Financing Long-term Care
The Problems with Self-Funding
Those who do not make plans to fund the long-term care they may need as they get older often end up having to pay for their care our of their own pockets because they have no alternative. Other people consciously plan to use their own income, savings, and assets to pay for care. This chapter looks at self-funding, discussing the problems with this approach and exploring some of the financial vehicles that can be used to fund care.
Those planning to pay for their own long-term care should consider these questions:
• Will your assets be enough to cover your long-term care needs?
• Even if your accumulated assets are sufficient, do you really want to spend them on long-term care? Wouldn't you prefer to preserve them and pass them on to your spouse or other heirs?
As we saw in the preceding chapter, long-term care services are costly, and paying for them requires a large amount of money. Suppose, for example, that someone who is 45 years old today decides to create a fund to pay for her future long-term care needs. The average length of stay in a nursing home is roughly 2.5 years; if an average cost of $171 per day is assumed, the total amount at today's prices would be about $155,000. And if the person needs that amount of nursing home care in 40 years, when she is 85, she will need $1,098,499 (assuming costs continue to increase by 5 percent annually). To accumulate that amount by then, she will have to save about $315 a month and invest it at an 8 percent rate of return; at a 5 percent rate of return she would have to save $720 a month. And this does not even take into account any home care or assisted living the person might need.
Most people will find putting aside that much money every month extremely difficult, and doing so is not very cost-effective. And there is another problem-if a person adopts this savings plan but needs long-term care while she is still relatively young, the funds accumulated by that time may fall short of her expenses. Clearly, for most people, relying on savings and assets to pay for long-term care is not a feasible option.
A few people do have sufficient financial assets to pay long-term care costs. However, even they should ask whether they want to gamble on possibly having to pay an uncapped liability (that is, a loss that has no fixed limit). If the gamble is lost, they may have to spend very large amounts of money on care, money that otherwise could have been used to enhance their quality of life or provide for their heirs.
However, for those who are paying for their own care, either because they made no other provisions in advance or because they deliberately chose to self-fund, there are a number of funding sources aside from savings accounts, stocks and bonds, and other common assets. These include home equity, annuities, life insurance policies, and health savings accounts (HSAs).
The most important financial asset many older people have is home equity, the value of the home they own after any mortgage amount owed or other liability has been subtracted. The amount of home equity can be substantial, especially if the home was purchased many years before and the mortgage has been mostly entirely paid off. In such cases, home equity can be an important source of funds to cover long-term care costs.
In the past, there were only two main ways of turning home equity into funds that could be used to pay for long-term careselling the home or taking out a home equity loan. Each of these alternatives has serious drawbacks. Selling means leaving a longtime residence, and a home equity loan requires regular payments at a time when a person needs more income, not another expense. Fortunately, there are now several new methods of drawing on home equity. Here we will discuss the most popular reverse mortgages.
A reverse mortgage is a type of home equity loan available to those 62 and older. We can best understand how it works by comparing it to regular mortgages and conventional home equity loans.
• In a regular mortgage, a bank or other lending institution lends a person the money he needs to buy a home, and the person pays the lender back by means of monthly payments. The home is security for the loan.
• In a conventional home equity loan, a bank lends money to someone who already owns a home outright or has substantial equity in one, with the home or the equity serving as security for the loan. As with a mortgage, in a conventional home equity loan the borrower must make regular payments to the lender.
• In a reverse mortgage, as in a conventional home equity loan, a bank lends money to a homeowner with the home serving as security. However, in a reverse mortgage, the homeowner does not have to make regular payments to the lender. Instead, the loan must be paid off only when the homeowner dies, sells the home, or moves out of the home.
Thus a reverse mortgage can be advantageous for an elderly person-she can obtain funds from her home equity without having to worry about being able to make loan payments, as she would with a conventional home equity loan, and without having to leave her home.
There are different types of reverse mortgages, and whether a person qualifies for one depends on the type he is applying for. But generally speaking, a homeowner must be at least 62 years old, and the home must be his principal residence.
The lender's payment to the homeowner can be made in a lump sum, in monthly payments, through a line of credit to be drawn on as needed, or a combination of these. The fact that in most cases the lender makes regular or periodic payments to the homeowner (instead of the homeowner making regular payments to the lender as in a regular mortgage) is why this arrangement is called a reverse mortgage.
The amount a lender advances a homeowner depends on several factors, including the value of the home, the homeowner's age, the interest rate charged, the type of reverse mortgage, the payout method chosen by the homeowner, and, for federally insured reverse mortgages, local lending limits established by the Federal Housing Administration (FHA).
The lender's payment to the homeowner is not subject to income tax, because it is not income but rather a loan that will eventually be repaid. Interest on a reverse mortgage is not tax deductible until it is actually paid-that is, at the end of the loan period when the debt is paid off.
A homeowner taking out a reverse mortgage retains title to her home and is responsible for maintaining the home and paying real estate taxes. If the homeowner dies, the lender does not take title to the home, but the homeowner's heirs must payoff the loan. Usually the debt is repaid by selling the home or refinancing the property with a traditional mortgage.
For most types of reverse mortgages, the homeowner can use the money received for any purpose, including long-term care. However, reverse mortgages do have some limitations and disadvantages as a long-term care funding source. If the borrower leaves her home permanently, the mortgage must be paid off, and if she remains in an assisted living residence or nursing home for 12 months or more, she is considered to have permanently left the home; consequently, while a reverse mortgage can fund home care and short stays in a facility, it is not a solution for extended nursing home care. Also, a person taking out a reverse mortgage will substantially reduce her home equity, leaving her with less to rely on as a financial reserve and to pass on to her heirs. Finally, given the high cost of long-term care, the funds obtained from a r4everse mortgage may not be adequate to cover costs.
An annuity is a type of investment. The investor (called the annuitant) pays money to an insurance company or financial institution, and in return the insurer makes regular payments to the annuitant over a period of time. Depending on the type of annuity, this period may be for as long as the annuitant lives or for a limited, predetermined time. The amount of the payments made to the annuitant may be fixed and unchanging, or it may vary according to the performance of the investments the annuitant's money is placed in.
The payments from an annuity can be used to pay some of the cost of long-term care services. Alternatively, an annuity can be used in combination with long-term care insurance. The annuity income pays for the premiums of an LTCI policy, and the policy covers the costs of care. And some people use funds from a reverse mortgage to buy an annuity and then use the annuity income to pay for long-term care or LTCI premiums.
For example, a person could purchase a single-premium fixed life annuity. In this type of annuity, the annuitant makes a onetime payment (the single premium) to an insurer, and in return the insurer pays the annuitant a fixed amount of money every year for as long as he lives. A person age 60 might be able to purchase an annuity that would pay $5,000 annually for life for about $85,000, $40,000 less than the amount needed to generate that much through an interest-bearing investment. At age 65, a $5,000 annuity could be purchased for about $67,000. (The older the purchaser, the fewer years the financial institution will likely have to pay the annuity, so the less it charges.) And the annuity payments would be partially tax-free. Of course, $5,000 a year would not usually be anywhere near enough to cover the cost of long-term care, but it could be used to pay LTCI premiums.
