Major Medicaid Changes Pending

The recently-enacted Deficit Reduction Act of 2005, signed into law by President Bush on February 8, 2006, significantly amends the federal Medicaid statutes. Although details of how New Hampshire will implement these changes won’t be known for some time, here are the major areas the federal law requires states to address:

Look Back Periods

Under prior law, outright gifts were subject to a 36-month look back period, while transfers involving trusts were subjected to a longer 60-month look back period. Under the Deficit Reduction Act, all gift transfers will be subject to the longer 60-month look back period.

Penalty Periods

Although the look back period garners most of the attention in the media, the method of computing the duration of penalty periods actually determines the impact of a gift on Medicaid eligibility. The penalty period is determined by dividing the dollar value of the property gifted by the average cost of nursing home care in the state (currently $6,467.90 per month in New Hampshire). This yields a number of months of Medicaid ineligibility. Under prior law, this period of ineligibility commenced on the first day of the month in which the gift was made. Knowing this fixed start date and the applicable penalty for any given gift amount allowed a donor to predict the length of the penalty associated with a gift and to wait until the penalty had expired before applying for Medicaid. Careful computation of a private pay reserve would allow the donor to retain just enough to pay for care privately until then. The Deficit Reduction Act will make this more difficult by changing the start date of the penalty. The rule is now complex, but in most cases will result in the penalty commencing at the point in time when the donor is otherwise ready to apply for Medicaid (i.e., when the donor has exhausted the retained assets). This “floating” penalty will effectively eliminate gifting intended to protect assets from the cost of nursing home care because potential donors will be unable to take the risk that the penalty will commence when the donor no longer has the capacity to pay for his or her care privately. Ironically, the new rule will likely encourage gifting by only the most wealthy individuals who can afford to pay privately for the 60 month look back period and avoid reporting altogether for large gifts made prior to that period.

Hardship Waivers

The Deficit Reduction Act contains expanded hardship waiver provisions designed to mitigate somewhat the harshness of the new penalty start date rules. Although much clarification of these new waiver rules will be needed, there will likely be room for substantial planning for transfers that can be characterized as having motives other than Medicaid planning, such as transfers of business interests intended to keep a growing concern within a family.

Annuities

Surprisingly, the Deficit Reduction Act does not eliminate the use of annuities as an effective Medicaid planning tool for married nursing home residents. Two years ago New Hampshire enacted a statute requiring the state to be named as the remainder beneficiary of annuities purchased by a nursing home resident who applies for Medicaid. However, that rule never applied to annuities purchased by the spouse of the nursing home resident, which have always been preferred for planning purposes. The Deficit Reduction Act adds a federal provision similar to the one previously enacted in New Hampshire, and the author’s reading of the statute is that it appears to preserve the distinction between annuities purchased by the nursing home resident and annuities purchased by his or her spouse. A few other technical changes will eliminate some more aggressive techniques, such as the use of private annuities with balloon payments.

New Home Equity Limit

The Deficit Reduction Act imposes a new $500,000 limit on the amount of home equity that may be treated as non-countable for Medicaid purposes. This appears unlikely to affect most New Hampshire Medicaid applicants.

Expanded Long Term Care Incentives

States will be encouraged to offer Medicaid eligibility incentives for the purchase of private long term care supplements. Asset disregards and lien recovery waivers are chief among the incentives. This portion of the Act is complex and beyond the scope of this article.

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