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MEDICAID ESTATE PLANNING 
IN THE AFTERMATH OF OBRA '93 



Brian Burwell 
William H. Crown 



August 1 995 



The MEDSTAT' Group 
125 CambridgePark Drive 
Cambridge, MA 02140 
(617) 492-9301 



This study was prepared by The MEDSTAT" Group for the Office of Research and Demonstrations, Health Care Financing 
Administration, under subcontract to Lewin-VHI of Fairfax, VA. The statements and opinions expressed in this paper are solely 
those of the authors and do not necessarily reflect the opinions of Lewin-VHI or HCFA. 



TABLE OF CONTENTS 



1.0 INTRODUCTION 1 

1.1 What is Medicaid Estate Planning? 1 

1.2 Objectives of the Study 2 

1.3 Study Methodology 2 

1.4 Why Medicaid Estate Planning is Growing 6 

1.5 Prior Research on Medicaid Estate Planning 9 

1.6 OBRA '93: The Latest Federal Response to Medicaid Estate 

Planning 10 

2.0 FINDINGS 13 

2.1 Magnitude of Medicaid Estate Planning in the Case Study States 13 

2.2 Variations Across States 15 

2.3 Common Medicaid Planning Techniques 16 

2.3.1 Medicaid Planning Techniques for Married Couples 16 

2.3.2 Medicaid Planning Techniques for Single Persons 23 

2.4 The Variable Effectiveness of Estate Recovery Programs 30 

2.5 Medicaid Estate Planning and State Administrative Practices 34 

3.0 DISCUSSION 39 

3.1 Impact of OBRA 1993 on Medicaid Estate Planning 39 

3.2 State Opportunities for Further Tightening the System 40 

3.3 The Inequities of Medicaid Estate Planning 42 

3.4 The Politics of Medicaid Estate Planning 42 

3.5 Options for Further Federal Reform 44 

3.6 Treatment of the Home: What's the Fair Policy? 47 

3.7 The Feasibility of Empirical Research on Medicaid Estate Planning 48 

3.8 The Future of Medicaid Estate Planning 49 

APPENDICES: CASE STUDIES 

A. California A-1 

B. Florida B-1 

C. Massachusetts C-1 

D. New York D-1 



1.0 INTRODUCTION 



1.1 What is Medicaid Estate Planning? 

Medicaid is a medical assistance program targeted to people who are poor. It is a "means- 
tested" program, meaning that in order to qualify for Medicaid benefits, applicants must have incomes 
and/or resources below certain financial criteria. The means-testing of Medicaid benefits is done to 
ensure that public resources are being used to provide medical assistance to people who cannot afford 
to provide for their own health care. 

"Medicaid estate planning" is a term used to describe a process by which elderly persons 
purposefully divest their assets and/or income in order to qualify for Medicaid benefits, particularly 
coverage for nursing home care. The goal of Medicaid estate planning is to preserve assets for family 
and heirs, rather than depleting one's assets on the private cost of nursing home care. Since private 
nursing home costs typically average over $3,000 per month, an individual who pays privately for his 
or her nursing home care, and does not do Medicaid estate planning, can easily deplete their entire life 
savings during an extended nursing home stay. 

Medicaid estate planning has several variations. For married couples, Medicaid estate planning 
usually has the objective of ensuring that the spouse remaining in the community (the "non- 
institutionalized spouse") retains as much of the married couple's combined income and resources as 
possible, so that he or she can continue to live the same lifestyle as prior to the admission of the 
institutionalized spouse. Another objective is to ensure that the community spouse will remain 
financially secure after the institutionalized spouse dies. For single persons, the goal of Medicaid estate 
planning is generally to preserve inheritances for heirs, usually the nursing home resident's children. 
A third goal of Medicaid estate planning involves protecting estates (largely the family home) from 
recovery efforts by state Medicaid programs acting as creditors against a deceased Medicaid recipient's 
estate. 

It is important to recognize that although many people think Medicaid estate planning is 
unethical, it is not illegal. The rules which determine whether individuals applying for Medicaid 
coverage meet the program's financial eligibility criteria are complex, and these rules provide 
opportunities for savvy individuals to divest or shelter their assets without penalty. And because the 
rules are complex, individuals who participate in Medicaid estate planning often seek the counsel of 
people who have special expertise in these matters, generally elder law attorneys. Indeed, over the last 



decade, "elder law" has been a rapidly growing specialty in the legal profession, and within the practice 
of elder law, Medicaid estate planning represents a significant proportion of the business conducted. 

