Demystifying Medicaid : Part II

Demystifying Medicaid - - Part II

Last month, I began a multi-part series about Medicaid. If you missed it, Click here for a link to it. We already know that Medicaid is a Federal law that leaves certain options up to the various states. Some provisions applicable in New Jersey do not apply in New York, Pennsylvania or Florida, and vice versa. Sometimes, where there is a choice, it may pay for a Medicaid applicant to move to another state to take advantage of more favorable laws. Those differences are beyond he scope of this article.

This month, I discuss the changes made to the Medicaid law by enactment of the Deficit Reduction Act of 2005 (the "DRA"), which became effective on February 8, 2006.

The "Lookback Period"

One of the major rules of Medicaid eligibility is how transfers of assets are treated. A person applying for Medicaid coverage for 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. Why? Congress does not want you to move into a nursing home on Monday, give all your money away on Tuesday, and qualify for Medicaid on Wednesday. To prevent this, the Medicaid law imposes a penalty on people who transfer assets without receiving fair value in return.

The first change created by the DRA was to increase the lookback period for making transfers from 3 years to 5 years. When a person makes a Medicaid application, state Medicaid officials look back only as far as February 8, 2006 (unless the transfers were made to certain kinds of trusts, in which case, the lookback period is 5 years). The previous lookback period of 3 years remained in effect (except for trusts, for which the lookback was already 5 years) until February 2009 because Medicaid grandfathered all pre-DRA transactions at 3 years. Beginning in March 2009, one month was added to the lookback period each month. This will continue until February 2011, when Medicaid will look back 5 years for all transfers. For transfers that are exempted from application of the law, the lookback rules will continue to be inapplicable. We will discuss exemptions and what happens when a Medicaid application is made in future articles.

Uncompensated value

The concept of what is inadequate consideration is not a very complicated one. Let’s look at four examples:

(1) Parent owns a house worth $350,000, with no mortgage. Before entering a nursing home, parent transfers the house to son and daughter for $1.00. This is a gift of $349,999. Under today’s regulations, there would be a penalty 48.06 months of ineligibility for Medicaid benefits.

(2) Same as #1 except that parent transfers the house for $100,000. Son and daughter each pay $50,000. Parent has made a gift of $250,000. There would be a penalty of 34.33 months, and the parents would have $100,000 in cash that would have to be spent down.

(3) Same as #1 except that parent takes back a $350,000 mortgage at the time of transfer. Under today’s regulations, there would be no penalty, because the mortgage constitutes adequate consideration as long as its terms and conditions are at market rates. Unfortunately, the mortgage is considered an asset, and the children have to make payments to the parent, and the entire value of the mortgage is an asset that will disqualify parent from benefits as long as it is outstanding.

(4) Suppose in example #3, the parent forgives the mortgage payments each month,or the entire balance after a year. This would be a transfer for uncompensated value and would disqualify parent for 48.05 months.

We will see in the future article about exemptions and Medicaid application procedures how some expenses do not create a penalty because adequate consideration was received.

The Transfer Penalty

The transfer penalty is the number of months during which a person who has transferred assets without receiving adequate consideration will be ineligible to receive Medicaid benefits. The penalty period is determined by dividing the amount of money or other asset transferred by what Medicaid determines to be the average monthly private pay cost of a nursing home in the state where the applicant lives. In New Jersey, Medicaid is administered by the Division of Medical Assistance and Health Services ("DMAHS") of the Department of Human Services. The penalty divisor is currently $7,282, an amount that has remained unchanged since 2008, even though the Medicaid law mandates annual updates.

Here is how a penalty is presently calculated. If you give away property worth $112,000, you will be ineligible for benefits for 15.38 months ($100,000 ÷ $7,282 = 15.38 months or 15 months and 11 days). Another way to look at the above example is that for every $7,282 transferred, an applicant would be ineligible for Medicaid nursing home benefits for one month.

When the Penalty Period Begins

Before the DRA, the penalty period began on the first day of the month in which a transfer occurred. It was possible for the penalty period to expire before the individual actually needed nursing home care. With careful planning, an individual was able to make a transfer, knowing how long the penalty period would be and retain enough assets to pay nursing home costs for the penalty period, so that, when the penalty expired, his assets would have been reduced to less than $2,000, the statutory maximum - - and he would be Medicaid eligible. As an example (but without the complicated calculations), the person described above who has $112,000 and Social Security income of $1,035 per month, could have transferred about $63,000 of the $112,000 and still be able to qualify for Medicaid benefits in 9 months.

The DRA, however, 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. The extension of the look-back period has made the application process more difficult. As a result, more applicants are being denied for lack of documentation, because that they must produce five years’ worth of records instead of three. This change could have negative consequences for nursing homes as well as residents. Nursing homes are finding themselves on the hook for the care of residents who wait 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. One such alternative is for the nursing homes to invoke 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. It will be interesting to see how this plays out over time.

Although DRA severely limits asset protection planning, the door is not closed completely if you know what you are doing. We will discuss some planning possibilities in a future article.