Deep Dive into Medicaid & Long Term Care
What is Medicaid?
Medicaid is a welfare assistance program for low-income individuals. It is also the largest payer of long-term care expenses in the country, paying 41% of our nation’s $342B long term care bill to approximately 6M elderly. Qualification is determined at the state level, and each state’s rules can vary, so consult your state-specific guidelines on eligibility for Medicaid benefits.
In general, an individual can keep only $2,000 ($3,000 in some states) worth of assets, while a spouse can protect assets (called the CSRA or “Community Spouse Resource Allowance”) equal to one-half the couple’s countable assets up to a maximum, which is indexed annually. In most states the 2018 maximum is $123,600. In addition, a monthly income allowance is permitted for individuals on Medicaid. Spouses are generally allowed to keep their entire income. For those whose income falls below a specific threshold (varying by state and indexed annually), income from the disabled spouse (the Medicaid participant) can be directed to the community spouse (the spouse not on Medicaid).
The Medicaid program was intended for poor people, not people who are poor on paper. Many long term care Medicaid beneficiaries are in the middle- to upper-income classes. Although families take advantage of the program without ever doing anything the law does not permit, Medicaid eligibility issues are at the heart of the current debate about the program’s sustainability.
The federal government has tried in the past to tighten up some of the vague language through which people can qualify. Each federal move has been countered by an analysis of the law and the identification of a new loophole, launching another round of what is referred to as “Medicaid planning.” The government then responds with more regulation, and the process continues. The Deficit Reduction Act of 2005 was the boldest move by the federal government to date in this ongoing battle to preserve Medicaid for the truly needy. In addition to reauthorizing the Long Term Care Partnership Program, the Deficit Reduction Act made several changes to Medicaid eligibility:
- The look-back period on a Medicaid application is now five years for everything. It used to be five years only for transfers involving trusts, and three years for all other transfers. Now, Medicaid reviews an individual's finances for a full five years preceding the date of application.
- The penalty period assessed for individuals deemed ineligible for Medicaid benefits because of an improper transfer within the look-back period now begins with the date of Medicaid application. Previously, the ineligibility period started on the date of transfer. This difference is significant, and specifically designed to counter a Medicaid planning strategy called “half a loaf”.
- A cap was placed on the amount of home equity allowed when determining Medicaid eligibility. The cap began at $500,000, although states had the option of electing a higher limit of $750,000. This rule was enacted to counteract the Medicaid planning technique of putting the majority of capital into a protected asset—the home—from which money could be easily accessed via a home equity line of credit. This was a less risky move than transferring assets out of one’s name. In 2018, the indexed values are now $572,000 and $858,000.
- Annuities had heretofore offered attractive ways of converting assets into income on a “value for value” exchange without running afoul of the law (ie. on a “less than fair market value” basis). While not completely curbing the practice of “Medicaid-friendly” annuities, the DRA limited its options going forward. For instance, deferred and balloon payments were made countable. Second, the State would have to be named “remainder beneficiary” on all annuities or as second remainder beneficiary behind a spouse, disabled child or minor under age twenty-one. Withdrawals could disqualify a beneficiary if they exceeded allowable limits.
People often forget that Medicaid is a publicly-financed program: we pay for it with our tax dollars. Individuals who find their way into this program when they have the resources to afford other solutions hurt those of us who do not have such options and who depend on this aid. Every day state legislators and administrators wrestle with their Medicaid budgets. This is why most states have embraced the Long Term Care Partnership Program as a way to help reduce this financial burden.
When making a determination of Medicaid qualification, assets are considered either “countable” or “non-countable” (sometimes called “exempt”). There is no limit to the amount of assets one can keep in exempt form. Following is a list of what one can keep today and still qualify for Medicaid:
- An individual’s principal residence if home equity is below the threshold of $572,000 (or $750,000 in WI, or $858,000 in CT, DC, HI, ID, ME, MA, NJ, NM, NY, and no maximum on the principal residence in CA); it can be above these limits if a spouse or child (under age twenty-one or blind and disabled) lives in it. The home equity limit is indexed for inflation.
