Routing

Seventy-seven million aging baby boomerswill sink America’s retirement security system ifwe don’t take action soon. A few years ago, theproblem went unrecognized by most Americans.Today, the prospect of a fiscal crisis has forcedpolicymakers to focus on solutions.

Social Security has center stage these dayswith a $10 trillion unfunded liability. Medicare isan even greater problem, with $60 trillion inunaccounted-for obligations. The good news isthat these massive “social insurance” programshave finally begun to attract the attention of ana-lysts, policymakers, and legislators.

Another social program bears scrutiny butreceives much less attention. Medicaid is the poorrelative among government programs. It is means-tested public assistance—in a word, welfare. While

Social Security and Medicare have spurious “trustfunds,” Medicaid draws its financing from gener-al tax revenue without even the pretense of a trustfund. Medicaid is the principal payor for long-term care (LTC), especially nursing home care.LTC is an 800-pound gorilla of social problemsthat lurks just around the bend. If we wait to dealwith Medicaid and LTC until after we handleSocial Security and Medicare, it will be too late.

At last, we have a window of opportunity toaddress the challenges of Medicaid and LTCfinancing. Congress has committed to find $10billion in Medicaid savings over the next fiveyears. Despite the handwringing this has caused,such savings and much more can be achievedwhile actually improving the program. Thispaper will explain how that can be done.

Aging America’s Achilles’ HeelMedicaid Long-Term Care

by Stephen A. Moses

_____________________________________________________________________________________________________

Stephen A. Moses is president of the Center for Long-Term Care Reform. He has been a Medicaid state representa-tive for the Health Care Financing Administration and senior analyst for the inspector general of the U.S.Department of Health and Human Services.

Executive Summary

No. 549 September 1, 2005

Introduction

Medicaid expenditures today exceed thecost of Medicare and continue to skyrocket.Medicaid is the biggest item in state budgets,having topped elementary and secondaryeducation combined for the first time in2004.1 Long-term care (LTC) accounts forone-third to one-half of total Medicaidexpenditures in most states, 35 percent onaverage.2 For 2003, total Medicaid expendi-tures were $267 billion. Of this, Medicaid-financed nursing home care accounted forapproximately $51 billion and home care$9.9 billion.3

Medicaid LTC recipients consume a dis-proportionate share of total program expen-ditures. Consider, for example, people whoare eligible for both Medicaid and Medicare.Such “dual eligibles” account for 42 percentof Medicaid spending, although they makeup only 16 percent of Medicaid recipients.4

Dual eligibles are heavy users of LTC andMedicaid-financed acute care services thatare not covered by Medicare. On top of this,Medicaid pays for Medicare premiums andcost sharing for dual eligibles.

Aged, blind, and disabled (ABD) individu-als—also heavy users of LTC—make up one-fourth of Medicaid recipients but account fortwo-thirds of program costs, whereas poorwomen and children make up three-quartersof the recipients but account for only one-third of Medicaid expenditures.5 Clearly,there is an imbalance between the types ofpeople who use Medicaid and the resourcesspent on them.

Key Points and Queries

LTC is Medicaid’s most expensive benefit.The heaviest users of LTC—those who are eli-gible for both Medicaid and Medicare andthose who are aged, blind, or disabled—con-sume a disproportionate share of Medicaid’stotal resources.6 Therefore, every actual orpotential dual eligible, ABD, or other LTCrecipient who is kept from becoming depen-

dent on Medicaid will result in dispropor-tionate savings to the program. In otherwords, if policymakers can prevent Medicaiddependence for even a small number of theseheavy LTC users, the savings would be extra-ordinarily high.

But aren’t dual eligibles, the aged, blind,and disabled, and heavy LTC users the poor-est of the poor? Isn’t Medicaid their only safe-ty net after a catastrophic spend-down hasdevastated their life’s savings and driventhem into financial destitution? Actually, thetruth is not that simple. By confronting thetrue complexity of Medicaid eligibility, wecan find the savings, fix the program, andimprove LTC for everyone.

Examine Your Premises

Are people on Medicaid necessarily poor?Only if they’re young and need acute or pre-ventive medical care. But not if their eligibilityis based on their being aged, blind, or disabledand in need of LTC. Medicaid’s financial eligi-bility rules are relatively tight for poor womenand children. For people over the age of 65who have a medical need for nursing-home-level care, however, Medicaid’s eligibility rules—contrary to conventional wisdom—are veryloose.

Income EligibilityEven substantial income is rarely an obsta-

cle to Medicaid eligibility for the elderly whorequire LTC. If they have too little income topay all their medical expenses, including nurs-ing home care, they’re eligible.7 Medicaid“income eligibility” is determined in one oftwo ways. According to the Social SecurityAdministration, 35 states and the District ofColumbia have “medically needy” income eli-gibility systems.8 Those states deduct eachMedicaid applicant’s medical expenses—including private nursing home costs, insur-ance premiums, medical expenses not coveredby Medicare, and so forth—from the appli-cant’s income.9 If the applicant has too littleincome to pay for all of these expenses, he or

2

For people overthe age of 65 who

have a medicalneed for nursing-

home-level care,Medicaid’s

eligibility rulesare very loose.

she is eligible for Medicaid—not just for LTCbut for the full array of Medicaid’s optionalservices, which often stretch far beyond whatMedicare covers.

The remaining states have “income cap”Medicaid eligibility systems.10 In those states,anyone with income of $1,737 or less permonth (300 percent of the SSI monthly bene-fit of $579) is eligible for LTC benefits.11 Butany additional income makes the applicantineligible for Medicaid, even though thatamount is not enough to pay privately fornursing home care. Thus, Congress approved“Miller income diversion trusts” in theOmnibus Budget Reconciliation Act of 1993(OBRA ’93). These special financial instru-ments allow people to siphon excess incomeinto a trust to become eligible for Medicaid.The trust proceeds must then be used to offsetthe Medicaid recipient’s cost of care, and anybalance in the trust at death is supposed torevert to Medicaid. Nevertheless, Millerincome trusts allow people with incomes sub-stantially over the ostensible limit to qualifyfor Medicaid, take advantage of the program’slow reimbursement rates, and receive an exten-sive range of additional medical services.

No one has to be poor to qualify forMedicaid. There is no set limit on how muchincome you can have and still qualify as longas your private medical expenses are highenough or, if you live in an “income cap” state,you have a Miller income diversion trust. Allanyone needs to qualify for Medicaid is a cash-flow problem—that is, too little income afterall medical expenses are deducted.

Asset EligibilityOne might ask, “So what?” Everyone

knows that people must spend down theirassets before becoming eligible for Medicaid.12

Here again the truth belies the conventionalwisdom. Medicaid beneficiaries can easilyretain unlimited assets while qualifying forMedicaid LTC benefits, as long as those assetsare held in an exempt form. For example,Medicaid exempts one home and all contigu-ous property regardless of value. A simple“intent to return” to the home keeps it

exempt, whether or not anyone resides in thehome or the Medicaid applicant has any objec-tive medical possibility of ever returning.13

How is this rule used to protect assets? Hereare some examples:14

Another sheltering strategy is to con-vert available, countable assets intononcountable, exempt assets. Forexample, money in checking or savingsaccounts may be used, without creat-ing a period of ineligibility, to purchaseor improve a home, pay off a mortgage. . . pre-pay residence-related taxes andinsurance, or even pay outstandingbills, including legal fees.15

Once Medicaid eligibility is estab-lished, the community spouse mayacquire unlimited assets in her ownname. Such assets might be received bygift, inheritance, or by selling the homeand, thereby, converting an exemptasset into a non-exempt asset (cash)with impunity.16

A transfer of the home with reservedspecial powers of appointment canprovide the best of all possible worlds.It can completely protect the homefrom the reach of Medicaid after theapplicable waiting period while allow-ing the powerholder to retain controlof the property and preserve all desir-able tax benefits with no exposure toestate recovery.17

Medicaid also allows an exemption for onebusiness, including the capital and cash flowof unlimited value.18 How is this rule used toprotect assets? Here are some examples:

A new amendment to the SocialSecurity Act allows an exemption forthe family business, farm or ranchfrom countable assets for Medicaid eli-gibility. The advocate should take max-imum advantage of this exemption toachieve immediate or very rapid eligi-

3

Medicaid beneficiaries caneasily retainunlimited assetswhile qualifyingfor Medicaid LTCbenefits, as longas those assets areheld in an exemptform.

bility for clients in need of Medicaidassistance. A considerable amount ofresources can be excluded includingthe value of land and buildings, equip-ment, livestock, inventory, vehicles,and liquid resources used in the busi-ness. The attorney should also counselhis clients on the best method of trans-ferring the business, farm or ranch toavoid the imposition of liens andrecovery from the estate for amountsspent for Medicaid.19

For farm and ranch families, theMedicaid planning strategy may con-sist of transferring the farm to the chil-dren in full with the children then rent-ing the farm back to the parents. Theparents would then act as tenantsunder a lease with the children. . . . Theappropriate Medicaid planning strate-gy for a client who is the holder ofclosely held stock in a family ownedcorporation may be to work the poten-tial Medicaid applicant into a minorityposition by making a series of giftsduring life outside of the applicablelook-back period until the applicant isin a minority position. Then, thestrategist should argue that the appli-cant is no longer able to sell the stockand therefore should be immediatelyeligible for Medicaid benefits. Thisstrategy allows the practitioner to pre-serve the asset in question for theapplicant and the applicant’s family.20

A prepaid burial space is another excludedresource, regardless of value. This includesimprovements or additions to such spaces aswell as contracts for care.21 Medicaid eligibil-ity workers often suggest prepaying burialexpenses to expedite Medicaid eligibility.

