LTC Bullet: Is it Spend Down or Medicaid Planning?

Friday, July 14, 2017


LTC Comment: A lot of what passes for Medicaid “spend down” in the scholarly literature is really Medicaid planning. We explain and give examples after the ***news.*** [omitted]



LTC Comment: Several economists have published excellent research showing how the availability of Medicaid affects consumers’ financial behavior and demand for long-term care insurance. We explored examples of this work in each of the past two weeks:

LTC Bullet: Medicaid, Home Ownership and Long-Term Care Financing (7/7/17) discussed dramatic evidence that Medicaid’s estate recovery requirement induces aging Americans to reduce home ownership, decrease home equity, and set up trusts in order to qualify for Medicaid long-term care benefits.

LTC Bullet: Home Equity and LTCI Demand (6/30/17) explored the thesis that home equity “substitutes” for long-term care insurance demand and suggested instead that Medicaid’s large home equity exemption obviates LTCI demand by eliminating home equity’s liability for long-term care costs.

The economists who wrote both of the articles reviewed in those Bullets got key aspects of Medicaid asset spend down wrong. The first assumed that Medicaid requires assets to be spent for care, but that is not the case as any amount of countable resources can easily be converted to exempt resources. The second assumed that Medicaid spend down is an onerous process and leads to deficient care, neither of which outcomes necessarily occurs if the spend down is managed by a Medicaid planner.

So what? I think that in both of these cases, the economists’ findings about the impact of Medicaid on financial planning behavior would have been much stronger if they had taken into account the ease with which even affluent people structure their income and assets before and after care is needed.

Today and in future weeks, we will review the work of other economists regarding Medicaid and long-term care to see how they treat the spend down issue. We’ll keep this question always in mind: “Is it spend down or Medicaid planning?” We seek an explanation of why economists and health policy analysts tend to equivocate on the meaning of Medicaid spend down. Why do they ignore the evidence of widespread Medicaid planning and therefore underestimate the impact of Medicaid on asset accumulation or decumulation and long-term care insurance demand?

Today, we consider an often-cited article by economist Norma B. Coe titled “Financing Nursing Home Care: New Evidence from Spend Down Behavior,” Tilburg University, 2007. What follows are quotes from the article followed by our comments.

Coe: “I find that the elderly shift their consumption and savings decisions in response to Medicaid. Single households have lower net worth through the median of the distribution due to Medicaid policy. On the other hand, I find that married households do not lower their total net worth, but they change their relative holdings of protected and non-protected assets.” (Abstract, p. 1)

LTC Comment: That sure sounds like Medicaid planning at work, doesn’t it? Singles jettison wealth whereas couples, over whom Medicaid financial limits are less stringent, convert countable assets into exempt resources. Surely the body of the article will explore this process. But, no.

Coe: “Medicaid covers long-term care, but only after most private savings have been exhausted.” (p. 2)

LTC Comment: Exhausted? How? The presumption is that savings are spent down for care. But Medicaid does not require that. A vast peer-reviewed legal literature explains how to “exhaust” savings to qualify for Medicaid without spending on care. Surely the article will review and explore the ramifications of that literature and those techniques. But, no.

Coe: “I explore two major avenues available to households to shift more of the cost of a nursing home stay to the government. The first is available to all households, and it is to simply lower your net worth. The second is available to single households in select states and all married couples, and that is to put more money in housing assets, which are protected from the Medicaid program.” (pps. 2-3)

LTC Comment: Now that’s a promising start. Unfortunately, we learn nothing more about how single people and married couples lower their net worth and put money into exempt housing assets. Is it spend down or Medicaid planning? For example:

Coe: “Medicaid . . . will pay for an unlimited amount of nursing home care, regardless of the underlying cause or the ability to recuperate. This insurance is not free: Medicaid is means-tested, and generally speaking, the eligibility rules require spending most of a household’s accumulated assets before coverage can start.” (p. 4)

LTC Comment: That is simply not true. Medicaid eligibility rules do not require spending most accumulated assets before coverage can start. Besides the fact that one can convert countable to non-countable assets without spending down anything, the vast majority of Medicaid applicant/recipients’ wealth is already held in exempt resources like the home and auto. On top of that, recipients can retain without any dollar limit a business including the capital and cash flow, IRAs in payout status, term life insurance, prepaid burial plans, home furnishings and personal belongings. Finally, for people who still own too much countable wealth to qualify, there are sophisticated legal methods to shift wealth away from spend down liability. If Medicaid induces reductions in net worth or conversion of wealth to exempt status, how much more so does it do that if you take these Medicaid planning techniques into consideration.

Coe: “A QIT [qualified income trust] is a ‘sheltering’ device, but it only shelters income to meet the eligibility criteria.” (p. 7)

LTC Comment: Here Dr. Coe veers into discussing one actual Medicaid planning technique. QIT’s, AKA Miller income diversion trusts, allow people in income cap states to divert excess income temporarily so they can become eligible for Medicaid LTC benefits despite having incomes above, often far above, the state’s limit. Thanks to QITs, the rule of thumb throughout the USA, whether in medically needy or income cap states, is that anyone with income below the cost of a nursing home, at least several thousands of dollars per month, can qualify for Medicaid long-term care benefits based on income.

Coe: “Any assets not allocated to the community spouse are allocated to the institutionalized spouse, who must spend them down to the state resource limit for a single individual before becoming eligible for Medicaid.” (p. 9)

LTC Comment: Here again, this time discussing the special rules to protect spouses from impoverishment, the reference is to the institutionalized spouse’s need to spend down excess resources. The unspoken presumption is that such resources must be spent for care. There is no acknowledgement of other options to reach the eligibility limits, such as the many methods of Medicaid planning.

