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Introduction

Medicaid has long served as financial aid for seniors struggling to meet long-term care needs while trying to stay financially afloat. With health care costs on the rise, the Medicaid program has been challenged to continue providing seniors the healthcare coverage they need while remaining economically viable. Congress, in an effort to confront that challenge, signed the Deficit Reduction Act of 2005 (the “DRA”) into law with provisions that effectively shift the financial burden of long-term health care from the government to families and nursing facilities. Since most seniors rely on Medicaid to cover long-term healthcare costs and the DRA adds an additional layer of complexity to the already complicated Medicaid program, it is important to understand how the DRA has altered the Medicaid landscape in Rhode Island.¹

Background: Medicaid, Medical Assistance & Long-Term Care Costs

Medicaid is a means-tested, jointly-funded, federal-state entitlement program created by Congress in 1965. States administer the program and set rules for eligibility and benefits within broad federal guidelines. As a result, from state to state, there are wide variations in the Medicaid program. Rhode Island’s Medical Assistance program is one of the country’s most highly customized Medicaid programs.

Rhode Island also consistently has some of the most rapidly increasing rates for both nursing homes and assisted living facilities in the nation. Fortunately, long-term health care facility costs only account for a small fraction of Rhode Island’s overall health care expenditures. Notwithstanding, for Rhode Island seniors with health care needs that require them to live in long-term care facilities, small fractions can have large monetary consequences. For example, the average cost of a nursing home in Rhode Island is $90,640 per person, per year.

Medicaid Eligibility Changes Under the DRA

Congress was particularly concerned about people exploiting the Medicaid program by giving away assets and resources to render themselves needy enough to qualify. Thus, the DRA contains a number of provisions affecting asset transfer rules. It requires states to impose penalties on seniors giving away resources or transferring assets for less than fair market value during what’s called the “look- back” period. The look-back period is a time-frame during which the senior’s financial history is scrutinized; to determine what other assets and resources the senior could draw upon, besides Medicaid, to finance their healthcare needs. Transfers during the “look-back” that do not affect Medicaid eligibility include those that were for fair market value, for a purpose other than creating Medicaid eligibility, or for the sole benefit of the institutionalized person’s spouse, permanently disabled or blind child.

Prior to the DRA’s enactment on February 8, 2006, the “look-back” period was 36 months for income and most assets, and 60 months for certain trusts. This meant that Medicaid looked at seniors’ financial history for the 36 months before the date of their Medical Assistance application. Now, Medicaid requires states to look at the 60 months prior to Medicaid when a senior enters a nursing home or becomes eligible for Medicaid, whichever is later. The DRA, therefore, lengthened the “look-back” period to 60 months for all income and assets transferred after February 8, 2006.

Probably the best way to understand how the “look-back” asset/resource transfer rules works is by using an example. Keep in mind that at this time, every $7,513 given away equals one month of ineligibility. That breaks down to $247/day based on a 30-day month. These numbers change with the market.

The change in the “look-back” period is regarded by many as the most troublesome provision of the new rules because seniors who gave gifts to family members fewer than five years ago may be unable to use Medicaid to pay for their long-term care. Or worse, if they’re already in a nursing home and transferred assets after February 8, 2006, they may be immediately ineligible for Medicaid. For states with a “filial responsibility” law, which holds adult offspring responsible for the support of their indigent parents, the “look-back” rules are even more worrisome because adult children of seniors currently in long-term health care facilities who become ineligible for Medical Assistance may have to pay their parents’ outstanding bills. Presumably then, these laws could lead to litigation between long-term care facilities, and the children of residents in those facilities. Nursing homes might sue children who could then counter-sue for sub-standard care with the costs of litigation adding to both parties’ woes.

Many seniors enter into contracts with life- care communities or continuing care retirement providers where they can live in the same community while they’re healthy and receive nursing care should this become necessary. The DRA places restrictions on deposits or entrance fees paid to these sorts of facilities. Seniors who have the means to afford this option should work with their legal and financial professionals to structure deposits or any fees that they pay in a way that is “Medical Assistance friendly.”

The DRA also affects the way homes, as assets, will be treated. Beginning on January 1, 2006, Medical Assistance applicants will be denied payment of long-term care benefits outright if the equity in their homes exceeds $500,000 unless they have spouses, minor children or blind or permanently disabled children living in the home. Seniors with $500,000 or more equity in their homes could obtain a reverse mortgage loan to shelter them from disqualification as long as they’re careful not to make it seem like the loan was taken out for the sole purpose of qualifying for Medical Assistance.

While the existing rules about the countability of annuities have not been changed, the DRA requires states to treat annuity transfers differently. The purchase of an annuity during the “look-back” period will be treated as a disqualifying transfer if the type of annuity, as well as its terms, do not comply with certain Internal Revenue Service regulations, with the Social Security Administration’s actuarial tables, and with certain probate/estate planning restrictions. For example, the State of Rhode Island must be named as primary remainder beneficiary up to the amount of benefits paid out by the State. There does exist an exception for a spouse or disabled child to be the primary beneficiary with the State in the second position. Likewise, promissory notes, loans and mortgages must contain certain restrictions or else they will be considered resources that seniors could use to pay for their long-term care. Purchases of life estate interests in another’s home are, per se, considered disqualifying transfers unless the purchaser (the applicant) resided in the home for at least one year after the date of such purchase.

In theory, Medicaid applicants can cure disqualifying transfers by recovering the assets transferred. But in practice, getting gifts back or having otherwise transferred assets returned may not be possible so, thankfully, Medical Assistance regulations allow seniors (or long-term care facilities with permission from the affected residents) to appeal decisions denying them Medical Assistance coverage. When appealing Medical Assistance denial; seniors should hire legal counsel.

Long-Term Care Insurance & the Long-Term Care Insurance Partnership

With the new rules under the DRA making it harder to be eligible for Medicaid, seniors should consider purchasing long-term care insurance coverage. Most financial planners recommend that clients purchase long-term care insurance in their late 50s or early 60s. In this age range the cost is quite affordable. Keep in mind that the cost of premiums increase with age and that eligibility is based on the seniors’ health at the time of purchase; therefore, if seniors are already ill they may not be able to apply.

The DRA extended eligibility for the federal Long-Term Care Insurance Partnership program to all the states, permitting individuals who purchase state-certified, long-term care insurance to become eligible for Medicaid after all the benefits under the policy have been paid. The details vary by state but such programs all require policyholders to have long-term care insurance that meets certain requirements laid out by the IRS and the NAIC (the National Association of Insurance Commissioners).

Conclusion

Seniors who expect to need long-term care used to give away assets in order to create Medicaid eligibility. However, the DRA now mandates that states impose a period of ineligibility to gifted assets. But even in a progressive and benefit-rich state like Rhode Island, the new DRA rules highlight why it is important for seniors to consult professionals about long-term care insurance, reverse mortgages or other ways to finance their healthcare. Due to the newness and complexity of the DRA and Medical Assistance laws, seniors should seek professional advice when applying for Medical Assistance or planning for their long-term healthcare.

1 The intent of this article is to provide general information. The DRA is a new and complex law. Seniors, as well as those working with seniors, should seek out the advice of the highest quality legal or financial professional when reviewing long- term care options or applying for Medicaid.

For non-filers, the IRS and States can prepare and bill you for estimated (substitute) tax returns.

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