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Medicaid (called "MassHealth" in Massachusetts) is a joint federal-state program that provides health insurance coverage to low-income children, seniors and people with disabilities. In addition, it covers care in a nursing home for those who qualify. In the absence of any other public program covering long-term care, Medicaid has become the default nursing home insurance of the middle class.
As for home care, Medicaid offers very little. Recognizing that home care costs far less than nursing home care, a few states— including Massachusetts--are pioneering efforts to provide Medicaid-covered services to those who remain in their homes.
While Congress and the federal Centers for Medicare and Medicaid Services (CMS) set out the main rules under which Medicaid operates, each state runs its own program. As a result, the rules are somewhat different in every state, although the framework is the same throughout the country. The following describes those basic rules, with reference to the specific application of theses rules in Massachusetts.
Resource (Asset) Rules
In order to be eligible for Medicaid benefits a nursing home resident may have no more than $2,000 in "countable" assets.
The spouse of a nursing home resident--called the 'community spouse'-- is entitled to keep a maximum of $128,640 (2020 figure) in "countable" assets excluding the value of the home and car, which is referred to as the Community Spouse Resource Allowance (CSRA). This figure changes each year to reflect inflation.
All assets are counted against these limits unless the assets fall within the short list of "noncountable" assets. These include the following:
- Personal possessions, such as clothing, furniture, and jewelry
- One motor vehicle of any value for the healthy (community) spouse
- The applicant or spouses principal residence, if located in Massachusetts. In Massachusetts, under the provisions of the Deficit Reduction Act of 2005 (DRA), the principal residence is deemed noncountable only to the extent the equity is less than $893,000 (Inflation adjusted 2020) for a single individual. In Massachusetts under the DRA, the house may be kept with no equity limit if the Medicaid applicant’s spouse or another dependent relative lives there
- Prepaid funeral plans and a small amount of life insurance
- Assets that are considered "inaccessible" for one reason or another
In Massachusetts, nursing home residents do not have to sell their homes in order to qualify for Medicaid. Under the DRA, principal residences may be deemed noncountable only to the extent their equity is less than $500,000, with the states having the option of raising this limit to $750,000. Massachusetts currently has a limit of $893,000 inflation adjusted through 2020. In some states, the home will not be considered a countable asset for Medicaid eligibility purposes as long as the nursing home resident intends to return home; in other states, the nursing home resident must prove a likelihood of returning home. In all states and under the DRA, the house may be kept with no equity limit if the Medicaid applicant’s spouse or another dependent relative lives there.
The Transfer Penalty
The second major rule of Medicaid eligibility is the penalty for transferring assets. Congress does not want you to move into a nursing home on Monday, give all your money to your children (or whomever) on Tuesday, and qualify for Medicaid on Wednesday. So it has imposed a penalty on people who transfer assets without receiving fair value in return. These restrictions, already severe, have been made even harsher by enactment of the DRA.
This penalty is a period of time during which the person transferring the assets will be ineligible for Medicaid. The penalty period is determined by dividing the amount transferred by what Medicaid determines to be the average private pay cost of a nursing home in your state.
For example, if you live in a state where the average monthly cost of care has been determined to be $5,000, and you give away property worth $100,000, you will be ineligible for benefits for 20 months ($100,000 ÷ $5,000 = 20).
Another way to look at the above example is that for every $5,000 transferred, an applicant would be ineligible for Medicaid nursing home benefits for one month.
In theory, there is no limit on the number of months a person can be ineligible.
The period of ineligibility for the transfer of property worth $400,000 would be 80 months ($400,000 ÷ $5,000 = 80).
However, for transfers made prior to enactment of the DRA on February 8, 2006, state Medicaid officials will look only at transfers made within the 36 months prior to the Medicaid application (or 60 months if the transfer was made to or from certain kinds of trusts). But for transfers made after passage of the DRA the so-called “lookback” period for all transfers is 60 months.
To use the above example of the $400,000 transfer, if the individual made the transfer on January 1, 2003, and waited until February 1, 2006, to apply for Medicaid -- 37 months later -- the transfer would not affect his or her Medicaid eligibility. However, if the individual applied for benefits in December 2005, only 35 months after transferring the property, he or she would have to wait the full 80 months before becoming eligible for benefits. On the other hand, if the individual made the transfer on February 10, 2006, he or she would have to wait 60 months before applying for Medicaid in order to avoid an ineligibility period.
