Medicaid was created in 1965 to offer medical insurance to certain protected groups of people, like low-income or disabled citizens. Unlike Medicare, which is federally operated and available generally to people over age 65, Medicaid is funded partly by the federal government but its parameters and eligibility requirements are decided on the state level. Standards and available coverages differ depending on your state of residence. 35 states have expanded Medicaid while 16 have yet to do so.
For many people, Medicaid is the only way they can afford long-term care in old age. Medicaid benefits cover nursing home or in-home care for those without the money to pay for it themselves through private long-term health insurance. To try and make sure Medicaid benefits are given only to those who need it, Medicaid has a look-back period during which the finances of a Medicaid applicant or couple applicant affect their Medicaid eligibility.
To explain why, consider a hypothetical individual who has done well for themselves, making enough money and owning enough property to be somewhere well over his or her state’s Medicaid asset limit. As the individual gets closer to old age, they decide they’d like to protect themselves in case the need for long-term care arises. Rather than purchase private long-term care insurance, they decide Medicaid is cheaper. So, they gift their house and a significant amount of their savings to children, spouses, family members, or charities until they qualify for Medicaid.
This attempt to “spend down” one’s assets doesn’t work if it’s within the look-back period. Medicaid will review applicants’ finances for a set period of time, 5 years in 49 states, and 2.5 years in California. During that period of time, any asset transfers, gifting, or selling of property could lead to Medicaid ineligibility.
The five-year look-back period is meant to discourage people from trying to “bankrupt” themselves just to qualify for Medicaid. If a Medicaid applicant has more countable assets in that five-year period of time and sold them for below fair market value, they are penalized with a Medicaid penalty, which means they are barred from receiving Medicaid for a period of time. That period of time varies widely by state, but it can lead to months or even years of Medicaid ineligibility in states like New York.
Understanding the Medicaid look-back rule is important for anyone who has to rely on Medicaid and may come close to the asset limit. For many people, they have some countable assets that will put them over the asset limit but won’t help them pay for long-term care if they need it. For others, estate planning should be done before the need for long-term care arises and mental faculty may diminish. To properly pass on assets to family members without inadvertently incurring a period of Medicaid ineligibility, you have to understand the look-back rule.
The look-back rule, as with pretty much everything to do with Medicaid, is extremely complicated, and failing to properly handle assets before applying for Medicaid can drastically affect how and whether you will be able to get the long-term care you need. Take the information in this article as a kind of basic explainer, but know that it does not serve as legal advice and is not a guide to personal estate planning.
Proper Medicaid eligibility planning should be done with the help of an elder care law firm or elder law attorney who understands Medicaid in its most current form. This article will present some basic information on the Medicaid look-back rule for general knowledge.
Medicaid has many programs and since it’s not controlled by the federal government, the programs in each state are different. They also have different eligibility requirements and so the look-back rule may be applied for some programs and not others depending on where the Medicaid applicant lives.
In general, the look-back rule will kick in when applying for SSI, Medicaid long-term care insurance, and regular Medicaid. All of the Medicaid programs and coverages that apply to elderly people are affected by the look-back rule, including nursing home coverage and home- and community-based service (HCBS) waivers.
For Medicaid, owned property is divided into countable assets and exempt assets. Not every asset will count toward the asset limit, but determining which will and which are exempt is exceedingly difficult without an elder law attorney or Medicaid preparation expert.
As an example, in many states, the asset limit for a single Medicaid applicant is $2,000 in countable assets. However, the applicant’s home doesn’t count in most places provided its fair market value is below $595,000. In some states, the fair market value of an applicant’s home can be up to $895,000, and California doesn’t have any limit on the fair market value. Any debt still owed on the house is subtracted from the fair market value for Medicaid’s asset limit.
Couples in which both spouses are Medicaid applicants are allowed to have $4,000 in countable assets. One new change to the Medicaid rules is that, for a married couple where one spouse is a Medicaid applicant and the other is the “community spouse,” meaning they aren’t applying for Medicaid, then the applicant spouse can transfer countable assets to the community spouse. They can have up to $2,000 in jointly-owned assets and the community spouse is allowed to have up to $128,460 in countable assets that are individually owned. This is called the Community Spouse Resource Allowance, or CSRA. A house is not counted toward the asset limit if the community spouse lives in it.
Besides countable assets, there are also limits on the amount of money a Medicaid applicant can make while they are a beneficiary. In 2020, that limit per single individual Medicaid applicant is $2,349 per month to qualify for both nursing home and long-term care Medicaid. Generally, spouses’ incomes are counted separately. If one spouse applicant is moving to a nursing home or receiving home care through an HCBS waiver, the other spouse can use part of the applicant spouse’s income to pay for living expenses. This scheme is called the Minimum Monthly Maintenance Needs Allowance.
If each spouse is a Medicaid applicant, then they can each make up to $2,349 per month. If applying for the Aged, Blind, or Disabled Medicaid coverage, then the income limit is much less, likely because it can be harder to make the same income amount if you fit into these categories and need long-term care or a nursing home. The ABD income limit varies by state, but about half the states have a $783, and most of the other half have a $1,063 individual limit and a $1,437 limit for couples. For ABD Medicaid, spouses’ incomes are counted together, even if only one spouse fits the ABD category and is applying for Medicaid on that basis.
If, after review of all of a Medicare applicant’s financial transactions, a large transfer of assets or selling off of countable assets for less than the fair market price, the applicant will incur a period of ineligibility, which means they will be barred from accessing Medicare coverage for a specified period of time.
