Things You Need to Know About Medicaid

Would you like free nursing home care?

Almost everyone over age 65 has been exposed to seminars and other presentations promising just that. Adult children of older people, especially those already in nursing homes, get regular exposure to the ideas. Some elder law and estate planning attorneys make this promise a central part of their practices. Insurance agents also get into the act. All of these professionals promise to make you eligible for Medicaid so that the government will pay for any needed nursing home care.

You might want to consider carefully a couple of points before undertaking these strategies.

States, which administer Medicaid and pay most of the bills, are in financial stress and are looking at ways to relieve that stress. Medicaid can account for about 20% of state spending, and about $47 billion went from Medicaid to nursing homes in 2001. A General Accounting Office report a few years ago found that 13% to 22% of those whose nursing home care was paid by Medicaid were able to pay at least part of the cost themselves.

Medicaid nursing home care is receiving a lot of attention from the states. One strategy states are stepping up is to wait until a Medicaid recipient dies, then try to collect reimbursement from the estate. Other states send bills to the spouses of nursing home residents whose care is being paid by Medicaid.

The latest move by states is to tighten regulations. Federal rules limiting Medicaid eligibility were enacted in 1997. Those rules, however, didn’t do much to limit Medicaid-eligibility strategies. People just needed to plan further in advance. Now, states are proposing tighter regulations. If regulations currently proposed by Connecticut are approved by the federal government, many other states quickly will adopt their own versions. Then, the ability to use Medicaid for nursing home care will be diminished significantly.

The second reason to be cautious about the Medicaid strategies is quality of care. Quality nursing homes limit the number of Medicaid patients they will accept. That’s because Medicaid does not pay enough to provide quality care. A good nursing home will have a small percentage of Medicaid patients. A nursing home that has most Medicaid patients likely will have a much lower quality of care than a “private pay” nursing home.

A third reason to be cautious about these strategies is that they require you to arrange your finances and assets in ways that don’t make sense for any extended period. You might find it difficult to maintain your standard of living after implementing the strategies. You’ll see this clearly by examining the strategies I explain below.

Medicaid is only for the poor. To have Medicaid pay for nursing home care, you must be poor – at least on paper. The professionals who promote these strategies privately refer to them as “impoverishment strategies.”

The strategies work because Medicaid has limits and exclusions. To qualify you generally cannot have more than $2,000 of assets (exact rules vary a bit among the states). The asset limit, however, excludes a home, car, and some personal possessions. It also excludes some assets owned by a spouse. Here are a few strategies that allow people to take advantage of these exceptions:

• Upgrade your home. In most states there is no limit on the value of a home that one is allowed to own and still be Medicaid-eligible. If you are so inclined, pouring most of your money into a home will get your nursing home care paid by Medicaid. Variations are to use your investments to pay off any mortgage on the home or to expand the home.
• Drive a dream. An automobile also is excluded from assets counted toward Medicaid eligibility, so you can buy an expensive new car every year or two to remain eligible.
• Give it away. People used to simply give all their money to their children the day before they entered a nursing home. The 1997 rules say that any money given in the 36 months prior to entering a nursing home are counted as your assets. (It is 60 months for assets transferred to a trust.) That makes some people give their money early. A problem is that the transfer can result in big gift taxes. In addition, you cannot compel the money to be returned if the nursing home care never is required.
• Give some of it away. Under this strategy, the money is not given in advance. Instead, when nursing home care will be needed, retain enough assets to cover expenses for the waiting period. Give away the rest, so that your exposure to nursing home costs is limited. Again, there could be big gift taxes.
• Buy an annuity. In most cases, annuity income paid to a spouse as co-beneficiary will not count toward Medicaid eligibility. That makes some people put all or most of their investment assets in annuities. While that can help with Medicaid eligibility, it isn’t much of a long-term investment strategy.
• Cut your spouse loose. Curiously, some states don’t require a spouse to support a spouse in a nursing home. The spouse entering the nursing home can give his or her spouse all the assets. Then the healthy spouse refuses to pay for the nursing home care.

This issue should concern even those who don’t plan to use the strategies. Often a parent sets up a joint account with an adult child to pay the nursing home bills or gives an adult child a financial power of attorney. Then the children, realizing that their inheritances are going to the nursing home, adopt one or more of these strategies and make the parent eligible for Medicaid. Consideration of who will handle your finances and make such decisions, along with a discussion of your preferences, should be part of your estate plan.