In order to offer a simple example, we have described above a pure life annuity. However, most people choose an annuity that guarantees that at least the amount of money paid in will be paid out-in other words, if the annuitant dies before he has received payments totaling the amount he paid for the annuity, payments will be made to his beneficiaries until that amount is reached. Of course, such an annuity costs more or makes lower payments than a pure life annuity.
A fixed annuity such as the one described above is guaranteed to pay the agreed-upon amount, nothing less. There are also variable annuities, in which the payment amount varies with the performance of the investments the annuity funds are placed in. With such an annuity, there is no guarantee that the payment amount wail be sufficient to cover long-term care expenses or LTCI premiums, so it may not be a suitable approach for someone seeking to provide for these cost.
Unless a very large amount is invested in an annuity, the payments will cover only a portion of long-term care expenses. It should also be noted that annuities have costs and charges that can make them in some ways less attractive investment vehicles than mutual funds or individual stocks and bonds.
A life insurance policy provides protection against the financial consequences of the death of one or more individuals. That is, if a covered person (an insured) dies while the policy is in force, the insurer makes a payment (known as a death benefit) to the beneficiary or beneficiaries designated by the insured. People purchase life insurance for various reasons: to ensure the financial security of a spouse, children, and other family members; to preserve an estate for heirs by providing money to pay estate taxes and settle outstanding debts; or to create an inheritance for a loved one or a charity.
Life insurance was not developed to meet long-term care needs. But a person can obtain money from her life insurance policy in various ways and use that money to pay long-term care expenses. However, as we will see, this approach has serious disadvantages and should generally be used only as a last resort by those who have no other options.
Accelerated Death Benefits
Accelerated death benefits (also known as living benefits) are payments of a portion or all of the death benefit before the death of the insured. For an insurer to pay accelerated death benefits, an event specified in the policy (a benefit trigger) must occur. In early versions of these benefits, the insurer paid only if the insured suffered from a terminal illness, and that is still a common triggering event. However, many policies now allow for payment under other circumstances, and benefit triggers typically include one or more of the following: diagnosis of a terminal illness or physical condition, as a result of which death is likely to occur within a specified number of months; diagnosis of one of several specified critical illnesses; permanent confinement to a nursing home; the need for extended long-term care (in a facility, at home, or in the community) because of an inability to perform a specified number of ADLs; and a cognitive impairment.
Insurers must compensate for the loss they incur by paying the death benefit early instead of keeping the money and earning investment income on it until the insured dies. An insurer usually requires a slightly higher premium, or it may reduce the benefit amount or treat the advance payment as a loan and charge interest.
The amount that an insured may obtain as an accelerated death benefit varies according to the policy. Many policies will pay up to a certain limit, defined either as a dollar figure or a percentage of the death benefit (usually at least 50 percent). Other policies will pay the full death benefit. A long-term care accelerated death benefit is often paid in monthly installments, with each payment equaling a percentage of the death benefit (usually between 2 and 5 percent). Money received as accelerated benefits by terminally or chronically ill individuals is not subject to income taxation.
An obvious drawback to using the accelerated death benefit of a life insurance policy to cover long-term care costs is that it defeats the primary purpose of life insurance. The money advanced is subtracted from the death benefit of the policy and will not be available to pay estate taxes or a mortgage balance, or to provide income to the insured's family.
Another problem is that accelerated death benefits are not usually adequate to pay for long-term care for an extended time. The average person's life insurance policy has a death benefit of less than $100,000, and arr accelerated benefit may be as little as half that amount. This will not cover COSts for the several years that a person might need care.
In a viatical settlement, an insured (referred to as the viator) sells his life insurance policy to a viatical company. Specifically, the viatical company pays the viator a lump sum, the amount of which is somewhat less than the policy's death benefit, and in exchange the viatical company becomes the owner and beneficiary of the viator's policy and receives the death benefit after the viator dies. The viatical company also takes over the payment of premiums on the policy.
This transaction has advantages for both parties. The viator gets money while he is still alive, which he can use for any purpose. The viatical company normally realizes a gain because the lump sum it pays the viator is less than the death benefit it receives after the viator dies.
However, a viatical settlement is not an option for most people with life insurance. It is generally available only to those with a terminal illness and a very limited life expectancy-sometimes five years or less but more typically two to three years or less. This is because only if the death benefit is likely to be paid in the near future is it in a viatical company's interest to buy a policy. (Nonetheless, in some cases those with chronic illnesses are able to obtain viatical settlements.)
Under the Health Insurance Portability and Accountability Act of 1996 (HIPAA), the money a viator receives from a viatical settlement is tax-free, provided she has a life expectancy of two years or less, and provided the viatical company is licensed in the states in which it does business. The determination of life expectancy is made by a licensed healthcare practitioner (a physician or nurse), not the Internal Revenue Service. And if the viator does in fact lives beyond two years, the IRS will not seek back taxes. A viatical payment made to a chronically ill person may also be tax-free, provided certain conditions are met.
Like accelerated death benefits, a viatical settlement defeats the purpose of life insurance, since when the insured dies no death benefit is available for taxes, mortgage payments, or survivors. However, for a dying person in need of long-term care services and without other means of paying for them, a viatical settlement may be an appropriate funding source.
In many states today life settlements as well as viatical settlements are available. The two are similar in that both involve the sale of a life insurance policy to a third parry. But for a life settlement there is no requirement that the insured be terminally or chronically ill (although he must be elderly-generally only applicants over 70 are accepted).
As in a viatical settlement, in a life settlement an individual sells her policy to a company for a percentage of the death benefit. The company becomes the owner of the policy, pays the premiums, and receives the death benefit when the individual dies. The amount received is much lower than for a viatical] settlement because the life expectancy of the insured is usually much longer. The money can be used for any purpose, including paying for long-term care services or LTCI premiums.
Life settlements have their drawbacks. Unlike viatical payments, proceeds from a life settlement in excess of the total amount paid in premiums over the life of the policy may be taxable. And as with a viatical] settlement, the insured's beneficiaries will receive no death benefit. But if the death benefit is not really needed (as might be the case if a person's spouse has died and her children are self-supporting), or if the premiums have become unaffordable, obtaining a life settlement may be a reasonable course of action.
Policy Loans, Withdrawals, and Surrenders
There are two types of life insurance. Term life insurance is in force for a limited, specified period (the term of the policy), and it pays a death benefit only if the insured dies during that period. For example, most employer-sponsored group life insurance is term insurance, and an employee's coverage generally continues only as long as he works for the sponsoring employer. Permanent life insurance, on the other hand, is designed to be in force for the entire lifetime of the insured. (It generally remains in force until the insured's death unless he lets it lapse by failing to pay premiums.)
While both term and permanent life insurance policies have death benefits, a permanent policy (but not a term policy) also normally accumulates a cash value. This is an amount of money, based on the amount of premiums paid and the investment growth of those premiums, that the insured can access in certain ways. The cash value of a policy normally grows during the life of the policy as the insured pays more premiums and those premiums yield more investment earnings. An insured can access her cash value by means of a policy loan, a policy withdrawal, or a policy surrender.
In a policy loan an insured borrows a portion of the cash value from the insurer. The insured is not required to repay the loan during her lifetime; instead, when the insured dies, the loan amount plus interest is subtracted from the death benefit paid to beneficiaries.
