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 discussion.
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 discussion 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 MMMNA ranges from $1,650 to $2,541 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 10 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 Medicaid certified, 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.