LTC Bullet: States Decry Medicaid LTC Loopholes
Friday, January 11, 2013
LTC Comment: State Governors
complained about egregious Medicaid LTC loopholes in replies to a
Congressional inquiry. Details after the ***news.*** [omitted]
LTC BULLET: STATES DECRY MEDICAID LTC LOOPHOLES
North Dakota: A couple with $700,000 in liquid assets qualified for Medicaid LTC by purchasing a more expensive house and car and buying an annuity while receiving $8,000 per month of income from pensions, Social Security, annuity payments and oil lease money. Another couple had more than $528,000, but qualified when the community spouse bought a new home, a new car, and two annuities worth $240,000 and then applied for Medicaid to pay the institutionalized spouse’s nursing home costs.
Wisconsin: An ill spouse transferred $600,000 to the community spouse who refused to sign the Medicaid application making the ill spouse eligible for Medicaid LTC because “interspousal transfers are not considered divestment.”
New York: Using promissory notes, immediate annuities, and spousal refusal, affluent Medicaid LTC applicants qualify while retaining unlimited assets. Even when the state has legal recourse: “Medicaid does not have sufficient resources to pursue all these cases in court.”
Rhode Island: A couple with $400,000 in a bond account became eligible in a month by purchasing “a large single premium immediate annuity.” A single man transferred $100,000 to his son but dodges half the transfer of assets penalty using a promissory note to carry out a reverse half-a-loaf strategy.
Virginia: A man bought a $900,000 annuity in his wife’s name which paid her $89,000 per month, but “the Virginia Medicaid program could not count this income for purposes of determining the husband’s Medicaid LTC eligibility.”
Read the answers to question #4 below for more examples of how the wealthy qualify for Medicaid LTC benefits without spending down personal wealth.
LTC Comment: In LTC Bullet: The Medicaid Long-Term Care Reform Act of 2012 (October 5, 2012), we described legislation introduced by Congressman Charles W. Boustany, Jr., MD (R, LA) and others that called for the study and reform of Medicaid LTC eligibility and estate recovery rules.
In the same Bullet, we reported that the bill’s sponsors had sent a letter to state Governors asking their opinion of the proposed legislation and requesting their replies to four key questions about the appropriate role of Medicaid long-term care financing.
Despite prodding from the members of Congress, only 15 states replied to their letter. But in those 15 replies, there is strong evidence that Medicaid eligibility and estate recovery rules are subject to frequent and egregious abuses.
Following are typical replies to each of the four questions:
1. Should the federal government give states greater flexibility to consider assets, including substantial home equity, when determining eligibility for long-term care coverage through the Medicaid program? Why or why not?
New Mexico Governor Susana Martinez: “I agree that alternate policy options should be pursued to prevent state Medicaid programs from becoming the default financier of long-term care services for middle income individuals, and to protect the program as a safety net for those who need it most.”
Wisconsin Department of Health Services Secretary Dennis G. Smith [Smith was Director of Medicaid at the federal Centers for Medicare and Medicaid Services (CMS) for eight years during the George W. Bush administration]: “Greater flexibility should be provided to states regarding Medicaid eligibility policies, including which assets should be considered for purposes of determining medicaid eligibility. Increased flexibility will allow states to adopt changes to their Medicaid programs in order to help ensure the long-term sustainability of such programs for their residents most in need of government assistance.”
Pennsylvania Department of Public Welfare Secretary Gary D. Alexander: “States should be given more flexibility to determine asset limitations for Medicaid long-term care program eligibility. The economic climate of states varies, as does their ability to raise revenues. What makes sense in one state may not make sense in another. A $525,000 home exemption, while better than the prior limitless exemption, does not address the needs of state that are struggling to provide services to those who do not have sufficient asset reserves. States should have the flexibility to adjust asset limitations based upon their individual needs.”
Maine Governor Paul R. LePage: “Yes, we believe that States should be given greater flexibility to consider assets.
New York Deputy Secretary for Health James E. Introne: “For states that are tied to the resource rules of the Supplemental Security Income (SSI) program, federal Medicaid policy should be developed separately for the treatment of annuities, promissory notes and individual retirement accounts. These assets are most commonly encountered in Medicaid and yet the rules regarding their treatment as an asset is dependent on the rules of the SSI cash program.”