Under a universal life insurance policy, a policy withdrawal is possible. In a universal life insurance policy, the premium amount is flexible-a target amount is set, but the insured may pay more or less than this amount. The more he pays, the faster the cash value of the policy grows. (This differs from a whole life insurance policy, in which a fixed premium amount is set at purchase.) For some universal policies, the death benefit consists of not only the face amount but also the cash value of the policy, so for these policies the actual payment at death depends in part on how much cash value the insured has accumulated.
In a policy withdrawal, the insured simply withdraws money from the cash value of the policy, just as she would from a bank account. A policy withdrawal is not a loan, so repayment is not required and there is no interest to pay. The amount is limited by the cash value of the policy-if the entire cash value is withdrawn, this constitutes policy surrender (see below). Of course, the cash value of the policy is reduced by the amount withdrawn. Consequently, for policies that pay beneficiaries the cash value as well as the face amount, the total amount paid will be reduced.
Finally, in a policy surrender, the insured terminates her life insurance policy and receives the cash value of the policy minus any surrender charges (called the cash surrender value). Surrender enables a person to obtain the largest possible amount of a policy's cash value; however, the amount is generally much less than the death benefit that beneficiaries would have received.
As with accessing the death benefit of a policy, accessing the cash value tends to defeat the purpose of life insurance by reducing or eliminating the benefit available to heirs, and the funds produced are not usually sufficient to pay for long-term care for very long.
Health Savings Accounts (HSAs)
Health savings accounts (HSAs) were created by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (commonly known as the Medicare Modernization Act, or MMA). An HSA is a tax-advantaged arrangement designed to help people pay for their healthcare, and it can also be used to fund long-term care.
An employer can sponsor an HSA for an employee, or an individual can establish one for himself. The employee or individual makes contributions to his HSA (up to an annual limit), and these contributions are tax-free. An employer may also contribute to an employee's HSA, and these contributions are also excluded from the employee's taxable income. Funds in an HSA are carried over from year to year and accumulate, and investment earnings and gains are tax-free. A person can withdraw money from his HSA at any time for any purpose, and if a withdrawal is used to pay healthcare expenses (including long-term care) not covered by insurance, it is tax-free. Thus an HSA enables an individual to pay long-term care costs with tax-free money, resulting in considerable savings.
To be eligible to contribute to an HSA or have contributions made on his behalf, an individual must be covered by a high deductible health plan (HDHP). For a health plan to qualify as an HDHP it must have an annual deductible of at least $1,110 for individual coverage and $2,200 for family coverage, and annual cost-sharing payments (deductibles, coinsurance, and co payments) may not exceed $5,500 (individual) or $11,000 (family) (2007 figures, adjusted annually). Also, the individual may not be covered by any other broad-based health plan or Medicare. An LTCI policy is not considered a broad based health plan for HSA purposes. A Medicare beneficiary may not make contributions to an HSA, but he can withdraw money from an HSA he contributed to before enrolling in Medicare.
The maximum annual contribution to an HSA is $2,850 for an individual or $5,650 for a family (2007). However, an exception applies to individuals age 55 and older, who may contribute a "catch-up" amount in addition to the annual maximum. In 2007, they can contribute an extra $800, and this amount will increase to $900 in 2008 and $1,000 in 2009. This exception allows those approaching retirement to build up a substantial HSA balance for use during their retirement years.
Funds accumulated in an HSA can be used tax-free to pay long-term care expenses not covered by insurance or otherwise reimbursed. HSA funds can also be used to pay LTCI premiums, and within certain limits this money is also tax-free. However, given the annual limits on contributions and the short time
HSAs have been in existence, it will be many years before anyone will have accumulated sufficient funds in an HSA to cover a substantial amount of long-term care costs. In the meantime, HSAs can be seen as a tax-advantaged source of supplementary funding.
Medicare & Medigap
Many people believe that the Medicare program will pay most of their long-term care expenses after age 65. Others think that Medicare supplement (Medigap) insurance covers most long-term care services not reimbursed by Medicare. In this chapter we will examine exactly what benefits Medicare and Medigap insurance provide in the area of long-term care, and we will learn why these benefits do not adequately meet long-term care needs.
Medicare Programs and Medigap Insurance
Medicare is a federal healthcare benefits program. It helps pay for medical services (such as hospital stays and physician visits) of people age 65 and older, as well as some persons under 65 who are disabled or suffer permanent kidney failure (end-stage renal disease).
A Medicare beneficiary may choose the original Medicare plan or (where available) a Medicare Advantage plan. The original Medicare plan operates on a fee-for-service basis. Medicare reimburses healthcare providers who serve beneficiaries by paying them a fee for each service rendered. Beneficiaries can go to any physician, hospital, or other provider that accepts Medicare fees as payment. Beneficiaries must pay a deductible, and they also usually pay a portion of the cost of covered services in the form of copayments and coinsurance. The original Medicare plan has two parts:
• Medicare Part A primarily covers inpatient care in hospitals.
• Medicare Part B primarily covers physician services, outpatient hospital care, and some other medical services not covered by Part A.
Medicare Advantage (formerly Medicare-Choice, also called Medicare Part C) is a program under which private-sector health insurance plans provide coverage to Medicare beneficiaries. It consists of managed care plans, such as health maintenance organizations (HMOs) and preferred provider organizations (PPOs), as well as private fee-for-service plans. Medicare Advantage plans provide Medicare Part A and Part B benefits as well as some additional benefits.
Finally, the Medicare Modernization Act created Medicare Part D, a new prescription drug benefit program that began operating in January 2006.
Many Medicare beneficiaries buy Medicare supplement (MedSupp) insurance. This is private health insurance that fills some of the gaps of Medicare coverage (hence it is often called Medigap insurance). Specifically, Medigap policies pay some of the deductibles, copayments, and coinsurance amounts that beneficiaries must otherwise pay themselves, and some policies also offer a few additional benefits not provided by Medicare.
These Medicare programs and Medigap insurance are discussed below with a focus on their relevance to long-term care.
Those at least 65 years old and eligible for retirement benefits from Social Security or the Railroad Retirement system can enroll in Medicare Part A without paying a premium. Some persons 65 and over who are covered by government employee retirement plans instead of Social Security are also eligible for Part A at no charge. Those 65 and over who do not fall into one of these categories can enroll in Medicare Part A, but they must pay a premium, ( As a general rule, those who paid into the Medicare system during their working lives through payroll deductions--the great majority--do not pay a premium, but those who did not must pay.) Medicare Part A coverage is also extended to persons of : any age who are disabled or suffer permanent kidney failure (end-stage renal disease) and meet certain criteria.
Anyone 65 or over can enroll in Medicare Part B, as can disabled persons eligible for Medicare Part A, but all must pay a monthly premium. Because Part B covers important healthcare services not covered by Part A, almost all those enrolled in Part A almost all those enrolled on Part A choose Part B as well. Starting in 2007, the Part B premium will for the first time be adjusted according to the income of the beneficiary. Single persons with a modified adjusted gross income (MAGI) over $80,000 and couples with a MAGI over $160,000 will pay a higher premium than other beneficiaries. This increase
Individuals enrolled in both Medicare Part A and Part B have the option of participating in a Medicare Advantage plan, and they also may enroll in Medicare Part D for an additional premium.
Medicare and Long-Term Care
The Medicare program was created to help pay the medical expenses of the elderly, and it primarily covers hospital and physician services. Medicare does provide very limited benefits under limited circumstances in two areas associated with long-term care-nursing home care and home healthcare. But as we will see, these benefits do not meet the need for ongoing personal care or supervisory care, which is the focus of long-term care.