The second and more significant major change in the treatment of transfers made by the DRA has to do with when the penalty period created by the transfer begins. Under the prior law, the 20-month penalty period created by a transfer of $100,000 in the example described above would begin either on the first day of the month during which the transfer occurred, or on the first day of the following month, depending on the state. Under the DRA, the 20-month period will not begin until (1) the transferor has moved to a nursing home, (2) he has spent down to the asset limit for Medicaid eligibility, (3) has applied for Medicaid coverage, and (4) has been approved for coverage but for the transfer.
For instance, if an individual transfers $100,000 on April 1, 2007, moves to a nursing home on April 1, 2008, and spends down to Medicaid eligibility on April 1, 2009, that is when the 20-month penalty period will begin, and it will not end until December 1, 2010. How this change will be implemented from state-to-state will be worked out over the next few years.
Exceptions to the Transfer Penalty
Transferring assets to certain recipients will not trigger a period of Medicaid ineligibility. These exempt recipients include the following:
- A spouse (or a transfer to anyone else as long as it is for the spouse's benefit)
- A blind or disabled child
- A trust for the benefit of a blind or disabled child
- A trust for the sole benefit of a disabled individual under age 65 (even if the trust is for the benefit of the Medicaid applicant, under certain circumstances).
In addition, special exceptions apply to the transfer of a home. The Medicaid applicant may freely transfer his or her home to the following individuals without incurring a transfer penalty:
- The applicant's spouse
- A child who is under age 21 or who is blind or disabled
- Into a trust for the sole benefit of a disabled individual under age 65 (even if the trust is for the benefit of the Medicaid applicant, under certain circumstances)
- A sibling who has lived in the home during the year preceding the applicant's institutionalization and who already holds an equity interest in the home
- A "caretaker child," who is defined as a child of the applicant who lived in the house for at least two years prior to the applicant's institutionalization and who during that period provided care that allowed the applicant to avoid a nursing home stay.
Is Transferring Assets Against the Law?
You may have heard that transferring assets, or helping someone to transfer assets, to achieve Medicaid eligibility is a crime. Is this true? The short answer is that for a brief period it was, and it's possible, although unlikely under current law, that it will be in the future.
As part of a 1996 Kennedy-Kassebaum health care bill, Congress made it a crime to transfer assets for purposes of achieving Medicaid eligibility. Congress repealed the law as part of the 1997 Balanced Budget bill, but replaced it with a statute that made it a crime to advise or counsel someone for a fee regarding transferring assets for purposes of obtaining Medicaid. This meant that although transferring assets was again legal, explaining the law to clients could have been a criminal act.
In 1998, Attorney General Janet Reno determined that the law was unconstitutional because it violated the First Amendment protection of free speech, and she told Congress that the Justice Department would not enforce the law. Around the same time, a U.S. District Court judge in New York said that the law could not be enforced for the same reason. Accordingly, the law remains on the books, but it will not be enforced. Since it is possible that these rulings may change, you should contact your elder law attorney before filing a Medicaid application. This will enable the attorney to advise you about the current status of the law and to avoid criminal liability for the attorney or anyone else involved in your case.
Treatment of Income
The basic Medicaid rule for nursing home residents is that they must pay all of their income, minus certain deductions, to the nursing home. The deductions include a $72-a-month personal needs allowance, a deduction for any uncovered medical costs (including medical insurance premiums), and, in the case of a married applicant, an allowance for the spouse who continues to live at home if he or she needs income support. A deduction may also be allowed for a dependent child living at home.
For Medicaid applicants who are married, the income of the community spouse is not counted in determining the Medicaid applicant's eligibility. Only income in the applicant's name is counted in determining his or her eligibility. Thus, even if the community spouse is still working and earning $5,000 a month, she will not have to contribute to the cost of caring for her spouse in a nursing home if he is covered by Medicaid.
Protections for the Healthy Spouse
The Medicaid law provides special protections for the spouse of a nursing home resident to make sure she has the minimum support needed to continue to live in the community.
The so-called "spousal protections" work this way: if the Medicaid applicant is married, the countable assets of both the community spouse and the institutionalized spouse are totaled as of the date of "institutionalization," the day on which the ill spouse enters either a hospital or a long-term care facility in which he or she then stays for at least 30 days. (This is sometimes called the "snapshot" date because Medicaid is taking a picture of the couple's assets as of this date.)
