Medicaid Rules

Resource (Asset) Rules
The Home
The Transfer Penalty
Exceptions to the Transfer Penalty
Is Transferring Assets Against the Law?
Treatment of Income
Protections for the Healthy Spouse
Estate Recovery and Liens
Summary of the New Medicaid Rules (the DRA)


Medicaid (called "Medi-Cal" in California and "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 except in New York, which provides home care to all Medicaid recipients who need it. Recognizing that home care costs far less than nursing home care, a few other statesnotably Hawaii, Massachusetts, Oregon and Wisconsin--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, but check your state for the specific application where you live.


The Home

Depending on the state, 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 $525,000, with the states having the option of raising this limit to $786,000. 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. 


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.
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. 
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. 
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. 
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.
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 $113,640 (in 2012) 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. For more on these programs, click here.

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.

For the full text of the DRA, click here (the long-term care provisions begin on p. 58). (If you do not have the free PDF reader installed on your computer, download it here.)