Nursing Home Coverage
A Medicare beneficiary can receive benefits for care in a skilled nursing facility provided all of the following conditions are met:
• The individual has had an inpatient hospital stay of at least three consecutive days within the last 30 days.
• The individual needs skilled care. The individual may require personal or supervisory care in support of skilled care, but if he needs only personal or supervisory care, he is not eligible for benefits.
• A physician has determined that there is a medical necessity for skilled care-this means that skilled care is required for the diagnosis and treatment of a medical condition. In practice, benefits are paid to those who need care to help them recover from an acute illness or injury and regain normal functioning. Benefits are not paid to those who need care indefinitely to help them cope with a chronic impairment.
• The skilled nursing facility is certified by Medicare. (Most are, but not all.)
In theory, Medicare can pay up to 100 days of nursing home benefits. But in practice this does not often happen, as few people continue to meet the medical necessity requirement for very long. Most people recover from their injury or illness within a few weeks, so that care is no longer medically necessary. Others do not fully recover and become chronically impaired. These people also cease to meet the medical necessity requirement because they no longer need skilled care for the diagnosis and treatment of a medical condition, but instead need personal care to cope with their impairment.
In those cases in which Medicare continues to pay benefits beyond 20 days, the beneficiary must make a daily copayment ($124 in 2007). And all benefits end after 100 days.
Michael, a Medicare beneficiary, falls and breaks his hip. He goes into the hospital for surgery. After a week, his doctor determines that he no longer needs hospital care, but he does need skilled nursing care and rehabilitation to recover from the injury. Michael enters a Medicare-certified skilled nursing facility. After 30 days, his doctor decides that his further recovery does not require skilled care in a nursing home, and he goes home. For the first 20 days Michael is in the nursing home, Medicare pays the $160 daily charge. For the next 10 days, he pays $124 a day (2007), and Medicare pays the remaining $36, so Michael is now bearing most of the expense himself After 30 days, he no longer meets the medical necessity requirement, and Medicare nursing home benefits end.
In summary, although Medicare does provide some benefits for nursing home care, these benefits do not meet long-term care needs for the following reasons:
• No benefits are paid if the beneficiary needs personal or supervisory care only, not skilled care.
• No benefits are paid for skilled care unless it is medically necessary.
• If benefits are provided, Medicare covers all expenses only for the first 20 days, after which the beneficiary pays a large daily copayment and Medicare pays any charges exceeding this amount.
• No benefits are paid beyond 100 days.
Home Healthcare Benefits
Medicare Part A pays benefits for home health care, but as with nursing home benefits, only if strict conditions are met:
• The beneficiary must need home care within 14 days after a stay of at least three consecutive days in a hospital or skilled nursing facility.
• A physician must certify the medical necessity of intermittent skilled nursing care or physical, speech, or occupational therapy. (Intermittent care is defined as less than eight hours per day of care, or fewer than seven days a week of care over a period of 21 days or less.) A need for only personal or supervisory care is not sufficient.
• The physician must certify that the beneficiary needs to receive care at home, and the physician must develop a plan of care.
• The beneficiary must be homebound-that is, she must be unable to leave home, or doing so must require a major effort. When she does leave home, it must be infrequently and for a short time, and it must be for urgent purpose, such as to get medical treatment or to attend religious services.
• Care must be provided by a Medicare-certified home healthcare agency. (Many but not all agencies are Medicare-certified.)
If all these conditions are met, Medicare pays for intermittent skilled nursing care and therapy. In some cases other services and supplies required to support skilled care, such as home health aide services or durable medical equipment, may also be covered. Medicare pays the full approved amount for covered services, except for 20 percent coinsurance for durable medical equipment. However, there is a limit of 100 visits by home care personnel, and as with nursing home benefits, the duration of home care benefits is in practice severely limited by the medical necessity requirement. Like nursing home benefits, Medicare Part A home care benefits are designed to meet the needs of those recovering from an acute illness or injury, not those requiring long-term care to cope with a chronic impairment.
Medicare Part B provides the same home healthcare benefits as Part A and requires that the same conditions be met, with two exceptions:
• To receive Part B benefits, a person need not have had a prior stay in a hospital or a skilled nursing facility.
• Part B benefits are not limited to 100 visits. However, they are limited by medical necessity, and the physician may be required to periodically recertify that care is medically necessary.
Essentially, Medicare Part B provides benefits to those who:
• have not recently been in a hospital or nursing home but otherwise meet all the requirements for home healthcare under Part A;
• have reached the l00-visit limit of Part A, but still meet all the Part A requirements, including medical necessity; or
• meet all Part A requirements including a prior stay in a hospital or nursing home, but are not enrolled in Part A, only Part B.
There is no set limit to the number of visits that Medicare Part B can cover, but once again, because of the medical necessity requirement, people seldom continue to qualify for benefits for very long. Consequently Part B coverage also fails to meet the needs of those requiring long-term care.
In summary, Medicare does provide home healthcare benefits, but because personal or supervisory care is not covered unless skilled care is also needed, and because few people qualify for benefits and even fewer qualify for more than a short time, these benefits do not meet long-term care needs.
Why Medicare Does Not Meet Long-Term Care Needs
Some people, learning that Medicare pays some benefits for nursing home care and home healthcare, jump to the mistaken conclusion that Medicare meets at least some long-term care needs. As we have seen, this is simply not so. Let us review why.
• The large majority of long-term care patients need assistance with ADLs (personal care) or supervision because of a cognitive impairment, not skilled nursing care or therapy. But Medicare does not pay benefits if only personal or supervisory care is needed.
• Even skilled care is covered only if it is medically necessary that is, if it is needed to help the beneficiary recover from an injury or illness. Because of this requirement, few people qualify for benefits for more than a short time.
• When Medicare does pay nursing home benefits, it covers the full cost for only 20 days, after which the beneficiary must make a large daily copayment. And all nursing home benefits cease after 100 days.
• When Medicare provides home healthcare benefits, because of the medical necessity requirement they are seldom paid for long.
Medigap, Medicare Advantage, and Long-Term Care
Many Medicare beneficiaries buy private Medigap insurance. As explained above, Medigap policies pay some of the deductibles, copayments, and coinsurance amounts required by Medicare, and some policies provide a few additional benefits. Medigap policies may include two benefits for services associated with long-term care.
• Some Medigap plans provide at-home recovery benefits. These help pay for personal care in the insured's home while he is recovering from an illness or injury and receiving Medicare benefits for skilled care at home. Benefits may also continue for a limited time after skilled care is no longer needed. But for two reasons these benefits contribute little to meeting the need for ongoing personal care. First, the insured must initially meet the stringent conditions for Medicare home health care benefits described in this chapter-in other words, skilled care must be medically necessary for the insured's recovery from an acute injury or illness. Second, benefits are limited to a total of eight weeks and $1,600 a year.
• Most Medigap plans cover the daily copayment that Medicare charges after the 20th day of nursing home care. But this benefit also has a limited impact, since it too applies only to those who are recovering from an injury or illness and meet Medicare's medical necessity requirement. Moreover, since people seldom continue to meet this requirement much beyond 20 days, this benefit is not often paid for very long.
