The Deficit Reduction Act (DRA) signed February 8, 2006 revised Medicaid’s “look-back period” and set up a nationwide long-term care insurance partnership program. As an advisor, you can help your clients plan by communicating these changes.
While Medicaid was designed to finance health care for the poor, the unscrupulous used Medicaid planning (spending down assets through gifting) to avoid purchasing private insurance. Prior law required a look-back period of gift transfers for the 36 months leading up to an application for nursing home care (and 60 months for transfers made to certain trusts). Under the Deficit Reduction Act, the 60-month period now applies to all transfers.
Thus, if someone has become eligible for Medicaid as a result of gifting, Medicaid will only pay benefits if the person either makes an upfront contribution towards their nursing home care or waits for the new look-back period to elapse. Let’s say a widow gifted $200,000 to her children in January of 2003 and applies for nursing care coverage under Medicaid 48 months later. If the $200,000 reduction in assets had qualified her for Medicaid, she will now need to come up with out-of-pocket compensation or endure an imposed period of ineligibility determined by dividing the uncompensated (gift) value by the average monthly cost of care in a nursing home. Out-of-pocket costs would also be calculated based on the gift value (i.e., our widow would pay the first $200,000 before Medicaid benefits would commence). Thus, if the average cost of care was $5,000 and the gifted asset was valued at $50,000, an applicant would be subject to 10 months of ineligibility.
These new rules are more restrictive, but are hardly unprecedented — in actuality, they bring the United States in line with other nations’ public-assistance policy. Germany, for example, mandates a look-back period of 10 years.
Another common Medicaid estate planning strategy used the home to shelter the estate. Prior law did not include the value of the individual’s home when determining Medicaid eligibility, as a spouse or dependent relative continued to live there. While this seems reasonable at face value, some people invested large amounts of money in home improvements or even traded up. Since few states have successful estate recovery programs, home equity often passed as an exempt asset to the next generation.
Effective January 1, 2006, Medicaid coverage is denied to nursing home applicants with home equity in excess of around $500,000 ($750,000 in some states). Starting in 2011, the caps will rise with the Consumer Price Index. As with prior law, the exclusion does not apply if a spouse (or child who is under 21, blind or disabled) resides in the house.
This effectively means that a Medicaid applicant with a large home must sell it and spend the proceeds on care before benefits can commence or use a reverse mortgage to reduce their equity interest; as a result, issuers of reverse mortgages may significantly benefit from the DRA.
Again, while these new rules may seem restrictive, the United States is still more generous than other socialized health care systems in this regard. For instance, the United Kingdom allows a home exemption of a little under $40,000 in order for a citizen to qualify for publicly financed long-term care. Furthermore, we are already seeing signs that the current U.S. home equity limit will drop; last year, the National Governors Association recommended that the cap be lowered to $50,000.