On Monday of this week, the U.S. Government Accountability Office released its report “Financial Characteristics of Approved Applicants and Methods Used to Reduce Assets to Qualify for Medicaid.” This report was requested by several members of Congress, including: Sen. Tom Coburn (R-OK) and Richard Burr (R-NC) and Reps. Darrell Issa (R-CA) and Trey Gowdy (R-SC).
In response to the GAO report, the National Association of Elder Law Attorneys has issued a nationwide Press Release, published a position paper on long-term care, issued a position paper entitled “Clarified Myths and Realities About Medicaid,” and relayed histories of various individuals and their Medicaid experiences. NAELA also has developed a webpage for easy access to the long term care materials. That website page can be accessed by clicking here.
We have reproduced, with permission, the information provided by NAELA in the article entitled: “Clarified Myths and Realities about Medicaid.”
Myths and Realities About Medicaid Planning
Long-term care in the United States is overwhelmingly provided by unpaid caregivers; researchers estimate the value of this unpaid care giving at well over $450 billion per year.1 By contrast, paid care giving costs the public and private sectors about $219.9 billion,2 more than a quarter of which is paid out-of-pocket by individuals and their families. Nursing home care costs more than $81,000 per year on average, with 36% of that paid out-of-pocket by individuals and their families.3 It is in this context that families needing long-term care services engage in financial planning to pay for those services. The Medicaid aspect of that planning has given rise to a number of myths.
Myth 1: Medicaid planning is the fraudulent sheltering of assets done to help people become eligible for Medicaid.
Medicaid planning is legal and accepted under federal law. It is not fraudulent or illegal. Medicaid planning describes legal changes in one’s estate plan, one goal of which may be to obtain or preserve Medicaid coverage when private coverage options are untenable. Transferring assets to other family members is not a major part of Medicaid planning, because it generally must be done more than five years before needing Medicaid coverage. If done within five years, the individual faces disqualification from Medicaid for a period of time proportionate to the amount given away. The reduction of the penalty period by the act of returning half the transferred amount (sometimes called “reverse half-a-loaf ”) encourages the return of transferred assets but is permitted in only some states. The most recent GAO study on the subject found that only five applicants (2%) out of a total study population of 294 use a “half-aloaf” mechanism.4
Apart from giving away countable assets and facing a penalty, the more common planning steps taken by Medicaid applicants are actions permitted by the Medicaid statute and represent a balanced policy accommodating personal and public responsibility. The following methods are highlighted in the most recent GAO study of approved Medicaid applications in three states:5
• Spending countable resources on goods and services that are not countable, such as expenditures on home maintenance or upgrades (the home is generally not a countable resource), burial contracts, or personal service contracts (to pay for assistance with daily living). All three of these expenditures represent common sense, responsible planning. Plus, home modification and payment for personal services are intended to maintain the individual in the home and community, a major goal of most elders. It also helps save Medicaid dollars that would otherwise be spent on nursing home care.
• Converting countable resources into non-countable resources that generate an income stream. This planning method primarily consists of purchasing an annuity that qualifies as an exempt asset under guidelines spelled out in the Medicaid statute. The guidelines represent a win-win approach to meeting individual needs and public accountability because: the guidelines assure that
the annuities are actuarially sound; the income from the annuities helps individuals and spouses meet real expenses including the cost of long-term care; Medicaid does count the income in determining eligibility; and when the individual dies, any value left in the annuity goes to pay back Medicaid for benefits paid.
• Increasing the amount of assets the community spouse retains. Congress enacted special eligibility rules for married couples to help ensure that the community spouse would not be impoverished by the cost of care of the ill spouse. That goal is critical to couples facing the catastrophic costs of long-term care. They may use annuities like those described above or seek court support orders to meet the particular needs of the community spouse. The occurrences of some cases in which a community spouse refused to contribute to the care of the institutionalized
spouse are more difficult to judge, since states have the ability to recover against those spouses if they deem it appropriate.
An earlier GAO study of practices in Massachusetts revealed that about 90% of Medicaid planning involved merely the conversion of countable assets into exempt assets — most typically setting aside money for burial arrangements, making home repairs, or purchasing an automobile.6 Congress has exempted certain assets from being counted in determining Medicaid eligibility because they are considered essential to the well-being and dignity of individuals. Thus, these asset conversions trigger no penalty.
Where countable assets are transferred under certain circumstances that trigger a period of disqualification under Medicaid, the transfer is not illegal. Penalties are imposed under federal law in many civil law contexts. For example, you are penalized under federal tax law for early withdrawals of money from Individual Retirement Accounts (IRAs) or 401(k) plans. The result of the penalty in the Medicaid context is that the individual is liable for all long-term care costs during the penalty period.
