LTC Bullet: Medicaid Planning Up, LTCI Down

Tuesday, August 31, 2010


LTC Comment: While private LTC insurance struggles, two Medicaid planning techniques prosper. More after the ***news.*** [omitted]


LTC Comment: It's no secret that long-term care insurance sales have languished over the past few years, despite a recent blip up.

But government-financed LTC is on a rampage of expansion. It isn't just the new CLASS program, which is actuarially unsound and bound to wither and die. It's Medicaid, the historically dominant funder of long-term care for most Americans--rich, poor and in between.

According to yesterday's USA Today: "More than 50 million Americans are on Medicaid, the federal-state program aimed principally at the poor . . .. That's up at least 17% since the recession began in December 2007. 'Virtually every Medicaid director in the country would say that their current enrollment is the highest on record,' says Vernon Smith of Health Management Associates, which surveys states for Kaiser Family Foundation."

The key phrase in that news is "aimed principally at the poor." Medicaid IS a health and LTC safety net for the poor. Unfortunately, it has also become the dominant payor for long-term care for the middle class and many of the affluent as well.

But how? If Medicaid is welfare, how do people qualify for it who have high incomes and substantial assets? You can find 128 LTC Bullets we've published on that subject since the Center's founding in 1998 here. But bottom line: Medicaid LTC income and asset limits are so generous that most people qualify without significant asset spend down and virtually anyone else can qualify easily with a little legal help.

We've pushed back aggressively and successfully against the abuse of Medicaid to fund LTC for people who should, could and would have otherwise paid for their own care. We had a big win in the Omnibus Budget Reconciliation Act of 1993, which strengthened and lengthened transfer of assets rules and made estate recovery mandatory.

Another huge success, the Deficit Reduction Act of 2005, eliminated some of the most egregious Medicaid planning techniques (such as the "half-a-loaf" strategy), put the first limit ever on exempt home equity, and unleashed the LTC Partnership program.

But, alas, it seems every time we gain a little ground on saving Medicaid for people in need by diverting others who shouldn't need it to private financing alternatives, other ways to abuse the program emerge. I'll highlight today two Medicaid planning techniques that are not new, but have become markedly more common since DRA '05 closed down easier methods of self-impoverishment.

Technique number one received special attention in the Wall Street Journal on August 29: "Compensating a Family Member." The article begins like this: "Given the still-fragile economy, a growing number of families are compensating relatives who serve as caregivers to elders, elder-law attorneys say. But to avoid stoking family tensions or running afoul of Medicaid eligibility requirements, it's important to draft a formal employment agreement--and disclose the arrangement to the entire family."

Say what? How does taking care of a loved one and getting paid for it help you qualify for Medicaid? Simple. Set up an agreement in advance, pay your adult children or others to take care of you, and deduct the amount you pay them from your countable assets. Then, when you need nursing home care some day, you'll have fewer assets left to spend down. Medicaid planner Howard Krooks, who practices in both New York and Florida, said such cases are 20 percent of his workload nowadays.

"Rather than issue weekly paychecks, some families pay caregivers a lump sum upfront--calculated by multiplying the caregiver's hourly wage by the number of hours he or she is expected to work over the parent's life expectancy. With such a move, a family can transfer assets to a child that might otherwise be deemed available to pay a nursing home, says Mr. Krooks."

So much for filial love and support. Run a tab on Mom and Dad. Send the bill to the taxpayers, Medicaid and the poor.

Technique number two is much more complicated. It is described in detail here: "Promissory Notes for Emergency Medicaid Planning."

But in a nutshell: say you want Medicaid to pay for your long-term care but you neglected to get rid of your assets five years in advance. I say "you," but it's almost never you who are worried about this. You're frail, infirm and, quite likely, cognitively impaired. So itís really your heirs and their complicit attorney who are working to preserve their inheritance and fees, respectively. If they had your best interests at heart, they'd be spending your money to keep you out of a nursing home, in your own home, and receiving the best possible care private money can buy. But be that part as it may. Here's how they wave this magic legal wand to get you into a welfare nursing home instead without spending down too much.

Give away half your otherwise countable assets. Lend your remaining wealth to someone using a promissory note. The note is OK because it is deemed a transfer for value, i.e. an exchange of a countable asset for an equally valuable cash stream that rarely causes ineligibility. Just make sure you dot the I's and cross the T's so the promissory note passes Medicaid muster.

Now you're broke and eligible for Medicaid except for the gift. File for Medicaid. Your application will be denied because you transferred assets for less than fair market value within the five-year look back period. But by applying and being denied, you started the penalty period clock running. Now use the monthly payments from the promissory note to pay for your care. As soon as the penalty period expires, re-apply for Medicaid and voila', you're eligible in half the time and at half the cost you'd have otherwise required.

That's called the "reverse half-a-loaf" strategy and it has become commonplace since DRA '05 shut down the plain old reliable "half-a-loaf" method.

Does it seem crazy to you that poor people would go to such lengths to save a few dollars? It is and they don't. People need to have a lot of money to justify paying Medicaid planning attorneys up to tens of thousands of dollars to protect their wealth in these and many other ways.

Do you think this kind of thing is uncommon? Try Googling "Medicaid planning in [Your State]" and see what you find.

Still, as common as these techniques and many other Medicaid planning gimmicks are, they remain only the tip of the iceberg. The vast majority of Americans qualify for Medicaid LTC because their incomes are less than the cost of their long-term care and their assets are held in exempt form such as home equity. Eligibility is easy for most. Only the affluent need Medicaid planning methods like those described above.

So if you wondered why Medicaid LTC pays for most people and few plan for LTC or buy LTCI, you now have the answer.

Sadly, the Medicaid bubble is about to burst. In fact the whole government entitlement bubble, including social insurance programs as well as welfare programs, is about to burst. And when it does, it'll make the fall out from the internet and real estate bubbles look like a walk in the park. A lot of people, especially the poor, will be hurt.

Here's the takeaway: In the future, only those who have the wherewithal, or the insurance, to pay privately for long-term care will have access to quality care at the most appropriate level. Medicaid LTC, if it survives at all, will be available only to the destitute.

So, protect as many people as you can while time remains.