Uncle Sam Tightens Noose on Long Term Care:

The Deficit Reduction Act of 2005


This page was updated August 23, 2006

The message is clear from Washington: "Don't count on Uncle Sam for your long term care unless you've been flat broke for at least five years. You'll end up paying through private insurance or out-of-pocket, or else."

The Deficit Reduction Act (DRA) was signed into law on February 8, 2006 as Public Law 109-171. It is currently being challenged, because the U.S. Constitution says that every bill must first be passed by the House of Representatives and the Senate. This bill was not passed by both houses in an identical form. This issue may have to be resolved in the federal courts. Until then, let's assume it is law, as the concerned agencies certainly will be doing so!

The Deficit Reduction Act was created in order to help cut the federal budget deficit. The projections are that it will save the federal government $2 billion.

The Act affects who and when a person can qualify for Medicaid long term care assistance. It helps close the loopholes that affluent Americans may have been using for asset protection strategies - one of those being to transfer assets in order to look impoverished on paper. The Act was imposed, as these strategies may have taken assistance away from those who truly needed it. In the case of states like Arizona, where there is a huge population of elderly, those kinds of "asset protection" strategies contibute to the depletion of the state's treasury.

Since the Federal government has drastically cut funding to states, the states now need every way possible to:

1) keep their residents off the "dole" and

2) get reimbursed for their Medicaid spending.

Many states are nearing bankruptcy, but the Feds are not helping. Instead they are telling the states: Get your money from your residents. We'll give you the laws with which to do just that. And they have.

Here are some of the changes that may affect you:

Transferring Assets - You can no longer get around transfer of asset rules by making multiple transfers. States are now allowed to look at many transfers over several months as a single transfer/asset. Also, the Medicaid lookback and penalty periods would begin with the first transfer.

Medicaid's lookback period has been lengthened from 3 years to 5 years. That means if you need to go into a nursing home on January 1, 2010 you would have had to transfer your assets before January 1, 2005.

The changes to the transfer rules are effective for transfers made after February 8, 2006, except if a state's constitution requires it to enact the changes in their Medicaid plan. In such cases, the new transfer rules will start on the date that the state legislature authorizes the changes.

The Act also establishes a hardship waiver that permits states to make an exception to the penalty in cases where it would threaten the health or life of the person or would deprive him/her of food, clothing, shelter and other necessities. Although critics of the transfer changes say that hardship is subjective and previously existing hardship waivers are rarely, if ever, used.

Income First Method - The spouse of a Medicaid recipient is entitled to a portion of the couple's combined income - at least the first $1,603.75 (through June 30, 2006) and assets - usually about half of the couple's combined assets (up to $99,540 in 2006), and of the combined monthly income.

Under the new rules, if the spouse's income is less than $1,603.75 he/she must use a share of the Medicaid recipient's income in order to raise the at-home spouse's income to the minimum of $1,603.75.

The new rules now require that the income be used first, instead of allowing the spouse to use the couple's combined assets, as was permitted before the Deficit Reduction Act was passed.

Home Equity - If you have more than $500,000 in home equity you cannot qualify for Medicaid. The exceptions are if your spouse resides in the home or it is occupied by a child who is blind or disabled or under 21 years old. In other words, this law isn't going to throw the elderly, the young or the alter-abled into the streets.

The law also allows for individual states to increase the home equity amount to $750,000 and the states also might limit that increase to particular parts of the state, depending upon whether certain areas have substantially higher real estate values than others. For instance, I think it would be safe to say that San Francisco, California would have much higher real estate values than Barstow, California; New York City would be higher than Buffalo, New York; Scottsdale, Arizona real estate would be worth more than in Page, Arizona.

If you have more equity in a home than the Act or state permits, you would have to sell your home in order to qualify for Medicaid (exceptions listed previously). If you are considering asset protection planning, you can take out reverse mortgages and home equity loans to reduce your equity. Just remember to get the loans BEFORE you enter a facility, because they're generally only available to people who are living on the property.

This change in home equity rules makes single folks ineligible for community services. It could also make it more difficult to transition people out of nursing homes, if this requirement forces individuals to sell their homes.

Annuities - If you own annuities, the rules have been changed. They used to be considered exempt assets, but now they are subject to penalties. Medicaid considers the purchase of an annuity as an uncompensated transfer if it was purchased within the 5 year lookback period. Medicaid would impose a penalty period UNLESS Medicaid applicants disclose the existence of annuities and:

a) Name the state as the primary remainder beneficiary (at the time of death of the annuiant) to at least cover the total amount of benefits received from Medicaid. OR

b) The state is named "secondary remainder beneficiary" - after your dependents - spouse or minor or disabled child.

Also, a Continuing Care Retirement Community can now require residents to spend down their resources BEFORE they can apply for medical assistance. The entrance fee can also be considered a "resource" - therefore affecting your Medicaid eligibility.

Additionally, a life estate would be considered an asset. Exception: You must have lived in the house for a year or more after you bought it.

What is the Lookback Period?

This is the period of time prior to applying for Medicaid that the state can check out your assets. How much money do you have in your bank accounts, how much equity in real assets do you have, what income do you generate via investments, pensions, annuities, etc.