Whole life and other kinds of life insurancethat build equity are limited to a cash-surren-der value (i.e., the amount that the policy hold-er can collect by voluntarily terminating thepolicy) of $1,500. But one can hold unlimitedterm life insurance with no effect on eligibili-

ty.22 Because the proceeds of a life insurancepolicy pass to beneficiaries outside a probatedestate, not only can a term life policy shelterlarge assets from Medicaid eligibility limits, itcan also be used to avoid estate recovery.

Home furnishings are officially excludedregardless of value. Personal property that isheld for “its value or as an investment” is a“countable resource.” However, such assets arenot usually counted, because Medicaid eligi-bility workers rarely verify whether such prop-erty is held for the purpose of investment orhiding assets.23 In fact, Medicaid eligibilityworkers often suggest that applicants pur-chase new or additional household goods tominimize the amount they have to spenddown and expedite Medicaid eligibility.

One car of unlimited value is exempt,assuming it is used to transport the Medicaidrecipient or a member of the recipient’shousehold.24 And because it is exempt, givingit away is not a transfer of assets to qualify forMedicaid, so the applicant can give one caraway, buy another, give it away, and so onuntil he or she reaches the $2,000 eligibilitythreshold for nonexempt assets. That’s calledthe “two Mercedes” rule.

How are these rules used to protect assets?Here are some examples:

[A] common misconception amongapplicants is that excess resourcesmust be spent only on doctors, hospi-tals, nurses, medication, and nursinghomes. Nowhere in the law is this indi-cated. Quite literally, an applicantcould spend all of his or her assets onsomething “frivolous,” such as a 90thbirthday celebration . . . and thisshould not be cause for denial ofMedicaid, because the applicantreceived “value” for his or her money.25

The real goal . . . is to work with yourparents on an asset-shifting plan that willallow them to have Medicaid pick up thetab for their long-term care if need be. . . .Planners also suggest shrinking the totalassets your parents have to begin with.

4

Medicaid exemptsone home and all contiguous

property regardless of

value.

One way to do this is by turning assetsthat aren’t exempt from Medicaid intothose that are. Money in the bank or acertificate of deposit could be spent on aprepaid funeral or a more extravagantengagement ring, for example; both areexempt assets.26

Another tactic is to spend the assetson property that won’t count forMedicaid purposes . . . [such as] a home. . . a new car . . . household goods . . .funeral expenses . . . and . . . a burialplot . . . A client can also reduce his networth by spending money on travel,which many elderly people enjoy.27

According to one press account, elder lawattorney Howard Black, of Westbury, NewYork, suggested this technique to qualify forMedicaid: “if the individual happens to haveabout $82 million lying around, he or she couldeven buy a painting by Renoir to hang on thewalls of the house,” a strategy he calls “‘buryingmoney in the treasure chest of the house.’”28

Married couples are given even higherincome and asset protections than singlepeople, including up to $2,377.50 of month-ly income and up to $95,100 of assets for thecommunity spouse as of 2005.29 How is thisrule used to protect even more income andassets? Here is an example:

A potential planning technique wouldbe for the community spouse to reallo-cate his or her assets into forms that payless income. For example, money marketfunds could be used to buy zero couponbonds, gold, or growth stocks, all ofwhich pay no income at all. The com-munity spouse could then legitimatelyargue that he or she requires a largerallocation of income up to the MonthlyMaintenance Needs Allowance.30

In spite of these generous special exclu-sions and exemptions, married couples arefrequently advised to consider qualifying forMedicaid by getting a divorce.

Divorce is one of the more extremeMedicaid planning strategies. A success-ful divorce, in which both parties are rep-resented by independent counsel, andcontaining an agreement in which mostor all of the couple’s assets are given tothe community spouse, can result inalmost immediate Medicaid eligibilityfor an institutionalized spouse.31

The divorce option will likelybecome increasingly attractive to thecurrent generation of wealthy baby-boomers as they near retirement age.They can hardly be expected to willing-ly give up the standard of living towhich they have grown accustomedjust because their spouse has suffered acatastrophic injury or illness thatrequires full-time medical care in anursing home. It is unlikely that thecurrent generation will feel it isbeneath them to preserve their hard-earned assets by taking advantage ofpoorly drafted Medicaid legislation.32

Bottom line, there is no limit to how muchwealth people can stash in exempt assets orjettison by means of a calculated divorce set-tlement to become eligible for Medicaid LTCsubsidies.

Medicaid Estate Planning On top of these already generous income

and asset limits, professional Medicaid plan-ners—including attorneys, financial plan-ners, accountants, and some insuranceagents—use other techniques to protect addi-tional hundreds of thousands of dollars formore affluent clients and their heirs. Suchtechniques include gifting strategies, annu-ities, trusts, life-care contracts, and dozens ofothers delineated in hundreds of books, lawjournal articles, and the popular media. Theproceedings of the annual symposia andinstitutes of the National Academy of ElderLaw Attorneys are a rich repository of the cre-ative and highly profitable methods ofMedicaid planning.

5

Medicaid allowsan exemption forone business,including the capital and cashflow of unlimitedvalue.

Hundreds of articles, legal treatises, andbooks spanning the past three decades are read-ily available in any law library. I have personallypublished over 100 columns describing thepractice and techniques of Medicaid planning.33

To obtain even more references, one can simplyconduct an Internet search for “Medicaid plan-ning” and find more than two million links tosources, methods, and purveyors of artificialself-impoverishment techniques. Similar tech-niques allow people with substantial incomeand assets to avoid Medicaid’s ostensiblymandatory estate recovery rules, although statesrarely enforce these rules effectively.

Here’s how a Medicaid planner describedthe process to the Department of Health andHuman Services’ Office of Inspector Generalin 1988:

For a fee of $950, I guarantee eligibilitywithin 30 days. . . . I change the owner-ship of all property including lifeinsurance policies, car titles, mobilehomes, residences and other real prop-erty, bank accounts, certificates ofdeposit, stocks, government or privatebonds, and anything else. Propertytransfers go from the ill to the wellspouse. . . . If a contract or deed of trustis involved, I do an assignment so thatthe income becomes separate to thewell spouse. I help them buy burialplots and other exempt property.34

The techniques and practices of Medicaidestate planning have changed little since thisaccount was published 17 years ago. What haschanged is the cost in legal fees to qualify some-one for Medicaid LTC benefits virtuallyovernight without “spending down.” Today,Medicaid eligibility can be bought for a legal feeequal on average to one month in a private nurs-ing home. That’s roughly $5,000 or $6,000—verycheap insurance for LTC, especially when it canbe purchased after the insurable event occurs.

Medicaid Spend-DownIf Medicaid eligibility rules are so gener-

ous, why do so many Americans spend down

into impoverishment before they become eli-gible for benefits? The answer is, they don’t.Dozens of so-called “Medicaid spend-down”studies were conducted in the late 1980s andearly 1990s that showed that spend-downwas much less common than previouslybelieved.35 Before those studies, academicsassumed that one-half to three-quarters of allpeople in nursing homes had been admittedas private-pay patients and spent down untiltheir life savings were consumed. Since thespend-down studies, however, we haveknown that the actual figure is less than one-quarter of nursing home residents who beginas private-pay patients and later convert toMedicaid. And, because none of those spend-down studies distinguished between peoplewho spent down the conventional-wisdomway (writing big checks to a nursing homeevery month) and people who spent downthe Medicaid planning way (writing onecheck to an elder law attorney), we have everyreason to believe that genuine catastrophicspend down of real personal assets is even lessthan those studies indicated.