1 .2 Objectives of the Study 

This study represents the third in a series of studies on Medicaid estate planning and public 
policy responses to Medicaid estate planning. 1 The study was sponsored by the Office of Research 
and Demonstrations at the Health Care Financing Administration through a contract with Lewin-VHI, 
and a subcontract to The MEDSTAT Group. The objectives of the study were as follows: 

• To assess the magnitude of Medicaid estate planning in selected states; 

• To identify the most commonly used Medicaid estate planning techniques in the selected states, 
and variation in the use of techniques across states; 

• To assess relationships between Medicaid estate planning activities and (1) state Medicaid 
eligibility policies; and (2) state administrative practices in the eligibility determination process; 

• To assess the impacts of legislative changes enacted under the Omnibus Budget Reconciliation 
Act of 1993 on Medicaid estate planning; 2 and 

• To assess the feasibility of conducting more empirical research that could measure the 
magnitude of Medicaid estate planning activity and/or effects of public policy responses. 



1.3 Study Methodology 

A case study methodology was employed, and four states were selected to participate in the 
study. The four states were Massachusetts, California, New York and Florida. The selection of the 
four case study states was not random. New York and California were selected because they represent 
the two largest Medicaid programs in the country. They were also selected for their contrast: New 
York has among the highest per capita Medicaid nursing home expenditures in the country, while 
California is among the lowest spending states per capita. New York and Massachusetts were also 
selected based upon the general knowledge that the Medicaid planning "industry" had grown rapidly 
in these two states, relative to other states. Florida was selected because it is an "income cap" state, 
which has a definite relationship to Medicaid estate planning techniques. The states' willingness to 



'See Burwell, B. Middle-Class Welfare: Medicaid Estate Planning for Long-Term Care Coverage. SysteMetrics, Lexington, MA, 
September 1991; and Burwell, B. State Responses to Medicaid Estate Planning, SysteMetrics/MEDSTAT, Cambridge, MA, May 
1993. 

2 For a discussion of the specific provisions of OBRA 1 993 related to Medicaid estate planning, see Section 1 .4. 



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participate in the study, and to cooperate with the demands of the site visits, was also a factor in their 
selection. 

Table 1 provides background information on the four states selected for the case studies. Three 
of the four states — California, New York, and Massachusetts — extend nursing home coverage to the 
medically needy — while Florida only covers individuals whose countable income falls below a special 
"income cap" equal to 300% of the Federal SSI benefit level. In 1994, the income cap in Florida was 
$1,338 per month. All four states had estate recovery programs in operation prior to OBRA '93, 
although Florida's program was minimal, and did not seek recoveries from real property. Two 
states — California and Massachusetts — operated estate recovery programs on a centralized basis, 
meaning that all recoveries were conducted by a single state agency. In New York, the responsibility 
for estate recoveries was delegated to each individual county. New York and Massachusetts used 
TEFRA liens as part of their estate recovery programs. California had recently enacted legislation for 
a lien program, but had not yet implemented it. Florida did not use TEFRA liens prior to the enactment 
of OBRA '93, but was considering doing so. 

California, Florida, and New York set the Community Spouse Resource Allowance (CSRA) level 
at the maximum allowed under Federal law, which was $72,660 in 1 994, while in Massachusetts, the 
CSRA level was set at the minimum amount allowed — $14,532. New York and California set the 
Minimum Monthly Maintenance Needs Allowance (MMMNA) at the maximum, which was $1,817 in 
1 994. Florida and Massachusetts had set the MMMNA at the floor of $1,1 79, although this amount 
could be increased for excess shelter expenses. 

Two of the four states rank very high among the 50 states in regard to the amount they spend 
for nursing home care under the Medicaid program. Except for Connecticut, New York spends more 
for Medicaid-covered nursing home care per elderly state resident than any other state, and 
Massachusetts ranks fifth among the states on this measure. Florida and California, on the other hand, 
spend far less than the national average on Medicaid-financed nursing home care, ranking 49th and 
35th respectively. 