In theory, the community spouse may keep one half of the couple's total "countable" assets up to a maximum of $128,640 (in 2020). Called the "community spouse resource allowance," this is the most that a state may allow a community spouse to retain without a hearing or a court order.
If a couple has $100,000 in countable assets on the date the applicant enters a nursing home, he or she will be eligible for Medicaid once the couple's assets have been reduced to a combined figure of $52,000 -- $2,000 for the applicant and $50,000 for the community spouse.
Some states, however, are more generous toward the community spouse. In these states, the community spouse may keep up to $128,640 (in 2020), regardless of whether or not this represents half the couple's assets.
If the couple had $60,000 in countable assets on the "snapshot" date, the community spouse could keep the entire amount, instead of being limited to $30,000.
In all circumstances, the income of the community spouse will continue undisturbed; he or she will not have to use his or her income to support the nursing home spouse receiving Medicaid benefits. But what if most of the couple's income is in the name of the institutionalized spouse, and the community spouse's income is not enough to live on? In such cases, the community spouse is entitled to some or all of the monthly income of the institutionalized spouse. How much the community spouse is entitled to depends on what the Medicaid agency determines to be a minimum income level for the community spouse. This figure, known as the minimum monthly maintenance needs allowance or MMMNA, is calculated for each community spouse according to a complicated formula based on his or her housing costs. The MMMNA may range from a low of $2,030 (2020)) to a high of $3,216.00 a month (in 2020). If the community spouse's own income falls below his or her MMMNA, the shortfall is made up from the nursing home spouse's income.
Mr. and Mrs. Smith have a joint income of $3,000 a month, $1,700 of which is in Mr. Smith's name and $700 is in Mrs. Smith's name. Mr. Smith enters a nursing home and applies for Medicaid. The Medicaid agency determines that Mrs. Smith's MMMNA is $1,700 (based on her housing costs). Since Mrs. Smith's own income is only $700 a month, the Medicaid agency allocates $1,000 of Mr. Smith's income to her support. Since Mr. Smith also may keep a $72 a month personal needs allowance, his obligation to pay the nursing home is only $628 a month ($1,700 - $1,000 - $72 = $628).
In exceptional circumstances, community spouses may seek an increase in their MMMNAs either by appealing to the state Medicaid agency or by obtaining a court order of spousal support.
Estate Recovery and Liens
Under Medicaid law, following the death of the Medicaid recipient a state must attempt to recover from his or her estate whatever benefits it paid for the recipient's care. However, no recovery can take place until the death of the recipient's spouse, or as long as there is a child of the deceased who is under age 21 or who is blind or disabled.
While states must attempt to recover funds from the Medicaid recipient's probate estate, meaning property that is held in the beneficiary's name only, they have the option of seeking recovery against property in which the recipient had an interest but which passes outside of probate. This includes jointly held assets, assets in a living trust, or life estates. Given the rules for Medicaid eligibility, the only probate property of substantial value that a Medicaid recipient is likely to own at death is his or her home. However, states that have not opted to broaden their estate recovery to include non-probate assets may not make a claim against the Medicaid recipient's home if it is not in his or her probate estate.
In addition to the right to recover from the estate of the Medicaid beneficiary, state Medicaid agencies must place a lien on real estate owned by a Medicaid beneficiary during her life unless certain dependent relatives are living in the property. If the property is sold while the Medicaid beneficiary is living, not only will she cease to be eligible for Medicaid due to the cash she would net from the sale, but she would have to satisfy the lien by paying back the state for its coverage of her care to date. The exceptions to this rule are cases where a spouse, a disabled or blind child, a child under age 21, or a sibling with an equity interest in the house is living there.
Whether or not a lien is placed on the house, the lien's purpose should only be for recovery of Medicaid expenses if the house is sold during the beneficiary's life. The lien should be removed upon the beneficiary's death. However, check with an elder law specialist in your state to see how your local agency applies this federal rule.
Summary of the New Medicaid Rules (the DRA)
On February 8, 2006 President Bush signed into law the Deficit Reduction Act of 2005 (DRA), which cuts nearly $40 billion over five years from Medicare, Medicaid, and other programs. Of greatest interest to the elderly and their families, the new law places severe new restrictions on the ability of the elderly to transfer assets before qualifying for Medicaid coverage of nursing home care.
