Changes in Federal Law Impact Medical Assistance Long-term Care Benefits
The Deficit Reduction Act of 2005, hereinafter “DRA,” was signed into law by President Bush on February 8, 2006. (See, Public Law No. 109-171; Title VI, Subtitle A- Medicaid, Chapter 2 -Long Term Care Under Medicaid, Subchapter A- Reform of Asset Transfer Rules, §§6011 – 6021 and Subchapter B- §6022 Expansion of State Long-term Care Partnership Program.) The full text of the DRA can be found in the “Public Laws” section of the Library of Congress website.
The Medicaid reform portions of the DRA significantly tighten the rules for Medicaid applicants seeking coverage for long-term care costs. The rule changes will impact eligibility requirements for both nursing facility care and “home and community-based services” such as Pennsylvania’s Aging Waiver Program. The Pennsylvania Department of Human Services will apply the new rules to applications filed on or after March 3, 2007, although some portions of the new law apply retroactively to February 8, 2006.
A summary of the provisions is provided below.
Expansion of Look-Back Period
Prior to March 5, 2007, the look-back window for outright transfers was thirty-six (36) months. Section 6011(a) of the DRA expands the look-back period for all transfers to sixty (60) months stretching back from the date of the nursing home resident’s Medicaid application. That being said, transfers made prior to the enactment of the new law will still be subject to a thirty-six months look-back. The expansion of the look-back effectively begins on February 9, 2009, and each day thereafter until the full 5 year look-back is phased in effective February 8, 2011. However, the change in the start-date, discussed below, has immediate impact on the calculation of penalty periods caused by asset transfers.
Change in the Start Date of the Penalty Period
Probably the most dramatic change to be brought about by the new Medicaid law will be the change of the start date for calculating the penalty period for transfers made for less than fair consideration, i.e., gifts. See DRA, §6011(b). In Pennsylvania, the penalty period for a non-exempt transfer currently runs from the first day of the month in which the gift occurs. Under the new law, the penalty period will start not in the month of the gift, but rather on the date when the Medicaid applicant is in a nursing home and otherwise eligible for Medicaid but for the penalty period caused by gift. The relevant statutory language reads:
(b) CHANGE IN BEGINNING DATE FOR PERIOD OF INELIGIBILTY…(ii) In the case of a transfer of assets made on or after the date of enactment of the Deficit Reduction Act of 2005, the date specified in this subparagraph is the first day of a month during or after which assets have been transferred for less than fair market value, or the date on which the individual is eligible for medical assistance under the State plan and would otherwise be receiving institutional level care described in subparagraph (C) based on an approved application for such care but for the application of the penalty period, whichever is later, and which does not occur during any other period of ineligibility under this subsection.
The above provision of the DRA appears to effectively eliminate gifting as a viable Medicaid planning strategy unless the individual makes that gift more than five years prior to applying for Medicaid. Since entry into a nursing home is frequently a sudden and unexpected event, and because the financial consequences of a Medicaid ineligibility period are potentially so severe, the DRA will likely have a chilling effect on gifting by seniors with fragile health situations, even where Medicaid planning would not be the primary objective of an asset transfer. Some commentators have suggested that the new law may reduce the number of seniors willing to help grandchildren with tuition costs or willing to make significant charitable contributions for fear of those transfers being characterized years later, in part, as being for the purpose of qualifying for Medicaid. On the other hand, since the change in the gifting rules applies only to divestment of assets accomplished within the five-year look-back period, many healthy seniors may decide to accelerate gifting to their children, either outright or through trusts.
Gifts made at any point in the five years prior to applying for Medical assistance are penalized starting when the Medicaid applicant is otherwise eligible and has spent-down the non-excluded, available resources. In other words, after the person is in a nursing home and has otherwise spent-down his or her non-exempt resources, Medicaid will impose a period of ineligibility from that point going forward.