Tennessee Deputy Director of Policy and Research Beth Tipps in the office of Governor: “Taking substantial home equity and other assets currently exempt under the law into account in determining eligibility for Medicaid reimbursement of LTC would result in fewer people with substantial means qualifying for Medicaid-reimbursed LTC until such time that those assets have been exhausted, and target Medicaid reimbursement to those with the greatest financial need. The effectiveness of any such policy would also likely require adjustments to the look-back period for asset transfer.
“Persons who want to protect assets would still be able to purchase a LTC Partnership policy and protect assets up to the value of private insurance benefits provided. This would encourage those who can afford LTC insurance to purchase it in order to protect assets, and decrease dependency solely on Medicaid for payment of LTC.”
Virginia Secretary of Health and Human Resources William A. Hazel, Jr., MD: “Giving states flexibility to change eligibility rules and expanding LTC insurance coverage options for middle income individuals will help to protect Medicaid LTC as a safety net for the low income Americans who need it most.”
“Under current federal requirements, states must exclude, at a minimum, approximately $500,000 in home equity when determining the eligibility of an individual for Medicaid LTC. If a qualifying individual (e.g. a spouse or dependent child) is living in the house, the home equity exclusion can be even higher. Virginia believes, in general, that states should have greater flexibility to determine the level of assets can have and still be eligible for Medicaid LTC.”
“Currently, the repeal of the federal MOE provision would likely be the single most effective way of providing Virginia with the flexibility needed to reform LTC eligibility requirements and eliminate several loopholes that allow individuals to shelter assets from the Medicaid program. These loopholes allow individuals to shelter even more assets than those allowed under the home equity exemption and still qualify for Medicaid LTC.
Georgia Governor Nathan Deal: “Federal restrictions fail to recognize significant variation across states. Home values, household incomes, cost of living, demographics, and cost of health care are factors that determine eligibility but are widely different from place to place. States are better suited to establish criteria which ensure their safety net programs better serve those for which it is intended.”
2. Please provide examples of barriers to effective Medicaid estate recovery programs and tools that might help states in this area.
North Dakota Human Services Department Interim Executive Director: “State Medicaid programs have, by default, become the major form of insurance for long-term care. Medicaid estate planning has increasingly become a way for middle income Americans to impoverish themselves to the point that they can become eligible for Medicaid. The current system is consuming both state and federal budgets and is unsustainable. It is imperative that states have the flexibility to pursue creative and innovative options for state-appropriate solutions.”
Wisconsin Department of Health Services Secretary Dennis G. Smith: “There has been an increase in the number of beneficiaries age 65 and older seeking disability determinations solely to place excess assets into . . . pooled trusts. The trusts are preventing the state from recovering medicaid costs in certain cases, and the extra requests for disability determinations from persons over age 65 are straining the state’s resources.”
“The prohibition against filing a TEFRA lien prior to the outcome of a fair hearing has been increasingly problematic because beneficiaries or their responsible parties postpone hearing dates while attempting to sell the home. When the home eventually sells prior to the hearing, no lien can be placed because the beneficiary is no longer the owner. Many beneficiaries then seek a determination of disability and, if granted, the sale proceeds are placed into a . . . pooled trust and not available to pay for the cost of care which then continues to be borne by Medicaid.”
Pennsylvania Department of Public Welfare Secretary Gary D. Alexander: “The underlying policy debate on estate recovery involves the very character and purpose of Medicaid. Should the Medicaid long-term care program be a strictly needs-based program for individuals who have no ability to pay for their own care? Or should middle class individuals and couples be permitted to qualify for benefits without losing the ability to transfer wealth to their children? When the economy falters, allowing the latter to occur places an increasing amount of stress on limited human services budgets and requires policymakers to consider service reductions.”
Hawaii Governor Neil Abercrombie: “When a Medicaid recipient dies while having only a life estate interest in the property, the lien that was on the property must be released which results in the loss of revenue. The federal statute should be amended to allow recovery of up to the value of the life estate at the time of the recipient’s admission to the facility.
“Reverse mortgages are an emerging area of concern. Families are beginning to draw out the equity in property before they have to pay back the lien. By leaving little, if any, equity in the property prior to having to repay the lien, families are effectively diverting this asset from its intended use as a means to repay the government. We believe that this should be considered a fraudulent diversion of assets, and states may have to file a civil fraud complaint to recoup this money.”