Coe: “There are limits to how one may eliminate assets to qualify for Medicaid.” (p. 10)

LTC Comment: That sounds promising, but the following section discusses only Medicaid’s largely ineffective asset transfer rules without addressing the many highly effective ways people actually use to shelter or divert assets in order to qualify for Medicaid.

Coe: “While this set-up is done to minimize the government’s burden for nursing home care, it does set up an interesting incentive scheme. If one enters a nursing home and cannot self-fund the entire cost and therefore needs to go on Medicaid, there is an implicit 100% tax on all income and assets over the protected limit. If there is no difference, psychological or in actual care between having public funds or private funds pay for a nursing home, the optimal decision is to consume all wealth over the protected amount in the previous period and then let Medicaid pay for all nursing home costs.” (p. 11)

LTC Comment: No, there is not a 100% tax. In fact, people can have their cake (retain exempt assets or use a more elaborate Medicaid planning method, such as a reverse-half-a-loaf transfer, a Medicaid friendly annuity, or a trust) and eat it too (qualify for Medicaid LTC benefits while retaining or diverting wealth to others).

Is that point mitigated if, as is widely acknowledged, care financed by Medicaid means lesser quality and fewer choices? No, because of the “key money” planning technique. Medicaid planners advise their affluent clients to hold back some cash (key money) so they can pay privately for a while. That guarantees the clients red-carpet access to top quality facilities and care because long-term care providers are desperate to attract non-Medicaid residents paying the full private market rate. Consequently, poor people, without the means to buy their way into the better facilities, end up in the more typical high-Medicaid-census homes that have earned the program’s dubious reputation.

Coe: “Two financial activities that could be influenced by Medicaid policy are inter-vivos transfers and trust formation, which I do not address directly in this paper.” (p. 12)

LTC Comment: A promising turn, but unfortunately, trusts and transfers are not the major Medicaid planning methods, although they are the ones analysts tend to focus on, probably because data about them is more readily available, and the analysts are not familiar with the many other methods of or the extensive legal literature about Medicaid planning.

Coe: “Stum (1998) conducted in-depth interviews using open-ended questions to understand how the family members view and experience the reality of financing long-term care, including the spend-down process. She found that buying prepaid burial trusts and one-time gifts to children ranging from $500 to $8,000 were the most common behavioral responses to imminent spend-down.” (p. 12)

LTC Comment: This is more promising, because exempt pre-paid burial plans, according to the many Medicaid eligibility workers and supervisors I’ve interviewed, are the single most common Medicaid planning method. They occur in 65% to 85% of all Medicaid long-term care cases usually averaging $8,000 to $10,000 per case. State Medicaid eligibility staff often recommend that applicants purchase burial plans instead of spending their remaining countable funds on private care. This exemption constitutes a huge subsidy to the funeral industry at the expense of Medicaid, taxpayers and long-term care providers. Although the most common of all Medicaid planning methods, sheltering funds in prepaid burial plans is only one of many similar approaches.

Coe: “The data I use for this project are the 1995-2000 waves of the Assets and Health Dynamics of the Elderly (AHEAD). The AHEAD is a nationally representative panel survey of households with heads at least age 70 in 1993. By design, the AHEAD over samples African- Americans, Mexican-Americans, and Floridians. The AHEAD follows people over time regardless of institutionalization, divorce, or remarriage.” (p. 17)

LTC Comment: Using this data source raises serious questions and problems as I explained in LTC Bullet: Behind AHEAD (9/2/16). For example, there are many reasons why AHEAD respondents and their representatives might fail to report income and assets to surveyors or even purposefully misrepresent the facts. People who have reconfigured their wealth in order to qualify for public welfare benefits may be ashamed of having done so or simply unaware that their heirs did this on their behalf. Seniors reporting on themselves may be cognitively impaired or intimidated by their self-interested loved ones. Heirs who benefit from preserving parents’ estates may prefer to conceal the facts. Lawyers who do Medicaid planning are protected from disclosure by attorney/client privilege. Long-term care providers and Medicaid eligibility staff, who often know, especially in small rural communities, which wealthy locals are taking advantage of Medicaid, often seethe, but cannot disclose the information because of legally enforced confidentiality. Getting to the truth in such matters is extremely difficult.

Coe: “The Medicaid rules are intricate and interact with each other to create variations in eligibility and benefit generosity. Therefore it is difficult to examine the effects of Medicaid on behavior using each rule independently, or looking at only one aspect of the plan, such as the presence of a Medically Needy program or the value of the CSRA. Instead, it is necessary to use a summary measure for the overall generosity of the state’s Medicaid program. I use three different summary measures.” (p. 20)

LTC Comment: In fact, there is very little difference in the overall generosity of states’ Medicaid programs when you factor in Medicaid planning methods. For example, so what if one state imposes the usual $2,000 limit on countable assets and another permits five times that much, when federal law and regulations allow virtually unlimited exempt assets to be retained? While there is some variation in state Medicaid eligibility rules, DeNardi, French and Jones concluded there was “little practical difference in Medicaid eligibility across the different states,” largely as a result of medical and long-term care expense deductions.[1]

Closing LTC Comment: Economist Norma Coe’s basic point is correct and very important. Because Medicaid exists as a payor of last resort, aging Americans structure their wealth to maximize eligibility for the program’s long-term care benefits. But Dr. Coe, and her colleagues who have made the same observation, miss the full import of their findings because they do not know and hence cannot explain how Medicaid’s extremely elastic and manipulable eligibility rules facilitate eligibility, desensitize the public to long-term care risks and costs, and result in most people ending up uninsured privately and dependent on public assistance--whether they genuinely “spend down” or not.

[1] De Nardi M, French E, Jones JB, Gooptu A. Medicaid and the elderly. Econ Perspect. 2012;36:17-34; [LINK]