes, indicating potential challenges in halting these automatic spending reductions. The implications for Medicare payment rates, provider participation, and rural healthcare funding underscore critical concerns for payers, providers, and policymakers managing compliance and budgetary constraints in the evolving healthcare landscape.