Opportunities for State Medicaid Reform

Policy Reports | Health

No. 288
Thursday, September 28, 2006
by John C. Goodman, Michael Bond, Devon M. Herrick, and Pamela Villarreal

Paying for Long-Term Care

Although long-term care is an optional benefit, it is one of the fastest growing areas of state Medicaid spending.  Every state provides this benefit - and not just to the poor.  Medicaid is paying for the long-term care of a growing number of middle-class seniors.  When they retire, most Medicare enrollees do not meet Medicaid income and asset tests for long-term care coverage.  However, Medicare has annual and lifetime maximum benefits for nursing home care, which it provides mainly for rehabilitation following injury, illness or surgery.  Seniors in need of long-term care who max-out their Medicare coverage, or those who need custodial care rather than medical treatment, must pay out of pocket.  Seniors who exhaust their assets paying for nursing home care may be eligible for Medicaid, if their incomes are low enough.  This provides incentives for seniors to arrange their financial affairs just to meet asset and income tests for Medicaid long-term care benefits. 

“Some seniors transfer assets to their children to qualify for Medicaid.”

There are several methods that allow individuals to legally impoverish themselves and qualify for Medicaid.  They can 1) transfer assets to their children, 2) divorce, and 3) set up irrevocable (Miller) trusts.  They must plan in advance and make financial arrangements several years before the need arises.  When a state is determining eligibility, federal law allows it to "look back" and include as assets any funds that a senior transferred within five years of applying for long-term care benefits.173  

An entire industry of attorneys practicing "elder law" has sprung up in recent years to help seniors transfer assets in order to qualify.  However, it is difficult to identify abuses because most asset transfers by seniors are not made to skirt Medicaid asset tests.  According to the 2002 Health and Retirement Study of the National Institute on Aging, one in five elderly households (22 percent) transferred assets in the prior two years.174

Seniors are often advised to have enough financial assets to pay for a year's worth of care.  Good-quality nursing homes can turn down individuals who rely solely on Medicaid for their long-term care and cannot pay for the first year.  But once a year's worth of assets are spent down, a nursing home cannot legally kick someone out.

A growing number of seniors have established Miller Trusts, also known as Qualified Income Trusts.175   Seniors may assign their investment income to the trust, which is designed to limit how the funds are distributed.  Trust funds can be used to make certain payments including insurance premiums, support for a spouse and $60 per month for personal needs.  These trusts effectively allow people to hold back income that otherwise would reduce Medicaid's long-term care costs.

Encouraging Community Care over Institutional Care.  Medicaid encourages institutional care over home care.  Although many state programs are changing, they could increase their use of less-expensive home care.176  Home care often costs only half as much as a nursing home.177  In some high-cost areas, the cost savings from home care may be even greater.  For instance, home care in Washington, D.C., costs less than one-third as much as nursing home care.  In Manhattan, a year of home care costs only about one-fifth as much as a year-long stay in a nursing home.178  Home providers offer a range of medical services, including occupational or physical therapy. 

Ohio, Oregon, Washington and Wisconsin expanded home- and community-based care to help control rapidly increasing institutional care expenditures.  These states were able to serve more people while controlling the growth in overall long-term care spending.  Between 1982 and 1992 the combined total of nursing home beds in the three states declined 1.3 percent, while total nursing facility beds nationwide increased 20.5 percent.179

“Reverse mortgages could be used to pay for nursing home care.”

Ohio's Commission to Reform Medicaid has proposed rewarding families who choose lower-cost options that save the state money, such as care in the home or community.  This would allow an elderly parent living with family members to receive a few hours of home or personal care per week that could delay their entry into a nursing home.  The financial incentive could be to exclude some assets from eligibility tests or shield them from cost recovery.180

Private insurance is available to cover nursing home and in-home care, but few seniors purchase it.  There are limited state programs to encourage more private coverage.  A pilot project in New York, Connecticut, California and Indiana called the Partnerships for Long-Term Care (PLTC) provides financial incentives to purchase long-term care insurance.  The plan allows people to shelter their assets by purchasing a qualifying private insurance policy with a defined amount of coverage.  When a policyholder enters a nursing home, he or she first relies on the insurance.  When the insurance is exhausted, special eligibility rules allow them to receive Medicaid benefits while retaining assets equal to the value of the policy. 

In California and Connecticut Partnership programs, individuals purchase coverage from competing private insurers.  For each dollar of coverage, they protect a dollar's worth of assets.  For instance, a long-term care policy with $120,000 in benefits allows an individual to shelter $120,000 in assets and still qualify for Medicaid long-term care.  Since most nursing home stays are less than one year, very few of those who have purchased policies have applied for Medicaid benefits. 