Out-of-Pocket SpendingIf there is no reason to spend down assets,

then why is such a large proportion of LTCspending composed of out-of-pocket expendi-tures? Again, the answer is, it isn’t. BecauseMedicaid patients have to contribute theirSocial Security income toward their cost of care,the percentage of nursing home costs paid outof pocket is really much less significant than itappears. The Centers for Medicare andMedicaid Services (CMS) reports that out-of-pocket spending accounted for 27.9 percent ofnursing home care spending in 2003 (downfrom 38.5 percent 15 years earlier).36 Nearly halfof those out-of-pocket expenditures are actual-ly the recipients’ Social Security income, whichthe recipients are required to contribute to thecost of their care under Medicaid.37 That is tosay, what is usually assumed to be spend-downof life savings is largely just money transferredfrom one government program (SocialSecurity) to another government program(Medicaid).38 Back out the other major sources

6

There simply isno evidence of

widespread catastrophic

spend-down ofpersonal assets

for LTC.

of nursing home financing as well (Medicaidat 46.1 percent in 2003, Medicare at 12.4 per-cent, private health insurance at 7.6 percent,and other public and private funds at 6 per-cent), and one is left with only one dollar outof seven (14 percent) spent for nursing homecare that could even possibly be coming frompeople’s life savings.39 Fully 86 percent of allnursing home expenditures come from directgovernment funding (Medicaid andMedicare) plus indirect government funding(spend-through of Social Security income bypeople already on Medicaid) plus privatehealth insurance, and much of the remaindercomes from personal income other thanSocial Security (i.e., not from assets). Theresimply is no evidence of widespread cata-strophic spend-down of personal assets forLTC.

Bottom LineMedicaid is not primarily an LTC safety

net for people who have spent down intoimpoverishment. Rather, it is the principalpayor of LTC for nearly everyone regardlessof economic status. Medicaid provides fewerthan half the dollars expended for nursinghome care but covers two-thirds of nursinghome residents. And because Medicaid resi-dents have the longest stays, the programtouches more than 80 percent of all nursinghome patient days.40 Home care is no differ-ent. Only 17 percent of home health carecosts were paid out of pocket in 2003.41 Theremainder comes from Medicaid, Medicare,and private health insurance.

The fundamental problem with LTCfinancing is that government pays for somuch of it that the public has been anes-thetized to the risk and expense of high-costextended care. People can ignore the risk,avoid the premiums for private insurance,wait to see if they will need LTC, and transferthe cost to taxpayers. Is it any wonder that sofew Americans buy private insurance or usereverse mortgages (see below) to financeLTC? Is it any wonder that most Americanswho need LTC end up dependent onMedicaid?

Building on the Facts

How can we use these facts to saveMedicaid as an LTC safety net, restrain its ris-ing tax burden, and improve the program inthe process? One thing is certain: as long asMedicaid exempts unlimited assets, mostpeople will not spend their own money onLTC or buy private insurance. A good firststep would be to ask: what is the singlebiggest asset that Medicaid protects fromLTC costs? As discussed above, Medicaidexempts the home and all contiguous prop-erty, regardless of value, for both nursinghome and home care recipients.

How is that fact significant? According tothe National Council on the Aging, 81 percentof America’s 13.2 million households aged 62and over own their own homes. Seventy-fourpercent of those senior homeowners own theirhomes free and clear. Altogether, seniors ownnearly $2 trillion worth of home equity.42 Thatwealth is illiquid, is largely untapped for LTCcosts, is totally exempted from Medicaid eligi-bility limits, and is usually protected againstMedicaid estate recovery.

What would happen if home equity, or atleast part of it, were at risk for financing LTC?There are ways to liquefy this wealth and put itto use financing quality LTC for frail andchronically ill seniors, without compelling peo-ple to leave or sell their homes. Reverse mort-gages, for example, allow people to convert illiq-uid home equity into usable income or assets.Essentially, the homeowner borrows against hishome equity, and the lender makes paymentsto the homeowner based on the homeowner’sage and the value of the home. The paymentscontinue as long as the borrower occupies theproperty. After that, the loan becomes due.

Reverse mortgages allow seniors to spendtheir home equity any way they see fit and stillremain in their homes as long as they are phys-ically able to do so.43 Forty-eight percent ofhouseholds aged 62 and older could get$72,128 on average from reverse mortgages. “Intotal, an estimated $953 billion could be avail-able from reverse mortgages for immediate

7

Altogether,seniors own nearly $2 trillionworth of homeequity.

long-term care needs and to promote aging inplace.”44

Yet reverse mortgages are rarely used tofinance LTC today, because Medicaid obvi-ates the need to tap home equity for that pur-pose. Placing at least some home equity atrisk before granting access to Medicaid LTCbenefits would substantially relieve the fiscalpressure on Medicaid, create a strongerincentive for people to purchase private LTCinsurance, and add significantly to the num-ber of market-rate private payers that LTCproviders so desperately need.

Home equity is the single largest asset pro-tected from LTC spend-down by Medicaid,but there are many others that could also betapped to relieve the financial burden onMedicaid and enhance private financingsources. As discussed above, those assetsinclude one business, burial spaces for thewhole family, household furnishings, a car,and term life insurance.

Do those assets amount to much? Takejust one category for example. In a study theCenter for Long-Term Care Financing con-ducted on behalf of the Nebraska StateLegislature in 2003, state eligibility workersestimated that more than 80 percent of thestate’s 9,800 Medicaid LTC recipients hadexempted a total of $51 million for prepaidburials, for an average of $6,505 per recipi-ent.45 If this were true for the country as awhole, it would mean nearly $7 billion isdiverted from LTC funding at any given timeto prefund burials.

Is it good public policy to use scarceMedicaid resources to indemnify heirs ofrecipients against the cost of burying theirparents? How much could be saved ifMedicaid only exempted $1,000? What ifMedicaid placed reasonable limits on all theassets the program currently exempts with-out limit? Is Medicaid’s proper role to protectinheritances or to provide access to qualityLTC for the genuinely needy?

Those and many other difficult technical,ethical, and political questions need to beanswered. But to date, the questions havealmost never even been asked.

The Solution

When the problem of Medicaid and LTCfinancing is properly understood, its solu-tion is obvious. Most people will not pay forsomething the government is giving away.This is true unless and until the product gov-ernment gives away is so undesirable thatpeople will spend their own money to obtaina better service. That is already beginning tohappen as consumers gravitate toward pri-vately financed home care and assisted livingto avoid or postpone Medicaid-financednursing home care.

Medicaid has a dismal reputation forproblems of access, quality, reimbursement,discrimination, and institutional bias. This iswell-established in the literature, which isreplete with comments like the following:

Nursing homes whose patients aremostly private generally provide high-er-quality care than facilities depen-dent on Medicaid patients.46

It is usually easier to enter a nursinghome of your choice if you are a privatepay patient than if you are on Medicaid.Because the Medicaid approved rate ofpayment is lower than what the nursinghome charges private pay patients,many nursing homes are reluctant toaccept Medicaid patients. After you arein a nursing home, you may later quali-fy for Medicaid and remain at the facili-ty. Once you are on Medicaid, the reluc-tance of some nursing homes to acceptMedicaid patients may make it difficultfor you to transfer to another facility,even though discrimination is illegal. . . .Nursing homes are not supposed to dis-criminate against patients who go onMedicaid. However, some states doallow Medicaid patients to be assignedto a separate wing of the nursing home,or to be discharged to another nursinghome if no Medicaid bed is available. Ifyou have to receive acute care in a hos-

8

Placing homeequity at risk

before grantingaccess to

Medicaid LTCbenefits would

relieve the fiscalpressure on

Medicaid.

pital, the nursing home will keep yourMedicaid bed for you for a limited time.If this period expires, the nursing homemay not readmit you.47

If we do nothing, the quality of Medicaid-financed LTC will continue to deteriorate. If weallow the current financing system to collapseentirely, there will be no way left for people toobtain access to quality LTC at any level exceptto pay privately. When that time comes—cer-tainly within 20 or 30 years and probably soon-er—there will be no place for aging boomers togo for the private resources to purchase theirLTC except their home equity.