The primary data collection approach used in the study was a one-week site visit to each state 
by a two-person site visit team. Generally, on the first day of the site visit, the team met with state 
Medicaid eligibility staff to discuss long-term care eligibility policies, perceptions about the magnitude 
of Medicaid estate planning activity, and state policy responses to Medicaid estate planning. Also, the 
team met with staff from each state's Estate Recovery Program to discuss the organizational and 



administrative structure of Medicaid estate recovery, recent developments in estate recovery efforts, 
and state implementation of OBRA 1993 mandates related to estate recovery. 

The remaining four days of the site visit concentrated on the conduct of interviews with front- 
line Medicaid eligibility workers and supervisors in local eligibility offices. These interviews were 
usually set up by state Medicaid eligibility staff. The selection of local offices to visit was not random. 
Usually, state Medicaid staff selected counties where they felt significant Medicaid planning activity 
was occurring, or where the local office had undertaken a specific response to the problem. In 
Massachusetts, however, there are only three eligibility offices in the entire state that process 
applications for long-term care coverage and all three were visited. 

The interview protocol with local eligibility workers and their supervisors was relatively 
unstructured, but touched upon common themes. Workers were asked specific questions about their 
interpretation of current policy regarding how various assets are treated in the application process. 
Examples of the types of questions that were asked of workers and supervisors are as follows: 

1. What is the policy regarding the treatment of the home for married applicants, for single 
applicants? What if the home has been transferred prior to the date of application? What is 
your policy regarding second homes? Do you do any independent property checks to identify 
properties that may not be reported on the application? 

2. How do you evaluate assets held in savings accounts? What is your policy regarding applying 
transfer of asset penalties when assets in saving accounts have been withdrawn prior to 
application? How do you treat joint bank accounts? Do you do any independent checking to 
identify additional accounts that may not be reported on the application? 

3. What happens when applicants report the existence of trust instruments, or annuities? Do 
front-line workers assess whether these assets are exempt, or are these decisions referred to 
specialists, such as a legal counsel? 

4. What are your current policies regarding the exemption of other assets, such as automobiles, 
household goods, art or jewelry, business property, burial contracts, etc.? 

5. What is your perception of the level of Medicaid estate planning in this area? What percentage 
of applicants do you believe have done something prior to submitting an application to divert 
or shelter assets? How often are applications prepared by attorneys rather than the applicants 
themselves? What are the most common Medicaid planning techniques you encounter in 
processing applications? How has the level of Medicaid estate planning activity changed over 
the time of your employment in this office? 

6. Have you encountered planning techniques to increase the Community Spouse Resource 
Allowance (CSRA) above the maximums allowed under the Medicaid spousal impoverishment 
provisions? If so, what techniques are used? Have applicants used the fair hearing process to 
increase the CSRA for the community spouse? If so, how does this work? What have been 
the outcomes of these fair hearings? 



Table 1 

Selected Characteristics of Case Study States 





Income Cap 
State 3 


Had Estate 
Recovery Program 
Prior to OBRA '93 


Centralized 

Estate 
Recovery 


Uses TEFRA 
Liens 4 


1994 
CSRA 5 
Minimum 


1994 
MMMNA 6 
Maximum 


Medicaid Nursing 
Home Expenditures 

nor FIHprlv ^tato 

Resident, 1992 7 
(State rank) 


California 


No 


Yes 


Yes 


No 


$72,660 


$1,817 


$474 
(35) 


Florida 


Yes 


Yes, but minimal 


No 


No 


$72,660 


$1,179 


$302 
(49) 


Massachusetts 


No 


Yes 


Yes 


Yes 


$14,532 


$1,179 


$1,185 
(5) 


New York 


No 


Yes 


No 


Yes, at county 
discretion 


$72,660 


$1,817 


$1,353 
(2) 



3 An income cap state is one which does not provide nursing home coverage to "medically needy" Medicaid applicants, but only to persons whose countable incomes fall below 
a special income level, which under Federal law cannot exceed 300% of the Federal SSI benefit level. 

4 TEFRA liens are imposed on real property (usually the home) of Medicaid recipients to and protect the interests of the state in recovering incurred Medicaid costs from the property 
upon the sale of the home or upon the death of the Medicaid recipient. 

5 The CSRA is the Community Spouse Resource Allowance, the amount of assets retained by a non-institutionalized spouse of a Medicaid applicant, and is excluded in determining 
eligibility for the institutionalized spouse. 

