A Road to Avoiding Impoverishment

There are essentially two ways of planning for a health-care calamity requiring long-term-care: (1) Waiting until the calamity is upon you, or (2) Looking ahead, anticipating the problems associated with such calamity and seeking appropriate professional guidance to protect you and your loved ones from being impoverished. Most people take the first route, and as a result the risks of financial ruin loom greater, and the options for planning are far fewer.

To assist you in taking the second approach, the following is a brief explanation of the Medicaid program, contrasting it with Medicare, and the current state of the Medicaid program as it relates to the elderly. Medicare and Medicaid sound alike, but these programs are quite different in terms of their benefits and eligibility requirements. Medicare is a government-subsidized insurance program, similar to social security. Medicaid is a need-based, fully government-paid-for entitlement program (i.e., “welfare”).

Medicare is a federal program open to all persons over 65 years of age who are entitled to receive social security or Railroad Retirement benefits. There are four parts to the Medicare program (parts A, B, C and D).

Part A covers medically necessary inpatient care, home health care, hospice services and convalescent or rehabilitative services in a skilled nursing home – up to a maximum of 100 days. Strictly custodial care in the patient’s home or in a skilled nursing home is not covered by Medicare.

Part B covers outpatient care provided by physicians, and such services as X-rays, ambulance services, therapy, medical equipment (wheel chairs, breathing apparatus, etc.), and similar services. Medicare pays 80% of the usual and customary costs of such services. The remaining 20% is the patient’s responsibility or can be paid through a supplemental health insurance policy (called Medigap insurance). Part B does not cover any costs of skilled nursing care in a care facility.

Part C is a combination plan, including Parts A and B, using a managed care approach. There are some limited benefits to this “HMO-type” approach; however, many of the same drawbacks to HMOs generally apply to managed care Medicare under Part C. In any case, the costs of skilled nursing home care is not covered.

Part D is the new prescription drug plan. There are a multitude of variations in Part D plan options – too numerous to include here.

As far as skilled nursing care is concerned, Medicare Part A requires (1) applicant must be in a Medicare approved facility, (2) the stay in the facility must follow at least three days of hospital care, (3) the patient must enter the facility within thirty days of the hospital care, and (4) the patient must require skilled nursing services. This requirement is based upon a need for skilled nursing services (not merely custodial care), such as those types of services provided by highly-trained personnel, such as R.N.s, therapists and related professionals. Custodial care relates to “activities of daily living” (or “ADLs”), which include, bathing, transferring, toileting, feeding and clothing. In addition, to qualify for Medicare Part A, the patient must continue to need such services and must show continued improvement from such rehabilitative services. Once the patient’s condition stabilizes, Medicare Part A skilled nursing services are discontinued. Medicare will only pay 100% of the first twenty days of care, after which the patient must pay a co-payment for the next 80 days (e.g., $137.50 per day).

Although Medicaid covers many types of health-care needs and includes persons under the age of 65, in this article I will refer primarily to the Medicaid Institutional Care Program (“ICP”) as it relates to the elderly (over 65) who may need skilled nursing care (beyond the 100-day Medicare limit) and custodial care (where the applicant cannot meet his or her activities of daily living).

Although Medicaid is a federally-created and federally-funded entitlement program, the eligibility requirements vary significantly from State to State. Applicants for Medicaid who are eligible for SSI or AFDC are automatically eligible for Medicaid. There are some basic eligibility requirements for the Florida ICP:

1. Must be a U.S. citizen or resident alien admitted for permanent residence, age 65 or older, blind or disabled

2. Must be a Florida resident

3. Must receive skilled care in a Medicaid certified facility

4. Must have a social security number

5. Must assign to the State all rights to collect private health insurance benefits and long-term-care insurance benefits

6. Must meet both income and asset tests

7. Must apply for all eligibility benefits

The first category of eligibility refers to the applicant’s level of care or the level of health-care assistance actually needed. This criterion is determined by the State of Florida Department of Elder Affairs (a subdivision of the Florida Department of Children and Families or “DCF”) through their CARES unit. The term “CARES” stands for Comprehensive Assessment and Review for Long-Term-Care Services. The CARES unit is a State administered team of professionals usually consisting of a registered nurse and social worker who visit the applicant and review the applicant’s medical records. As a general rule, the inability of the applicant to perform at least three activities of daily living (“ADLs”) will meet the basic level of care requirement.

The second category of eligibility relates to the income and assets of the applicant and his or her spouse. As far as income is concerned, the applicant’s gross monthly income cannot exceed the then-applicable income cap (presently $2,022. The term “gross monthly income” includes the Medicare premium (presently between $96.40 and $110.50), so if an applicant’s net social security benefit were $1,926.60, the gross figure (adding back the $96.40 Medicare premium) would be $2,023, just one dollar over the income cap, such that the applicant would not meet the income test. There are remedies for such circumstances however.

The applicant’s spouse, who may not presently need Medicaid assistance, is termed the “community spouse,” and his or her income is not counted as part of the income test.