The DRA made significant changes to Medicaid’s long-term care rules, including the look-back period; the transfer penalty start date; the undue hardship exception; the treatment of annuities; community spouse income rules; home equity limits; the treatment of investments in continuing care retirement communities (CCRCs); promissory notes and life estates; and state long-term care partnership programs.
Following is a brief summary of the Medicaid laws before and after enactment of the DRA in these areas. Also, bear in mind that states are gradually coming into compliance with the new transfer rules.
The Look-Back Period
A person applying for Medicaid coverage of long-term care must disclose all financial transactions he or she was involved in during a set period of time--frequently called the "look-back period." The state Medicaid agency then determines whether the Medicaid applicant transferred any assets for less than fair market value during this period. Congress does not want a person to be able to give away all of their assets one day and then qualify for public benefits the next.
The DRA extends Medicaid's "look-back" period for all asset transfers from three to five years. Previously, the agency reviewed transfers made within 36 months of the Medicaid application (60 if the transfer was to or from certain kinds of trusts). Now, the look back period for all transfers is 60 months. The extension of the look-back period will make the application process more difficult and could result in more applicants being denied for lack of documentation, given that they will need to produce five years worth of records instead of three.
The look-back period is being implemented differently in different states. Some states, like New York, are phasing in the 60-month look-back period. According to these states, the look-back period cannot be greater than 36 months until at least February 2009, the first point at which an individual could possibly have made a transfer that occurred more than 36 months after the DRA enactment. Other states have sidestepped the issue or look at the past 60 months of transfers for all applications filed after the DRA’s enactment (Feb. 8, 2006) regardless of when the transfer occurred.
The Penalty Period Start Date
The penalty period is the period during which a Medicaid applicant is ineligible for Medicaid payment for long term care services because the applicant transferred assets for less than fair market value during the look-back period.
Before the DRA, the penalty period began either when the transfer was made or on the first day of the following month. It was possible for the penalty period to expire before the individual actually needed nursing home care. The DRA changes the start of the penalty period to the date when the individual transferring the assets enters a nursing home and would otherwise be eligible for Medicaid coverage but for the transfer. In other words, the penalty period does not begin until the nursing home resident is out of funds and has no money to pay the nursing home for however long the penalty period lasts.
This change could have negative consequences for both nursing homes and residents. Nursing homes will likely be on the hook for the care of residents waiting out extended penalty periods. If nursing homes end up flooded with residents who need care but have no way to pay for it, they will begin looking for alternatives. In states that have so-called "filial responsibility laws," nursing homes may seek reimbursement from the residents’ children. These rarely-enforced laws, which are on the books in 30 states, hold adult children responsible for financial support of indigent parents and, in some cases, medical and nursing home costs.
In addition, some states have passed laws providing that if a transfer occurs within 5 years of a Medicaid application, the state can assume the transfer was made to establish Medicaid eligibility and can retrieve the value of the Medicaid care services from the person who received the property.
Home Equity Limits
Before the DRA’s enactment an individual could still qualify for long-term care services even if he or she had substantial assets in his or her home. Under the DRA, states will not cover long-term care services for an individual whose home equity exceeds $500,000, although states have the option of increasing this equity limit to $750,000 (Currently $893.000 in Massachusetts as of 2020). In all states and under the DRA, the house may be kept with no equity limit if the Medicaid applicant’s spouse or another dependent relative lives there.
Change in Community Spouse Income Rules
The DRA requires all states to follow the "income-first" rule for supplementing a community spouse's income. For more on this, click here.
The Treatment of Annuities
The DRA added requirements for disclosing immediate annuities, which have been useful long-term care planning tools. In its simplest form, an immediate annuity is a contract with an insurance company under which the consumer pays a certain amount of money to the company and the company sends the consumer a monthly check for the rest of his or her life or a prescribed time period.
An immediate annuity can be used to convert assets into an income stream for the benefit of an institutionalized Medicaid applicant or the applicant's spouse. The state will not treat the annuity as an asset countable toward Medicaid’s asset limit ($2,000 in most states plus up to $128,640 for the healthy spouse) as long as the annuity complies with certain requirements. The annuity must be: (1) irrevocable – the annuitant cannot take funds out of the annuity except for the monthly payments, (2) non-transferable – the annuitant cannot be able to transfer the annuity to another beneficiary, and (3) actuarially sound - the payment term cannot be longer than the annuitant’s life expectancy and the total of the anticipated payments have to equal the cost of the annuity.