Clearly, neither of these benefits goes very far in meeting the needs of those requiring long-term care for an extended period.
Some Medicare beneficiaries participate in a Medicare Advantage plan. Medicare Advantage plans provide the standard Medicare Part A and Part B benefit packages, and they also offer some additional benefits that fill some of the gaps of Medicare coverage, like Medigap policies. However, also like Medigap policies, Medicare Advantage plans do not provide any substantial coverage in the area of long-term care.
Medicare Part D
Prescription drugs are often a significant expense of those receiving long-term care. Traditionally, the Medicare program did not cover the cost of outpatient prescription drugs. However, the Medicare Modernization Act established a prescription drug benefit program, Medicare Part D, which became available January 1, 2006. Medicare beneficiaries choose whether they wish to participate in Part D, and those who do pay an additional monthly premium.
Part D benefits are most commonly provided by private prescription drug plans (PDPs). A Medicare beneficiary enrolls in the PDP of her choice, receives benefits from that PDP's, and pays her premium directly to the PDP. Some Medicare Advantage plans also provide Part D benefits.
Medicare beneficiaries generally have many PDPs to choose from, and PDPs vary in the benefit packages they offer. But all plans must provide a minimal level of benefits-specifically, Medicare has established a standard Part D benefit, and while a PDP may offer a benefit structure that differs from this standard, it must be at least actuarially equivalent to the standard. Medicare also specifies certain drugs that all PDPs must cover.
The Medicare Part D standard benefit is adjusted annually for inflation; for 2007 it is as follows:
• The beneficiary pays the first $265 of covered drug costs each year. (That is, there is a $265 annual deductible.)
• After the deductible is satisfied, the beneficiary pays 25 percent coinsurance, and the PDP pays the remaining 75 percent of covered drug costs. This cost-sharing arrangement continues until the initial coverage limit is reached-that is, until the combined costs paid by the beneficiary and the PDP during the year total $2,400.
• After the initial coverage limit is exceeded, the beneficiary pays 100 percent of costs until she has paid $3,850 out of pocket (at which point the combined costs paid by the beneficiary and the PDP total $5,451.25). This phase is referred to as the Part D coverage gap (sometimes called the "doughnut hole" by detractors of the plan). However, although no benefits are paid during this period, the beneficiary generally does pay less for her drugs than she otherwise would, as she usually benefits from pharmacy discounts negotiated by her PDP.
• After covered drug costs for a year reach $5,451.25, catastrophic coverage is triggered, and the PDP pays nearly all costs. The beneficiary pays either 5 percent coinsurance or a copayment ($5.35 for brand-name drugs, $2.15 for generics), whichever is greater, and the PDP pays the balance. This arrangement continues until the end of the year.
• At the beginning of each year, this system begins again-the beneficiary must again satisfy the annual deductible, after which she pays 25 percent coinsurance until the initial coverage limit has been reached, and so on as described above.
TABLE 4.1 The Medicare Part D Standard Benefit*
Kate is a Medicare beneficiary enrolled in a PDP She takes several prescription drugs, all of which are covered by the PDP Their cost totals $10 a day. How much of this does the PDP cover, and how much does Kate have to pay herself?
Kate must pay the first $265 of costs to satisfy the deductible. Then she pays 25 percent coinsurance-that is, she pays $2.50 of the daily cost and the PDP pays $7.50. But after about seven months, Kate has paid $798.75 (the $265 deductible plus $533.75 in coinsurance), and the PDP has paid $1,601.25, for a total of $2,400, the initial coverage limit. After this limit is reached, Kate must pay the full cost of her prescriptions for the remainder of the year (although she benefits from discounts negotiated by her PDP).
Spencer is also a Medicare beneficiary enrolled in a PDP All his prescription drugs are covered by the PDP's, but they cost $20 a day. Spencer pays the $265 deductible, then 25 percent coinsurance ($5 a day), and later, after costs total $2,400, he pays all costs. But after about eight-and-a-half months, total costs reach the $5,451.25 threshold. From now until the end of the year, Spencer pays only the coinsurance or copayment amounts reported above, and the PDP covers the rest.
As mentioned, PDPs offer a wide variety of benefit packages, and many of these packages are superior to the standard benefit. Some PDPs require no deductible or a smaller deductible, and some charge copayments for most drugs instead of the 25 percent coinsurance. Many PDPs cover drugs not required by Medicare. Of course, premiums vary by PDP and plan option, according to the benefits provided.
The Medicaid program pays for healthcare for the poor of all ages. Unlike Medicare, Medicaid provides extensive benefits for long-term care, but only to those who are impoverished. However, some people who are not poor when they first need long-term care are eventually able to rely on Medicaid to cover the costs of their care. They spend their assets and income on care until they have very little left, at which point they meet Medicaid's definition of poverty and qualify for benefits. This practice is called spending down, and it is a viable means of meeting long-term care needs, but it has significant drawbacks, some obvious and others not so obvious, as we will see in this chapter.
The Medicaid Program
Medicaid is a federal-state program. The federal government establishes broad guidelines for its operation, and each state administers its own program and determines, within these guidelines, eligibility criteria; the type, amount, and duration of services its program pays for; and rates of payment for services. Thus, a person who is eligible for Medicaid in one state may not be eligible in another state, and the benefits provided in one state may not be provided in another. In addition, state Medicaid programs may change from year to year in response to changing needs, fiscal constraints, or emerging problems. For information on a particular state's program, we suggest visiting the website of the National Association of State Medicaid Directors (www.nasmd.org), which includes links to state Medicaid websites.
Medicaid is jointly funded by the federal government and the state governments. In 2006 the federal government provided 50 to 76 percent of funds, depending on the state, with an average federal contribution of 59 percent; the states paid the rest.
Despite the disadvantages, many people end up relying on Medicaid to pay for their long-term care because they did not make other provisions. As a result, Medicaid accounts for a major portion of all long-term care expenditures-47 percent in 2004.
In simplest terms, to be eligible for Medicaid a person must be poor. But determining who is considered poor for purposes of Medicaid eligibility is anything but simple. There are many categories of eligible individuals, and as mentioned above, requirements differ from state to state, and they may change from year to year. In this section and those that follow, we offer a summary of the complex rules that apply in this area.
Some people are deemed categorically needy by Medicaid that is, they are defined as poor and eligible for Medicaid benefits because they fall into certain categories. Most of these categories consist of children of low-income families, some parents of such children, and low-income pregnant women, so they are not normally relevant to long-term care. But a few categories include adults without dependent children, such as recipients of Supplemental Security Income (SSI). These are people with very low incomes (in 2007, no more than $623 per month for individuals, $934 for couples) who receive government assistance to help them maintain a minimal standard of living.
Most (but not all) state Medicaid programs also extend eligibility to some people who do not belong to one of the categorically needy groups but are considered medically needy. These are people whose income and assets were above the poverty level but have been depleted by medical or long-term care expenses. For a person to qualify as medically needy, the value of her financial assets must be below a certain level, and her income (or her remaining income after medical or long-term care expenditures) must also be below a certain level. These levels are known as eligibility limits. If a person's assets and income are not already below her state's eligibility limits, to qualify for Medicaid she must spend down-that is, she must liquidate her assets and spend the proceeds on care until the value of the remaining assets falls below the asset eligibility limit, and she must spend almost all her income on healthcare or long-term care, so that the remaining amount falls below the income limit. Once she reaches the eligibility limits, she can begin receiving benefits for Medicaid-covered services. Asset and income eligibility limits are discussed in more detail below.
