Medicaid and the Deficit Reduction Act of 2005
Michael Gilfix and Bernard A. Krooks
2008 - When President Bush signed the Deficit Reduction Act of
2005 (DRA) on February 8, 2006, a stated goal was to reduce the
federal Medicaid budget by $5 billion over the next 10 years.
The law’s supporters view the changes as a way to reduce
expenses and close loopholes. Its opponents see the measure as
placing a unfair burden on older Americans, because it will make
it harder for them to receive assistance from Medicaid when they
face the substantial cost of nursing home care.
The DRA has
been implemented in all but a handful of states. Nevertheless,
it remains to be seen how specific DRA provisions will be interpreted
planners must consider this time to be a transition period. The
DRA has yet to be consistently implemented, and the harshest critic
of the DRA legislation, the Democratic party, is now in control
of Congress. The DRA passed into law by the narrowest of margins;
the Senate vote witnessed a 50–50 tie, with Vice President
Cheney casting the tie-breaking vote. In the House, the DRA became
law by a 216–214 vote. It is therefore possible that selected
provisions of the DRA may be amended or repealed in coming years.
Critical Role of CPAs
preparers generally meet with individuals annually, they are more
likely to become aware of the need for long-term care and asset-preservation
planning than other professionals, such as an individual’s
attorney. If significant health issues arise, a CPA may be in
a position to raise issues of tax deductibility of medical expenses,
as well as other long-term care planning issues. It becomes an
opportunity for affirmative, protective planning. If necessary,
CPAs can also play a role in referring individuals to an attorney
specializing in eldercare law.
need not become fluent in the intricacies of federal Medicaid
law, they should be aware of major changes, such as the DRA, in
order to develop a sound elder-care plan. The most relevant provisions
of the DRA are noted below, along with the steps that can be taken
to protect an individual’s assets if threatened by long-term
is a government program designed to ensure the delivery of fundamental
healthcare services to elders, individuals with disabilities,
and others who would otherwise be deprived of such care. Significantly,
Medicaid is the only federal program that can pay all or a portion
of the cost of long-term nursing home care.
and some financial advisors mistakenly believe that Medicare pays
the ongoing costs of a nursing home. As a result, many elders
fail to save for these costs or obtain long-term care insurance.
Without planning or insurance, elders may have to pay $6,000–$15,000
per month out of their own pockets. This has given rise to last-minute
attempts to access government-financed healthcare.
is a needs-based program. Depending on the approach taken in a
particular state, an individual must have extremely limited assets
(typically between $2,000 and $4,500) to qualify. In other states,
there also is an income test, and if the individual’s income
exceeds a nominal amount (approximately $1,900 per month), Medicaid
is presumptively denied, notwithstanding the individual’s
inability to pay for the cost of care.
DRA, the Omnibus Budget Reconciliation Act of 1993 (OBRA) set
forth the rules with regard to Medicaid eligibility and restrictions
with regard to asset transfers. The DRA significantly changed
many of those rules. Despite the DRA’s restrictions, with
proper planning assets can be preserved while qualifying for Medicaid.
in Asset Transfer Rules
DRA, asset transfers presumptively resulted in a period of Medicaid
ineligibility if they were for less than fair market value. If
a gift was made within the prior 36 months (the look-back period),
it would generate a period of Medicaid ineligibility. A gift made
12 months prior to admission to a nursing home in the amount of
$15,000, for example, would have generated a three-month period
of ineligibility if the state’s average cost of care was
$5,000. Note that such a gift would present no barrier to eligibility
if the application had been filed at the time of institutionalization,
because the period of ineligibility commences on the date of the
gift. So this three-month period of ineligibility would have run
out nine months beforehand.
DRA, the period of ineligibility commences not on the date of
the gift, but on the date that the individual would already be
receiving institutional care (presumably in a skilled nursing
facility), has applied for Medicaid, and has demonstrated eligibility
but for the gift previously made. This look-back period has also
been extended to 60 months. Regardless of whether the $15,000
gift was made one year ago, three years ago, or up to five years
ago, it would generate a three-month period of ineligibility commencing
on the date of application for a nursing home resident.
If an individual
is denied Medicaid for three months and has no money to pay the
private cost of care, the nursing home is left “holding
the bag.” It has no source of reimbursement, and is deprived
of the opportunity to transfer the resident from the facility,
because no other nursing home would accept her. Such a scenario
led the authors to refer to the DRA as the “Nursing Home
Bankruptcy Act of 2005” in a prior work (Michael Gilfix
and Bernard A. Krooks, “Throw Mama from the Train: The Deficit
Reduction Act of 2005 Abandons Our Nation’s Elders,”
Trusts & Estates, March 2006).
understand the impact of this provision in the DRA, consider the
following example: A grandmother gifts $25,000 gift to a grandchild
to make the down payment on a new house. If the gift was made
on or after February 8, 2006 (the implementation date of the DRA
transfer rules), she would be denied Medicaid eligibility for
five months using the prior assumption, if she applies within
five years of making the gift. The law previously provided that
transfers made without any intention to qualify for Medicaid coverage
are to be excused; while this continues to be the case, state
Medicaid programs have consistently rejected this defense, notwithstanding
evidence of innocent intent.