6 The MMMNA is the Minimum Monthly Maintenance Needs Allowance, which is the amount of protected income allowed for the non-institutionalized spouse. All remaining 
countable income of the Medicaid recipient excluding a personal needs allowance, must be used as the Medicaid recipient's contribution to his or her nursing home care It is 
important to note that unlike the treatment of assets, in which a married couple's total combined assets are considered available to the Medicaid applicant, Medicaid eligibility 
rules treat a couple's income separately. Thus, if the non-institutionalized spouse has independent income in excess of the MMMNA, he or she is not required to contribute to 
the cost of the institutionalized spouse's nursing home care beyond the first month of institutionalization. 



'Mean Medicaid expenditures per elderly resident nationwide were $623 in 1992. 



In addition to local Medicaid eligibility staff, interviews were conducted with other individuals 
who play a role in Medicaid estate planning activity. In all four states, we interviewed Medicaid estate 
planning attorneys to elicit their perspectives on the size and growth of the Medicaid estate planning 
industry, the demand for their services, and state policy responses to the growth of Medicaid estate 
planning. In addition, we sometimes interviewed nursing home administrators and representatives of 
state nursing home associations. In the state of New York, we also conducted interviews with the 
state Department on Aging, which provides counseling to seniors on long-term care planning issues. 

It is important to underscore the limitations of the findings reported in this study. First, in 
addressing the objectives of the study identified on page two, the findings reported are qualitative, not 
quantitative, in nature. The "data" presented in the study are largely the reports and observations of 
the people that we interviewed during the course of the study. These data are obviously subject to 
personal bias. 

Second, we purposefully selected states and counties within states where the level of Medicaid 
estate planning was expected to be relatively high. Thus, the reported of magnitude of Medicaid estate 
planning activity in the states and counties selected for the study is probably higher than that which 
would have been reported if we had randomly selected states and counties to visit. As discussed later 
on, higher levels of Medicaid planning were reported in more wealthy geographical areas, and if we had 
selected Kansas, Iowa, Texas, and Kentucky as the case study states, rather than New York, California, 
Massachusetts, and Florida, reported Medicaid estate planning activity would have undoubtedly been 
lower. 

1 .4 Why Medicaid Estate Planning is Growing 

A number of factors are contributing to the growth in Medicaid estate planning (See Figure 1). 
First, older individuals are becoming increasingly aware that nursing home care is not covered by 
Medicare. The debate surrounding the repeal of the Medicare Catastrophic Coverage Act of 1988 
played an important role in this growing awareness, as did discussions of the need for public long-term 
care insurance in the recent Congressional debate regarding President Clinton's Health Security Act. 

Second, the complexity of the "spousal impoverishment" provisions of the Medicare 
Catastrophic Coverage Care Act, in combination with the rising economic status of the older population, 
has spurred many older persons to seek professional advice in planning for long-term care. Table 2 
shows that median net worth (in constant dollars) for persons age 65 and over has increased quite 



Figure 1 

Why the Practice of Medicaid Estate Planning 

May be Growing 



Increased awareness that 
[ Medicare doesn't cover nursing 
home long-term care 




Rising economic 
status of the elderly 



Growth in 
Medicaid Estate 
Planning 



Rising costs of 
nursing home care 




Growing awareness 
of nursing home risk and 
Medicaid Estate Planning 



' Growth of the elder law^ 
profession and expertise in 
Medicaid estate 



significantly in recent years. 8 Thus, elderly persons at risk of needing long-term care have increased 
incentives to protect their wealth from the catastrophic costs of long-term care services, particularly 
nursing home care. The table also shows, however, that most of the net worth among the elderly is 
concentrated in home equity. Excluding home equity, the median asset level of older households would 
finance less than a year of nursing home care in most locations. 

Table 2 

Trends in Median Household Net Worth 
by Age of Household Head 

(1991 Constant Dollars) 



Age 


1984 


1988 


1991 


65 to 69 








Total Net Worth 


$88,151 


$96,834 


$104,354 


Excluding Home Equity 


28,718 


31,879 


33,345 


70 to 74 








Total Net Worth 


79,476 


95,249 


92,793 


Excluding Home Equity 


24,732 


32,679 


25,943 


75 and over 








Total Net Worth 


72,920 


71,330 


76,541 


Excluding Home Equity 


22,584 


21,830 


22,866 


65 and over 








Total Net Work 


79,576 


85,226 


88,192 


Excluding Home Equity 


25,006 


27,673 


26,442 



Sources: Eller, T.J. 1994. "Household Wealth and Asset Ownership: 1991." Current Population Reports P-20-34. 
Washington, D.C.: U.S. Bureau of the Census. 