As was discussed briefly in the introduction, the Medicaid eligibility rules are applied somewhat differently to individuals who participate in a state long-term care partnership program. If their long-term care insurance benefits run out and they are forced to apply to Medicaid, they are allowed to keep some assets that others would be required to spend down. The specifics of partnership programs and how they affect Medicaid spend-down requirements are covered in detail later in this course . In this chapter we will focus on the standard rules that apply to most applicants.
The Deficit Reduction Act (DRA) of 2005, effective February 8, 2006, made significant changes in the rules governing Medicaid eligibility. These changes are highlighted in the discussion that follows.
The asset eligibility limit varies by state, but it is generally about $2,000 for an individual and $3,000 for a married couple. (For cases in which one member of a couple is applying for Medicaid long-term care benefits, see "Spousal Impoverishment" below.)
Medicaid divides financial assets into two categories: countable assets are those that are considered in determining whether a person exceeds the eligibility limit, and noncountable assets (also called exempt assets) are those that are not. Countable assets include:
• cash, savings and checking accounts, and certificates of deposit;
• stocks and bonds;
• IRAs, Keogh accounts, and other retirement funds;
• the cash surrender value of life insurance policies with a combined face value greater than $1,500;
• items that may be converted into cash, including vacation homes, second vehicles, collectibles, and any other items not specifically listed as noncountable assets by Medicaid; and
• in some cases, the applicant's home (see below).
If the total value of a person's countable assets exceeds the eligibility limit, she is not eligible for Medicaid. To become eligible, she must spend all countable assets above the eligibility limit on care; illiquid assets, such as houses and vehicles, must be sold and the money spent on care.
Noncountable assets are not counted in calculating whether the eligibility limit is exceeded, and they do not have to be sold to pay for care. They include:
• household goods and personal effects, such as furniture and clothing;
• one automobile, regardless of its value, if its primary use is the day-to-day transportation of a household member;
• the cash surrender value of life insurance policies with a combined face value of less than $1,500;
• one wedding and one engagement ring;
• burial plots for the applicant and her immediate family, as well as burial funds for the applicant and her spouse; and
• the applicant's home in most cases (see below).
Medicaid's treatment of a person's home (her primary residence) is complex and has been modified by the DRA. The rules can be summarized as follows:
• If the applicant is living in the home and is not applying for payment of long-term care services, the home is noncountable, regardless of value.
• If the applicant is applying for long-term care benefits, the home is countable if the equity value is more than $500,000 (or $750,000, at the option of the state) unless a spouse, dependent child, or disabled child lives in it.
• If the applicant has left her home permanently to live in a nursing home, the home is countable, regardless of value, unless a spouse, dependent child, or disabled child lives III It.
In addition, in cases where a home is deemed noncountable and the applicant is not forced to sell it, a lien may be placed on it so that if it is sold, Medicaid must be reimbursed for long-term care benefits out of the proceeds.
Many states also have income eligibility limits. Like assets limits, income limits vary from state to state, but in all states they are very low-usually even lower than the income limits cited above for the Supplemental Security Income (SSI) program. Some states grant Medicaid eligibility to certain persons with incomes above SSI levels, but only within limits-generally no higher than the federal poverty level (in 2006, $9,800 annually for an individual and $13,200 for a couple) or, for those who qualify for special eligibility options, 300 percent of SSI levels.
In calculating whether a person's income exceeds the eligibility limit, Medicaid counts all but the first $20 per month of unearned income, including Social Security benefits, other government and private pensions, veterans' benefits, workers' compensation, annuity payments, and investment income. Food stamps and certain other forms of public assistance and charity are not counted. (A portion of any earned income, such as wages or earnings from self-employment, is not counted, but this is of course not normally relevant to applicants in need of long-term care.)
Whether a state has income eligibility limits or not, if a person qualifies for Medicaid and enters a nursing home, almost all her income must be spent on care. She may retain only a small personal needs allowance (usually between $30 and $90 per month depending on the state) to cover items such as toiletries and reading material. In addition, any income used to pay health insurance premiums may be retained.
The Medicaid eligibility rules explained above give rise to a question: If one of the spouses of a married couple needs long-term care and applies for Medicaid, must all the income and assets of the couple above the eligibility limits be spent on her care, leaving the spouse who does not need care with nothing to live on?
Medicaid rules have evolved to prevent spousal impoverishment-that is, to ensure that the spouse who remains at home (called the community spouse) while the other spouse enters a nursing home retains a reasonable amount of financial resources. States may also apply these rules when a person does not enter a facility but needs home healthcare or community-based care, but for the sake of simplicity, we will refer here only to the "nursing home spouse." These rules are complex, and we will summarize them.
If a community spouse has income of his own, he retains that income and does not have to spend it on his spouse's nursing home care. If the community spouse has little or no income of his own, some of the income of the nursing home spouse is set aside for his use and is not required to be spent on care. Specifically, the spousal impoverishment rules provide for a minimum monthly maintenance needs allowance (MMM A) for the community spouse. In 2007, the amount of the MMM A ranges from $1,650 to $2,5415 depending on the community spouse's actual housing costs. The MMMNA works in this way:
• If the community spouse has no income of his own, he receives the entire MMMNA amount from the income of the nursing home spouse.
• If the community spouse does have some income of his own, he receives an amount from the income of the nursing home spouse necessary to bring his income up to the MMMNA level.
• If his own income is greater than the MMM A, he receives nothing from the income of the nursing home spouse.
Jane and Ted are a married couple. Ted enters a nursing home and is expected to remain there indefinitely. They apply for Medicaid. Jane receives $700 a month from a trust left her by a relative but has no other income of her own. The applicable MMMNA is $1,900. Jane is allowed to retain $1,200 of Ted's monthly income, which added to her $700 of trust income gives her a total monthly income at the MMMNA level of $1,900.
If there are other family members living in the household in addition to the community spouse, a family monthly income allowance is alloted to them in a similar way.
In general, a couple must spend all its countable assets in excess of the eligibility limit on the care of the nursing home spouse, except for a protected resource amount (PRA) reserved for the community spouse. (All noncountable assets are of course retained by the couple.) The amount of the PRA is set by each state within federal guidelines. All states must allow the community spouse to retain all countable assets up to a minimum amount ($20,328 in 2007). States have the option of also allowing the community spouse to keep half of assets in excess of the minimum up to a certain limit. This limit cannot be higher than a federal maximum ($101,640 in 2007), but it may be less than that maximum-for example, a state might let the community spouse retain half of assets up to $50,000.
In addition, if the entire income of the nursing home spouse is allotted to the community spouse and this is insufficient to bring the community spouse's income up to the MMMNA level, the community spouse may retain enough of the couple's assets to generate enough income to reach the MMMNA level.
Transfers of Assets
Some individuals reduce their assets to the Medicaid eligibility limit not by spending them on care, but by giving them to family members or others, in some cases in order to continue to access the assets through the cooperation of relatives, or at least to enable others to benefit from them.