The Deficit Reduction Act allows all 50 states to establish partnership programs.  Individuals who purchase such policies can access Medicaid benefits after their insurance runs out - without the means testing required for non-insured applicants.181

Encouraging the Use of Assets to Finance Long-Term Care.  There are more than 13 million households headed by people aged 62 years or older.  Many seniors own their homes but are reluctant to tap their equity to pay for nursing home care out of fear of losing their homes.  However, they could obtain a reverse mortgage, which is a home loan that does not have to be repaid as long as the owner (which could include the spouse of a nursing home resident) lives in the house.182  More than six million of these households could access more than $72,000 in home equity using reverse mortgages.183 This would pay for a year or more of nursing home care and two or more years of home care in most areas.  Currently, seniors rarely use reverse mortgages for long-term care.  Why should they?  Home equity is generally an exempt asset when qualifying for Medicaid long-term care.  Since seniors can obtain long-term care without taking out a reverse mortgage, they have little reason to do so.

The solution is to remove the home-equity exemption and specify that seniors must first exhaust home equity using a reverse mortgage before qualifying for Medicaid long-term care.184  An added benefit is that more people may plan ahead and purchase long-term care insurance if they are not allowed to shelter their largest asset while still qualifying for Medicaid.

A home sales contract is similar to a reverse mortgage; it allows a senior couple to sell their home now, but live in it the rest of their lives.  This would be appealing to married seniors and seniors who are getting rehabilitative care and expect to leave the nursing home. 

“Long-term care insurance helps seniors shelter assets.”

Seniors with life insurance policies who enter a long-term care facility may qualify for viatical settlements to assist them with expenses.  Viatical settlements are financial arrangements that allow terminally-ill individuals to sell their life insurance policies at a discount in return for cash.  The purchasing firm pays less than face value (generally 50 percent to 80 percent) depending upon life expectancy.  The purchaser pays any remaining premiums and assumes the risk for life expectancy.  In other words, the insured is not penalized for living longer than expected.  However, one problem is that not everyone qualifies for this arrangement.  Insurers, providers and states use different definitions for what they consider terminal illness.  For instance, seniors expected to live more than five years likely will not qualify for this arrangement.185

According to the Federal Trade Commission, there are also tax implications that can be quite complicated.  Viatical settlements, where life expectancy is less than two years, are exempt from federal taxes - although some states do not provide this exemption.186

The federal government should facilitate viatical arrangements and life settlements for people facing long-term care, including limiting tax liability.  It should require such arrangements for life insurance owned by individuals applying for Medicaid long-term care coverage.  Transfer of ownership of life insurance policies should be treated the same way as other asset transfers. 

Increasing Estate Recovery.  When beneficiaries die, states can recover the cost of their nursing home care from their estates.  That could include a house, for example, since a home is typically not included in assets for determining Medicaid eligibility.  The Deficit Reduction Act now makes individuals ineligible for Medicaid nursing home coverage if their home equity value is greater than $500,000.187  Federal law also permits states to recover personal and real property in which the individual has an interest or legal title that aren't included in the probated estate.  Some states are aggressively pursing estate recovery, and all states receive federal funds to do so.188

Future legislation should require that any funds placed in qualified income trusts be considered income for determining Medicaid eligibility.  It could even eliminate the use of trusts that reduce current income.  Furthermore, property settlements in divorces made prior to Medicaid eligibility should be subject to the same five-year rule as other divisions of property. 

“Children could be asked to contribute to their parents’ care.”

Holding Children Responsible for Their Parents' CareStates should seek to recover current nursing home costs from beneficiaries' families who are financially able to pay.189  About 30 states currently have filial responsibility statutes that require adult children to care for their indigent elderly parents.  There is no uniform federal filial responsibility statute.  The state statutes vary, but in general they force adult children to reimburse the state for programs or institutions that have cared for an indigent parent.  States with filial responsibility statutes take a variety of approaches to enforcement: 21 allow some sort of civil court action to obtain financial support (or cost recovery) and 12 specify a criminal penalty for filial nonsupport; three states allow both civil and criminal actions.  Children's liability is limited under a variety of conditions.  These include whether the adult child has enough income to actually contribute and if they were abandoned or deserted by the parent. 

Medicaid costs could be reduced if states began to systematically enforce filial responsibility laws.  When adult children understand they could be responsible for a portion of their indigent parents long-term care needs, they will have an incentive to encourage their parents to plan for the future.

A state could automatically consider an adult child able to pay toward care of an indigent parent unless they file a public notice that they are not responsible for the debts of the parent.  Additionally, adult children who refuse to support their parents could be required to relinquish inheritance rights and rights to any trust set up for them by a parent. 

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