After several months of confusion surrounding the effect of Sequestration on payment rates under Medicare Advantage Plans (MA Plans) and Prescription Drugs Plans (PD Plans), the Centers for Medicare and Medicaid Services (CMS) has now clarified that these Plans cannot pass the cuts through to contracted providers and suppliers absent a contract provision authorizing the pass-through.
On April 1, 2013, the Budget Control Act of 2011 — more commonly known as “Sequestration” — went into effect. The law requires a reduction of spending of two percent for “Medicare programs” for one year. The Act states that “individual payments for services furnished” under Medicare Parts A and B will be reduced, while “monthly payments under contracts” will be cut for Part C (Medicare Advantage) and Part D (the Prescription Drug Benefit). Prior to Sequestration going into effect, CMS provided little guidance on the implementation of Sequestration. Notably, CMS had remained silent on whether MA Plans and PD Plans could, or should, pass on the Sequestration cuts to the health care providers and suppliers providing services to MA Plan and PD Plan beneficiaries.
Over the past few months, many of the largest sponsors of MA Plans, such as UnitedHealthcare, Humana, and Anthem Blue Cross Blue Shield, notified providers that the two percent Sequestration cuts would be passed on to MA Plan providers and suppliers in the form of reduced payment rates. The notices posted on the MA Plans’ websites (and, in many cases, distributed to providers and suppliers) imply that the reduction in reimbursement is required under the Act. We are not aware of similar notices by PD Plans but, given the reference to PD Plans in the CMS guidance, believe that some PD Plans may have also announced plans to reduce payment rates to network pharmacies.
On May 1, 2013, CMS issued a memorandum clarifying that Sequestration does not mandate a two percent reduction of reimbursement to MA Plan contracted providers and PD Plan network pharmacy providers. The memorandum states, in pertinent part:  
[W]hether and how sequestration might affect an [MA Plan’s] payments to its contracted providers are governed by the terms of the contract between the [MA Plan] and the provider… Similarly, the question of whether and how sequestration might affect a Part D plan sponsor’s payment to its contracted providers is governed by the payment terms of the contract between the plan sponsor and its network pharmacy providers.
It is now clear that MA Plans and PD Plans can only pass along Sequestration cuts to providers, suppliers, and pharmacies if their contracts with the specific provider, supplier, or pharmacy permit the pass-through. Consequently, providers, suppliers, and pharmacies sh