“Currently, there are loopholes because there is no definition of the term ‘medical institution.’ There are certain types of facilities that are not considered ‘medical institutions’ for the purposes of placing a lien. The term ‘medical institution’ needs to be better defined in the federal statute. An example of this is a Residential Alternative Community Care facility.”
“There are no standards or guidelines regarding whether or not a lien remains on a property held in joint tenancy. When the Medicaid recipient passes away, is the lien extinguished or does it continue even though the property transferred to the surviving joint tenant? Perhaps the federal statute should be amended to allow liens to continue on real property held in joint tenancy after the Medicaid recipient passes away.
“Some families don’t report the death of the medicaid recipient in a timely manner. Perhaps there needs to be a requirement for the families to report the death of the Medicaid recipient within a certain time frame. The delay in the reporting is potentially costing the state millions of dollars.”
“By amending the federal statute to include property held ‘just prior’ or ‘immediately prior’ to death, real property held as a life estate or held in joint tenancy would be included in a Medicaid recipient’s estate.”
New York Deputy Secretary for Health James E. Introne: “Although states are required by federal statute to pursue estate recovery from all real and personal property and other assets within an individual’s estate as provided by State law, states have the option of expanding the probate definition of estate to include any other real and personal property and other assets in which the individual had any legal title or interest at the time of death. If the option to expand the probate definition of estate for Medicaid estate recoveries were a mandate, rather than an option, all states would be participating equally in the effort to decrease Medicaid spending.”
Rhode Island Governor Lincoln D. Chaffee: “Medicaid estate recovery programs are problematic because of legal options allowable under current State and Federal laws. People are currently able to find refuge for assets in the form of life estates or promissory notes.”
“The federal government should not allow for the use of ‘Lady Byrd’ deeds; life estate with special powers; or enforced life estate deeds. Currently, CMS does not consider the use of such deeds to be a transfer of a resource because the transferor retained the right to ‘sell, mortgage, hypothecate, etc.’ Medicaid, however, cannot recover from an estate when such a deed has been executed. Therefore, homes or former homes may not be considered assets under probate when the life estate holder dies and subsequently the State cannot recover monies spend for medical costs.”
Tennessee Deputy Director of Policy and Research Beth Tipps in the office of Governor: “Estates must include real and personal property and other assets in an estate as defined in state probate law. At the option of the state, however, recoverable assets also may include any other real and personal property, annuities, and other assets in which the person has legal title or interest at the time of death, including assets conveyed to a survivor, heir, or through assignment through joint tenancy, tenancy in common, survivorship, life estate, living trust, or other arrangements. Thus, assets (i.e., living trusts, life insurance policies, and certain annuities), which may pass to heirs outside of probate, would only be subject to Medicaid recovery if a state expanded its definition of ‘estate.’ These are the vehicles often used by Medicaid Estate Planners to help people with more substantial wealth protect assets while still qualifying for Medicaid reimbursement of LTC.”
Virginia Secretary of Health and Human Resources William A. Hazel, Jr., MD: “In addition to Virginia’s current broad estate recovery authority, we are considering several other measures to increase recovery efforts, but these are currently stalled due to the Affordable Care Act (ACA) maintenance of eligibility (MOE) provision which precludes more restrictive eligibility policy for adults enrolled in Medicaid until at least 2014.”
3. Should state and federal governments encourage middle-income Americans to anticipate and plan for their future long-term care needs, instead of relying on Medicaid, a safety net for the poor? Why or why not?
New Mexico Governor Susana Martinez: “Current policies have transformed the Medicaid long-term care program from a safety-net for the financially and medically needy to an entitlement for middle-income individuals, essentially changing its original scope and intent. Estate planning for Medicaid discourages individuals from engaging in meaningful financial planning that would enable them to take greater personal responsibility for their future long-term care needs.”
North Dakota Human Services Department Interim Executive Director: “The current lack of limitations on estate planning virtually eliminates incentives for individuals to plan for their own future needs. While the long-term care partnership act was enacted to encourage couples to plan for their long-term care needs, the interpretation of the Medicaid act to allow people to shelter an increasing number of assets makes the allowances found in the long-term care partnership act a less desirable option to assist a couple in retaining their assets.”
