Medicaid: A primer
Medicaid is a hybrid federal and state program (funded by both) that is designed to provide healthcare for those who cannot afford it. Medicaid is designed as a “payor of last resort” and so has strict eligibility criteria.
While Medicaid programs are administered on the state or local level and so are governed by state law, federal law also imposes numerous conditions on Medicaid funding that are the bases for Medicaid rules. So, Medicaid administrators must follow federal law plus any additional applicable state or local rules.
What Medicaid Provides
Medicaid does not, itself, provide healthcare. Instead, Medicaid pays for insurance under which eligible people are covered. The policies themselves are issued by private companies, such as Aetna, UnitedHealthcare or Blue Cross/Blue Shield. All such policies are comparable to each other in benefits and operation, as they are dictated by Medicaid rules. Under federal law, Medicaid plans must cover a variety of healthcare services, including doctor and clinic visits, hospital expenses, diagnostics and screenings, lab work, x-rays, family planning and ambulances. States may add services that Medicaid plans must cover in their states, including dental, vision, personal health aides, occupational and physical therapy and many other services.
In addition, Medicaid pays for long-term care services for elderly people that may not be paid for by Medicare. While Medicare covers most people over age 65 regardless of income or assets, Medicaid is only available to those who meet its income and asset eligibility requirements.
For example, Medicare will only pay for nursing home care if it is considered temporary and rehabilitative. Medicare does not pay for permanent or long-term nursing home stays. Medicaid, on the other hand, can pay for nursing home stays of many years. This is where the legal services element of Medicaid comes in. Because many elderly clients may need expensive healthcare services covered by Medicaid, planning for eligibility becomes a high-stakes legal service.
Income and asset thresholds for Medicaid eligibility vary widely from state to state. For states that have adopted the Affordable Care Act’s Medicaid expansion rules (which are more than half the states), people are eligible if their incomes are less than 133% of the federal poverty level. Many other states have maintained limits that are stricter and thus reduce eligibility. The federal poverty level and the Medicaid thresholds for all states also depend on family size. The federal government maintains a website with Medicaid income limitations in all states.
In addition to income limitations, Medicaid eligibility also has strict asset limitations. A person is ineligible for Medicaid if he has more than a minimal value in assets that are considered “available” for Medicaid purposes. This limit is as low as $2,000 in some states, though may be somewhat higher in others. Assets are considered “available” to the potential Medicaid recipient if they can be converted to cash and used to pay healthcare expenses. Assets that are very difficult to sell, such as some business interests in small companies, may not be considered “available.”
Moreover, some assets are exempt from this calculation, and thus can be held by a Medicaid recipient without hurting eligibility. These requirements often follow the unwritten rule of “reasonableness.” Examples include:
1. Reasonably necessary personal property, such as clothing, home appliances, furniture, etc. While the local Department of Social Services is not going to make one sell one’s refrigerator or winter coat, ostentatious or obviously expensive jewelry may be counted. It’s all a matter of what is considered reasonable under the circumstances.
2. The recipient’s car, again, within the bounds of reason. Medicaid authorities are not going to make the applicant sell his family’s minivan, but pulling up to the Medicaid office in a late model Lexus is not advisable.
3. Assets in a 401(k) or qualified retirement account, except that required payouts are considered available resources.
4. The applicant’s home, up to $500,000 in home equity (or $750,000 in some states).
5. Pre-paid burial expenses, which can be held in an “irrevocable burial trust.”
Beyond these exempted assets, assets beyond the asset limits will make one ineligible until one “spends down” one’s assets on one’s healthcare to get below the threshold.
There are also limitations on the assets of the spouse of the recipient, though these limits are typically much higher, being $100,000 or more in many states.
The Five-Year Lookback Rule
Because of the asset limitation on Medicaid recipients, one common component of an estate plan for an elderly client who anticipates needing expensive long-term health care is to diminish his asset levels by giving away assets to his children or other beneficiaries.
To limit people’s ability to transfer assets to become Medicaid eligible, federal law requires a period of ineligibility to follow any significant gift. Since the passage of the Deficit Reduction Act of 2006, there is a five-year “lookback” period when a potential recipient applies for Medicaid.
If a Medicaid applicant has given gifts in the past five years, he must wait out a period of ineligibility before being eligible for Medicaid. The period of ineligibility starts on the date of the application and is measured in months and is the amount of the gift divided by the average nursing home cost in the county. So, for example, if a potential recipient made a $100,000 gift on January 1, 2018 and applied for Medicaid on January 1, 2020, and the published average nursing home costs in the county is $5000 per month, he must wait 20 months from the date of the application, or until September 1, 2021. Because of the lookback rule, it is common for elderly clients engaging in estate planning to be advised to gift the bulk of their assets away at least five years prior to their anticipated need of long-term care services.
Where a recipient has access to income or assets or has made substantial gifts in the past five years and needs Medicaid immediately, there are various legal strategies to save at least some of the assets while gaining Medicaid eligibility. While these are beyond the scope of this presentation, some are covered in our other presentations on the subject.
Medicaid is a hybrid federal and state program designed to be a “payor of last resort” of healthcare expenses for those who cannot pay their own. Nevertheless, because of the variety of services Medicaid pays for and because of its expansion under the Affordable Care Act, Medicaid has increased its importance as a major component of the American healthcare system in recent years.