LTC Bullet:  Supremes Sing Sour Note for Medicaid Planning

Tuesday  February 26, 2002


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LTC Comment:  Various judges have called Medicaid nursing home eligibility rules "Byzantine," "a Serbonian bog," and "an aggravated assault on the English language, resistant to attempts to understand it."   Hence, Medicaid planning, which burrows through loopholes in Medicaid eligibility rules, is also extremely complicated and convoluted.  That's one reason Medicaid planning often escapes appropriate scrutiny and criticism.  Many of our readers may not plough through the brain-numbing details that follow, so here's what it means in a nutshell.  The Supreme Court of the United States has eliminated any right people would otherwise have had, independent of state Medicaid policy, to use a popular and lucrative Medicaid planning technique.  That technique allowed married couples to keep as much as a quarter million dollars or more, over and above what Congress intended to permit them to retain, while they qualify for welfare-financed nursing home care.  By allowing state Medicaid programs to prohibit the popular "transfer assets before income" planning gimmick, the Supreme Court sent a strong message that Medicaid is a safety net for the poor, not a substitute for private financing of long-term care.  Now, read on, for a little glimpse of the twilight-zone maze that is Medicaid nursing home eligibility and Medicaid planning.

Supremes Sing Sour Note for Medicaid Planning

In a 6-3 decision last week (“Wisconsin Department of Health and Family Services v. Blumer,” No. 00-952, available at, the U.S. Supreme Court dealt a blow to Medicaid planners by resolving a thorny Medicaid eligibility question.  In finding permissible the “income-first” approach to raising the level of a community spouse’s income to a minimum threshold level, the Court has denied Medicaid planners a powerful asset-sheltering technique in states already utilizing the “income-first” approach and in those states now likely to follow suit. 

As we often explain, Medicaid planning (the practice of transferring or sheltering a client’s assets in order to qualify him or her for welfare-financed long-term care) severely limits a client’s access to quality care at the appropriate level and has a corrosive effect on the long-term care service delivery system.  It should be noted that the National Academy of Elder Law Attorneys, the trade association of the Medicaid planning bar, submitted an Amicus Curiae (friend of the court) brief in support of the losing side in this case.

Here’s a much-simplified version of the story.  The Medicare Catastrophic Coverage Act of 1988 (MCCA) established the current statutory framework used to determine Medicaid nursing home eligibility.  In addition to dealing with the “institutionalized” spouse who is seeking Medicaid-funded care, this framework addresses permissible asset and income levels for the “community spouse” living at home.  With respect to assets, a community spouse is entitled to keep half of the couple’s assets (notwithstanding several assets which are exempt from consideration such as the family home) not to exceed a Community Spouse Resource Allowance (CSRA) which is set by each state within a range prescribed by the federal government.  On the income side, the community spouse is permitted to keep all of his/her own income and, at a minimum, is entitled to a Minimum Monthly Maintenance Needs Allowance or MMMNA (set by states, but at least 150% of the federal poverty level) to meet basic needs.  When a community spouse’s monthly income is determined to be below the MMMNA, the law permits the institutionalized spouse to supplement the community spouse’s income with a Community Spouse Monthly Income Allowance (CSMIA) in order to raise the community spouse’s income to the minimum level.  The central question resolved by the Supreme Court in this case is how this transfer of income may occur.

States have been using either of two methods.  The “income-first” approach used by Wisconsin and a majority of states requires the institutionalized spouse to transfer a portion of his or her income first before being allowed to transfer income-producing assets (“resources”) to raise the community spouse’s income level.  The other “resource-first” approach allows just the opposite.  The institutionalized spouse first transfers income-producing assets capable of filling the income gap.  Only if the institutionalized spouse has insufficient income-producing assets to fill the gap would a straightforward transfer of income be required.  In this case, the Wisconsin Court of Appeals had ruled earlier that the “income-first” approach as codified in a Wisconsin state statute impermissibly conflicts with federal law (which the court understood as mandating the “resource-first” approach).  However, courts in other states as well as several federal courts have ruled the “income-first” approach is not inconsistent with federal law.  The Supreme Court granted certiorari to resolve the conflict.