- One auto of unlimited value
- Personal property up to reasonable limits
- Jewelry (such as an engagement or wedding ring)
- Term life insurance of unlimited value
- Individual retirement accounts (IRA's)
- Prepaid funeral plans in unlimited amounts (for the beneficiary and everyone in his family)
- One business, including the capital and cash flow of unlimited value
- If married, the healthy spouse can keep 50 percent of total assets up to $123,600 (2018 limit)
- Designated assets protected by long term care partnership policy proceeds
As you can see, there is a lot that one can keep. The obviously vulnerable assets here are the liquid ones: cash, checking and savings accounts, investments, stocks, pensions, etc.
There is a trade-off, however. When they put themselves in the hands of Medicaid, people who are accustomed to having their own way may be in for a surprise. First, the asset transfer must be irrevocable: in short, you cannot access that money. Imagine transferring all of your liquid assets to your son, only to see him divorced a couple of years later and half of your assets going to your former daughter-in-law.
Second, you may not be able to go to the facility you want. Medicaid works only with providers who accept Medicaid reimbursement (the lowest of any third-party payers), which could limit one’s choice. In fact, in 2014, Medicaid’s facility reimbursement rate averaged $24.26/day less than the cost of providing care. For this reason, it’s increasingly common to find facilities which accept private-pay only. Health care delivery in this country is becoming a two-tier system.
Finally, you will likely have roommates. People whom you might never have associated with in your former life are now your companions for the rest of it. However, recent changes to Medicaid have made it more attractive. In the past, one of its biggest drawbacks was that it traditionally reimbursed only for nursing home care, the least desirable of all long term care settings. In a move called "rebalancing", states are increasingly paying for Medicaid home care services.
Many of the wealthier people who take the Medicaid planning route do so even though a long-term care insurance alternative exists. Many elder law attorneys today counsel their clients to consider insurance first, before orchestrating any financial moves to improve their eligibility for Medicaid.
But what if one cannot qualify for LTC insurance coverage? If you cannot qualify for any insurance coverage-- and a competent agent can recommend several alternatives besides traditional LTC insurance-- then consulting an elder law attorney for advice could be worthwhile.
Medicaid is currently facing serious financial problems, despite the best efforts of the American Recovery and Reinvestment Act of 2009 (ARRA), which boosted federal funding for Medicaid to the states for several years, through June 30, 2011. Now the Affordable Care Act (aka "Obamacare") increases Medicaid enrollment with (again) some financial help from the federal government to spur take-up.
But these are temporary band-aids on a situation that cries out for long-term fiscal solutions. The federal government may be able to artificially prop up these programs for a time, but states face tougher decisions ahead.
Take Illinois, for example. The Deficit Reduction Act of 2005 had been around for years. It required states to adopt more stringent Medicaid rules. Because financial times were good in the middle of the first decade of the 21st century, some states chose to drag their feet on implementation. (You have to remember the opposition to the DRA changes at the time. AARP said it would "seriously threaten the ability of millions of Americans to get needed long-term care services" and "will deny millions of older and disabled Americans the long-term care services they need and leave them vulnerable to substandard care.")
But times change. Illinois finally adopted the Medicaid rules in 2010, nearly five years after the federal government enacted them. These tougher eligibility standards were meant to save states money, and even long-time holdout Illinois was not immune to the financial decline of state budgets. Now more than a decade after it could’ve launched its Partnership program, Illinois is starting to show signs of a thaw in that regard as well.
Today, Medicaid accounts for over 40 percent of all long term care spending. And because this serves only a small number of beneficiaries overall, look for states to consider making eligibility much harder for potential applicants. Some have flirted with the idea of increasing the number of ADL’s required. Others have seriously considered opting out entirely. One way or another, states must get their budgets under control.
Balancing a State Budget
To understand the state of Medicaid today, it is important to grasp the numbers that state legislators look at every year. In good economic times, there is generally enough revenue to fund the program and little or no budget alteration needed. But when times are tough (and the Great Recession has seen America in its most precarious financial situation in decades), the job becomes exceedingly difficult.
