Medicaid Long-Term Care: A Background and look at the Eligibility Rules

One of the most common misperceptions of the American health care system is that if an elderly individual – maybe a parent or a grandparent – has to enter a nursing home, their stay will be fully covered by the Medicare program.  But that is not accurate.  Medicare does not cover long-term care.  It will pay for up to 100 days in a skilled nursing facility per spell of illness, but in order to qualify, the patient must need skilled, not maintenance, care.

In fact, the largest payer of long-term care in the United States is the Medicaid program.  Despite all of the political rhetoric surrounding the expansion of Medicaid in the ACA, the fact of the matter is that the expansion population and other individuals under the age of 65 who qualify for Medicaid – like mothers and children – consume a small proportion of the total Medicaid budget.  Yes, it’s expensive – any large government program is – but the bulk of Medicaid’s costs come from chronic, long-term care for the elderly and individuals with disabilities.

But wait a minute … Medicaid is only for low-income individuals.  So how is it that seemingly middle-income Americans qualify for Medicaid-covered long-term care?  That’s what we’ll talk about in today’s post.

To begin with, the very first sentence of the Medicaid statute explains that the program is designed to help individuals “whose income and resources” are insufficient to afford health care.  Those two words – “and resources” – have introduced great complexity into the Medicaid program.

As a very general statement, an individual cannot have more than $2,000 in assets to qualify for Medicaid.  Some states have a higher limit, and other states have received a waiver of the asset limit for the under-65 population.  Furthermore, the asset limit does not apply at all to the ACA expansion population.  But every state maintains the asset limit for the 65+ population.

It is that asset limit that comes into play when an elderly individual must contemplate the need for long-term care or a family has to contemplate long-term care for an elderly parent or grandparent.  Let’s talk about how it works.

The best way to think about application of the asset limit is to picture the applicant’s assets in three different buckets:  non-countable assets; inaccessible assets; and countable assets.

We’ll look at non-countable assets first.  These are assets that, although they are legally in the owner’s name, a state will disregard them in terms of determining eligibility for Medicaid long-term care.  The most common example of a non-countable asset is the individual’s principal residence – their home.  But there are a couple of caveats.  First of all, if an individual has more than $500,000 in equity in their principal residence, the excess is considered a countable asset.[1]  The second caveat is that even though a principal residence is a non-countable asset, a state must put a lien on the home in order to establish priority to be repaid for the care it provides when the home is eventually sold.  Homes are exempt from liens, however, as long as the individual’s spouse, child under the age of 21, or a disabled child of any age is living in the house.

Other non-countable assets include personal effects, such as one car, jewelry, artwork, and other such assets.  In addition, a life insurance policy with a face value of less than $1,500 and a burial plot (up to $1,500 in value) are not countable assets.

The next class of assets to discuss are inaccessible assets.  These are assets to which the individual has a clear legal entitlement, but ownership of the asset is not yet in the applicant’s name.  An example might be property to which you are entitled under a will or a trust.  In property law, this is called a “future interest” in property.  The property in which you have a future interest cannot be used by the state to determine eligibility for Medicaid long-term care.

Finally:  countable assets.  All of these assets count toward determining the $2,000 limit.  These could be things like:  a vacation home on Cape Cod; a § 401(k) plan; a pension; stocks and bonds; mutual funds; and a bank account.  If the total of these countable assets exceeds $2,000, the applicant cannot qualify for Medicaid.

Well, most people have at least $2,000 in one of these types of assets.  So how can anyone possibly qualify for Medicaid to pay for their long-term care needs?

The answer is that federal law allows asset transfers to be disregarded in some cases.  It’s important to note that although these asset transfer rules may appear similar to the application of the federal estate tax, the rules are different, and it’s important to note that just because an asset can be excluded from consideration in determining Medicaid long-term care eligibility, that same asset may be treated as part of the applicant’s taxable estate upon their death.

To state the policy simply, under the Medicaid asset transfer rules, if an individual transfers an asset for below fair market value, and they do not apply for Medicaid long-term care benefits for at least five years, the asset is disregarded for Medicaid long-term care eligibility purposes, even though the applicant may have full use and enjoyment of the asset.  If, on the other hand, the individual transfers the asset and applies for Medicaid long-term care benefits within five years, the individual faces a period of disallowance.[2]

Let’s take a look at how all of these rules work.  Let’s say that Jane, an elderly widow, lives at home in her own home outside of Chicago, Illinois that she owns free and clear, with no mortgage.  It’s worth $400,000.  She has three children.  She also has a vacation home in the Ozark Mountains in Missouri that’s worth $350,000.  She also has a mutual fund portfolio worth $150,000.

On December 1, 2018, Jane transfers the deed to the home in the Ozarks to her three children as joint tenants.[3]  Her children agree to let her use it whenever she wants.  She also gives each of them $50,000 of her mutual fund shares.

On September 1, 2023, Jane applies for Medicaid long-term care benefits because her children and her doctor think she can no longer live at home and needs to go into a nursing home.

Can Jane qualify for long-term care benefits under Medicaid?  Yes … but she will be subject to a period of disallowance because she applied for Medicaid benefits within five years of the asset transfer.

The disallowance period is calculated by dividing the cost of the assets transferred by the average cost of nursing home care in the state.  Assuming that the average monthly cost of nursing home care in Illinois is $15,000, Jane will not be eligible for Medicaid benefits for 33 months ($500,000 in assets transferred divided by $15,000).  In this case, Jane would have been much better off if she waited to apply for Medicaid long-term care benefits for three more months and she would have avoided the disallowance penalty entirely.

You can see how these asset transfer rules can really be a trap for the unwary.  It’s important to rely on a competent advisor when making financial decisions of this magnitude.  And of course, Medicaid is not the only option for long-term care financing; individuals can also buy long-term care insurance or rely on family members or their own resources.  But it’s an expensive proposition and financially out of reach for most people.  That’s why the Medicaid long-term care asset rules continue to be important.

In a future post, we’ll discuss how these rules apply when an individual transfers assets not to a family member, but to a trust.

[1] Congress gave states the option of choosing a $750,000 or $500,000 limit – indexed for inflation.  Most states chose the lower limit, and the home equity limit is now $572,000 for states that chose the lower limit, and $858,000 for states that chose the higher limit.

[2] Note that these rules only apply for purposes of determining eligibility for Medicaid long-term care benefits.  An individual with significant assets could transfer those assets and apply for regular Medicaid the next day without penalty.

[3] This is another property law term.  A “joint tenancy” means that the joint tenants own the property equally and have an equal and undivided interest in the property as a whole.

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