On March 1, 2013, President Obama ordered the sequestration (i.e., cancellation) of $85.33 billion in FY2013 budgetary resources from nonexempt budget accounts across the federal government. The FY2013 sequestration order was issued pursuant to the Balanced Budget and Emergency Deficit Control Act (BBEDCA), as amended by the Budget Control Act of 2011 (BCA). Under the BCA, the FY2013 sequestration was to be ordered on January 2, 2013. A provision in the American Taxpayer Relief Act of 2012 (ATRA) delayed the order by two months. The FY2013 sequestration is the first of a series of automatic spending reductions under the BCA, as amended by ATRA, that are required each year through FY2021. These annual spending reductions were triggered by the failure of the Joint Select Committee on Deficit Reduction to propose, and Congress and the President to enact, legislation to reduce the deficit by an amount greater than $1.2 trillion over the period FY2012-FY2021. Based on the calculations of the Office of Management and Budget (OMB), the FY2013 sequestration requires a 7.8% reduction in nonexempt defense discretionary spending and a 7.9% reduction in nonexempt defense direct (i.e., mandatory) spending over the course of the fiscal year. The sequestration also requires reductions of 5.0% to nonexempt nondefense discretionary spending, 2% to Medicare, and 5.1% to other nonexempt nondefense mandatory programs. There is considerable interest among policymakers in whether the automatic spending reductions triggered by the BCA will impact implementation of the Patient Protection and Affordable Care Act (ACA). Among its many provisions, ACA restructures the private health insurance market, sets minimum standards for health coverage, and, beginning in 2014, will require most U.S. residents to obtain health insurance coverage or pay a penalty. The law creates competitive private health insurance marketplaces—or exchanges—in each state through which individuals and small employers, beginning in 2014, will be able to shop for, select, and enroll in qualified health plans. Qualifying individuals and families will be able to receive federal subsidies to reduce the cost of purchasing coverage through the exchanges. In addition to expanding private health insurance coverage, ACA, as enacted, requires state Medicaid programs to expand coverage to all eligible nonelderly, non-pregnant individuals under age 65 with incomes up to 133% of the federal poverty level (FPL). Under ACA, the federal government will initially cover 100% of the expansion costs, phasing down to 90% of the costs by 2020. Medicaid law allows the Secretary of Health and Human Services (HHS) to withhold existing federal Medicaid matching funds if states refuse to comply with the expansion. However, in National Federation of Independent Business v. Sebelius , the U.S. Supreme Court found that the Medicaid expansion violated the Constitution by threatening states with the loss of their existing federal Medicaid matching funds. The Court precluded the HHS Secretary from penalizing states that choose not to participate in the Medicaid expansion (see text box). ACA also amends the Medicare program in an effort to reduce the rate of its projected growth; imposes an excise tax on insurance plans found to have high premiums; and makes many other changes to the tax code, Medicare, Medicaid, the State Children's Health Insurance Program (CHIP), and other federal programs. ACA is projected to have a significant impact on federal direct spending and revenues. The law includes direct spending to subsidize the purchase of health insurance coverage through the exchanges, as well as increased outlays for the expansion of state Medicaid programs. ACA also includes numerous mandatory appropriations to fund temporary programs to increase access and funding for targeted groups, provide funding to states to plan and establish exchanges, and support many other research and demonstration programs and activities. The costs of expanding public and private health insurance coverage and other spending are offset by revenues from new taxes and fees, and by savings from payment and health care delivery system reforms designed to slow the growth in spending on Medicare and other federal health care programs. Implementing ACA also is affecting discretionary spending, which is provided in and controlled by annual appropriations acts. The law established numerous new grant programs and provided for each an authorization of appropriations. It also reauthorized appropriations for many existing grant programs. This report examines how automatic spending reductions triggered by the BCA might affect health reform implementation under ACA. It is divided into three sections. The first section provides an overview of ACA's health insurance reforms and some analysis of the Congressional Budget Office's (CBO's) estimates of the impact of the law's implementation on federal direct spending and revenues. The second section examines the automatic spending reductions under the BCA. The final section discusses which types of health reform spending are likely subject to, or exempt from, those reductions. The report is periodically revised and updated to reflect important legislative and other developments. The primary goal of ACA is to increase