States—unlike the federal government—must balance their budgets. So as a state legislator, when you show up to the year’s legislative session knowing you have to cut a few billion dollars to make it all work, you know you are going to hear from every potential group whose funding may be cut or eliminated entirely.
Let’s look at the long-term care picture with regard to Medicaid since long term care benefits are responsible for a majority of its expenditures. If Medicaid were a business and you were its chief financial officer looking to cut expenses to get out of the red, these are the facts which would stand out in blinking neon:
- The elderly and disabled comprise one-quarter of the Medicaid population (25% of 62.7M total enrollees), but account for about 2/3rds of spending (65% of $346.5B).
- Although Medicaid pays less than 1/3rd the cost of nursing home care—30.9% of the dollars in 2011—it covers 2/3rds of all residents. Because people in nursing homes on Medicaid tend to be long-stayers, Medicaid pays something toward nearly 80% of all patient days.
- The 5% of Medicaid beneficiaries with the highest costs account for over half of all spending.
This trend is unlikely to reverse itself. Desperate states may be forced to take frantic measures, even going so far as withdrawing from participation in Medicaid entirely. They are required to participate only if they want federal funding. Some states have crunched the numbers to see whether they should abandon the Medicaid program and instead construct their own, less costly health insurance programs for the poor.
Elected and appointed officials in several states, including Washington, Texas, South Carolina, Wyoming, and Nevada have all publicly floated the idea. Wyoming found that Medicaid accounts for 63 percent of its nursing home revenue.
In January 2010, the governor of Nevada asked staff members to explore whether the state would be better off leaving the Medicaid program. The state sought to use its own money to continue providing care for those who might otherwise be left behind, including the seriously ill and disabled.
The state of Virginia actually proposed a bill in its legislature that required it to withdraw from Medicaid upon passage of the Patient Protection and Affordable Care Act (PPACA), the recent health care reform law. Although the bill was later tabled by committee, the move was prescient.
The states are hooked on federal matching funds. They need the money, but they have to spend money to acquire it. This creates a vicious circle. Generally, for each $1 a state spends on its own Medicaid program, the federal government matches anywhere from 50-cents to 74-cents based upon a state’s per capita income using a formula called the FMAP (“Federal Medical Assistance Percentage”). On an overall basis, the Federal government funds about 57% of Medicaid spending overall.
Governors are constantly lobbying the federal government for leeway in administering their programs, with varying degrees of success. So-called “block grants” were requests by the states (generally right-leaning) for total freedom in how their money could be spent. Greater success was found in working with the Obama Administration’s desire to try “Managed LTSS”. About a dozen states were awarded grants to design more “person-centered” plans that would better manage costs and integrate care than traditional fee-for-service models. It was hoped this would contain costs for the exorbitantly expensive “dual eligible population” (beneficiaries on both Medicare and Medicaid).
Working at cross-purposes to the states is a federal requirement called “Maintenance of Effort”. MOE was used in the American Recovery and Reinvestment Act (ARRA), the upshot being that if a state wanted federal stimulus funds it could not tighten its Medicaid eligibility requirements. During times of recession or high unemployment, when greatest strain is put on the system, states will want to tighten eligibility in order to constrain their budgets, but MOE prevents this.
The Affordable Care Act expanded access to Medicaid to an estimated eighteen million Americans, and governors were very concerned how they’d pay for this. To sweeten the deal, the federal government agreed to raise its matching rate to 100% through 2016 and 90% thereafter (to finance the newly-eligible adults). Still, nearly twenty states opted-out of the Medicaid expansion entirely, depriving their citizens of this source of health insurance.
If history is any guide, it's worth remembering that when Medicare and Medicaid were first introduced over 50 years ago in 1965, the programs were not universally adopted by the states then either. Just as Obamacare's "Medicaid expansion" is taking years to spread in fits and starts, so too did the original program many decades ago, until today these entitlements are considered a fabric of our nation's healthcare delivery and financing system.
But as responsible Americans planning for our retirements, the other lesson is to do so not by looking through the rearview mirror at the way things have always been done, but through the windshield. No one believes these programs can sustain themselves indefinitely in their present form.