If that is where we will end up by sustainingor expanding the status quo, why not spare theAmerican public that pain by implementingpolicies that place home equity at risk for LTCnow? This would not force people to use theirhome equity, but it would provide the necessaryincentive for Americans to protect against thisfinancial risk as they do against other financialrisks: by purchasing private insurance.

Achieving that objective does not requireforcing anyone to do anything. This is America.We should not compel people to buy insuranceor take out a reverse mortgage. But neithershould we use a public welfare program toindemnify heirs against the cost of providingtheir parents with quality LTC. With theirinheritances at risk for LTC, adult children willpull together to help their parents obtain qual-ity care or to purchase insurance instead offighting over the Medicaid planning spoils, asthe current system encourages.

Recommendations

To fix the current dysfunctional LTCfinancing system, the following steps shouldbe taken:

1. Pass a congressional resolution stating thatMedicaid should be a safety net for the poor—andonly the poor. This would signal that it isCongress’s intent to restore Medicaid to itsoriginal mission, and it would help blunt theMedicaid planners’ argument that if Congress

didn’t want the wealthy on welfare, it wouldn’thave put the loopholes in the law. Here’s anexample of that argument from two promi-nent Medicaid planning attorneys: “The merefact that Congress and the states have enactedstatutes and regulations expressly permittingand endorsing Medicaid planning is clearly anexpression of the public policy to allow suchplanning.”48

2. Eliminate all or most of Medicaid’s open-ended home equity exemption for LTC recipi-ents. Denying public assistance until homeequity is consumed for LTC will not forceanyone to leave or sell their homes. Familiesmay choose to (1) support their elders andkeep the home in the family, (2) rent thehouse (in lieu of consuming the equity) topay for the elders’ LTC, (3) sell the house andspend down to purchase top-quality care, or(4) get a reverse mortgage to liquefy homeequity for that purpose. Paying privately,seniors will have better access to a widerrange of higher-quality services.

3. Place reasonable limits on the amounts ofother assets that people can shelter while quali-fying for Medicaid LTC benefits. It is inappro-priate and unethical to shelter assets for thepurpose of qualifying for public assistanceintended for the poor. The current unlimitedexemptions for assets such as a business, acar, home furnishings and improvements,prepaid burials for the whole family, andterm life insurance should be limited.Reasonable limits on these exemptionswould give adults more incentive to planresponsibly for their parents’ and their ownLTC needs. And while the courts have heldthat lawyers cannot be held criminally liablefor advising nonpoor clients to take advan-tage of Medicaid, state bar associations canhold their members to a higher standard bydeclaring such practices unethical andgrounds for disbarment.

4. Extend the look-back period for asset trans-fers to 10 years for most property and 20 years forreal property. States are required to determineif Medicaid applicants made asset transfers forless than fair market value for the purpose ofbecoming eligible. The “look-back” period

9

If we do nothing,the quality ofMedicaid-financed LTC will continue to deteriorate.

refers to how many years prior to an individ-ual’s Medicaid application the state examinessuch transfers. The look-back period is cur-rently three years for most assets, and five yearsfor transfers to trusts. If a state finds that assetswere transferred for less than fair market valueduring those periods, the state is supposed todelay the applicant’s Medicaid eligibility dateby one month for each month the applicantcould have paid privately for nursing homecare. Yet many applicants get around the look-back period by planning their asset transfersover three years (or five years in the case oftrusts) in advance of applying for Medicaidwhen they know LTC is imminent. (The aver-age period of time from onset to death inAlzheimer’s disease, for example, is eight years.)However, few would want or be able to gamethe system 10 or 20 years in advance. Transfersof real property would be much more easilytracked than transfers of personal propertybecause the former are publicly recorded. Ifindividuals need to prepare for LTC longenough in advance, they will be much morelikely to plan responsibly by purchasing insur-ance when they are younger, still medicallyinsurable, and financially able to do so.

5. Appoint a commission of legal experts tostudy the practice of Medicaid estate planning,and recommend further reforms. The commis-sion should review the extensive legal litera-ture on the subject, monitor the conferencesand publications of the National Academy ofElder Law Attorneys (the Medicaid planners’trade association), and prepare recommenda-tions on how to curtail the most egregiousMedicaid planning techniques, such astrusts, annuities, life care contracts, lifeestates, “spousal refusal,” and so forth, thatare routinely used to impoverish affluentseniors artificially.

There is no need to reinvent the wheel, how-ever. Ten years ago, Medicaid LTC scholarsBrian Burwell and William Crown suggestedmany specific measures for Congress to con-sider, all of which still deserve serious consider-ation.49 These options include numerous mod-ifications to complicated provisions of OBRA’93, which implemented the most recent set of

far-reaching changes to Medicaid LTC eligibil-ity requirements made by Congress.50 Forexample, Congress should do the following:

• Reconsider the special new trusts creat-ed by OBRA ’93, particularly a provisionthat allows transfers from the commu-nity spouse to a third party “for the solebenefit of the community spouse,” alsoknown as “sole-benefit trusts.”51

• Eliminate the “half-a-loaf” strategy, whichallows people to transfer half their assets,spend down the other half during theresulting eligibility penalty period, andbecome eligible for Medicaid in half thetime originally intended by Congress.52

• Apply transfer-of-assets penalties to alltransfers done for the purpose of estab-lishing eligibility for Medicaid or avoid-ing estate recovery, including transfersthat shift wealth from nonexempt assetsto exempt assets.53

• Prohibit the “spousal refusal” or “just-say-no” gambit. “Another asset preserva-tion strategy is for a community spouseto ‘just say no’ to paying for the otherspouse’s nursing home care. Say Mrs.Jones holds more money than the stateallows for her husband to qualify forMedicaid coverage. If it can be shownthat she simply refuses to spend hermoney on her husband’s care, Medicaidcoverage will be allowed for Mr. Jones ifother easily met requirements are satis-fied. This approach has been particular-ly successful in New York.”54

• Explicitly empower state Medicaidestate recovery programs to recoverfrom the estates of surviving spouses ofdeceased Medicaid recipients. OBRA ’93required states to implement Medicaidestate recovery programs. States are notallowed, however, to recover from arecipient’s estate until after the death ofa surviving spouse. Some courts haveinterpreted this to mean that the recipi-ent’s cost of care can be recovered fromthe estate of a surviving spouse. Othercourts have held otherwise. Congress

10

Congress should eliminate

all or most ofMedicaid’s

open-ended homeequity exemption

for LTC recipients.

should clarify this point.• Eliminate the “resources-first” option for

raising the Community Spouse ResourceAllowance. Federal law allows states to useeither an “income-first” or a resources-firstmethod of determining the communityspouse’s resource allowance and monthlymaintenance needs allowance. Under theincome-first approach, the institutional-ized Medicaid recipient’s income is trans-ferred to the community spouse inamounts sufficient to bring the commu-nity spouse up to the amount the statedetermines that spouse needs (i.e., his orher “maintenance needs allowance”).Under the “resources first” approach, theMedicaid recipient is allowed to transferassets above the limits otherwise pre-scribed for the Community SpouseResource Allowance. The resources-firstapproach invites abuse because it allowsthe Medicaid recipient to transfer substan-tial excess resources to the communityspouse, thus becoming eligible morequickly and spending down less. It allowsthe community spouse to seek the lowestpossible return on invested capital for thepurpose of maximizing the assets trans-ferred without exceeding the maintenanceneeds allowance, a perverse result as com-pared to sensible financial planning. Insome cases, such methods have been usedto shelter more than $200,000 in assetsabove the limit of $95,100 that would oth-erwise apply.55

• Require liens on exempt real property asa condition of receiving Medicaid LTCbenefits. The Medicare CatastrophicCoverage Act of 1988 made transfer-of-asset penalties mandatory under federallaw. OBRA ’93 made estate recoveriesmandatory. Liens on real property ensurethat the property remains in the estate sothat it can be recovered. State use of suchliens is still voluntary under the TaxEquity and Fiscal Responsibility Act of1982 (TEFRA ’82). The absence ofTEFRA liens in many states means thatreal property, including exempt homes,

often disappears during a recipient’s timeon Medicaid and is therefore not avail-able for estate recovery. Mandating lienson real property would help to keephome equity in the recipient and spouse’sestate for recovery.