The state can "look back" at your financial activities in order to make sure you do not have any hidden assets. Now, instead of the lookback period being 3 years, it is 5 years. That's quite a chunk of time.


What is the Penalty Period?

If the state finds what they consider assets (above the amount that would qualify you for Medicaid) that they deem were "hidden", you will be assessed a penalty period. Medicaid will not pay for your nursing home expenses until after he penalty period is over.

Here's a scenario:

You are a kind and generous parent. You aren't wealthy - you don't even own a home - but you've managed to put aside some savings over the years.

On July 5, 2007 you give your daughter $40,000 to start her own business. It's one of the last things you can do to help her financially. You feel happy that you had enough money to assist her with her dreams and goals.

A couple of years pass and you find it difficult to live independently without a bit of assistance - housework, cooking, maybe even taking baths. You hire a trustworthy person to clean and cook for you, plus a home health care agency to help you bathe 3 times a week. It costs a lot, but it's worth it in order to stay in your home.

Another year goes by. Your mobility has worsened and you find that you simply cannot function at home even with the hired help. Your health is stable, but you just can't get around easily. Your housekeeping and home health care expenses have used up the rest of your savings. You need to be in a long term care facility, but you have no money to pay for it.

Your daughter is working long hours at her business, which is producing just enough income to pay her bills and put a bit aside for emergencies. She doesn't have the time to be a caregiver, nor the money to pay for your long term care.

You don't want to go on welfare. It's against everything you been taught to believe in, but you have no choice. You apply and qualify for Medicaid January 1, 2010.

But, uh oh…

The state looks back and sees that in 2007 you transferred $40,000 to your daughter. Now, just to make things clear: transfers made more than five years before you apply for Medicaid can not be penalized. However, since that $40K was given to your daughter 3 years before your Medicaid application, it can be penalized.

Not only that, but because it was a gift, it was what the state calls "uncompensated", meaning you received nothing, or very little, in return for the money you transferred to her. Therefore, the state considers it an asset.

The state can, and most likely will, assume that you were trying to hide the money or get rid of it in ways other than normal living expense "spend down". They do not care that it was a heartfelt gift and that you had no intention of trying to get rid of assets to avoid paying for nursing home expenses. You try to explain that you were feeling fine at the time you gave your daughter the money and that needing a long term care was the furthest thing from your mind.

It doesn't matter…the state slaps you with a Penalty Period.

How does the state calculate the length of the Penalty Period?

They divide the amount of the money transferred by the average monthly cost of nursing home care in their state.

Let's say that by 2010 the state's monthly cost for a long term care nursing facility is about $5000. Divide the $40,000 by $5,000 and you get a 8 month penalty period. So, you or your family would have to come up with 8 month's worth of your long term care expenses before Medicaid begins your benefits.

There has to be a better way. The best solution is to get yourself some Long Term Care insurance. Yet so many still balk at the idea.

They'd still rather try to shuffle their assets in order to get assistance from the government.

Now, I'm no lawyer and I'm NOT advising anyone to do (or how to do) any kind of asset protection, but I suppose there could be a few "work arounds" left...for now. However, I think these strategies are not in the best interest of any State, the truly needy, OR those trying to protect their assets. Any strategy that prepares you to be on Medicaid, when you don't need to be, is not only morally objectionable, but also pretty stupid, in my humble opinion. Welfare is not the preferable solution.

But here we go anyway:

  • You could take a gamble that you won't need long term care for at least 5 years and start gifting your money to your relatives early on, but you better have a binding contract about how that money will be spent, just in case you need assistance. If they were smart, they'd use some of that money to buy you LTC insurance - thereby protecting the monies they get, while making sure that you get the care you deserve when you need it most! Yet you'd be surprised at how greedy relatives can be.

  • You might be able to put your assets into some kind of a trust, but you might also lose control of those assets.

  • If you are the "sole proprietor" of your own business, you might be able to create an LLC or Corporation. It can be costly and complicated, but might give you needed protection against lawsuits apart from any asset protection.

Of course, any and all of the above "preventative measures" should be researched and implemented by competent attorneys who specialize in each specific area - elder law, contract law, and corporate law.

All these strategies seem like a LOT of hassle just to end up on welfare. Have you ever BEEN on welfare? It's no picnic, believe me. Once you are on Medicaid, the state is in charge of your life, like it or not. Most people also don't consider that, in general, welfare recipients aren't treated with as much respect or compassion as those paying their own way. Nor are they given the best medical care. It's a sad, but true fact - one that reflects poorly on our country's social conscious.

If you have the money, wouldn't it be easier to buy some Long Term Care insurance?

Those who cannot afford the LTC insurance premiums for lifetime benefits may be able to afford a policy with lower benefit years - long enough to cover any penalty period imposed by Medicaid. When you consider that most nursing home stays are only about 3 years, a more affordable policy might be all you need. Although, keep in mind that people usually spend a few years needing care outside of a nursing home. Also, if you are young, a lifetime policy is a much safer bet. Plus, an inflation rider on any policy should be a "must" if you are under 65 years of age.

True, insurance is a gamble no matter what kind it is, but even a little bit of protection is better than none, eh?