Medicaid Gets Tough
Prepare to pay for your own long-term care.
By Mary Beth Franklin, Senior Editor
From Kiplinger's Personal Finance magazine, May 2006
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Who's eligible
Medicaid, jointly funded by federal and state governments, is intended to provide health care for the poor. But it has become the major source of financing for long-term care, paying nearly half of all nursing-home bills in 2003, according to the Centers for Medicare & Medicaid Services (CMS). Rising health-care costs and a growing elderly population are already straining state budgets, with medicaid representing the single largest expenditure by the states, surpassing even education. One of three medicaid dollars goes toward long-term care.
The annual cost of nursing-home care averaged more than $74,000 nationwide in 2005 and far more in places such as New York and California. Because care is so expensive, more than half of nursing-home residents end up qualifying for medicaid assistance either immediately or in a few months, after they've burned through their savings. Most states require nursing-home residents to spend virtually all of their assets, down to $2,000, before they can qualify. Married couples have higher asset allowances as long as one spouse is healthy enough to remain at home.
Once nursing-home residents are eligible for aid, they receive a personal-needs allowance of $30 per month. All their sources of income, such as pensions and social security checks, must be turned over to medicaid to pay for their care. Those rules remain the same under the new law.
The new law extends the "look-back" period, during which medicaid can scrutinize financial transactions, from three years to five. If you give away money or property during the five-year look-back, it triggers a penalty period during which you're ineligible for medicaid assistance.
In the past that wasn't so onerous because the penalty period began the day you transferred the assets and often expired before you were admitted to a nursing home. Now, however, the penalty begins the day you apply for medicaid, which by definition means you have already spent virtually all your money and need public assistance to pay the bills.
To determine how long you would be ineligible, divide the amount of money or the value of the asset you gave away by the average cost of a month's stay at a nursing home in your area. Let's say you gave away $70,000 to family members and the average nursing-home cost is $7,000 a month. You would be ineligible for medicaid assistance for ten months from the time you apply.
Stricter rules
A real-life example helps illustrate the changes. John Lecrone, 83, has been paying more than $6,000 a month to care for his 80-year-old wife, Betty. Under medicaid rules, the healthy spouse can retain half of a couple's assets up to about $100,000, plus their home. (If William Zatlin's wife were alive, his family might still own the Zatlin residence on Long Island.)
Late last year, Lecrone asked lawyer Robert Clofine for advice on how best to deploy his assets. Clofine told Lecrone that he was permitted to use his and Betty's savings to replace his old car and repair their home in York, Pa. That would reduce his assets, and his responsibility for paying the bills for Betty's care, before medicaid would take over. Those rules don't change under the new law. But Clofine also advised Lecrone that if he wanted to give money to his two grown children, he should act before the law changed in February.
Taking Clofine's advice, Lecrone spent about $35,000 on a new car and home repairs, and gave each of his children $6,000. Because he made the gifts before the new rules took effect, he was able to give the money to his children instead of to the nursing home. Under the new law, however, that $12,000 -- the cost for two months of Betty's care -- would delay her medicaid eligibility by an additional two months after she applied for help. Her husband would have to come up with an additional $12,000 of his own money before medicaid took over her bills.
The new law is likely to crack down on intentional asset-shifting. But seniors could unwittingly run afoul of the regulations. Suppose, for example, that a grandmother gives her grandchild money for college. Three years later she suffers a stroke and needs nursing-home care. That gift would block her from receiving medicaid immediately, even though she didn't intend to circumvent any rules.
The best way to avoid such a situation is to hang on to your money unless you're positive you won't need nursing-home care -- or need help paying for it -- for at least five years. "We're afraid it's going to have a chilling effect on people who want to help their families or give to charities," says David Certner, of AARP.
In the past, says the Congressional Budget Office, few applicants incurred penalties for prohibited asset transfers. Under the new rules, the CBO estimates that about 120,000 people a year, or 15% of new applicants, will be affected, either because they violate the new transfer rules or because they decide not to give away assets. That should save the federal government about $2.5 billion over five years. States would save billions more.
Keep in mind that if you gave away assets before the new law took effect, you're covered by the less-restrictive three-year look-back and the more liberal penalty period.