Wisconsin Department of Health Services Secretary Dennis G. Smith: “Wisconsin supports collaboration between states and the federal government in order to encourage all Americans to anticipate and plan for their future long-term care needs. Placing greater emphasis on future planning, coupled with changes to eligibility requirements in order to ensure that only those individuals who are in fact financially eligible for Medicaid receive such coverage, will contribute greatly to ensuring the long-term sustainability of Medicaid programs.”
Maine Governor Paul R. LePage: “People would be more inclined to purchase LTC plans if there were tighter rules around transfers and greater incentives to purchase such policies.”
Rhode Island Governor Lincoln D. Chaffee: “Yes; using Medicaid as the primary source of funding for long-term care is not sustainable.”
Virginia Secretary of Health and Human Resources William A. Hazel, Jr., MD: “State and federal governments should encourage middle income Americans to anticipate and plan for their future LTC needs. Current reliance of Americans on Medicaid financing for their LTC is simply not sustainable. The Medicaid program is intended to be a payer of last resort; a safety net for the truly needy. Allowing individuals who can afford to buy LTC insurance to accumulate assets and shield those assets, enabling them to qualify for a program intended to serve individuals with very low income, is wrong.”
Georgia Governor Nathan Deal: “Encouraging all Americans to plan for their future needs is critical to ensuring our Medicaid program is able to serve the most vulnerable citizens for which it is designed. Personal responsibility is fundamental. . . . The Medicaid program is a ‘welfare’ or ‘poverty’ program which was established as a safety net program for the poor.”
4. Do you consider Medicaid estate planning to be a significant problem that takes resources from the truly needy in your state? Please explain and provide examples.
Texas Governor Rick Perry: “State Medicaid programs have, by default, become the major form of insurance for long-term care. Medicaid estate planning has increasingly become a way for middle income Americans to impoverish themselves to the point that they can become eligible for Medicaid. The current system is consuming both state and federal budgets and is unsustainable. It is imperative that states have the flexibility to pursue creative and innovative options for state-appropriate solutions.”
North Dakota Human Services Department Interim Executive Director: “Shortly before going into the nursing home, the couple had liquid assets worth about $700,000, not including the home or car. They were over the Medicaid limit by more than half a million dollars. The community spouse, on advice of an attorney, sold the home the couple had lived in for years and bought one worth twice as much and sold the car they had and bought a brand new one worth three times as much. The car is completely exempt under Medicaid rules. The house also is completely exempt under Medicaid rules, as long as the community spouse lives in the house. After successfully sheltering those assets, the community spouse took $400,000 cash, money that was available to be spent on the institutionalized spouse’s care and instead, bough an annuity from their attorney (an ‘investment’ which essentially returns the premium with a very small return) in an effort to tie up the money to make the couple appear to have fewer resources. The annuity is irrevocable, non-assignable, and non-transferable. . . . The North Dakota Department of Human Services was sued in federal court under a civil rights action for denying Medicaid to this wealthy institutionalized spouse. . . . The community spouse has successfully retained nearly all of the wealth the couple had before the institutionalized spouse went into the nursing home and the nursing home has not received one penny. The bill is nearly $100,000 and the couple wants medicaid to cover it. The couple receives nearly $8,000 a month from pensions, social security, the annuity payments, and oil lease money. This couple is not needy and they are simply not who the Medicaid program was or is intended to cover.” [Emphasis in the original.]
“In another case, a couple had nearly $600,000 available that could have been used for nursing home costs. The 83-year old community spouse had beginning sighs of dementia, and ‘invested’ $340,000 . . . into an irrevocable, nontransferable, non-assignable annuity on the advice of his attorney in an attempt to qualify the institutionalized spouse for Medicaid.”
“In another case, the day the institutionalized spouse entered the nursing home, the couple had more than $528,000. At that time, the couple represented to the nursing home that they intended of be ‘self-paying,’ and in fact, paid for two months of care. After learning of ways to exploit Medicaid laws, the community spouse purchased not one, but two annuities from their attorney after realizing the first one did not maximize the assets that could be sheltered. The community spouse bought a new home, a new car, and an annuity for $220,000 and the next day, a subsequent one for $20,000, and then applied for Medicaid to pay the institutionalized spouse’s nursing home costs.”