Eargle, J. 1990. "Household Wealth and Asset Ownership: 1988." Current Population Reports P-70-22. 
Washington, D.C.: U.S. Bureau of the Census 



Third, the increased demand for Medicaid estate planning services has been met with increased 
supply. One indicator of supply, the membership level of the National Association of Elder Law 



8 ln contrast, median net-worth for non-elderly households has declined. 



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Attorneys (NAELA), increased from 80 members in 1987 (the year NAELA was founded) to about 
3,000 in 1994. It is not only the number of elder law attorneys that has been growing, but also the 
level of expertise among Medicaid Estate Planning attorneys. This expertise is routinely shared through 
conferences and newsletters that keep elder law attorneys abreast of the latest developments in the 
field. 9 

Fourth, the cost of a nursing home stay continues to rise every year. Currently, the private pay 
rate for nursing home care averages $3,000 to $4,000 per month, and is substantially higher in some 
areas (e.g., it is $5,000 to $6,000 per month on Long Island). Consequently, not only do the elderly 
have more wealth to protect, but the risk of losing their wealth from the high costs of private nursing 
home care has also increased. 

Finally, recent research has highlighted the substantial lifetime risk of a nursing home stay. 10 
Although, at any one time, only about 5 percent of the population age 65 and over is in a nursing 
home, estimates of the lifetime risk of institutionalization exceed 40 percent. 

In short, the confluence of the rising economic status of the elderly, the rising costs of nursing 
home care, and the considerable lifetime risk of needing nursing home care has raised the financial 
consequences associated with needing long-term care. It is reasonable to expect that this growing risk, 
in combination with the shrinking numbers of elderly who mistakenly think that Medicare covers long- 
term care, and the growth in the elder law industry itself, would lead to growth in the practice of 
Medicaid estate planning. 

1.5 Prior Research on Medicaid Estate Planning 

The policy debate surrounding Medicaid estate planning is full of rhetoric and strong emotions 
but lacking in good information. Heated arguments frequently occur on the prevalence of Medicaid 
estate planning activity, as well as on its ethics. Some believe that Medicaid estate planning is a major 
policy problem in the Medicaid program, and that many elderly individuals who qualify for Medicaid 
coverage in nursing homes retain or divest significant assets that could be used to pay for their care 



9 A good example of such a newsletter is The ElderLaw Report published by Little, Brown and Company, Law Division, 34 Beacon 
Street, Boston, MA 02108. 

,0 See, for example, P. Kemper and C. Murtaugh, 1 991 . "Lifetime Use of Nursing Home Care." New England Journal of Medicine. 
Vol. 342 (9): 595-600. 



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privately. 11 Others argue that the vast majority of disabled elderly persons have no or few financial 
assets to begin with and thus concerns over the magnitude of Medicaid estate planning as a policy 
problem are vastly overblown. 12 The polemics over Medicaid estate planning are also often made in 
the context of the "unfairness" of public policy regarding the lack of public insurance for nursing home 
care and the "draconian" nature of Medicaid's means-tested benefits. 13 

The methods of Medicaid estate planning are very complicated and not very amenable to 
quantitative measurement. Thus, empirical studies of Medicaid estate planning activity are few. In 
October 1992, the General Accounting Office conducted a review of 403 applications for Medicaid 
long-term care coverage in one of Massachusetts' three long-term care eligibility offices. The purpose 
of the review was to identify assets that had either been converted from countable assets to excluded 
assets or transferred. GAO found that more than half the applicants had converted assets, although 
the vast majority of these cases involved applicants setting aside funds in burial accounts that are 
excluded in determining Medicaid eligibility. In about 10 percent of the cases, applicants had 
transferred assets in the 30 month period prior to making application. The average amount of the 
transfer was about $46,000. 14 

1.6 OBRA '93: The Latest Federal Response to Medicaid Estate Planning 

Medicaid estate planning has been a policy issue for many years in the Medicaid program, and 
Congress has taken a number of policy responses to restrict its practice. In 1980, Congress enacted 
the first provisions to deny Medicaid eligibility to persons who purposefully transferred assets in order 
to obtain Medicaid coverage. In 1982, transfer of asset restrictions were expanded to encompass 
certain excluded assets, such as the home. The Medicare Catastrophic Coverage Act (MCCA) of 1 988 
made a number of further amendments to the Medicaid transfer of asset rules, including requiring all 
states to adopt transfer of asset restrictions, rather than having these restrictions be optional. 