Medicaid's transfer of assets rules address this practice. They apply to transfers of assets for less than their value (as occurs when assets are given away or sold for less than they are worth) made by a Medicaid recipient or, more commonly, by a person before she applies for Medicaid. Specifically, these rules apply during a certain amount of time before the date of the Medicaid application, called the look-back period. Under the ORA, the look-back period for transfers made on or after February 8, 2006 is 60 months. For transfers made before that date, the old look-back period of 36 months still applies. The look-back period for transfers involving most trusts has been and remains 60 months.
If a transfer of assets meeting the above criteria has occurred, benefits must normally be withheld for an amount of time referred to as the penalty period or disqualification period. The length of the penalty period for nursing home care is determined in this way: The value of the transferred asset is divided by the state's average monthly private-pay rate for nursing facility care. (This rate is set by each state Medicaid program based on charges to private patients in the state.) The result of this calculation is the number of months that Medicaid benefits are withheld. The effect of this rule is that the recipient has to payout of his own pocket an amount at least roughly equal to the amount of the improperly transferred asset, generally making the transfer not financially advantageous. There is no limit to the length of a disqualification period.
Karl gave assets worth $90,000 to his children five months before entering a nursing home and applying for Medicaid. This transfer falls within the look-back period, so benefits must be withheld. The $90,000 is divided by the state's average monthly private-pay rate ($4,500), resulting in a 20-month penalty period-that is, Karl must pay for nursing home care out of his own funds for 20 months. And since nursing home costs will be increasing over these 20 months, Karl may actually pay more than $4,500 toward the end of the penalty period and as a result spend a total of more than $90,000 .
Before the DRA (and this rule still applies to transfers made before February 8, 2006), the penalty period began the first day of the month in which me transfer occurred, leaving a loophole in the transfer of asset rules.
In January 2005 Jerry gave $50,000 to his daughter. Fourteen months later, in March 2006, he entered a nursing home and applied for Medicaid. This transfer fell within the look-back period, and in theory Jerry was subject to a penalty period of 1 0 months (based on his state's average monthly private pay rate of $5,000). However, this penalty period began on the first day of the month in which the transfer occurred-January 1, 2005-and ended 10 months later, on October 31,2005. So in fact, the penalty period had already elapsed by the time Jerry applied for Medicaid, and he suffered no penalty. (If he had applied earlier, say in June 2005, he would have been subject to a penalty period, but only up to October 31, 2005, even if this resulted in a penalty period of less than 10 months.)
Under the DRA, for transfers taking place on or after February 8, 2006, the penalty period begins on the first day of the month in which the Medicaid applicant enters a nursing home and otherwise meets Medicaid eligibility requirements.
In January 2007 Jane gives $50,000 to her son. Fourteen months later, in March 2008, she enters a nursing home and applies for Medicaid. This transfer falls within the look-back period, and Jane is subject to a penalty period of 10 months (based on her state's average monthly private-pay rate of$5,000). This penalty period begins on the first day of the month in which Jane enters the nursing home and qualifies for Medicaid--March 1, 2008-and ends 10 months later, on December 31, 2008. So Jane, unlike Jerry, will have to pay for her nursing home care for 10 months.
Certain types of assets transfers are permitted. These include transfers to a spouse, or to a third party for the sole benefit of the spouse; transfers to certain disabled individuals or to trusts established for those individuals; transfers for a purpose other than to qualify for Medicaid; and transfers where the Medicaid program determines mat imposing a penalty would cause undue hardship.
How the asset transfer rules apply to loans has not been entirely clear in the past, and as a result, some Medicaid applicants have been able to transfer assets to family members while avoiding a penalty period.
George, 81 years old, suffered from a worsening physical impairment. He expected to need nursing home care in the near [future and planned to apply for Medicaid. He lent his son Jesse $90,000, and under the terms of the loan no interest was charged, Jesse made monthly payments of only $250, such that repayment would take 30 years, and in the event George died before the loan was repaid, the balance would be forgiven. George's state Medicaid program did not deem this transaction a transfer of assets for less than their value (since in theory it was a loan that would be repaid in full), so the asset transfer rules did not apply to it and no penalty period was imposed. But when George died five years later, Jesse had received $90,000 while having to pay back only $15,000, for a gain of $75,000.
The DRA provided clarification in this area. The following rules apply to loans, promissory notes, and mortgages created on or after April 1, 2006:
• Repayment terms must be actuarially sound. This means that, based on the lender's life expectancy at her current age, it is reasonable to expect that repayment will be received in full during her lifetime.
• Repayment must be made in equal payments over the term of the loan. A large lump-sum payment (a balloon payment) cannot be scheduled at the end of a series of smaller periodic payments. Payments may not be deferred.
• The balance of the loan, promissory note, or mortgage may not be cancelled on the death of the lender.
If an individual purchases an annuity during the look-back period, this is not considered a transfer of assets for less than fair market value and thus not subject to the asset transfer rules, provided the payout of the annuity is actuarially sound. This means that based on the life expectancy of the annuitant at her current age, she must be expected to receive the principal (the amount she paid for the annuity) back during her remaining lifetime.
In the past Medicaid applicants were allowed to name a family member or other person as beneficiary of an annuity. (In other words, if the annuitant died before the end of the payout period, the family member would receive the remaining money to be paid out.) As a result, in certain circumstances an individual could arrange to transfer assets to an heir.
Sue, a 65-year-old widow, had cancer and was not expected to live more than a couple more years. She used most of her assets to purchase a 10-year annuity, naming her daughter Peggy as her beneficiary, and a few months later applied to Medicaid. Since at 65 Sue's age-based life expectancy was more than 10 years, the annuity was considered actuarially sound and thus not subject to the asset transfer rules. When Sue died at age 67, Peggy received most of her assets.
Under the DRA annuities purchased on or after February 8, 2006 must meet several new requirements to be exempt from the asset transfer rules. Most important, the Medicaid recipient must name the state as the beneficiary or, in the case of a married person, the secondary beneficiary after the spouse. Thus if the recipient (and the spouse if there is one) dies before the annuity has fully paid out, the remaining money goes to the state, not a family member.
A trust is a legal arrangement by which one person, the grantor, transfers assets to another, the trustee, for the benefit of one or more parties, the beneficiary or beneficiaries. Although the trustee is the titleholder of the trust's assets, he has the legal obligation to act solely in the interests of the beneficiary. The beneficiary benefits from the assets in some way-for example, by receiving income earned from them. In some trusts, the beneficiary is the grantor himself.
In the past, some people used trusts to avoid Medicaid eligibility rules. A person could create a trust, designate a close relative or even herself as beneficiary, put assets in the trusts, and later apply for Medicaid. The trust's assets benefited the individual or her family, but under the rules then in effect, those assets were not counted in determining if eligibility limits had been exceeded.
This is no longer the case. Specifically, when assets are transferred to a trust by a Medicaid applicant or recipient (whom we will refer to here as the grantor), they are treated in the following ways:
• If an amount is paid from the trust to the grantor or for the benefit of the grantor, the amount is treated as the grantor's income.
• If an amount could be paid to the grantor or for his benefit, but is not, the amount is treated as an available asset of the grantor.
• If an amount could be paid to the grantor or for his benefit, but is paid to someone else, the amount is treated as a transfer of assets for less than their value and is subject to the rules governing asset transfers discussed above.
• If an amount cannot in any way be paid to the grantor or for his benefit, the amount is also treated as a transfer of assets for less than their value.