• Change the “intent-to-return” rule sothat homes remain exempt assets onlyso long as the recipient can reasonablybe expected to return home based on hisor her medical condition. Medicaidrules currently allow a home to remainexempt indefinitely as long as the recip-ient or a personal representative claimsthe intent to return. The intent is entire-ly subjective; the home remains exempteven if it is vacant and it is medicallyimpossible for the recipient to return.

These measures would postpone or elimi-nate Medicaid dependence for many Ameri-cans. How much could these public policiessave? Medicaid spent $91 billion on 7.2 mil-lion dual eligibles in 2002, or $12,646 perdually eligible recipient.56 To save $20 billionper year, Medicaid would only need to reducethe number of dual eligibles by approximately1.6 million, or 22 percent. Rodney Whitlock ofthe Senate Finance Committee staff believesthe potential savings to Medicaid are evengreater. In a speech to the National Confer-ence of State Legislatures, he said that basedon Congressional Budget Office numbers,Medicaid could save $160 billion between2011 and 2015 (the second five-year portion ofthe current 10-year budget window) by divert-ing only one-third of the people who wouldotherwise have ended up on Medicaid in nurs-ing homes to private-pay status instead.57

Are such large potential savings inMedicaid’s long-term care budget feasible? Theyare if, as NCOA reports, half of householdsheaded by people over 62 could get over $70,000each from a reverse mortgage. When added toother income and assets people would retain,those funds could delay or prevent Medicaiddependence for millions of Americans.

Understand, of course, that savings of thismagnitude would not come from eliminating

11

These measureswould postponeor eliminateMedicaid dependence formany Americans.

eligibility for current dual eligibles. Most of themare poor and lack home equity. The savings willcome over time by preventing people frombecoming “impoverished” Medicaid dependents.The proposed changes in eligibility rules wouldeliminate the perverse incentives that discour-age responsible LTC planning. They would cre-ate strong positive incentives for people to pur-chase private LTC insurance while they are stillable to qualify medically and financially.

Whether or not one accepts much largerestimates of potential savings, changes toMedicaid like those recommended abovewould easily save the $10 billion that Congressis trying to save over five years. In fact, it is rea-sonable to conclude that such changes, ifimplemented, would save enough to fund thecost of an above-the-line tax deduction for pri-vate LTC insurance and/or the cost of fundinga national LTC Partnership program. Thatprogram, originally sponsored by the RobertWood Johnson Foundation, allows individualsto exempt assets above the usual $2,000 limit ifthey have purchased LTC insurance. The pro-gram exists in only four states and has lan-guished since OBRA ’93 denied its participantsexemption from estate recovery. Legislationhas been proposed that would eliminate thatrestriction and lead to rapid expansion of theLTC Partnership program.

These measures would pay dividends overtime as more and more people buy insurance,pay privately for LTC, and avoid Medicaiddependence. It is also worth mentioning thathealthy markets for LTC insurance and reversemortgages would mean more jobs, more taxrevenue, and hence more resources to operateMedicaid as a safety net for the genuinely needy.

Objections

If this is such a big problem, why is there so lit-tle empirical evidence of “asset transfers” orMedicaid planning? First of all, Medicaid plan-ning is a dirty little secret. Adult children, whotake early inheritances and put their parents innursing homes on welfare, often won’t talk.Seniors whose assets are taken are often cog-

nitively impaired and/or intimidated by theirheirs. They don’t talk. Medicaid planners easi-ly hide from scrutiny through attorney/clientprivilege. They refuse to talk. Nursing homestaff are silenced by confidentiality. They can’ttalk. State Medicaid staff are also silenced byconfidentiality. They can’t talk either.

The second reason we don’t have more solidempirical evidence of the extent of Medicaidplanning is a widespread preference among aca-demics, foundations, and some think tanks forpublic financing of LTC over private financingalternatives. Those who might be expected tosupport private LTC financing—such as conser-vative and libertarian think tanks—have mostlyignored Medicaid and LTC to focus on SocialSecurity and Medicare. Whatever one’s politicalpreferences, however, all should be able to sup-port targeting Medicaid to the needy as a fair-ness issue. Why use scarce public welfareresources to indemnify affluent heirs of well-to-do seniors?

Elderly Americans are not very rich. Just howcostly can Medicaid planning possibly be?Overzealous Medicaid planning is just the tipof the iceberg. Only a small percentage ofseniors have the average wealth of Medicaidplanning clients, (i.e., a home worth $250,000to $400,000 plus additional assets in the rangeof $150,000 to $250,000).58 But, to use a differ-ent metaphor, these people are the straw thatbreaks the camel’s back. The load that makesthe camel vulnerable comes from the open-ended home exemption and all the other rou-tine exclusions and allowances that permitpeople with substantial assets and income toqualify. As a result, the average senior easilyqualifies for Medicaid LTC benefits withoutspending down significantly.

If using home equity to pay for LTC is such agreat idea, why don’t people already use reversemortgages for these expenses? Why would they,when Medicaid exempts the home and all con-tiguous property regardless of value and estaterecovery is easy to avoid? Put home equity at riskand consumers will take LTC seriously, plan forit, and save, invest, or insure against the risk.

How would requiring people to use their homeequity and other wealth improve Medicaid? With

12

The savings willcome over time bypreventing people

from becoming“impoverished”

Medicaid dependents.

fewer people to serve, Medicaid would havemore resources to help those who are genuine-ly in need. Medicaid would require fewer eligi-bility workers and estate recovery staff, thusreducing administrative costs. Part of theMedicaid savings could be applied to increasingreimbursement rates and expanding the con-tinuum of services provided, thus improvingaccess to and quality of care. Finally, the jobscreated in the financial services industry(reverse mortgage lenders) and the insuranceindustry (LTC insurance agents) would gener-ate new tax revenues to help states and the fed-eral government support Medicaid.

Wouldn’t reverse mortgages impoverishspouses of Medicaid recipients and leave themdependent on public assistance? No, just theopposite. Reverse mortgages provide extraincome indefinitely. They are fully insured bythe federal government so that families retainthe income and the use of the home until theymove, sell, or die, even if the home equity isentirely consumed.

Wouldn’t this take away a sacred right peo-ple have to pass on their homes to heirs? No,Congress made it clear over 20 years ago that“all of the resources available to an institu-tionalized individual, including equity in ahome, which are not needed for the supportof a spouse or dependent children will beused to defray the cost of supporting theindividual in the institution.”59 That was thejustification for estate recovery, which hasnot worked well because it is punitive, after-the-fact, and politically sensitive. Reversemortgages as a precondition of eligibilitywould achieve the same objective far moreefficiently and before Medicaid has to obtainand expend the funds.

Wouldn’t LTC providers, including nursinghomes, assisted living facilities, and home careagencies, lose Medicaid patients? Yes, and theywould be thrilled to replace Medicaid recipi-ents, whose reimbursement is often less thanthe cost of providing their care, with privatepatients who pay a market rate. Furthermore,the influx of new revenue would improveaccess and quality for all LTC patients, bothprivate-pay and Medicaid.

Wouldn’t baby boomers, who are countingon inheritances protected by Medicaid, objectvehemently? Probably, but why shouldMedicaid, which was intended as a safety netfor the poor, be inheritance insurance formiddle-class boomers? Boomers are exactlythe generation we need to awaken to LTCrisk and to their need to insure against it. Fornearly 40 years, Medicaid has done exactlythe opposite. It has anesthetized boomers tothe risk by paying for their parents’ LTC. Wemust worry about the unfunded liabilities ofMedicaid just as we do those of SocialSecurity and Medicare. Medicaid is a dead-weight drag on state and federal generalfunds. Medicaid will have nowhere to turnwhen the demographic tsunami hits.

How would we prevent people from gamingthis rule the same way they use Medicaid plan-ning to circumvent the current system? Mostpeople who transfer assets to qualify forMedicaid do it after they have an LTC crisisor when they (or usually their heirs) antici-pate such a crisis coming soon. By that time,they don’t qualify medically or cannot affordprivate LTC insurance, so they turn toMedicaid. Confront them with the risk of areal Medicaid spend-down liability while theyare still young, healthy, and affluent enoughto insure privately, and most people woulddo so. Unlike transfers of liquid assets ornegotiable securities, real property transfersare publicly recorded and easily discovered. Itwould be simple to hold people accountablewho give away large amounts of home equityany time before applying for Medicaid, even adecade or more.