Why do Medicaid planners care about which method states utilize?  This is the easy part of the analysis.  The “resource-first” approach allows Medicaid planning clients to shelter more assets and qualify for Medicaid more quickly than under the “income-first” approach.  Here’s a simple example:  Let’s say a community spouse’s monthly income is $500 below the MMMNA.  Under the “income-first” approach, the institutionalized spouse would have to transfer as much of the $500 as possible to the community spouse before being allowed to transfer any income-producing assets.  If the institutionalized spouse has $500 per month or a sizeable part of it to transfer, there may be little or no opportunity to transfer assets over and above the prescribed CSRA.  Under the “resource-first” approach, however, the institutionalized spouse may begin by transferring assets sufficient to generate the entire $500 monthly income if possible.  How much in assets can be transferred?  As much as a hearing examiner can be convinced is necessary to fill the income gap.  Of course, a Medicaid planner will do his or her best to argue for the highest asset transfer possible.  Every dollar that goes to increase the community spouse’s CSRA is a dollar that doesn’t have to be “spent-down” to achieve Medicaid eligibility for the institutionalized spouse.  A significant amount of assets can be sheltered in this way and through other tactics to increase the CSRA.

We note that the transfer-resources-first approach leads to some otherwise upside-down financial planning choices.  For example, to maximize the amount of assets that the institutionalized spouse may transfer to the community spouse, Medicaid planners recommend investment vehicles that pay the lowest possible interest.  Why?  Because the less income the assets generate, the more assets can be transferred away from the Medicaid recipient and to the healthy spouse.  In the example above, to generate the extra $500 per month allowed, the Medicaid recipient could transfer $120,000 to the healthy spouse if the assets generated a five percent return, but could transfer only $60,000 if the assets generated a ten percent return.  We're not making this up.  Here are two examples from legal periodicals that recommend the transfer-resources-first gambit.

 "A potential planning technique would be for the community spouse to reallocate his or her assets into forms that pay less income.  For example, money market funds could be used to buy zero coupon bonds, gold, or growth stocks, all of which pay no income at all.  The community spouse could then legitimately argue that he or she requires a larger allocation of income up to the Monthly Maintenance Needs Allowance." (Gregory Wilcox, "Another Strategy to Increase the CSRA," The ElderLaw Report, Vol. II, No. 8, March 1991, p. 12.)

"The Other Spouse Can Petition for an Increased Asset Allowance.  The other spouse can argue that additional assets are needed to generate income...[thereby sheltering in one example an additional] $200,000."  (Lawyers Weekly, 9/27/93)

The above is a very simplified summary analysis of how Medicaid eligibility works in this area.  The Court’s opinion in this case and any number of legal treatises provide detailed examinations of Medicaid eligibility with even more confusing acronyms.  The point of bringing this decision to your attention is not based on the specific facts of the case (wherein a very small amount of assets was in question).  Nor is this case important to us because of the particular reasoning behind the majority’s holding that the “income-first” approach is valid.  (The majority gives considerable deference to the Secretary of Heath and Human Services’ position that both the “income-first” and “resource-first” methods are acceptable and to the flexibility given states generally in implementing related MCCA provisions.).  Rather, the importance of the case rests on the impact of the decision.  States are now free to choose a method to supplement a community spouse’s income that does not promote potentially egregious Medicaid planning.  Moreover, states which do not already use the “income-first” approach will now be tempted to do so.  With tax receipts down and welfare rolls up, states will not likely ignore the fact that the “income-first” approach has the practical effect of minimizing the likelihood of interspousal asset transfers which hasten Medicaid eligibility and associated costs.

On a final note, the majority opinion begins its discussion of Medicaid eligibility rules by stating, “The federal Medicaid program provides funding to States that reimburse NEEDY persons for the cost of medical care.” (p. 2, emphasis added).  Although the Court does not address the implications of its decision on the practice of Medicaid planning, its decision brings us one--albeit small--step closer to the Court’s description of Medicaid’s intended purpose.  Who knows?  Maybe this decision from the highest court in the land will prompt a bit of self-examination on the part of Medicaid planners and their clients who could have planned ahead to avoid welfare dependency and additional strain on the Medicaid program.  Not likely.  But one less arrow in the Medicaid planning quiver (at least in states using the “income-first” approach) is a victory for responsible long-term care planning nonetheless.