The cost of long term care in this country has been spiraling for years, forcing families and their advisors to become innovative about how to finance the treatment of long term disease and disability. The problem has been wind in the sails of those selling long term care insurance and other financial instruments helpful in preparing for retirement. It has also forced many people to seek counsel regarding Medicaid, the federal government’s health care program for lower income individuals, including impoverished senior citizens receiving long term care services.
Because Medicare and private health insurance plans generally do not cover long term care expenses, many individuals pay for such care out of pocket, from their personal assets. As a result long term care often exhausts people’s lifesavings. Given this risk, those worried about incurring long term care expenses should strongly consider long term care insurance policies. But if these policies prove unaffordable, Medicaid may be the only long term care coverage available. Absent major governmental reforms that reduce the cost of long term care, Medicaid assistance will remain a necessary option for some families.
However, Medicaid has become more difficult to obtain since the passing of the Deficit Reduction Act (DRA), signed by President Bush in February 2006. In several important ways, the law has restricted the means by which individuals can qualify for Medicaid long term care benefits.
Prior to the DRA, an individual applicant for Medicaid long term care assistance could not possess more than $2,500 in assets, excluding a home, a car, a life insurance policy with a face value of less than $1,500, and other miscellaneous assets. In addition, the spouse of the applicant could maintain a portion of the couple’s income and assets.
Essentially, the law allowed an individual to qualify for Medicaid benefits by “gifting” savings and assets to family members. There was a catch, however: If the Medicaid applicant divested assets (i.e., a second home or high value assets) at below fair market value within three years of applying, the individual would be penalized. The penalty took the form of a delay in eligibility for benefits. The delay would begin at the time the transfer took place, and its length depended on the value of the assets divested, or “gifted”, in that three-year “look-back” period. These restrictions effectively prevented individuals from giving away or shielding their wealth within three years of applying for Medicaid.
The DRA has enhanced these restrictions by lengthening the look-back period to five years. In addition, the penalty for divesting assets below market value within that five-year span is now much more consequential. The period of delay in eligibility begins to transpire only after the applicant is institutionalized (i.e., in a nursing home) and becomes poor enough to be otherwise eligible for Medicaid benefits.
Thus, relying on Medicaid without an in-depth knowledge of its technical rules can be a dangerous move. If a Medicaid applicant has “gifted away” assets within the five year “look-back” period, the applicant may be precluded from receiving any Medicaid benefits until he or she has already exhausted nearly all his or her lifesavings. Be especially careful when making usual and customary gifts to family members for such things as tuition payments or the down payment for a first home, as these may inadvertently trigger costly penalties for the unwary.
Medicaid should be viewed as a last resort when considering how to pay for one’s possible long term care in the future. Furthermore, federal funding for the program cannot be guaranteed given the many budgetary difficulties facing the country. Preparing for retirement in general and long term care expenses in particular requires savvy use of many strategies, including, in some instances, private long term care insurance. No family facing long term care – and most families at some point do – should plan to rely on Medicaid without carefully considering their financial needs, assets, health care prognoses, and expectations for care.