Sections Supplements

Proposed Changes Could Dramatically Impact Medicaid Planning

As part of the proposed Deficit Reduction Act of 2005, the U.S. Senate and House of Representatives each passed different bills on Nov. 3, 2005 and Nov. 18, 2005, respectively, the results of which could greatly impact long-term care (nursing home) Medicaid planning.

Although both the Senate version of the bill (S. 1932) and the House version of the bill (H.R. 4241) both impact Medicaid planning, the House version, if adopted by the Senate, could effectively eliminate most of the Medicaid-planning strategies currently being utilized to preserve assets in the context of long-term care planning.

The purpose of this alert is to highlight a few of the potential draconian changes in the Medicaid bills (the House version of the measure in particular), discuss the current status of the bills, and outline potential immediate planning strategies to consider.

By no means is this alert intended to be a comprehensive explanation of both bills in their entirety, but rather it is intended to draw attention to the most significant changes affecting most people who are contemplating Medicaid planning.

Look-back Period Changes

Under current law, if you apply for Medicaid, you are required to disclose to Medicaid any gifts made by the institutionalized or healthy spouse within the 36- month period preceding the date that the Medicaid application is filed. This period is referred to as the ‘look-back’ period. The House bill would extend the look-back period from 36 months to 60 months.

According to the current provisions of the House bill, the 60-month look-back period would apply to all gifts made after the enactment of the Act. Therefore, if gifting is an appropriate strategy for you, there is an incentive to attempt to make gifts immediately before a final version of the Act is enacted in order to avoid having your gifts be subject to a 60-month lookback period instead of a 36-month lookback period.

Transfer Penalty Starting Date Changes

If you or your spouse make a gift to charity or any person other than your spouse, and you subsequently apply for Medicaid within the look-back period, a transfer penalty may be imposed by Medicaid. In essence, Medicaid takes the position that if you give away cash or property that you could have otherwise utilized to pay for your long-term care, Medicaid will determine how many months worth of nursing home care you gave away and penalize you for that period of time.

In order to calculate the transfer penalty, Medicaid divides the value of a gift by the amount that Medicaid determines to be the average monthly cost of nursing home care in Massachusetts to arrive at the number of months penalty created by the gift.

Medicaid currently uses $232 per day (approximately $7,000 per month) as the average cost of nursing homes in Massachusetts. This amount is naturally below the actual cost of most nursing homes in the area, but by using a small dollar amount for the average cost, a larger transfer penalty results. Under current law, the penalty period begins to run on the date that you make the gift.

For example, if you gave $70,000 to a child on Jan. 1, 2005, a 10- month transfer penalty would result ($70,000 divided by $7,000 per month = 10 months) and the penalty period would begin to run on the date of the gift (Jan. 1, 2005) and would end 10 months later on Oct. 31, 2005.

Therefore, assuming your remaining assets were below the maximum amount of assets allowed for Medicaid eligibility (i.e. $2,000 for a single individual), you could qualify for Medicaid as soon as Nov. 1, 2005.

The House bill would change the date on which the penalty begins to run. The House bill provides that the penalty will begin to run on the later of (1) the date of the gift, or (2) the date that you are in a nursing home and you would otherwise qualify for Medicaid based upon the amount of assets that you own. In effect, for a single person this means that the penalty period will not start to run until your assets are spent down to $2,000, at which time you would not have sufficient funds to pay for your own nursing home care for the penalty period.

For example, assume that the House version of the bill is enacted into law on Dec. 31, 2005, you are single, you give $70,000 to a child on Jan. 1, 2006, and you enter into a nursing home on Sept. 1, 2006 with a total net worth of $2,000. The penalty period would not start to run on Jan. 1, 2006 (the date of the gift) but rather would start to run on Sept. 1, 2006, the date on which you entered the nursing home and had assets less than or equal to the asset limit.

Under this House bill regime, you would not be eligible for Medicaid until July 1, 2007. The problem that is presented with the House bill provision is that on Sept. 1, 2006 you only have $2,000 in the bank.

Apparently, the House expects that the person to whom the gift was made will pay for your care in a nursing home for the next 10 months.

As you can see, the House bill not only has a devastating impact on an institutionalized person who has made gifts within the look-back period, but it also could have a terrible financial impact on nursing homes as well. Nursing homes will be forced to make the difficult decision of evicting a resident who is unable to pay his or her monthly costs or the home would have to attempt to absorb the monthly cost of keeping the patient until he or she qualifies for Medicaid. In light of the fiscal crunch facing nursing homes in the United States, the latter option is not realistic.

The effective date of the potential change in the manner of calculating the transfer penalty is the date on which the Act is enacted. Therefore, transfers made prior to the enactment of the Act are ‘grandfathered’ under the current transfer of asset penalty rules.

Accordingly, if you are contemplating making gifts to loved ones or charities as part of a Medicaid planning strategy, such as making a gift of your home to your children and retaining for yourself a life estate, you should consult with a qualified Medicaid planning attorney as soon as possible to help you determine if making a gift is appropriate for you at this time. It would behoove you to make any such gift prior to the enactment of the Act in order to avoid a potential 60-month look-back period and the threat of the change in the manner in which the penalty is calculated.

While there are no guarantees that Congress will not make further sweeping changes to the bills prior to passing the Act, in most cases the negative taint associated with any gift can be eliminated as long as your loved ones are willing to give the gifts back to you if necessary to enable you to qualify for Medicaid or eliminate all or a portion of the transfer penalty.

Other Changes

A few other changes in the House bill that would adversely impact Medicaid planning include the following:

  • The use of annuities to convert Medicaid countable assets into allowable income would appear to be effectively eliminated (both for married couples as well as single individuals).
  • The value of the refund portion of entrance fees paid to continuing care retirement communities and life care communities may count toward the Medicaid asset limitations.
  • The current benefit of protecting your home from Medicaid liens by purchasing a long-term care policy meeting certain minimum standards law may be greatly restricted or potentially eliminated.

There are other potential rule changes contained in both versions of the Medicaid reform bills not discussed herein, as they are fairly technical and are beyond the scope of this review. The Senate bill does not contain the harsh revisions to the lookback period and transfer penalty changes contained in the House bill. However, among other changes, the Senate bill would eliminate the annuity planning strategy for single individuals and could restrict the benefits associated with Massachusetts residents purchasing long-term care policies.

The next step in the process toward the passage of the Act is the reconciliation of the House and Senate bills by conference committee. Once the conference committee reconciles the bill, the Act will become effective on the date the President Bush signs the bill out of conference.

Bruce E. Devlin, Esq. is an associated attorney at the law firm of Robinson Donovan, P.C.; (413) 732-2301.