The Deficit Reduction Act of 2005 and Medicaid Eligibility for Long Term Care
The Deficit Reduction
Act of 2005
and Medicaid Eligibility for Long Term Care
by D. Chalgian & A. Tripp © 2006
Following extremely close votes in both the U.S. House and Senate, the Deficit Reduction Act of 2005 (the "DRA") became law February 8, 2006. The DRA makes significant changes to some of the rules that apply when people seek Medicaid assistance in the nursing home and through the Home and Community Based Waiver Program. Following is a brief summary of these changes.
The portion of the DRA that has received the most attention is the portion that changes the rules that penalize people who transfer assets and then seek to become eligible for Medicaid benefits in the long term care setting.
For many years, people who apply for Medicaid benefits in long term care have had to disclose whether they have given away assets (or sold assets for less than they were worth) within a set period of time prior to filing an application for Medicaid assistance. In the language of Medicaid eligibility, such transfers are called "divestments" and the period during which disclosure of divestments is required is called the "look-back period." When divestments are reported during the "look-back" period, a period of ineligibility (a period of time during which the Medicaid applicant will be ineligible for assistance) may be imposed. Therefore, for example, if someone gives away money during the look-back period, and assuming no exception applies, they will cause themselves to be ineligible for Medicaid assistance for a period of time, the length of which is a function of the amount of the money they gave away. The DRA changes the rules relating to divestments in several important ways:
(1) Prior to the DRA the look-back period was 3 years for transfers other than transfers to a trust (transfers to a trust were subject to a 5 year look-back). The DRA imposes a 5 year look-back on all transfers.
(2) Prior to the DRA a penalty period (i.e., the period of ineligibility) which was assessed for a divestment would begin running on the date of the transfer. Under the DRA, the penalty period does not begin to run until the person would meet all of the criteria to be eligible for Medicaid benefits except for the application of the divestment penalty period. This means, for example, that if someone gives away an amount of money that would result in period of ineligibility of ten months, then enters a nursing home four years later and depletes their assets by paying for their care to the point where they would otherwise be eligible for Medicaid assistance, and then files an application for Medicaid assistance, they will still have to wait another ten months before they can receive assistance. Prior to the DRA, the period of ineligibility would have expired ten months after the transfer was made, years before they person even entered the nursing home.
Although there are legitimate concerns that the application of this new rule will create hardships for people who are innocently making gifts to charities or helping family members with expenses, the DRA includes relatively generous hardship exception provisions that should provide relief for people who transfer assets with no reason to anticipate a future need for Medicaid assistance. In fact, the hardship exception language is so broad that this exception may be undercut strict application of some of the other provisions of the DRA.
(3) Prior to the DRA the formula for calculating the penalty period (period of ineligibility) allowed states, such as Michigan, to round down so that penalty periods were based on whole months. In addition, prior to the DRA, penalty periods could be calculated separately for transfers made in separate months. Under the DRA, states may no longer round down and must calculate penalty periods based on fractions of months. In addition the DRA authorizes states to aggregate transfers made in separate months, and to calculate the penalty period based on the aggregated amount.
The DRA transfer rules apply to all transfers made after February 8, 2006. All transfers before that date would be treated under the old rules.
The Homestead Cap
The residence (or "homestead") of a Medicaid applicant or his/her spouse is an exempt asset under Medicaid eligibility rules. Prior to the DRA, a homestead of any value was exempt. Under the DRA a homestead is only exempt if the "equity value" of the homestead does not exceed $500,000 (with a cost of living adjustment which will increase this cap over time). The homestead value cap may also be increased at the election of a state to as much as $750,000. The homestead cap does not apply if the applicant's spouse or disabled child or child under the age of 21 is living in the home. This limit does not apply to individuals receiving Medicaid assistance prior to January 1, 2006.
The use of annuities in Medicaid planning has become a significant issue in Medicaid planning. Recent changes in Michigan policy have restricted the use of some types of annuities, the DRA imposes further restrictions on the ability of people seeking Medicaid assistance to use commercial annuities to "protect assets." Among other things, the DRA requires that if a non-married individual places funds in an annuity and seeks Medicaid assistance in the long term care setting, the state must be named as the remainder beneficiary of the annuity, (unless that individual has a minor or disabled child who is named remainder beneficiary).
There are many other important changes to Medicaid eligibility rules in the DRA which are not addressed in this brief overview. Among other things, the DRA includes opportunities for states to pursue some progressive reforms to their long term care programs.
Although the DRA establishes February 8, 2006, as the date for most of the new rules to be implemented, it is unclear when Michigan may begin to impose the new rules on applications for Medicaid assistance. It would seem to be the case that most Department of Human Services caseworkers (the people who process Medicaid applications) rely almost exclusively on the rules as stated in their program eligibility manuals when determining eligibility for a client. At the time this article is written, those manuals have not been updated to include the new rules. It is likely that some confusion and uncertainty about which rules apply will continue until the Department of Community Health updates these policy manuals to incorporate the changes as required by the DRA.