This is a political nonstarter because Medicaidis a “third rail” like Social Security and Medicare.Nonsense. We are quickly approaching the timewhen the political risk of failure to confrontexploding Medicaid costs will exceed the politi-cal risk involved with confronting them hon-estly. How will politicians justify cutting dentalbenefits for poor children or slashing educationor letting roads go unrepaired just so prosper-ous seniors can pass their wealth to affluentheirs at the expense of ever-skyrocketingMedicaid LTC costs?

13

Why shouldMedicaid, whichwas intended as asafety net for the poor, beinheritance insurance formiddle-classboomers?

Do enough people who are currently receiv-ing Medicaid LTC benefits own their homes toachieve such big savings immediately? No.Probably no more than 15 to 20 percent ofpeople already receiving Medicaid still owntheir homes. Besides, policymakers wouldlikely want to grandfather in current recipi-ents under the status quo. The major savingswill come over a period of three years as theMedicaid LTC population turns over andfewer new recipients qualify until after theyspend down their home equity, either with areverse mortgage or by other means.60

The big question here is: what happens tothe homes owned by most seniors? As notedearlier, 81 percent of households over age 62own their homes. Despite the facts that illness-es like Alzheimer’s disease strike irrespective ofwhether seniors own or rent and that the vastmajority of LTC patients are Medicaid patients,a 1989 study by the General Accounting Officefound that only about 14 percent of Medicaidnursing home residents own their homes.61

Why is it that by the time they qualify forMedicaid, most seniors no longer own theirhomes? How can this be the case, if fewer thanone-quarter of nursing home residents spenddown their assets before becoming Medicaideligible? Are the homes being transferred toheirs? Are they being sold and the money usedsomehow? How? Evidently not for LTC, as theabove data indicate. Research is needed toanswer these questions.

Conclusion

Medicaid is supposed to be America’s LTCsafety net for the poor. Instead, it is the prin-cipal LTC payor for nearly everyone.Medicaid’s LTC benefit has become “inheri-tance insurance” for baby boomers, lullingthem into a false sense of security regardingtheir own future LTC needs. Medicaid’s looseeligibility rules for LTC create perverse incen-tives that invite abuse and discourage respon-sible LTC planning. The conventional wis-dom that most people must spend downtheir life savings before they qualify for

Medicaid LTC benefits is a myth. If people’s biggest asset, their home equi-

ty, were at risk to pay for LTC, most peoplewould plan early to save, invest, and insureagainst that risk. Reverse mortgages permitpeople to withdraw supplemental income orassets from their otherwise illiquid homeequity without risking use of the home. Thisextra cash can purchase services to help themremain at home and delay Medicaid depen-dence—or avoid it altogether. The single mosteffective step Congress and the president cantake to fix Medicaid, reduce its cost, andimprove the quality of LTC would be toreplace Medicaid’s wide-open home equityexemption with a more limited exemption ofhome equity or none at all.

With that one change in effect, familieswould pull together to fund quality LTC fortheir elders, rather than fighting over thespoils of Medicaid-planning abuse as they donow. That simple measure combined withother, lesser modifications would pump des-perately needed oxygen into LTC markets, easethe tax burden of Medicaid, enable Medicaidto provide better access to higher-quality carefor the genuinely needy, and supercharge themarket for LTC insurance and home equityconversion products. Everyone will be betteroff, with the exception of legal experts whocurrently profiteer on Medicaid’s extravagant-ly loose eligibility rules.

Notes1. National Association of State Budget Officers,“Table 3: Comparison of Shares of State Spendingwith Fund Sources, Fiscal 1994 to 2004,” 2003 StateExpenditure Report, p. 8, http://www.nasbo.org/Publications/PDFs/2003ExpendReport.pdf.

2. Steven R. Gregory and Mary Jo Gibson, Across theStates, 2002 Profiles of Long-Term Care, 5th ed.(Washington: AARP Public Policy Institute, 2002),p. xi, http://assets.aarp.org/rgcenter/health/d17794_2002_ats.pdf.

3. These two areas of care make up the lion’s shareof Medicaid LTC expenditures. Centers forMedicare and Medicaid Services, “Table 10:Expenditures for Health Services and Supplies

14

If people’s homeequity were at risk

to pay for LTC,most would plan

early to save,invest, and insureagainst that risk.

under Public Programs, by Type of Expenditureand Program: Calendar Year 2003,” http://www.cms.hhs.gov/statistics/nhe/historical/t10.asp.

4. Judy Kasper, Risa Elias, and Barbara Lyons, “DualEligibles: Medicaid’s Role in Filling Medicare’sGaps,” Kaiser Commission on Medicaid and theUninsured, March 2004, p. 1, http://www.kff.org/medicaid/loader.cfm?url=/commonspot/security/getfile.cfm&PageID=33892.

5. Diane Rowland, “Medicaid: Addressing theFuture,” Testimony before the U.S. Senate SpecialCommittee on Aging, June 28, 2005, Figure 1, KaiserCommission on Medicaid and the Uninsured, p. 12,http://www.kff.org/medicaid/upload/53725_1.pdf .

6. “Per capita spending for dual eligibles in nurs-ing facilities averages $44,600, or about fourtimes the spending for dual eligibles in the com-munity ($10,900) or for other Medicare beneficia-ries ($8,400). Because Medicare does not coverlong-term care, the higher costs for those who areinstitutionalized fall heavily on the Medicaid pro-gram and account for nearly 4 out of 5 dollarsthat Medicaid spends on dual eligibles.” Kasper,Elias, and Lyons, p. 10.

7. This is true in “medically needy” states. In“income cap” states, a Miller income diversiontrust achieves the same purpose.

8. See Social Security Administration, “SI 01715.020List of State Medicaid Programs for the Aged, Blindand Disabled,” http://policy.ssa.gov/poms.nsf/lnx/0501715020. Some “medically needy” states havebecome “income cap” states and vice versa sinceSocial Security last updated this list.

9. Medical expenses not covered by Medicare canbe substantial. They include eye care, dental care,foot care, and (at least until January 2006) phar-maceuticals.

10. See SI 01715.020. Some “medically needy”states have become “income cap” states and viceversa since Social Security last updated this list.

11. SSI stands for Supplemental Security Income,the federal welfare program for aged, blind, anddisabled individuals. SSI’s monthly benefitincreases with inflation every year. The dollaramounts cited here are in effect for 2005.

12. Only $2,000 for an individual ($3,000 for acouple) is exempt from the spend-down require-ment in most states.

13. Social Security Administration, ProgramOperations Manual System (POMS), http://policy.ssa.gov/poms.nsf/lnx/0501130100. A small number

of “209b” states can require sale of the home if noexempt relative resides in it and the Medicaidspouse is medically unable to return.

14. The reader will note that many of the sourcescited in the following pages are as old as 10 or 20years. The main reason for this is that Medicaidplanning lawyers have become more circumspectabout the practice of artificially impoverishingclients to qualify for Medicaid. Years of bad pub-licity, followed by the legal uncertainty created bya provision in the Balanced Budget Act of 1997(which made it a crime to recommend certainMedicaid planning practices in exchange for afee), caused most Medicaid planners to rein intheir rhetoric. When citing an older source, I willattempt to point out if anything in it has becomeinvalid in the meantime.

15. Hal Fliegelman and Debora C. Fliegelman,“Giving Guardians the Power to Do MedicaidPlanning,” Wake Forest Law Review 32, no. 2(Summer 1997): 341–96.

16. Michael Gilfix, “Elder Law in the 90’s: NoShortage of Issues,” Trusts and Estates 129, no. 4(April 1990): 45. “Community spouse” refers tothe healthy spouse of the institutionalizedMedicaid recipient. Since the Omnibus BudgetReconciliation Act of 1993, the communityspouse can no longer sell the house with impuni-ty. The proceeds of such a sale would not beexempt. The rest of the quote remains true.

17. Alexander A. Bove Jr., “Protecting the Homethrough Special Powers of Appointment,” TheElderLaw Report 7, no. 7 (February 1996): 3. “Estaterecovery” refers to the practice of state Medicaid pro-grams recovering the cost of care from the recipients’probated estates. Estate recovery was voluntary afterthe Tax Equity and Fiscal Responsibility Act of 1982and has been mandatory since the Omnibus BudgetReconciliation Act of 1993.

18. “Property essential to self-support used in atrade or business is excluded from resourcesregardless of value or rate of return effective May1, 1990.” Social Security Administration, ProgramOperations Manual System (POMS), http://policy.ssa.gov/poms.nsf/lnx/0501130501.

