What to Know About Long-Term Care and Medicaid

Shawn Britt, CLU®

Shawn Britt, CLU® Shawn is Director of Advanced Sales with Nationwide Financial in Columbus, Ohio. britts@nationwide.com.

Long-term care (LTC) concerns are growing in the United States. With the passage of the Deficit Reduction Act 2005, signed into law Feb. 8, 2006, those concerns loom even larger. This act brings new rules that make it far more difficult for seniors in need of long-term care to get assistance from Medicaid. Currently, only 10 percent of Americans over the age of 65 own some type of long-term care protection, and only 17 percent of baby boomers have planned for long-term care needs. People assume their health insurance will pay LTC bills, but it won’t. Even those who qualify for Medicare benefits will only be provided with a maximum of 100 days of nursing home care, and individuals are eligible only when going to a nursing home immediately after a three consecutive-day stay in a hospital. Then the first 20 days are covered, but a co-pay ($141.50 per day for 2011) will be required for the remaining 80 days. All benefits end after 100 days.

So how have Americans been paying for longterm care needs up to this point? Currently, 49 percent of LTC recipients are relying on Medicaid, but keep in mind, while some in this group come from our nation’s poor, many in this group start out paying out of pocket then go on Medicaid after their assets are exhausted (sometimes purposely). According to the National Clearinghouse for Longterm Care Information, only 7 percent of people are actually paying for long-term care with private insurance coverage they have purchased. The government took a step to reduce Medicaid roles with the passage of the Deficit Reduction Act (DRA) of 2005, making Medicaid eligibility more difficult. The three-year look back is gone. Under the new law, the look back period is five years for all transfers, and the beginning date for the penalty period is now the later of the date the person enters a nursing home (or begins a Medicaid waivered care program) or the date the person applies for Medicaid. What this boils down to is the penalty period will not begin until the nursing home resident is virtually destitute.

One purpose of the new legislation is to prevent the use of Medicaid as an inheritance protection program for the middle class. However, gifts made by seniors in the most innocent manner could jeopardize their eligibility for Medicaid even if it is legitimately needed. For example, a grandparent making a monetary gift to a grandchild for a wedding or college graduation present could end up delaying their Medicaid eligibility. To determine the penalty period, the amount of assets transferred will be divided by the average monthly cost of a nursing home in the area in which the applicant lives. If an individual lives in an area that averages $5,000 per month, the penalty for a $15,000 gift to a grandchild would be a waiting period of three months before Medicaid benefits would begin. If other monetary gifts had been given, the penalty period would be even longer. Some also refer to the DRA of 2005 as the “nursing home bankruptcy act.” It is illegal to force a nursing home resident out of a facility while they are waiting for Medicaid benefits to commence. For the grandparent in our example, the nursing home would have to continue care for the three month penalty period, even though the bill could not be paid. This is where seldom enforced “filial responsibility” laws come in. Nursing homes could use these laws to go after the adult children of residents to pay their parents’ bills.

Filial responsibility laws derive from England’s Elizabethan Poor Relief Act of 1601, and were transplanted to America with the arrival of the colonists. This law required grandparents, parents and children, to the extent they were able, to support family members who could not care for themselves. Currently, 28 states have filial responsibility laws. Up to now, they have seldom been enforced, and in some states never. However, with the changes to Medicaid eligibility, new interest in these laws has emerged. Pennsylvania has re-enacted its law making children liable for support of their indigent parents, and other states are likely to follow suit.

The DRA of 2005 also affects the exemption of a person’s home, the use of interest-only annuities and the forgiving of loans.