"See, for example, Moses, Steven: The Magic Bullet: How to Pay for Universal Long-Term Care. A Case Study of Illinois. LTC 
Incorporated, February 1995. 

12 See, for example, Weiner, Joshua; Hanley, Raymond; and Harris, Katherine: The Economic Status of Elderly Nursing Home 
Users. Unpublished manuscript, January 1994. Also, Sloan, F. and Shayne, M.: "Long-Term Care, Medicaid, and 
Impoverishment of the Elderly." Milbank Quarterly Volume 71, Number 4: 575-600, 1993. 

n See, for example. Medicaid Estate Recovery under OBRA '93: Picking the Bones of the Poor? A Report by the Commission 
on Legal Problems of the Elderly. The American Bar Association, Washington, D.C., November 1994. 

''General Accounting Office. Medicaid Estate Planning. GAO/HRD-93-29R. 



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On August 10, 1993, Congress enacted the Omnibus Budget Reconciliation Act (OBRA) of 
1 993, which included a number of changes to the Medicaid statute that were intended to address the 
growth of Medicaid estate planning. One objective of this study was to assess what impact OBRA '93 
is likely to have on Medicaid estate planning, to describe how states are implementing the provisions 
of OBRA '93, and to elicit from the states their perspectives on further changes that are needed to 
address asset transfers. 

Specific provisions enacted in OBRA '93 include: 



The "look-back" period for asset transfers was extended from 30 months to 36 months . The 
"look-back" period defines the period prior to Medicaid application in which asset transfers may 
be subject to a penalty period. Transfers made prior to the look-back period are not subject to 
penalty. 

The cap on the asset transfer penalty period was eliminated . 15 Previously, the asset transfer 
penalty period was subject to a 30-month cap. Under OBRA '93, there is no cap on the 
penalty, so that if someone transfers a very large amount of assets, the penalty period may 
extend for many years. 

Multiple transfers over a period of time are now treated as a single transfer . Prior to OBRA '93, 
some applicants and their attorneys were gaming the system by making multiple transfers of 
assets over a period of months, and then arguing that each transfer had to be treated as a 
separate transfer subject to its own penalty period. By having penalty periods run concurrently, 
applicants could greatly reduce the amount of time they had to wait between transferring their 
assets and becoming eligible for Medicaid. OBRA '93 clarified that penalty periods for multiple 
transfers are to run consecutively rather than concurrently. 

Transfers of jointly held assets are considered prohibited transfers subject to a penalty period . 
This provision clarified that when transfers are made from joint accounts that reduce the 
applicant's control or ownership of the asset, then the transfer will be subject to a penalty 
period. Prior to OBRA '93, some states did not treat withdrawals from joint accounts by non- 
applicants as prohibited transfers because the applicant himself had not made the transfer. 

Transfers made by applicants and recipients of non-institutional long-term care services are also 
subject to penalty, at the option of the state . Under this provision, states may, but are not 
required, to impose transfer of asset penalties on persons who have applied for or who are 
presently receiving non-institutional long-term care services. 

The circumstances under which income and assets placed in trusts are considered countable 
resources, and the circumstances under which assets transferred into a trust are considered an 
illegal transfers, were clarified . OBRA '93 includes rather lengthy clarifications of how assets 
transferred by the applicant, the applicant's spouse, or someone acting on behalf of the 
applicant, into a trust are to be treated in the Medicaid eligibility process. In most 
circumstances, the entire corpus of a trust is considered a countable asset. If not, the transfer 
of assets into the trust is subject to a penalty period with a 60-month look-back period. Thus, 



15 The "penalty period" is the length of time an applicant who would otherwise be Medicaid eligible is denied eligibility because 
he or she transferred assets prior to application. 



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transfers into a trust (because they are more likely to have occurred for Medicaid planning 
purposes) are treated more severely than other types of transfers. 

Certain kinds of trusts for disabled persons under age 65 are exempted from transfer of asset 
penalties . Most trusts created for the benefit of disabled persons under age 65 are not counted 
in the Medicaid eligibility process, and distributions from these kinds of trusts can be used to 
purchase supplemental services, equipment, etc. for disabled Medicaid recipients without 
affecting their Medicaid eligibility. 