19. Robert E. Hales and Rebecca L. Shandrick,“Advanced Planning for the Family Business,” 1992Symposium Manual, National Academy of Elder LawAttorneys, Tucson, AZ, 1992, p. 15.

20. Roger A. McEowen, “Estate Planning for Farmand Ranch Families Facing Long-Term Health Care,”Nebraska Law Review 73, no. 1 (1994): 104–41; See also“Company Makes Landlords of Elderly to ShelterAssets,” Associated Press, September 30, 2002.

15

21. POMS, “SI 01130.400: Burial Spaces,” http://policy.ssa.gov/poms.nsf/lnx/0501130400.

22. POMS, “SI 01130.300: Life Insurance,” http://policy.ssa.gov/poms.nsf/lnx/0501130300.

23. POMS, “SI 01130.430: Household Goods,Personal Effects and Other Personal Property,”http://policy.ssa.gov/poms.nsf/lnx/0501130430.

24. “Assume the automobile is used for trans-portation, absent evidence to the contrary.” SocialSecurity Administration, POMS, “SI 01130.200:Automobiles and Other Vehicles Used forTransportation,” http://policy.ssa.gov/poms.nsf/lnx/0501130200. Emphasis in original.

25. Ira S. Schneider and Ezra Huber, FinancialPlanning for Long-Term Care (New York: HumanSciences Press, 1989), p. 142.

26. Jean Sherman Chatzky, “Parental Guidance:Changing Places,” Smart Money 6, no. 10 (October1, 1997): 134–36.

27. Jim Dam, “Drastic Changes in MedicaidPlanning Made by Congress,” Lawyers Weekly 93,no. 13 (September 27, 1993): 1, 12.

28. Quoted in Mary Schroeder, “Elder Law ExpertOutlines Features of Asset Transfer, Power ofAttorney,” Financial Services Week 3, no. 20 (July 9,1990): 19. Although it is unlikely that someonewould actually shelter such an enormous dollaramount in “household furnishings,” and morerecent SSI rules have clarified that personalbelongings actually held for purposes of invest-ment and appreciation are not exempt, the truthis that Medicaid eligibility workers rarely verifythe value and kind of Medicaid applicants’ per-sonal belongings and applicants can easily pro-tect substantial assets in this way.

29. “Spousal impoverishment” protections beganat $1,500 per month of income and $60,000 inassets with passage of the Medicare CatastrophicCoverage Act in 1988. Protection amountsincrease with inflation annually.

30. Gregory Wilcox, “Another Strategy to Increase theCSRA,” ElderLaw Report 2, no. 8 (March 1991): 12.

31. Fliegelman and Fliegelman, pp. 341–96.

32. Michael Farley, “When ‘I Do’ Becomes ‘I Don’t’:Eliminating the Divorce Loophole to MedicaidEligibility,” Elder Law Journal 9, no. 1 (2001): 28. SeeDam, pp. 1, 12; and James H. Young, “MedicaidEligibility,” Maine Bar Journal 5, no. 4 (July 1990): 227.

33. Many of these are available from the Center

for Long-Term Care Reform, http://www.centerltc.com/bullets/subject.htm#medicaid_plan.

34. U.S. Department of Health and HumanServices, Office of Inspector General, Office ofAnalysis and Inspections, Medicaid EstateRecoveries, OAI-09-86-00078, June 1988, p. 7.

35. See, for example, Kathleen Adams, MarkMeiners, and Brian Burwell, “Medicaid Spend-Down in Nursing Homes: A Synthesis of RecentResearch,” draft study conducted under contractfor the Office of the Assistant Secretary forPlanning and Evaluation, U.S. Department ofHealth and Human Services, HHS-100-88-0041,1990; Denise A. Spence and Joshua M. Wiener,“Estimating the Extent of Medicaid Spend-Downin Nursing Homes,” Journal of Health Politics, Policyand Law 15, no. 3 (June 1990): 607–26; and KorbinLiu, Pamela Doty, and Kenneth Manton, “MedicaidSpend-Down in Nursing Homes,” Gerontologist 30(1990): 715.

36. Centers for Medicare and Medicaid Services,“Table 7: Nursing Home Care ExpendituresAggregate and per Capita Amounts and PercentDistribution, by Source of Funds: SelectedCalendar Years 1980–2003,” http://www.cms.hhs.gov/statistics/nhe/historical/t7.asp. The latest ver-sion of this table has dropped the 1988 data; it nowshows data for only 1980 and 1993 forward. Datacited here for 1988 are taken from the version ofthis table posted in January 2004.

37. Although Social Security is not usually consid-ered to be a financing source for nursing home care,the fact is that it contributes very significantly albeitindirectly as “spend-through.” Social Security spend-through refers to income most seniors collect in theform of Social Security benefits that must be con-tributed toward their cost of care when they receivenursing home services paid for by Medicaid.According to the Health Care Financing Admini-stration (since renamed the Centers for Medicare andMedicaid Services): “An estimated 41 percent . . . ofout-of-pocket spending for nursing home care wasreceived as income by patients or their representa-tives from monthly social security benefits.” Helen C.Lazenby and Suzanne W. Letsch, “National HealthExpenditures, 1989,” Health Care Financing Review 12,no. 2 (Winter 1990): 8. Later research confirmed thatSocial Security spend-through in 1997 was almosthalf (49.4 percent) of nursing home out-of-pocketcosts and fully 15.3 percent of total nursing homeexpenditures. Nelda McCall, “Long Term Care:Definition, Demand, Cost, and Financing,” in WhoWill Pay for Long-Term Care? ed. Nelda McCall(Chicago: Health Administration Press, 2001), p. 19.

38. For more information, see Stephen Moses, “LTCBullet: So What If the Government Pays for Most

16

LTC, 2003 Data Update,” Center for Long-TermCare Financing, January 19, 2005, http:// www.centerltc.com/bullets/archives2005/534.htm.

39. Centers for Medicare and Medicaid Services,“Table 7: Nursing Home Care ExpendituresAggregate and per Capita Amounts and PercentDistribution, by Source of Funds: Selected CalendarYears 1980–2003,” http://www.cms.hhs. gov/statistics/nhe/historical/t7.asp, and author’s calculations.The latest version of this table has dropped the 1988data; it only shows 1980 and 1993 forward. Datacited here for 1988 are taken from the version of thistable posted in January 2004.

40. S. Feinleib, P. Cunningham, and P. Short, “Useof Nursing and Personal Care Homes by theCivilian Population, 1987” (AHCPR Pub. no. 94-0096), Agency for Health Care Policy andResearch, August 1994, p. 4.

41. Centers for Medicare and Medicaid Services,“Table 9: Personal Health Care Expenditures, byType of Expenditure and Source of Funds:Calendar Years 1996–2003,” http://www.cms.hhs.gov/statistics/nhe/historical/t9.asp.

42. National Council on the Aging, “Use Your Hometo Stay at Home(tm) Program Study Shows ThatReverse Mortgages Can Help Many with Long-TermCare Expenses,” press release, April 15, 2004,http://206.112.84.147/content.cfm?sectionID=61&detail=576. NCOA has not previously been a strongadvocate of private long-term care financing alterna-tives. The organization’s support and encourage-ment of reverse mortgages as a new funding sourcefor long-term care displays growing doubt amongsenior advocates that traditional public fundingsources like Medicaid and Medicare will be adequateto finance long-term care in the future.

43. The National Reverse Mortgage LendersAssociation is a good source of information onhome equity conversion, http://www.reversemortgage.org/default.aspx. See also AARP, http://www.aarp.org/revmort/; and the National Center forHome Equity Conversion, http://www.reverse.org/.

44. National Council on the Aging.

45. Stephen A. Moses, “The Heartland Model forLong-Term Care Reform: A Case Study in Nebraska,”Center for Long-Term Care Financing, 2003,http://www.centerltc.com/pubs/Nebraska. pdf, p. 19.

46. Alice M. Rivlin and Joshua M. Wiener, Caringfor the Disabled Elderly: Who Will Pay? (Washington:Brookings Institution, 1988), p. 9.

47. Long-Term Care Planning: A Dollar and SenseGuide (Washington: United Seniors Health

Cooperative, March 1997), p. 53.

48. Fliegelman and Fliegelman, p. 373.

49. Brian Burwell and William H. Crown,“Medicaid Estate Planning in the Aftermath ofOBRA ’93,” The MEDSTAT Group, Cambridge,MA, 1995, pp. 44–47.