Example: Mother, age 70 and in declining health, gives the sum of $12,000 to her two children on their respective birthdays in 2006, after the enactment of the DRA of 2005. Mother falls ill two years later and enters a nursing home on November 1, 2008. She pays her nursing home care privately for two years until November 1, 2010 when she runs out of money. After paying approximately $180,000 to the nursing home over the course of those two years, she has reduced her remaining assets to below $2,400 and files an application for Medicaid and discloses the two gifts which occurred four years ago. Even though the gifts occurred four years ago, the total gifts of $24,000 are within the five-year look-back, and the penalty period starts as of the time she runs out of money and is otherwise eligible for Medicaid. Assume the penalty divisor in effect in November 2010 is $8,500 per month. (The penalty divisor in effect at the time of this writing is $6,757.67, but will be adjusted upwards over time as the average monthly cost of nursing facility care increases.) Mother would be ineligible for Medicaid for approximately 2.8 months on account of the gifts. Medicaid will not pay for her nursing home stay for 2.8 months. Mother has no money to pay the nursing home bill; she already paid what she had to the nursing facility. Unfortunately the children spent the money years ago and are not in a position to return $24,000. The nursing home cannot discharge Mother without a safe discharge plan, so they may not be paid during the period of ineligibility caused by the gifts.
The Medicaid caseworker will likely presume that the gifts were made, at least in part, for the purpose of qualifying for medical assistance. In some cases it may be possible to avoid the application of the penalty period by proving 1) that the gift was made exclusively for a purpose other than to qualify for medical assistance, or 2) that undue hardship would result by imposing a period of Medicaid ineligibility. As a practical matter, access to these exceptions will likely be through the appeal process.
Availability of Hardship Waivers
In order to help reduce the frequency of nursing homes getting stuck with non-paying residents who are ineligible for Medicaid, the DRA calls upon states to provide a hardship waiver process. The DRA provides that undue hardship will exist when the application of the transfer penalty provisions would deprive the individual of medical care “such that the individual’s health or life would be endangered,” or “deprive the individual of food, clothing, shelter, or other necessities of life.” Following a Medicaid denial and request for appellate review at a fair hearing before an administrative law judge, applicants typically appeal these cases not on the basis of undue hardship, but instead try to prove that the transfer was made for a purpose exclusively other than to qualify for Medicaid. See Pennsylvania Medicaid (Bisel), §4.3.7. See also, Godown v. Department of Public Welfare, 813 A.2d 954 (Pa. Cmwlth. 2002). Under the DRA, states would have to make the hardship appeal process known to applicants, make sure there is a timely processing of hardship requests, and provide an appeal process for adverse determinations. Pennsylvania would be authorized to make “bed hold payments” for hardship applicants for a period not to exceed thirty (30) days while the hardship appeal is pending. It is likely that the granting of any hardship waiver would require the applicant to make efforts to retrieve the transferred funds from the gift recipient.
Disclosure and Treatment of Annuities
Section 6012 of the DRA requires the disclosure of any interest of an applicant or an applicant’s spouse in an annuity. Full disclosure of assets has always been required under Pennsylvania Medicaid law. However, a provision under the Act would require the State to be named as the remainder beneficiary of an annuity as a condition of receiving Medicaid. Moreover, the DRA provides that the purchase of an annuity that fails to name the state as remainder beneficiary “for at least the total amount of medical assistance paid on behalf of the annuitant” is treated as a transfer for less than fair consideration and would therefore be subject to the transfer penalty rules. The law provides that the State must be named as remainder beneficiary in a second position behind the community spouse or minor or disabled child. The DRA exempts certain annuities from these requirements. Specifically exempted are annuities purchased with the proceeds of certain retirement accounts and annuities that 1) are irrevocable and non-assignable; 2) are actuarially sound, and 3) provide for payments in equal amounts during the term of the annuity, with no deferral and no balloon payments made.
Mandatory Application of Income-First Rule
Pennsylvania’s application of a resource-first rule, embodied by the “Hurly appeal process,” was eliminated in July of 2005 with the enactment of Act 42 of 2005. What replaced this resource-first approach was a modified income-first rule. See 62 P.S. §441.7. Act 42 represented a balancing of the Commonwealth’s desire to slow the growth of Medicaid spending, while seeking to address the clearly increased risk of spousal impoverishment presented by the implementation of a strict income-first rule. The Deficit Reduction Act of 2005 makes application of a strict income-first rule mandatory by all states. This provision of the DRA makes low-income individuals with a spouse in a nursing home more likely to face impoverishment when income is reduced upon the death of the institutionalized spouse. See Pennsylvania Medicaid, §3.4 for a discussion of the income-first rule versus the resource-first rule. This section of the DRA applies to allocations of income and resources for those who become institutionalized spouses on or after the effective date of the act, and will apply to applications filed on or after March 5, 2007.