The way they calculate the period of time during which a Medicare applicant will be ineligible (the penalty period) is based on something called the penalty divisor or private pay rate. This is either the average monthly cost or the daily average cost of nursing home care, which is increasing every year alongside the cost of live-in care as the baby boomer generation ages and requires more and more long-term nursing home care.
Medicaid will take the total value of transferred assets and divide them by the penalty divisor, which is determined by the state. The resulting number will represent the timeframe of the penalty period.
The look-back rule is very complicated and based on very minute details. Financial transactions for the last 5 years (or 2.5 in California) are considered, which means Medicaid applicants have to review their financial transactions for that time period before submitting a Medicaid application. Medicaid planning with an elder law attorney is going to be the best choice for a personalized plan, but here are a few illustrative hypothetical examples to help understand Medicaid’s look-back period and the possible penalty periods that can result.
For a simple example, let’s imagine a single woman from Missouri wants to apply for long-term nursing home care with Medicaid. After reviewing her financial transactions, Medicaid finds the woman has been gifting her daughter about $5,000 per year during the five-year look-back period. Medicaid sees that she has given away $25,000 in total during the time period.
The average monthly cost of a semi-private room in a nursing home in Missouri is about $5,000. Her gifting amount of $25,000 divided by the average monthly cost of $5,000 equals 5. That means her period of ineligibility will last for 5 months.
Let’s say this woman from Missouri isn’t single. She has a husband who doesn’t need Medicaid coverage and therefore will remain a community spouse. Together, they own a house with a fair market value of $350,000. She has not been gifting her daughter $5,000 a year during the five-year look-back period in this example. Rather, let’s say she has $28,460 in countable assets which she transfers to her husband, adding to his $100,000 in countable assets. In this case, there is no penalty period because the community spouse is just at the CSRA limit.
However, if she has $120,000 in countable assets and transfers assets to her husband who already has $128,460 of his own in countable assets, then she could incur a penalty period of two years! (That’s 120,000 divided by the $5,000 average monthly cost of a nursing home in Missouri.)
Homeownership can complicate things. What if the woman from Missouri lives in a house with a fair market value of $475,000. The house is completely paid off, but she sells it to her daughter for $275,000 as part of her estate planning. Well, the $200,000 difference is going to incur a penalty period of 40 months based on the average monthly cost of a nursing home in Missouri.
Of course, if the house is not paid off and the woman still owes $100,000 on it, then Medicaid should only count $100,000 of the difference in the sale price and the fair market value of the house. In that case, the penalty period would be cut in half, but it would still be 20 months.
As you can see, these calculations are complicated even in the most simple hypothetical situations. Just to demonstrate how convoluted they can get, let’s add a few more details.
For starters, imagine the woman now resides in Virginia, where the average monthly cost for a private room in a nursing home is about $8,500. She has a community spouse who will not submit a Medicaid application of his own. Together, they have $100,000 in countable assets. They own a house with a fair market value of $600,000 and owe $150,000 on it. The husband has his countable assets of about $50,000. The Medicaid applicant wife has $25,000 of her own countable assets.
Before submitting a Medicaid application, the wife transfers her $25,000 to the community spouse and gives the other $100,000 to him fully. Now, the community spouse husband has $50,000 of his own assets, the $100,000 that used to be shared, and the $25,000 that used to belong to his wife. That’s a total of $175,000, well over the $128,460 CSRA. However, they owe $150,000 on the house, which means their official countable assets are at about $25,000, which is fine as long as the husband is not a Medicaid applicant.
To complicate things, let’s say they only owe $50,000 on the house and the wife has also been gifting her daughter $5,000 per year for all five years of the look-back period.
Now, the husband still has $175,000 in countable assets. Subtract $50,000 they owe on the house and he’s at $125,000, just below the CSRA limit. No penalty period is incurred. Then, add $25,000 that the woman was gifting to her daughter. Now, the husband has $150,000. That’s $21,540 over CSRA. Divide that by the $8,500 average monthly cost for a nursing home and you get a penalty period of about 2 and a half months.
As you can tell from the fourth example, calculations can get complicated very fast. In that last example, the woman will only face a penalty period of 2.5 months, but if they pay $8,500 per month in nursing home costs, that’s $21,250. Depending on the nature of their countable assets, that could be a ton of money. The husband may be faced with selling off assets to pay for her care.
In that hypothetical, the mistake was gifting $5,000 to the daughter. Here, we’ll take a closer look at that and a few other common Medicaid mistakes:
We’ve already mentioned most of the common exemptions. The best one for married couples where one is a community spouse is the CSRA limit. Disabled children can also receive transferred assets. Family caretakers may also be able to receive payments that won’t be counted in the five-year look-back period.
Under some conditions, a house can be transferred to a sibling of the Medicaid applicant. The sibling should already own partial equity in the home and have resided there for at least one year before the transfer.
The best way to turn liquidity into uncountable assets is to pay off debt or pay off a mortgage on a house. Once the house is paid off, provided its fair market value is under the limit, the money you spent on it won’t cause a penalty period. Estate planning with a living will can ensure it is passed on to a family member.
Submitting a Medicaid application is unbelievably complicated and should not be done without the help of a Medicaid planning professional or elder care attorney. The reason they have so many conditions is to make sure Medicaid’s protection is given to the classes of people it was meant to help, namely low-income and disabled people. It will take lots of time to prepare, especially if you’re applying for Medicaid because of a sudden illness. If you start early enough, you can use estate planning and accepted methods of making your assets uncountable for Medicaid’s five-year look-back period. Hopefully, this article helped introduce the policy and how it might affect people in different situations.