50. Detailed descriptions and explanations ofthese provisions and recommended changes arebeyond the scope of this paper. Full details aregiven in ibid. and in numerous legal journal arti-cles on the arcane rules of Medicaid long-termcare eligibility.

51. For example: “Your wife can transfer her assetsinto a trust for your sole benefit [under provisionsof OBRA ’93]. This transfer would not subject herto a Medicaid period of ineligibility.” NationalAcademy of Elder Law Attorneys, 1996 conferenceproceedings, Session 9, pp. 34–38, 46.

52. “The most common means of transferringassets—the ‘half-a-loaf’ method—is designed toexploit this principle [maximum asset transfers]without breaking any rules, explains Bostonattorney Harry Margolis.” Chatzky, pp. 134–36.Margolis is publisher of ElderLaw Report, a widelyread newsletter with a focus on Medicaid plan-ning techniques. The most common method pro-posed for eliminating the half-a-loaf strategy is tobegin the period of ineligibility when the individ-ual enters a nursing home or applies forMedicaid, whichever happens first. If this strategyis implemented, however, a way must be found tohold long-term care providers harmless againstthe possibility they will end up with residentsdeemed retroactively ineligible for Medicaid butunable to pay for their own care.

53. See Baird Brown and Robert Fleming, “PlanningOptions That OBRA ’93 Does Not Affect,” 1993Elder Law Institute Proceedings, section #12 (1993): 14,16, 29.

54. Michael Gilfix, “Elders and Nursing HomeExpenses: Preserving Client Assets,” Trial 29, no. 6(June 1993): 38. For more on Medicaid planners’advocacy of “spousal refusal,” see Stephen Moses,“LTC Bullet: They’re Baaack, Part IV: ‘AbandonYour Spouse . . . Get Medicaid,’” Center for Long-Term Care Financing, October 29, 2001, http://centerltc.com/bullets/archives2001/310.htm.

55. See Dam, pp. 1, 12.

56. “Total Dual Eligibles, 2002,” Statehealthfacts.org,http://www.statehealthfacts.kff.org/cgi-bin/healthfacts.cgi?action=profile&area=United+States&categor y=Medicaid+%26+SCHIP&link_cate

17

gory=Medicare&link_subcategory=Dual+Eligibles&link_topic=Total+Dual+Eligibles; and “MedicaidSpending for Dual Eligibles by Service in Millions,2002,” http://www.statehealthfacts.kff.org/cgi-bin/healthfacts.cgi?action=profile&area=United+States&category=Medicaid+%26+SCHIP&link_category=Medicare&link_subcategory=Dual+Eligibles&link_topic=Medicaid+Spending+by+Service,Kaiser Family Foundation.

57. Rodney Whitlock, Address to the NationalConference of State Legislatures, June 17, 2005, pp.6–7, http://www.kaisernetwork.org/health_cast/uploaded_files/061705_ncsi_briefing_transcript. pdf.

58. Stephen A. Moses, “What We Don’t Know aboutMedicaid and Long-Term Care Is Hurting Washing-ton State,” Center for Long-Term Care Financing,Seattle, Washington, December 2004, p. 7, http://www.centerltc.com/pubs/washington.pdf.

59. United States Code, Congressional andAdministrative News, 97th Congress—Second Session—1982, Legislative History (Public Laws 97-146 to 97-248), vol. 2 (St. Paul, MN:, West Publishing), p. 814,cited in U.S. Department of Health and Human

Services, Office of the Assistant Secretary forPlanning and Evaluation, Office of Disability,Aging and Long-Term Care Policy, “MedicaidTreatment of the Home: Determining Eligibilityand Repayment for Long-Term Care,” Policy Briefno. 2, April 2005, p. 10, http://aspe.hhs.gov/daltcp/reports/hometreat.pdf.

60. Nursing home occupancy turns over at least100 percent every three years. Frederic H. Decker,“Nursing Homes, 1977–99: What Has Changed,What Has Not? Facts from the National NursingHome Surveys,” National Center for HealthStatistics, p. 3, http://www.cdc.gov/nchs/data/nnhsd/NursingHomes1977_99.pdf. Although sav-ings from current residents based on the proposedrule changes would be minimal, the objective is toencourage policies that delay or prevent Medicaidnursing home institutionalization by encouragingprivate financing alternatives, especially for home-and community-based care.

61. General Accounting Office, “Recoveries fromNursing Home Residents’ Estates Could OffsetProgram Costs,” GAO/HRD-89-56, March 7, 1989,p. 4, http://archive.gao.gov/d15t6/138099. pdf.

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OTHER STUDIES IN THE POLICY ANALYSIS SERIES

548. Medicaid’s Unseen Costs by Michael F. Cannon (August 18, 2005)

547. Uncompetitive Elections and the American Political System by Patrick Basham and Dennis Polhill (June 30, 2005)

546. Controlling Unconstitutional Class Actions: A Blueprint for Future Lawsuit Reform by Mark Moller (June 30, 2005)

545. Treating Doctors as Drug Dealers: The DEA’s War on Prescription Painkillers by Ronald T. Libby (June 6, 2005)

544. No Child Left Behind: The Dangers of Centralized Education Policy by Lawrence A. Uzzell (May 31, 2005)

543. The Grand Old Spending Party: How Republicans Became Big Spendersby Stephen Slivinski (May 3, 2005)

542. Corruption in the Public Schools: The Market Is the Answer by Neal McCluskey (April 14, 2005)

541. Flying the Unfriendly Skies: Defending against the Threat of Shoulder-Fired Missiles by Chalres V. Peña (April 19, 2005)

540. The Affirmative Action Myth by Marie Gryphon (April 6, 2005)

539. $400 Billion Defense Budget Unnecessary to Fight War on Terrorism by Charles V. Peña (March 28, 2005)

538. Liberating the Roads: Reforming U.S. Highway Policy by Gabriel Roth (March 17, 2005)

537. Fiscal Policy Report Card on America’s Governors: 2004 by Stephen Moore and Stephen Slivinski (March 1, 2005)

536. Options for Tax Reform by Chris Edwards (February 24, 2005)

535. Robin Hood in Reverse: The Case against Economic Development Takings by Ilya Somin (February 22, 2005)

534. Peer-to-Peer Networking and Digital Rights Management: How Market Tools Can Solve Copyright Problems by Michael A. Einhorn and Bill Rosenblatt (February 17, 2005)

533. Who Killed Telecom? Why the Official Story Is Wrong by Lawrence Gasman (February 7, 2005)

532. Health Care in a Free Society: Rebutting the Myths of National HealthInsurance by John C. Goodman (January 27, 2005)

531. Making College More Expensive: The Unintended Consequences ofFederal Tuition Aid by Gary Wolfram (January 25, 2005)

530. Rethinking Electricity Restructuring by Peter Van Doren and Jerry Taylor(November 30, 2004)

529. Implementing Welfare Reform: A State Report Card by Jenifer Zeigler (October 19, 2004)

528. Fannie Mae, Freddie Mac, and Housing Finance: Why True Privatization Is Good Public Policy by Lawrence J. White (October 7, 2004)

527. Health Care Regulation: A $169 Billion Hidden Tax by Christopher J. Conover (October 4, 2004)

526. Iraq’s Odious Debts by Patricia Adams (September 28, 2004)

525. When Ignorance Isn’t Bliss: How Political Ignorance Threatens Democracy by Ilya Somin (September 22, 2004)

524. Three Myths about Voter Turnout in the United States by John Samples (September 14, 2004)

523. How to Reduce the Cost of Federal Pension Insurance by Richard A. Ippolito (August 24, 2004)

522. Budget Reforms to Solve New York City’s High-Tax Crisis by Raymond J. Keating (August 17, 2004)

521. Drug Reimportation: The Free Market Solution by Roger Pilon (August 4, 2004)

520. Understanding Privacy—And the Real Threats to It by Jim Harper (August 4, 2004)

519. Nuclear Deterrence, Preventive War, and Counterproliferation by Jeffrey Record (July 8, 2004)

518. A Lesson in Waste: Where Does All the Federal Education Money Go?by Neal McCluskey (July 7, 2004)

517. Deficits, Interest Rates, and Taxes: Myths and Realities by Alan Reynolds (June 29, 2004)

516. European Union Defense Policy: An American Perspective by Leslie S. Lebl (June 24, 2004)

515. Downsizing the Federal Government by Chris Edwards (June 2, 2004)

514. Can Tort Reform and Federalism Coexist? by Michael I. Krauss and RobertA. Levy (April 14, 2004)