Medicaid planning is a part of a larger planning process that:
1. Examines the full range of long-term care options, issues, and costs relevant to the client’s circumstances; and
2. Pursues the goals of preserving and promoting the individual’s dignity, self determination, and quality of life according to the values and wishes of the client. Individuals who seek help with this planning process overwhelmingly prefer to stay in the community with formal and informal support services and prefer to stay out of any form of institutional care.
Myth 2: Gaming the system to get Medicaid coverage of long-term care is widespread.
Medicaid planning is neither “gaming the system” nor terribly widespread. The activity that is truly widespread is informal unpaid family caregiving of individuals needing long-term care. Families are the bedrock of the long-term care system: 83% of people with long-term care needs live at home, and 75% receive their care solely from unpaid caregivers (i.e., family and friends). The number rises to 93% when you include those who receive both paid and unpaid caregiving in the community.7 Most families seek Medicaid eligibility only after they have become worn out from informal caregiving. And, even after Medicaid is helping to pay costs, spouses and adult children continue to provide unpaid care.
Medicaid planning is about meeting the needs of real people faced with potential long-term care costs that are beyond the means of all but a tiny percentage of the population. Moreover, planning that involves asset transfers that could result in a penalty is done for half or fewer of the clients of attorneys responding to a past poll of the members of the National Academy of Elder Law Attorneys.8
Indeed, 60% of the Elder Law attorneys responding to that survey reported that such transfers were used in a quarter or fewer of cases. The GAO study in Massachusetts in 1993 found that only about 10% of the total cases they reviewed involved asset transfers, typically to family members.9
Myth 3: Elder Law attorneys help rich people get Medicaid.
The rich engage in tax planning; they have no need to rely on Medicaid, nor would they want to. Medicaid is a valuable program, but there are many disadvantages to relying on Medicaid, such as limitations in access to health care providers, limitations in coverage, exposure to recovery against one’s estate after death, and state-by-state variations in eligibility and coverage. Elder Law attorneys help individuals understand the pros and cons of all their legal options.
No one yearns to be on a program like Medicaid. Seniors engage in Medicaid planning mainly because they find themselves in a “lose-lose” corner. First, they lose their health and require long-term care and come face-to-face with nursing home costs averaging $81,030 for a semiprivate room and $90,520 for a private room per year. Second, they learn that they will have to lose virtually their
entire estate to pay for long-term care — paying 100% outof-pocket until they reach Medicaid’s definition of impoverishment. Congress created a partial remedy to this harsh result under Medicaid by exempting certain assets such as the home, allowing married couples to preserve a larger amount of their resources, and permitting a limited range of asset transfers without penalty. Other transfers beyond the limited range incur a significant penalty of non-eligibility for a period of time.
The recent GAO study found that only 5% of the total cases they reviewed involved disqualifying asset transfers. The study population as a whole possessed a median amount of countable plus non-countable assets of only $7,660. Breaking down that figure, the GAO reported that 41% had total resources of $2,500 or less; 44% had between $2,501 and $100,000 in total resources; and 14%
had more than $100,000 in total resources.10 Given that the value of a modest home in some locals can be several hundreds of thousands of dollars, these statistics reflect a fairly poor study population. These individuals are not millionaires impoverishing themselves.
Myth 4: Asset transfers result in huge additional costs to the Medicaid program.
No reliable data exist assessing the actual effect of asset transfers on Medicaid expenditures, however, a few studies provide informative insight. In a 1995 study, Liu and Moon estimated that if every elder with a significant incentive to divest countable assets in order to become Medicaid eligible actually did divest every penny, the amount transferred would equal about 4% of Medicaid nursing home expenditures.11
As a practical matter, this estimate overstates the scope of disqualifying transfers, because, as noted in both the current and 1993 GAO study, most Medicaid planning involves permissible conversions of assets that trigger no penalty. Moreover, these studies found that disqualifying transfers do indeed result in disqualification or withdrawal of application, resulting in little or no additional cost to Medicaid.
When people do become eligible for Medicaid, regardless of whether they have engaged in Medicaid planning, they must pay all but a small portion of their income each month for their care; Medicaid then pays whatever the difference is between that amount and the Medicaid rate. Thus, costs to Medicaid are always mitigated by the individual beneficiary’s monthly income.
Another fact essential to understanding the big picture is how it compares to other cost burdens on the Medicaid program. One endemic cost burden is that of administrative errors in the management of the program. For fiscal year 2011 reporting, a CMS audit reported an estimated national Medicaid improper payment error rate of 8.1% or $21.9 billion.12 The potential expense of Medicaid planning doesn’t compare.
Myth 5: Long-term care insurance will solve this problem.
Long-term care insurance (LTCI) products do provide an important planning option for some seniors, and the estate planning counsel provided by Elder Law attorneys includes evaluation of that option.