“In yet another case, a couple had nearly $400,000 the day one spouse entered the nursing home. An annuity for $125,000 was purchased to try to become eligible for Medicaid.
“These scenarios are being duplicated around the state, with an increase in the sales of these types of annuities, and around the country in other states. Medicaid is not intended for people who artificially impoverish themselves by sheltering their wealth instead of using it to pay for nursing home care, but these are the people who are fighting for it and winning – at the expense of the taxpayers and those who legitimately need the assistance of the Medicaid program.
“The North Dakota Department of Human Services argues that annuities like these should be treated as an asset available to pay the long-term care costs incurred by either spouse.”
“Changing the federal law to clarify that these annuities are assets or to allow states to determine how to treat these annuities as assets would be a significant first step in helping states determine appropriate limits of eligibility for the medicaid program. This would help ensure that Medicaid funds would be used by states for those who are the intended recipients rather than being diverted to subsidize those who can and should pay for their own care.”
Arizona Governor Janice K. Brewer: “Spouses use resources to purchase an annuity with high monthly payments being made to the community spouse. The annuity is not considered a countable resource and it is not considered a transfer so the applicant is eligible for medicaid.”
Wisconsin Department of Health Services Secretary Dennis G. Smith: “The Medicaid program is designed to provide health care and long-term care services to individuals and families who are financially eligible. Unfortunately, some estate planners have created a ‘cottage industry’ aimed at sheltering or using assets or income in ways for individuals to gain Medicaid eligibility despite having personal resources to pay for their own long-term care needs. These loopholes continue to leave the state at risk for people intentionally divesting their personal assets so their health care and long-term care is paid for through taxpayer dollars, rather than their own resources. Individuals should use their own resources before asking their neighbors to pay their long term care needs.”
“One example is related to spousal impoverishment laws. More and more, institutionalized spouses are transferring assets to community spouses who refuse to sign the Medicaid application. . . . Interspousal transfers are not considered divestment so Fred was able to maintain eligibility while Bonnie was able to keep $600,000. This is over five times the maximum Community Spousal Resource Allowance of $113,640. If the Department could deny eligibility if a spouse refuses to sign the application, Fred would have been able to cover at least six years of private pay nursing home care using his own resources.”
Pennsylvania Department of Public Welfare Secretary Gary D. Alexander: “Medicaid estate planning is a common tool, but significant issues and problems can arise because individuals and couples can transfer substantial wealth to their children yet still qualify for federal and state long-term care benefits. Annuities, promissory notes and the large home equity exemption used in combination with a life estate/remainder are all legal devices that applicants can use in the process of determination of benefit eligibility. Further, short duration ‘Medicaid’ annuities have been used to facilitate gifting of assets for Medicaid eligibility purposes.
“Special needs trusts are also used for disabled individuals. Yet some of these trusts raise serious policy questions. For example, multi-million dollar personal injury awards that include damages for future medical expense can be placed into such trusts. This results in qualification (or continuing eligibility) for Medicaid, and that program would pay future medical expenses during the recipient’s lifetime. Although there is a ‘payback’ requirement for such trusts, the payback occurs only if assets remain in the trust and only after the death of the individual, which can be decades later. This delayed payback can result in a substantial monetary benefit to the individual’s heirs.”
Maine Governor Paul R. LePage: “Yes, much of which is allowed under the current federal regulations. An example of such abuse is in the purchasing of ‘Medicaid’ qualifying annuities. It is clear that elder law attorneys use this loophole to shelter assets of their clients. Federal law allows such annuities as long as they meet certain provisions. It has become clear that the intent of Congress to allow individuals to save for retirement through the purchases of annuities has been abused and needs to be addressed. It was not intended for individuals to purchase annuities so that they can become eligible for Medicaid at the time they need LTC. . . .
“Another form of abuse is commonly referred to as the ‘half-a-loaf’ method. This allows individuals to transfer resources and then get back half of what they transferred to reduce their penalty, while still being able to transfer half of what they gave away. Regulations can be fixed so that, unless the individual gets back all of what they transferred, the entire penalty remains.”