Disqualification for Long-term Assistance for Individuals with Substantial Home Equity
Section 6014 of the DRA provides that Medicaid applicants with home equity exceeding a specified limit will not be eligible for long-term care benefits. Pennsylvania adopted the minimum limit of $500,000 when the DRA was initially implemented, but that figure has been increased over the years for inflation, and is $585,000 for 2019. The home equity limitation does not apply if the Medicaid applicant has a spouse, child under 21, or blind or permanently and totally disabled child residing in the individual’s home. The Act seeks to encourage the use of a reverse mortgage to tap the equity of the house in order to pay for long-term care costs. However, existing lending rules typically do not allow an individual who is not residing in the home to obtain a reverse mortgage. Additionally, the reverse mortgage is a borrowing option limited to those Medicaid applicants age 62 and over. Not all nursing home residents applying for Medicaid have attained age 62.
Additional Reforms of Medicaid Asset Transfer Rules
Section 6016 of the DRA contains additional restrictions on asset transfers, most of which have already been adopted in Pennsylvania. For example, the imposition of partial months of ineligibility is now mandatory on states. Pennsylvania already adopted that approach with Act 42 of 2005. See Pennsylvania Medicaid, Appendix 1B, §441.5. Accumulation of multiple transfers into one penalty period, set forth in DRA §6016(b) was already embodied in Pennsylvania case law. See Heffelfinger v. Department of Public Welfare, 789 A2d 349 (Pa. Cmwlth. 2001.)
Self-canceling installment notes, and other similar Medicaid planning devices that utilize financial instruments to render assets unavailable for Medicaid purposes will be eliminated by the DRA. Many such devices, however, had already been successfully challenged and stopped in Pennsylvania through litigation by the Department of Public Welfare.
One interesting provision, §6016(b) seeks to prevent Medicaid applicants from purchasing a life estate in another individual’s home by deeming it to be a transfer for less than fair consideration if the purchaser fails to reside in the home for at least one year after the date of purpose. The new rule sets forth a safe-harbor that may provide a useful option for the penalty-free transfer of assets in certain situations such as where a parent legitimately moves into a child’s home. This “purchase of a life estate” safe harbor would be consistent with a legislative intent to encourage family care-giving.
Possible Expansion of State Long-term Care Partnership Program
One goal of the DRA is to encourage middle-class baby-boomers to shelter their life savings through the purchase of long-term care insurance rather than by last minute divestment of resources with the intent of qualifying for Medicaid. Section 6021 of the DRA grants states the authority to expand the Long-term Care Partnership Program, a program designed to encourage individuals to purchase long-term care insurance. Individuals who purchase long-term care insurance policies that meet specific requirements can qualify for Medicaid without spending down all their assets through a “disregard of any assets or resources in an amount equal to the insurance benefits that are made to or on behalf of an individual who is a beneficiary under a long-term care insurance policy if the following requirements are met…”
The Act goes on to set forth extensive requirements that a long-term care policy must meet the requirements of the Long-term Care Partnership Program. Existing long-term care insurance policies held by Pennsylvania residents would not meet the criteria since in order to qualify they must be purchased after such time as the State Medicaid plan is amended to implement the Long-term Care Partnership Program. Additionally, the policy must be a “qualified long-term care insurance policy” as defined in §7702B (b) of the Internal Revenue Code. The policyholder can qualify for the asset disregard only in the state in which the individual was a resident at the time of purchase, so the protection for Medicaid purposes is not presently portable from state to state.
Example Assuming Pennsylvania amends its state Medicaid plan following enactment of the DRA to incorporate the Long-term Care Partnership Program. Mrs. Smith, age 65 and a Pennsylvania resident, then purchases a qualified policy. She subsequently suffers a stroke and requires long-term care in a Pennsylvania nursing home that accepts Medicaid. Her long-term care insurance policy pays out $150,000 to the nursing home over the course of three years. Mrs. Smith privately pays the difference with her income and savings. After this period of time, Mrs. Smith then has $150,000 in remaining assets which Medicaid would otherwise term “excess resources.” Because Mrs. Smith has an insurance policy that meets the criteria of the Long-term Care Partnership Program and paid out $150,000, Medicaid will disregard her remaining $150,000 and she can then qualify for Medicaid to pay her nursing facility care.
Robert C. Gerhard, III Esquire limits his Montgomery County practice to elder law matters, primarily asset protection from long-term care costs. He is author of the treatise, Pennsylvania Medicaid, Long-Term Care published by the George T. Bisel Company, and can be contacted at email@example.com with comments or questions.