However, an in-depth analysis of LTCI by the Kaiser Family Foundation concluded that the private LTCI market has emerged mainly in response to the demands of a small, relatively affluent market, and that most policies are not affordable for most people. Currently, private LTCI pays for less than 12% of all long-term care expenses.13 In addition, they may not be very well-designed to meet the real needs of many people who can afford modest coverage.14
Stand-alone LTCI products are a feasible investment for only a small minority of active workers. About 8.2 million Americans are covered by private long-term care insurance. 15 And, few retirees are able to afford comprehensive long-term care protection, especially since the cost of policies rises dramatically with age. Nor would many qualify, even if they could afford the cost – for example, more than one out of five persons age 60 to 69 would fail to pass health underwriting screens.16 Unlike Medicare and Medicaid, long-term care insurance has no open enrollment when all applicants are accepted without health underwriting.
Myth 6: Making the penalties for transfers of assets more severe will prevent “cheaters” from taking advantage of Medicaid.
Medicaid planning is not cheating. Current rules, enacted by Congress over a period of years, reflect public policy that balances the needs of individuals and families with that of fiscal responsibility.
Making asset transfer penalties more punitive will mainly hurt seniors who act in good faith yet fall innocently into the crosshairs of state budget cutting guns. One proposal to penalty period from the date of transfers to the date one applies for Medicaid. This has the practical effect of extending the penalty period for years beyond what it is now. A few of the likely victims of such measures are: the grandparent caring for a grandchild who provides savings to help pay for the grandchild’s education; the devoted church supporter who donates personal assets to the church; the widow who lacks records of her now deceased husband’s spending; the caring sister who uses savings to help a needy sister remain in her home. Under the state proposals to close transfer of assets “loopholes,” each of these individuals will be cut off Medicaid if they subsequently get sick and need long-term care. These proposals will also force many “well spouses” to choose between poverty and divorce. Indeed, most Medicaid planning enables marriages to continue and ensure that well spouses have sufficient assets and income to maintain their independence. Planning to pay for long-term care — including Medicaid planning – is the rational process engaged in by families faced with the prospect of paying more than $81,000 or more per year for nursing home care. The long-range solution to concerns about Medicaid planning is the creation of a system that builds on Medicare – a model that seniors and people with disabilities understand and Americans support – to guarantee universal coverage of long-term care.
In the short term, states need federally supported fiscal relief from the strain of their burgeoning Medicaid budgets, not punitive measures that target the victims of serious chronic illness.
1 Lynn Feinberg, Susan C. Reinhard, Ari Houser & Rita Choula, AARP Public Policy Institute, Valuing the Invaluable: 2011 Update: The Growing Contributions and Costs of Family Caregiving, at 1
(Mar. 201, at 11).
2 National Health Policy Forum, The Basics: National Spending for Long-Term Services and Supports (LTSS) 2012, http://www.nhpf. org/library/the-basics/Basics_LTSS_03-27-14.pdf (Mar. 2014).
3 MetLife Mature Market Institute, The 2012 MetLife Market Survey of Nursing Home, Assisted Living, Adult Day Services, and Home Care Costs, https://www.metlife.com/assets/cao/mmi/publications/studies/2012/studies/mmi-2012-market-survey-long-term-care-costs. pdf (Nov. 2012).
4 U.S. Government Accountability Office, Medicaid: Financial Characteristics of Approved Applicants and Methods Used to Reduce Assets to Qualify for Nursing Home Coverage, 29, GAO-14-473 (May 2014).
6 Government Accounting Accountability Office, Medicaid Estate Planning 2, GAO/HRD-93-29R (July 20, 1993).
7 J. Tully et al., Long-Term Care: Consumers, Providers, and Financing. A Chart Book, 24-25. The Urban Institute, Mar. 2001.
8 Charles P. Sabatino, NAELA Medicaid Planning Survey Results, 15:3 NAELA News 20 (May/June 2003).
9 U.S. Government Accountability Office, supra n. 6.
10 U.S. Government Accountability Office, supra n. 4, at 14-15.
11 Korbin Liu & Marilyn Moon, Recovering Hidden Assets: The Magic Bullet for Medicaid Savings?, The Urban Institute, Policy Bites, No. 23, Sept. 1995.
12 U.S. Government Accountability Office, Medicaid: Enhancements Needed for Improper Payments Reporting and Related Corrective Action Monitoring, GAO-13-229: (Mar 29, 2013).
13 The George Washington University, National Health Policy Forum, National Spending for Long-Term Services and Supports (LTSS), (Feb. 2012).
14 Id., at 35.
15 Eileen Tell, The SCAN Foundation, Overview of Current Long-Term Financing Options, (Mar. 2013).
16 American Association for Long-Term Care Insurance, Long-Term Care Insurance Health Qualifications. Are you Even Insurable?, http://www.aaltci.org/long-term-care-insurance/learning-center/are-youeven-insurable.php (2007).