In other words, as a general rule, if the assets a grantor places in a trust benefit himself in some way, they are treated as his income or assets, and if they benefit someone else (such as a family member), they are treated as a transfer of assets to that person.
As noted above, for most trusts the look-back period is 60 months--that is, the above rules apply to transfers to trusts occurring 60 months or less before the individual applied for Medicaid.
A few trusts are exempt-that is, the assets that a Medicaid applicant or recipient transfers to them are not counted in calculating whether she exceeds eligibility limits. These include most trusts established for disabled persons; certain trusts whose assets consist only of a grantor's pension, Social Security benefits, and other income; and a few trusts exempted by state Medicaid programs on a hardship basis.
As we have seen, a Medicaid recipient is allowed to retain noncountable assets such as his home, as well as countable assets up to the eligibility limit. When a recipient dies, he leaves these assets in his estate, and Medicaid generally seeks to recover from the estate the money it paid to the recipient in benefits. This is referred to as estate recovery, and it normally applies to recipients in nursing homes and to those who began receiving benefits for home-based and community-based care after age 55.
Medicaid may also recover assets left by the decedent but not included in his probated estate (as legally defined), such as jointly held property that passes automatically to the surviving joint owner or property held in a trust. Medicaid may not recover a decedent's home before the death of a surviving spouse, and in some cases the home may be protected from recovery and preserved for surviving children or siblings. For example, in some states, homestead provisions protect a primary residence from creditors, including Medicaid, and allow it to pass to heirs unencumbered. The states differ considerably in how they administer Medicaid estate recovery and how estate recovery provisions interact with state probate laws; thus there is much variation in what assets different states actually recover.
For those who qualify for Medicaid, the benefits provided are extensive. Like eligibility requirements, benefit provisions vary from one state program to another, but federal guidelines require all states to provide a minimal benefit package, including hospital inpatient and outpatient care, physician care, and many other services. In the area of long-term care, all states are required to pay for nursing home care, and they must also pay for home healthcare for those who are nursing home eligible (those who would need nursing home care if they did not receive home care). And although federal guidelines do not require it, an increasing number of states also pay benefits for home and community-based services for certain other Medicaid recipients. These services may include personal care, home health aide services, rehabilitation, therapies, respite care, adult day center care, homemaker services, and other services. In addition, a few states pay for long-term care services received in an assisted living residence.
Unlike Medicare, with its highly restrictive conditions for payment of nursing home or home care benefits, Medicaid generally meets the need for long-term care (for those who qualify). Medicaid pays benefits for personal and supervisory care even if skilled care is not also needed, and the program covers ongoing care needed to cope with a chronic impairment, not just care required for a short time to facilitate recovery from an acute illness or injury. However, there are some important limitations to Medicaid long-term care benefits:
• Medicaid coverage of home and community-based services, while expanding, is still limited. Not all states extend this coverage beyond the federally required home care for recipients who are nursing home eligible. In states that do provide such coverage, eligibility may be restricted and funding is often limited. (While there is considerable variation from state to state, nationally only about 33 percent of Medicaid long-term care spending goes to home and community-based services.)
• As mentioned, only a few states offer benefits for care in an assisted living residence, and generally those that do so pay only for long-term care services (such as assistance with ADLs), not for room and board.
• Medicaid covers nursing home care only if it is provided in a Medicaid-certified facility. (Most nursing homes are Medicaidcertified, but not all.)
The Disadvantages of Relying on Medicaid
For the poor, Medicaid is usually the only way to meet long-term care needs. Those who are not poor but are considering spending down in order to obtain Medicaid benefits should be aware of several disadvantages to this approach.
Spending down generally leaves a person with extremely limited assets and income and results in the loss of financial independence. An elderly person who has worked hard and been self-supporting her whole life becomes indigent and must depend on the government for her needs. Spending down also means that hard-earned assets cannot be used for such purposes as helping grandchildren go to college, and they cannot be left to heirs.
In addition, the types of long-term care available to a Medicaid recipient are often limited. As explained in the preceding section, benefits for home and community-based services are not offered everywhere, eligibility for them may be restricted, and funding is generally limited. And only a few state programs pay benefits for care in assisted living residences. Consequently, some Medicaid recipients who could be cared for at home are forced to enter a nursing home.
Finally, a Medicaid recipient may have a more limited choice of long-term care facilities, and the facilities generally considered the most desirable may not be available to her. This is because in most states facilities receive less for caring for Medicaid recipients than from private patients. For this reason some nursing homes that have a superior reputation and can easily fill their beds do not accept Medicaid recipients. Most nursing homes that do admit Medicaid patients assign only a limited number of beds to them, and the most popular of these facilities often have long waiting lists for Medicaid recipients. Consequently, Medicaid recipients often end up in facilities that, although certified by Medicaid and perfectly adequate, are found by others to be less desirable for various reasons. Another consideration is that, if fewer facilities are open to a Medicaid recipient, she may have to go wherever a bed is available, which might be distant from her family and friends.
In summary, those who rely on Medicaid to meet their long-term care needs lose their assets and their financial independence and often have limited choices of types of care and facilities.
Medicare is a federal program that pays healthcare benefits to the elderly and a few others. Medicare Part A primarily covers inpatient care in hospitals, while Medicare Part B covers physician services, outpatient hospital care, and some other medical services. Under the Medicare Advantage program (Medicare Part C), beneficiaries can receive Part A and Part B coverage (and some additional benefits) from a private health insurance plan.
Medicare provides some benefits in two areas associated with long-term care-nursing home care and home healthcare. But these benefits do not meet the needs of those requiring long-term care, for the following reasons:
• No benefits are paid if the beneficiary needs personal or supervisory care only, not skilled care.
• No benefits are paid for skilled care unless it is medically necessary, meaning that only those recovering from an injury or illness generally qualify.
• The duration of benefits is in practice quite limited because people seldom continue to meet the medical necessity requirement for more than a short time.
Medicare supplement (Medigap) insurance policies and Medicare Advantage plans offer a few benefits not provided by Medicare, but they do not include any major coverage in the area of long-term care.
The new Medicare Part D program provides benefits for prescription drugs, which are a major expense for many of those receiving long-term care, but of course it does not provide any funding for long-term care services themselves.
Medicaid is a federal-state healthcare benefits program. It covers long-term care, but to qualify for benefits an individual must be poor or must spend almost all her income and assets on care. She may generally keep only a few assets (such as her home, car, household goods, and personal effects) and a very small amount of income.
The rules governing Medicaid eligibility are complex. They cover the assets and income that are counted in determining eligibility; the treatment of married couples when only one spouse needs Medicaid benefits; and the transfer of assets to another person by a Medicaid applicant or recipient, including transfers involving loans, annuities, and trusts.
For those who qualify, the long-term care benefits that Medicaid provides are substantial. Unlike Medicare, Medicaid pays for personal and supervisory care even if skilled care is not also needed, and it covers ongoing care needed to cope with a chronic impairment, not just care required for a short time to facilitate recovery from an acute illness or injury.
Those considering relying on Medicaid to meet long-term care needs should bear in mind that spending down to qualify means losing one's financial independence and the assets one has spent a lifetime accumulating. And as a Medicaid recipient, one may have only limited choices of types of long-term care and of facilities.