The DRA acknowledges
such problems by allowing an “undue hardship” showing
that can result in eligibility, notwithstanding asset transfers
that would deny eligibility. Undue hardship is established when
the application of the transfer of asset provisions would deprive
the individual of medical care such that the individual’s
health or life would be endangered, or such that the individual
would be deprived of food, clothing, shelter, or other necessities
hardship concept is by no means new, yet advocates across the
country report that state Medicaid programs consistently and perfunctorily
deny undue hardship defenses and assertions. Moreover, state Medicaid
programs are notoriously slow in ruling on such claims, wth some
cases taking over a year.
The DRA does
allow a nursing home to file an undue hardship claim if it has
the consent of the resident or the resident’s representative.
The mere filing of the claim may result in Medicaid approval for
a period of up to 30 days. Given the typical delays in processing
undue hardship claims, this is a modest reprieve. The DRA calls
for enhanced procedures to ensure a timely response and the right
to appeal, but only time will tell what comes of it.
point. Unless individuals have long-term care insurance
or are able to self-insure, the DRA must be kept in mind when
answering questions about the implications of gifting. The $12,000
annual gift tax exclusion does not apply to Medicaid planning.
Middle-class clients, in particular, must be advised of the Medicaid
implications of such gifts. An amount of $48,000 in gifts made
to four individuals will typically be aggregated, resulting in
an initial Medicaid period of ineligibility. This will remain
a serious problem for the five-year look-back period.
there is no exception for charitable gifts. Under the DRA, a gift
to a charitable organization would affect Medicaid eligibility,
unless it can be proven that the gift was not made for such purposes.
Many states have already implemented waivers for “de minimus
gifts” (e.g., $500 or less).
Transfers Remain Intact
The DRA makes
no changes in certain provisions of OBRA that allow gifts to identified
categories of individuals. For example, any amount of money can
be gifted from one spouse to another, or to a child who is blind
or disabled. A residence may still be transferred to a spouse,
a minor, a blind or disabled child, a sibling who has any equity
interest in the residence and has lived there for a year beforehand,
or a caretaker child. To qualify for the caretaker child exception,
the child must have lived in the residence with the parent for
at least two years immediately prior to when the parent entered
the skilled nursing facility.
on Home Ownership
has long allowed an individual to retain home ownership without
imposing any barriers to eligibility. A residence of any value
has been “exempt” and excluded when determining eligibility.
The DRA very dramatically changes this rule.
The DRA allows
a residence to be exempt for the noninstitiutional spouse (i.e.,
the community spouse) only if the nursing home resident’s
equity interest in the home is under $500,000. The states have
the option of increasing this limit up to $750,000, and a few
states have opted for a higher limit.
In some regions,
it can be difficult or impossible to find a residence that is
valued as low as $500,000. (In the San Francisco Bay Area, for
example, the median home value is $800,000.) Virtually all elderly
homeowners in such expensive real estate markets are therefore
threatened with the loss of their residence if they cannot otherwise
pay the cost of nursing home care. The DRA acknowledges that this
provision presents a problem, but merely offers alternative solutions,
such as a reverse mortgage or a home equity loan.
have long been utilized as a means of protecting some portion
of an elder’s estate when nursing home care becomes unavoidable.
The DRA solidifies the role of annuities so long as several requirements
of an immediate annuity (i.e., with no cash surrender value) is
not a transfer because fair market value is received in return.
An appropriately crafted annuity must be “actuarially sound,”
providing for equal monthly payments scheduled within the life
expectancy of the annuitant, as prescribed by the Centers for
Medicare and Medicaid Services (CMS; www.cms.hhs.gov).
Medicaid program must be named as the primary remainder beneficiary,
to the extent that Medicaid benefits have been paid for the benefit
of the annuitant.
A single individual is entering a nursing home and has $100,000.
Upon entry, she gifts $50,000 to her children. She also purchases
a $50,000 annuity that satisfies all the DRA’s requirements.
structures her annuity to last for 10 months, which is the period
of ineligibility resulting from the $50,000 gift. She then applies
for Medicaid. Because she is now penniless, she will be determined
eligible for Medicaid but for the $50,000 gift. Because she satisfies
all of the prerequisites—she is in the nursing home, applies
for Medicaid, and is otherwise eligible—the period of ineligibility
commences immediately and will last for 10 months. Upon the expiration
of the 10-month period of ineligibility, her annuity will be exhausted
and Medicaid eligibility will commence. Proper planning allowed
this individual to save $50,000 for the benefit of her children.