New York Deputy Secretary for Health James E. Introne: “Yes. Medicaid funds spent on the high cost of long-term care for individuals who are financially able to pay for the cost of their own long-term care needs, but choose to avail themselves of Medicaid through estate planning techniques, increases the amount of state and federal funds that must be apportioned to support the program. As a result, state and federal funds may be restricted from funding programs for the truly needy, e.g. programs for children, education and programs that assist the elderly. Planning techniques such as promissory notes, immediate annuities and spousal refusal continue to provide a mechanism for individuals to access medicaid benefits rather than provide for their own long-term care needs.
“Promissory notes, even when made after an individual has been admitted to a nursing home, preserve the ‘half-loaf’ strategy. This strategy allows an individual to divest him/herself of assets (say $50,000 is transferred outright) and pay for nursing home care during a penalty period with monies returned through a promissory note (a second $50,000 loaned with repayments made at the private pay nursing home rate -- which covers the transfer penalty). The same strategy is employed using an immediate annuity. Money is transferred and an immediate annuity is purchased to pay for nursing home care for the number of months the person is subject to a transfer penalty. With spousal refusal, all assets are put into the name of the community spouse who then refuses to make the resources available for the nursing home spouse. Medicaid must be provided if the institutionalized spouse executes an assignment of support from the community spouse in favor of the Medicaid office or the denial of medicaid would create an undue hardship. Medicaid does not have sufficient resources to pursue all these cases in court.”
Rhode Island Governor Lincoln D. Chaffee: “Trusts allow the wealthy to shelter assets. The more affluent have access to better estate planning and thus, are more likely to have properly crafted legal documents (i.e., trusts, promissory notes, life estates with enhanced powers, caregiver contracts, etc.) In addition to the use of annuities for married couples, and promissory notes for those single individuals or married couples, the amount of monies paid for legal advice is sizeable.
“Mr. and Mrs. Smith have $400,000 in a bond account. Mr. Smith needs to go into a nursing home. After the spousal share has been determined, Mrs. Smith has excess resources transferred to her ‘spouse to spouse’ and purchases a large single premium immediate annuity paying her thousands per month. Mr. Smith has less than $4000 and is found eligible for LTC in the next month.
“Mr. Jones is a single individual with $100,000 in the bank. He goes into a nursing home. He transfers the whole $100,000 to his son. Applies for LTC/MA, meets a level of care due to his poor health and is ‘otherwise’ eligible for LTC except for the prohibited transfer of $100,000. His son creates a promissory note for $50,000 and pays him back monthly. This allows for the father to pay privately for ½ of the time he would have paid privately, except for this ‘Medicaid estate planning’ tool. (Assume the promissory note is created with the correct DRA language.)”
Tennessee Deputy Director of Policy and Research Beth Tipps in the office of Governor: “Medicaid estate planning (‘elder law’) is a big business and allows people with considerable income and assets to maximize their ability to protect both while preparing to access Medicaid to pay for LTC services.
“Restrictions on the use of annuities, promissory notes and life estates would reduce the types of financial vehicles available for protecting assets. In addition to consideration of a longer look-back period, tighter penalties for transferring assets for less than fair market value would likely deter some people from making transfers.”
Virginia Secretary of Health and Human Resources William A. Hazel, Jr., MD: “Medicaid estate planning is a significant problem that negatively impacts Virginia’s ability to provide LTC to the truly needy. Estate planning allows individuals to take advantage of loopholes in Medicaid eligibility rules which allow them to shelter their assets and avoid paying for their LTC services. These services are among the most expensive services provided by the Medicaid program. States are unable to afford the ever increasing cost of the Medicaid program and are obligated to impose limits on services, reduce provider compensation and, in some cases, stop covering certain services. This has an adverse impact on LTC services, as well as other Medicaid services, and directly impacts individuals who most need Medicaid services.”
“The following are examples of loopholes that the Virginia Medicaid program has wanted to close, but has been unable to due to the federal MOE requirement in ACA:
“Prior to applying for Medicaid LTC services, an individual placed approximately $900,000 into an annuity and named his wife as the beneficiary of the annuity. The annuity paid his wife $89,000 per month, but the Virginia Medicaid program could not count this income for purposes of determining the husband’s Medicaid LTC eligibility.”