The asset test, however, does apply to both the applicant and his or her spouse (the community spouse). The applicant may not have countable assets of more than $2,000, and the community spouse must not have countable assets in excess of $109,560. This last figure, called the community spouse resource allowance (or “CSRA”) increases each calendar year based upon the increase in the cost-of-living.

Certain assets of the applicant and his or her spouse (the community spouse) are not countable as far as Medicaid is concerned. These assets (in Florida) generally include: Homestead property having an equity value of no more than $500,000; household furniture, furnishings and personal effects of a reasonable value; one automobile of any value; income-producing property where the income being produced is consistent with its fair market value; life estate interests in real property; life insurance where the cash value is no more than $2,500; a pre-paid burial plan of any value, provided the plan is irrevocable; a separate burial fund of no more than $2,500; an IRA account which is annuitized in accordance with the life expectancy tables published through the Social Security Administration; and unmarketable real estate.

Because certain types of assets are non-countable, while other kinds are countable, you can readily see that converting a countable asset to a non-countable asset is aa quick way to meet the Medicaid asset test. For example, suppose the applicant had $12,000 in a bank account, and his Florida homestead having a fair market value of $100,000 has a mortgage of $10,000 owed on it. The applicant could simply take the excess $10,000 from his bank account and pay off his $10,000 mortgage, leaving him equity of $100,000 (far below the $500,000 threshold) and leaving him $2,000 in the bank – meeting that eligibility requirement.

There are other planning opportunities associated with transfers of assets from the applicant to others. In the first instance, any transfer from the applicant spouse to his or her community spouse is permitted prior to the application. Supposing the applicant had $106,000 and his spouse had $4,000, the applicant could transfer $104,000 to his community spouse, leaving himself with $2,000 and leaving the community spouse with $108,000 (below the CSRA of $109,560, and the applicant would be immediately eligible.

But suppose the applicant or his community spouse transferred the same $104,000 to their children prior to the application? Such a gift transfer would trigger a penalty, usually consisting of a period of Medicaid ineligibility being imposed against the applicant.

There are two elements to transfer penalties: (1) the period of required disclosure or “look-back” period, and (2) the manner in which the penalty for the transfer may be imposed, based upon the applicable penalty formula. Until the passage of the Deficit Reduction Act of 2005 (“DRA”), the look-back period was three years from the date of the Medicaid application. With the passage of the DRA this look-back period was increased to five years. Any uncompensated transfer (i.e., gift) must be disclosed as part of the Medicaid application process, if the transfer was made within the applicable five-year look-back period. I refer to this look-back period as the applicable look-back period, because Florida is phasing in the new DRA rules such that they will not fully apply to transfers until December of 2010. Until that month, the look-back period is based upon a gradual month-by-month phasing-in of the penalty period. I state “probably” because that is the way the new rules presently appear to be worded and because that is how Florida has historically enacted such sweeping changes in the Medicaid program (the last such major change having been made by OBRA 1994).

The manner in which the penalty period is imposed – the penalty formula – was based upon the dollar value of the transfer and the month of each such transfer. Until the passage of the DRA, the total dollar amount of a transfer made within any one month was divided by $3,300, the quotient was then rounded down to the nearest whole number,, and this whole number was the amount of months of Medicaid ineligibility imposed starting from and including that month during which the transfer was made. So, by way of example, a transfer of $6,500 in May of 2,007, would have to be disclosed for an application made in June, 2007. The $6,500 would be divided by $3,300, and the quotient (1.969) would be rounded down to the nearest whole number (1) and the applicant would be assessed a penalty of one-month’s ineligibility starting with the calendar month of the transfer (May, 2007), so as of June, 2007, the applicant would be eligible for Medicaid.

With the passage of the DRA, three major changes were enacted, one good, and two very harsh. The penalty divisor was increased to $5,000 (being a good change for the applicant), but the period of ineligibility now must run from the date of the Medicaid application, not the date of the transfer. This means that any transfer during the applicable look-back period which results in a transfer penalty will have that penalty period begin to run when the application for Medicaid is filed. What’s more, there will be no more rounding down of the penalty periods. The penalty period will be broken down into increments as small as daily (e.g., for a thirty-day month, a .5 penalty will equate to 15 days).

The effective date of the DRA – as far as computing of penalties is concerned – is November 1, 2007, so transfers made prior to that date will still use the old rule as far the date the penalty period will begin. The $5,000 denominator, however, will be used to calculate the pre-DRA transfers (good).

These new changes (the DRA) with respect to Medicaid do not mean that the applicant and his or her community spouse are bereft of planning options. Indeed, there are several new and effective tools remaining in the Elder Law attorney’s arsenal to protect assets and obtain Medicaid eligibility within the context of Medicaid. Because no two sets of circumstances are exactly alike, you are urged to set up a meeting with an Elder Law attorney to establish a suitable plan well in advance of having to face the kind of health-care calamity all too common to an aging population.