The DRA provides
for the dramatic expansion of long-term care insurance partnership
programs. Originally developed by the Robert Woods Johnson Foundation,
such programs, before the DRA, were firmly established in only
four states: California, Connecticut, Indiana, and New York. Since
the passage of the DRA, many other states have filed plans for
the implementation of long-term care insurance partnership programs.
are designed to induce elders to purchase long-term care insurance
by protecting their assets (resources) and income, up to 25% above
the community spouse allowance.
plan allows an individual to protect assets while qualifying for
Medicaid if a partnership policy was purchased and its benefits
exhausted. For example, an individual might purchase a policy
that provides for $150,000 in long-term care insurance benefits.
If she enters a skilled nursing facility and exhausts her $150,000
policy, she will be allowed to retain $150,000 in nonexempt assets
while qualifying for Medicaid. If she did not have a partnership
plan, she would be denied Medicaid eligibility until her assets
were reduced to approximately $2,000. Moreover, this $150,000
would be protected from any lien or estate claim that might be
asserted by the state at the time of her death. (All states are
federally mandated to have “estate recovery” programs
to recover costs from the estates of deceased Medicaid recipients.)
believe that the DRA is a positive step for the growth of long-term
care insurance. It calls upon the National Association of Insurance
Commissioners (NAIC) to assist state Medicaid programs in developing
uniform standards. This should enhance the likelihood that partnership
plans will be portable across state lines, which removes a major
deterrent to the success of partnership plans.
Care Retirement Communities
communities, generically known as continuing care retirement communities
(CCRC), are upscale facilities that typically offer three levels
of care: independent living, assisted living, and nursing care.
The DRA affects CCRCs in two ways.
change reflects successful lobbying by the CCRC industry to effectively
overturn a Maryland court case. In Oakcrest Village Inc. v.
Murphy [379 Md. 229 (2004)], provisions in a CCRC contract
that prohibited a resident from transferring assets before applying
for Medicaid coverage were ruled a violation of federal Medicaid
law, which provides that a Medicaid-certified provider of long-term
care may not condition entry upon a promise to pay the cost of
care privately for a certain period of time. The CCRC provision
in question had precisely this effect. The DRA provides that such
anti-alienation contractual provisions are enforceable and do
not violate Medicaid law. Such CCRCs may, therefore, require the
exhaustion of all assets declared upon entry before a Medicaid
application may be successfully filed. The impact of this provision
is limited in practice, because most CCRCs do not accept Medicaid.
Those that do are typically religious-based or nonprofit in nature.
provision in the DRA related to CCRCs allows a Medicaid program
to count the funds conveyed to the CCRC upon entry as available
assets, if the individual can use the funds to pay for the cost
of care in the CCRC if she is otherwise unable to do so, if a
refund will be provided upon death or termination of care, and
if no ownership interest in the community is conveyed by virtue
of the entrance fee.
point. CPAs can and should review the financial
statements of CCRCs when elders consider a lifetime’s investment
in such a community. Some life care communities have gone bankrupt
in prior years, leaving elders without assets and with little
recourse. The authors routinely advise such individuals to have
their accountants review the CCRC balance sheets. This presents
an opportunity to advise or warn elders about some typical problems
in CCRC contracts that relate to the quality of life. For more
information, see Michael Gilfix and Bernard A. Krooks, “Continuing
Care Retirement Communities: Issues for Elder Law Attorneys,”
The Elder Law Report (April 2006).
mandates a number of restrictive changes, the DRA does not represent
a paradigm shift in the world of Medicaid and asset-protection
planning. Beyond the scope of this article is a delineation of
the planning steps that remain available to protect assets if
an elder enters a skilled nursing facility, as well as a detailed
analysis of those options under the laws and programs of each
must nevertheless be aware of how the DRA narrows the asset transfer
rules, the requirements with regard to annuities, the allowances
for home ownership, and the ability to retain other assets. Elder-law
attorneys and competent insurance professionals, specializing
in elder-care issues, are helpful partners in a financial advisor’s
efforts to protect elderly individuals.
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Gilfix, JD, is an attorney/principal of Gilfix & La
Poll Associates, Palo Alto, Calif. He is a co-founder of the National
Academy of Elder Law Attorneys (NAELA), and a Certified Legal Specialist
in Estate Planning, Trust and Probate Law.
Bernard A. Krooks, JD, CPA, LLM (Tax), CELA, is
a founding partner of Littman Krooks LLP, New York, N.Y. He is a
former president of NAELA and a Certified Elder Law Attorney.