access to affordable health insurance for the millions of Americans without coverage and make health insurance more affordable for those already covered. In addition, ACA makes numerous changes in the way health care is financed, organized, and delivered. These provisions are intended to slow the growth in health care costs and improve the quality of care by aligning payment incentives to increase efficiency and achieve savings; organizing care delivery systems to promote accountable, patient-centered, and coordinated care; and establishing benchmarks for better health outcomes. While many of the key provisions of the law do not take effect until 2014, some provisions are already in place, and others are being phased in over the next few years. ACA created several temporary programs to increase access and funding for targeted groups. They include (1) temporary high-risk pools for uninsured individuals with preexisting conditions; (2) a reinsurance program to reimburse employers for a portion of the health insurance claims' costs for their 55- to 64-year-old retirees; and (3) small business tax credits for employers with fewer than 25 full-time equivalents (FTEs) and average annual wages below $50,000 that choose to offer health insurance. In addition, ACA included a series of private insurance market reforms, several of which have already taken effect. Health plans may no longer impose lifetime limits on the dollar value of essential benefits, rescind coverage (except in cases of fraud), or deny coverage to children up to age 19 based on a preexisting condition. Also, young adults up to age 26 generally must be allowed to remain on their parents' plans. Finally, plans must cover recommended preventive services and immunizations without any cost-sharing (i.e., out-of-pocket costs such as deductibles and co-pays). The major expansion and reform provisions in ACA take effect in January 2014. Each state will have a health insurance exchange through which eligible individuals and small employers are able to purchase coverage from private health insurance plans offering standardized benefit and cost-sharing packages. In 2017, states may allow larger employers to purchase health insurance through the exchanges, but are not required to do so. Some states have chosen to establish their own State-Based Exchange, while others will work with the federal government in a State Partnership Exchange. A Federally-Facilitated Exchange will operate in states that choose not to establish their own exchange. Refundable tax credits will be available to individuals and families who enroll in exchange plans, provided their income is generally at or above 100% and does not exceed 400% of the FPL, to help offset the cost of the insurance premiums. In addition, certain individuals and families receiving the premium credit will be eligible for a subsidy to lower their cost-sharing. ACA's market reforms are further expanded in 2014, with no annual limits on the dollar value of essential benefits permitted, and no exclusions for preexisting conditions allowed regardless of age. Plans offered within the exchanges and certain other plans must meet essential benefit standards, requiring them to cover emergency services, hospital care, physician services, preventive care, prescription drugs, and mental health and substance use disorder treatment, among other specified services. Premiums may vary by limited amounts, but only based on age, family size, geographic area, and tobacco use. Finally, plans must sell and renew policies to all individuals and may not discriminate based on health status. Beginning in 2014, most U.S. citizens and legal residents will be required to have insurance or pay a penalty. In its June 28, 2012, decision, the Supreme Court ruled that ACA's individual insurance mandate is within Congress's constitutional power to levy taxes (see earlier text box). As plans will no longer be able to restrict coverage of individuals with health problems, the individual mandate is intended to ensure that healthy individuals participate in the insurance market rather than waiting until they need health care services. Increasing the number of healthy persons in the risk pool helps spread the risk. ACA requires employers with more than 200 full-time employees that offer health insurance benefits to automatically enroll new employees in a coverage plan, though employees must be given adequate notice and the opportunity to opt out. Employers with 50 or more full-time employees that have at least one employee who is enrolled in an exchange plan and receiving a premium tax credit may be subject to penalties, whether or not they provide health insurance coverage to their employees. As already noted, ACA requires state Medicaid programs to expand coverage to all nonelderly, non-pregnant legal residents with incomes up to 133% of FPL. Under the Supreme Court's decision, however, states may now choose whether to expand their Medicaid programs without fear of penalty. Several states have announced that they plan to opt out of the Medicaid expansion. States making that decision would forgo a substantial amount of federal funding. The federal government will provide 100% of the costs of the expansion for the first three years, phasing down to 90% in the years thereafter.