To these requirements, the DRA added an additional requirement. The state must be named the remainder beneficiary of any annuities up to the amount of Medicaid benefits paid on the nursing home resident’s behalf. If the Medicaid recipient is married or has a minor or disabled child, the state must be named as a secondary beneficiary. The Medicaid application must now also inform the applicant that if he or she obtains Medicaid benefits, the state automatically becomes a beneficiary of the annuity.
In addition, all annuities must be disclosed by an applicant for Medicaid regardless of whether the annuity is irrevocable or treated as a countable asset. If an individual, spouse, or representative refuses to disclose sufficient information related to any annuity, the state must either deny or terminate coverage for long-term care services or else deny or terminate Medicaid eligibility.
Promissory Notes and Life Estates
Prior to the DRA’s enactment, a Medicaid applicant could show that a transaction was an (uncountable) loan to another person rather than (countable) gift by presenting promissory notes, loans, or mortgages at the time of the Medicaid application. A promissory note is normally given in return for a loan and it is simply a promise to repay the amount. Classifying transfers as loans rather than gifts is useful because it allows parents to "lend" assets to their children and still maintain Medicaid eligibility.
Congress considered this to be an abusive planning strategy, so the DRA imposes restrictions on the use of promissory notes, loans, and mortgages. In order for a loan to not be treated as a transfer for less than fair market value it must satisfy three standards: (1) the term of the loan must not last longer than the anticipated life of the lender, (2) payments must be made in equal amounts during the term of the loan with no deferral of payments and no balloon payments, (3) and the debt cannot be cancelled at the death of the lender. If these three standards are not met, the outstanding balance on the promissory note, loan, or mortgage will be considered a transfer and used to assess a Medicaid penalty period.
Prior to the DRA’s passage, another common estate planning technique was for an individual to purchase a life estate (a legal right to live in and possess a property) in the home of another person, such as a child. By doing this, the individual was able to pass assets to his or her children without triggering a transfer penalty. The DRA still allows the purchase of a life estate in another person’s home, but to avoid a transfer penalty the individual purchasing the life estate must actually reside in the home for at least one year after the purchase.
Undue Hardship Exception
Before the DRA’s passage, federal law allowed for an exemption from the transfer penalty if it would cause "undue hardship," but the law did not establish procedures for determining undue hardship and left it up to states to create their own. The DRA finally sets out some rules and requires states to create a hardship waiver process that complies with specific language in the federal law. The new law provides that undue hardship exists when enforcing the penalty period for asset transfers would deprive the Medicaid applicant of (1) medical care necessary to maintain the applicant's health or life or (2) food, clothing, shelter, or necessities of life.
If an applicant asserts an undue hardship, state Medicaid agencies must approve or deny the application within a reasonable time and must inform the applicant that he or she has the right to appeal the decision, and provide a process by which this can be done. In addition, the applicant must be told that application of the penalty period can be halted if undue hardship exists.
With the resident's consent, nursing homes may now pursue hardship waivers on the resident's behalf.
State Long-Term Care Partnerships
Many middle-income people have too many assets to qualify for Medicaid but can't afford a pricey long-term care insurance policy. So-called "partnership" programs, previously available in only four states – California, Connecticut, Indiana, and New York -- offer special long-term care policies that allow buyers to protect assets and qualify for Medicaid when the long-term care policy runs out. In an effort to encourage more people to purchase long-term care insurance, the DRA allows all states to create such programs.
Continuing Care Retirement Communities
The DRA now expressly allows continuing care retirement communities (CCRCs) to require residents to spend down their declared resources before applying for Medicaid. However, the spend-down requirements must still take into account the income needs of the Medicaid applicant's spouse. The DRA also requires that three conditions be met before a CCRC entrance fee can be considered an available resource of someone applying for Medicaid coverage of nursing home care. The entrance fee must be able to be used to pay for the individual’s care, the fee or any remaining portion must be refundable on the institutionalized individual’s death or on termination of the admission contract when the individual leaves the CCRC, and the fee must not grant the individual an ownership interest in the CCRC.
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