• A person’s home, formerly exempt from Medicaid eligibility limits, will be counted as an asset if the equity in that home exceeds $500,000. States are allowed the option to increase that amount to $750,000. (Home equity caps will be indexed for inflation starting 2011). This could have severe implications to older residents in California, New York and other areas of high real estate values.
• Some advantages in using interest-only annuities have also been eliminated. These annuities provided a small income during life (which did not risk Medicaid eligibility) and left the original investment to heirs upon the senior’s death. Under the new rules, the state must be named beneficiary of any leftover funds in the annuity for at least the amount of the medical assistance paid on behalf of the annuitant. The community spouse of a nursing home resident may still purchase an annuity to convert assets to noncountable income, but the state must be the first recipient of any leftover funds up to the amount Medicaid paid for the nursing home spouse. In other words, the community spouse can be protected for life, but the remaining assets may not be protected for the children.
• A senior can no longer loan money to their children to get it out of their estate, then forgive the loan. In order not to be considered a transfer of assets, the repayment of a loan or mortgage must be actuarially sound and cannot be forgiven or cancelled upon the death of the lender.

What do all these changes mean to people planning for their senior years? Projected growth in the senior population has caused states to seriously review Medicaid programs, which are consuming 32 percent of the overall Medicaid budget. State budgets cannot continue to sustain the expense of increasing LTC services. In addition to considering a cutback in programs, states are trying to shift LTC services from institutional settings to less expensive community-based services such as assisted living or home health care, according to a 2010 article in the Columbus Dispatch. This shift could be positive not only for state budgets, but for recipients who are better suited to a more independent living arrangement. In addition, the federal government is attempting another foray into encouraging citizens to take responsibility for their own LTC expenses by including a national long-term care insurance program called Community Living Assistance Services and Support (CLASS) into the Health Care Reform Bill signed into law March 23, 2010.

Seniors still thinking about hiding assets to impoverish themselves to qualify for Medicaid may want to think again and consider the following:

• In trying to give their money away, they could be liable for gift taxes, which could cost far more than implementing another plan such as purchasing LTC coverage, assuming of course that these transfers exceed the lifetime gifting threshold.
• If you are married, the spousal impoverishment provisions limit what a nonconfined spouse may keep. The at-home spouse may keep the primary residence, a car, personal and household items, a small amount for burial and a maximum of $109,560 (in 2011) in financial assets. There are also income limitations. Social security and pension benefits count toward this limit, and these funds that can’t be hidden.
• States that have allowed the practice of spousal refusal are taking another look. This allows a healthy spouse to refuse to share marital assets. The sick spouse then assigns their right of support to the state and goes on Medicaid for LTC support. But, according to the New York Times, states are now coming back and suing the healthy surviving spouse to recover the cost of care.
• Once the money has been transferred, the senior loses legal control of the assets. Many things could go wrong here, the least of which is the possibility of needing to ask your children for your own money.
• While Medicaid may pay the bill for nursing home care, you may not get to live where you wish. Many of the nicer nursing homes require proof that the prospective resident can pay privately for a defined period of time and can refuse to take new patients on Medicaid (though they must keep current residents who can no longer private pay and go on Medicaid).

LTC protection should be looked at as a more logical inheritance protection plan. Furthermore, LTC coverage can help provide financial proof for acceptance into a care facility of choice. In addition to LTC Insurance, there are hybrid products. For a reasonable cost, life insurance with a long-term care rider can be purchased. This plan will provide funds for the insured should they need long term care, protecting the loss of other assets they have worked so hard to accumulate. However, in the event no long-term care is ever needed, the insured has a death benefit to leave to heirs, enhancing even further the legacy they will be able to leave their loved ones. This plan generates a benefit to someone no matter what circumstances ensue, and may provide the insured a measure of protection for the inheritance they hope to leave their heirs.

Riders are offered at an additional cost and may not be available in all states. A life insurance or annuity purchase should be based on the life insurance or annuity contract, and not optional riders or features. The cost of an option may exceed the actual benefit paid under the option.

Keep in mind that as an acceleration of the death benefit, the LTC rider payout will reduce both the death benefit and cash surrender values. Care should be taken to make sure that your clients’ life insurance needs continue to be met even if the rider pays out in full. There is no guarantee that the rider will cover the entire cost of all the insured’s LTC, as these vary with the needs of each insured.

Retirement and estate planning must include a serious look at long-term care needs. The changes brought about by the DRA of 2005 will make transferring assets to children much less practical with the five-year look back. And the transfer could become a moot point if filial responsibility laws are enforced, forcing adult children to use those transferred assets after all to pay their indigent parents long-term care needs.