Roy B. Oser, Esq.

Congress sought to correct an abuse of Medicaid by some affluent seniors by enacting the Omnibus Budget Reconciliation Act of 1993 ("OBRA '93). OBRA '93 tightened the prohibition of transfers of assets in order to qualify for Medicaid coverage of nursing home care. (Medicare does not pay for long-term care, and Medicaid will pay for it only for people who have no money to speak of.) But more recent legislation, the Deficit Reduction Act of 2005 ("DRA"), more than corrected such abuse by elders and could result in abuse of elders.

Before OBRA '93, well-to-do elderly folk facing the prospect of needing nursing home care could game the system by giving away their wealth. Only their Social Security payments and other income would go toward the cost of the nursing home, and Medicaid would pay the rest. The cost of Medicaid was then, as now, borne in part by the federal government and in part by the states.

Newspaper articles would arouse outrage at this exploitation of Medicaid by the "newly minted poor." Articles like "Nursing Homes Drain Connecticut Budget" (Kirk Johnson, the New York Times, May 14, 1991) and "New York Medicaid Strained by Newly Poor" (Kevin Sack, the New York Times, March 22, 1992) would tell of exasperated welfare officials decrying this "expropriation" of Medicaid, a program designed for the poor, by the "newly poor." Some of these newly poor seniors were apparently enjoying amenities reminiscent of a country club in nursing homes that charged more than most.

But under OBRA '93, to summarize and simplify, if an individual applying for Medicaid coverage for nursing home care had made a gift within the preceding 36 months (60 months for transfers involving certain trusts), a period called the "look-back" period, the individual would be ineligible for Medicaid for a certain amount of time. That amount of time would be the number of months the gift would have paid for nursing home care. Gifts for this purpose included (and still include) inadvertent gifts - that is, the transfer of property to another for less than fair market value.

Accordingly, the period of ineligibility for an individual who had made a gift of $12,000 within the look-back period would result in that individual's being ineligible for Medicaid for about two months, depending on the state in which the individual resided. But (and this is a big "But"), the period of ineligibility would run from the date of the gift. This meant that while wealthy individuals could no longer give their wealth away and expect to qualify for Medicaid right afterward, the period of ineligibility for smaller gifts would be shorter and would generally have expired before the gift-giver applied for Medicaid.

To illustrate, under the rules of OBRA '93, an individual in a nursing home applying for Medicaid could qualify in the following sad scenario: Grandpa gave $12,000 to each of his two grown children to help them save for their children's college education. He also gave $5,000 that year to charity. Then he had a stroke and paid for home health care and nursing home care for a few years until his funds were used up.

If Grandpa's gifts were made more than 36 months before he (or someone on his behalf) was obliged to apply for Medicaid, they would not bar his immediate eligibility. Even if his gifts were made within 36 months preceding his application (the look-back period), they would not bar his immediate eligibility, for the following reason: depending on the state in which Grandpa resided, his $29,000 in gifts would have paid for around three to five months in a nursing home. The gifts were made before Grandpa had his stroke and spent a few years using up his funds for home health care and care in a nursing home. As a result, the period of his ineligibility for Medicaid, running from the date of the gifts, would have expired by the time Grandpa's Medicaid application was made.

Sad as Grandpa's physical (and financial) condition is, in our illustration, this scenario is likely to be a sadder one in the future. On February 8, 2005, Congress enacted the DRA. (The vote in the Senate was 51 to 50, with Vice President Cheney casting the deciding vote.) If Grandpa had made his gifts before that date, they would not be subject to the rules of the DRA. If he made them on or after that date, however, then, depending on when and how his state implements the new law (the issue is somewhat confused at this point), the rules governing his Medicaid eligibiity will have changed as follows:

Under the DRA, to summarize and simplify, the look-back period for his gifts will have been extended to 60 months, from 36 months, so more gifts made by Grandpa could come into play. This would not be the worst part of the story, however, for Grandpa. The worst part would be that his period of ineligibility for Medicaid, which would be calculated on the basis of the total amount of gifts he made during the five-year look-back period, would run from the date of his application.

Consequently, no matter how short - or long - the period of Grandpa's ineligibiity, there will be a delay, after Grandpa has exhausted his own funds, before the nursing home can be reimbursed for his care. That delay will be the number of months the total amount of Grandpa's gifts would have paid for that care. What will happen to Grandpa during that period? Will the nursing home discharge him? To where? Remember, Grandpa needs skilled nursing care. Will the state step up to the plate?

One of Congress' goals in enacting the DRA may have been to reduce the federal cost of Medicaid by shifting more of the cost of long-term care to the states. But a clear goal of Congress was to induce people to buy long-term-care insurance. Long-term-care insurance is expensive, however, especially for those who buy it late in life. When these people were younger and could have bought it for less, the need for it may not have been as clear.

Another significant effect of the DRA on Medicaid eligibility rules concerns home ownership. Prior to the DRA, the value of an individual's home was usually exempt from application of the Medicaid look-back rules. If Grandpa was ever able to return home, he would have a home to go to. Under the DRA, however, a person with more than $500,000 in home equity - states may increase this threshold to $750,000 - is ineligible for Medicaid coverage for nursing home care, unless the home is occupied by a spouse or a disabled or minor child.

Let us say that in our scenario there is a Granny, who is living in their house and whose financial resources have been diminished by Grandpa's health care costs. The time comes when she needs nursing home care. If the house in which she and Grandpa lived for many years has appreciated in value to the point where it exceeds the "cap" allowed by the Medicaid eligibility rules ($500,000, unless the state has raised it), she will be in a bind. Even if she can get a reverse mortgage or home equity loan to reduce her equity in the house, she will lose the house eventually.

Experts in estate planning may be able to mitigate some of the effects of the DRA, but that is a matter definitely best left to the experts. All of them will stress the importance of early planning. One lawyer has been described in a newspaper article as suggesting that a homeowner take out a mortgage to reduce equity in his house ("New Medicaid Rules on Home Ownership," Jay Romano, the New York Times, February 12, 2006). When asked what the homeowner should do with the proceeds, the lawyer is quoted as replying, "You could give it to your kids and hope you won't need Medicaid in the next five years. Or you could take a trip around the world."

Middle-class seniors without the great wealth needed to self-insure and without sufficient long-term care insurance just have to hope that if they have the misfortune to suffer from a long-term illness, that it will at least be five years after they have made a charitable donation, or given gifts to their children or anyone else. Otherwise, they may not only have to "spend down" all their assets to qualify for Medicaid coverage for nursing home care, but they may face the prospect of being put out by the nursing home (to where? on the street?) until the period of ineligibility expires.

Unless Congress has a change of heart.