Financial Awareness Bulletins

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Vol. XIV, No. 5
May 2006

The Deficit Reduction Act of 2005: Impact on Medicaid and
the Payment of Long-term Care Expenses

Summary

Medicaid, a government-sponsored health insurance program for eligible, low-income individuals in each state, is being affected by the Deficit Reduction Act of 2005. The Act has a major impact on how Medicaid pays for long-term care services. As a result, many individuals who anticipated being able to rely on the Medicaid program for payment of future long-term care expenses will no longer be eligible. Reputable financial planners recommend long-term care insurance as a viable approach to help pay for long-term care.

INTRODUCTION

This Financial Awareness Bulletin provides an overview of how the Deficit Reduction Act of 2005 (DRA) affects Medicaid and the payment of long-term care expenses.

Medicaid is a government-sponsored health insurance program for eligible, low-income individuals in each state. Over the past several years, the cost of Medicaid claims has risen so significantly that Congress has taken steps to limit/reduce certain Medicaid benefits. Among those steps are provisions of the DRA, which have a major impact on how Medicaid pays for long-term care services. As a result, many individuals who anticipated being able to rely on the Medicaid program for payment of future long-term care expenses will no longer be eligible.

Medicaid Program and Long-Term Care

The Medicaid program pays for long-term care and other health services for eligible, low-income individuals. Unfortunately, over the years, Medicaid has been exploited by a growing number of people who, in actuality, can afford to pay for health and long-term care services themselves. This exploitation typically occurs when financially stable individuals intentionally divest themselves of their estate assets (often by transferring them to relatives) in order to then qualify for Medicaid and taxpayer-funded nursing home services.

Such abuses of the Medicaid program have created a fiscal “black hole” that jeopardizes the integrity of a program intended for those most in need. According to the Center for Long-term Care Financing, a 2004 report released by the National Association of State Budget Officers shows that “Medicaid is crowding out other parts of state budgets” and for the first time states are expending more dollars on Medicaid than on elementary and secondary education.

Medicaid and Financial Planning

Some misguided elder care lawyers and financial planners inappropriately market “Medicaid planning services” as if Medicaid is a legitimate part of a sound financial plan. What many people don’t realize is that the quality of care and facilities provided through Medicaid is often substandard to that given to private-pay patients. As Stephen Moses of the Center for Long-term Care Financing pointedly states, “No clear-thinking person in possession of all the facts would coordinate benefits with a welfare program going bankrupt.” Marilee Driscoll, author of The Complete Idiots Guide to Long-term Care Planning, underscores Medicaid’s reputation: “It’s quite breathtaking the difference between the private pay rooms and Medicaid rooms [in nursing homes].” The reality is that Medicaid is meant only for the neediest citizens.

THE DEFICIT REDUCTION ACT OF 2005

In order to qualify for the Medicaid program to pay for long-term care services, an individual must meet multiple, stringent requirements. With the recent passage of the DRA, meeting the requirements has become even more difficult, especially with regard to the disposition and transfer of personal and estate assets. Here are just a few of the more significant changes that took effect in February 2006.

The “look-back” period for all asset transfers has been extended from three to five years from the date of application for Medicaid. Asset transfers within the five-year time frame may disqualify an individual from receiving Medicaid assistance.

The penalty period (waiting period before Medicaid pays for care) will now commence with the date of eligibility for Medicaid rather than the date of asset transfer, and assistance begins only after personal assets first have been spent down.

Multiple smaller transfer amounts will now be considered as a larger single transfer when calculating the penalty period. These amounts may include gifts to charities and churches, and even IRS approved tax-free distributions to children.

There is now a $500,000 cap on the amount of home equity (house and contiguous property) that can be excluded from Medicaid asset calculation. Besides those with more expensive residences, farmers and people with homes built on larger properties will feel the impact of this provision.

Annuities, which are sometimes used to “shelter” assets, must now list the state as the remainder beneficiary.

More restrictive rules now apply to the calculation of acceptable monthly income for a spouse. More assets must be spent down.

Medicaid laws and regulations are extremely complex and change frequently. Few experts believe the DRA will be the final action by state and federal policy makers to preserve the original intent of the Medicaid program. In the years ahead, more changes can be expected.

Planning for Long-Term Care

Planning for the future should include establishing a cost-effective and reliable strategy for preserving assets and protecting loved ones. Reputable financial planners recommend long-term care insurance as a viable approach to help pay for long-term care.

NEA MEMBER BENEFITS

NEA members, their spouses or domestic partners, parents, parents-in-law, and adult children can obtain long-term care insurance through the NEA MemberCare® Long-Term Care Insurance Program, underwritten by Mutual of Omaha Insurance Company. For more information, call toll free, 1-800-884-2675 (8 a.m. - 5 p.m., ET).

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