Trusts established only with the income of applicants in so-called "income cap" states are not 
considered an available resource . This provision enables individuals who are denied Medicaid 
eligibility because they have incomes over Medicaid eligibility limits in so-called "income cap" 
states to attain Medicaid eligibility by temporarily transferring their income into an "income 
trust." Unlike the other provisions of OBRA '93, this provision expands Medicaid eligibility to 
certain individuals who would otherwise not be able to obtain Medicaid coverage for nursing 
home care in the 15 states that use income caps. 16 

The law requires states to specify procedures and policies for administering hardship rules . 
Hardship rules specify the circumstances under which states will waive transfer of asset 
penalties, trust rules, and estate recovery rules in cases where the application of these 
provisions would cause "undue hardship" on the applicant, recipient, and/or surviving family 
members. 

All states are required to implement estate recovery programs . Prior to OBRA '93, only about 
half the states operated programs seeking to recover Medicaid nursing home costs from 
recipients' estates upon their deaths. In addition, OBRA '93 allows states to expand the 
definition of "estate" to include resources that pass to heirs outside the probate process, such 
as through joint tenancy, tenancy in common, rights of survivorship, life estates, living trusts, 
and other arrangements. By so expanding the definition of "estate", OBRA '93 expanded the 
scope of assets that could be subject to state recovery efforts. 



,6 These 1 5 states are Alabama, Alaska, Arizona, Arkansas, Colorado, Delaware, Florida, Idaho, Iowa, Mississippi, Nevada, New 
Jersey, New Mexico, South Dakota, and Wyoming. 



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2.0 FINDINGS 



2.1 Magnitude of Medicaid Estate Planning in the Case Study States 

We made no effort to measure the magnitude of Medicaid estate planning in the case study 
states, other than asking eligibility workers their personal opinions about the extent to which they 
believed applicants had participated in Medicaid estate planning activities prior to submitting their 
Medicaid applications. Readers must recognize that statements made here about the magnitude of 
Medicaid estate planning are primarily based upon the subjective opinions of the individuals we 
interviewed during the course of our site visits, as well as the authors' own personal observations. 

Although there was clear evidence of Medicaid estate planning activity in all four states, it is 
fair to say that the majority of people who apply for Medicaid long-term care benefits have not 
purposefully divested or sheltered their assets prior to applying for Medicaid. Other than perhaps a 
home, a car, and some personal property, all of which are exempt in determining eligibility for Medicaid, 
most elderly people in need of nursing home care do not have a lot of financial assets. This is 
particularly true for persons without a living spouse. These individuals are also the least likely to know 
about the opportunities which Medicaid estate planning offers. People with low levels of assets also 
tend not to use financial planners, lawyers, or other financial experts. 

It is also important to point out that for people with few financial assets (e.g., less than 
$20,000), the question of whether they do "Medicaid estate planning" is often a fuzzy one. For 
example, a daughter may make a Medicaid application for her elderly mother who needs nursing home 
care, and who has $15,000 in savings but nothing else. The application may be denied because the 
applicant has "excess resources." 17 In the course of the application, the eligibility worker may 
educate the daughter about legitimate strategies to dispose of excess resources. The worker may 
simply advise the daughter to spend the money on other things her mother may need. Does the house 
need a new roof or other major repairs? Are there any loans to pay off? Does the car need a major 
check up? Does your mother need a new refrigerator or other household items? The daughter may go 
back home and spend the $15,000 in the bank on various "needed" purchases, then reapply for 
Medicaid for her mother the following month and be determined eligible. 

Does this spending of excess resources constitute Medicaid estate planning? We tend to think 
not. Rather, our conceptualization of Medicaid estate planning is more on the level of planned and 



"In most states, the asset level for Medicaid eligibility for a single individual is $2,000. 



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purposeful activity by people with significant levels of assets to avoid paying privately for their nursing 
home care. 

Medicaid estate planning is also distinguished from simple estate planning. Estate planning 
generally involves strategies to reduce assets in order to avoid Federal and state taxation of estates 
upon death. Under Federal law, the first $600,000 in assets is exempt from Federal estate tax, so that 
estate planning for Federal tax purposes is not a concern for individuals with net worths of less than 
$600,000. State estate taxes vary from state to state, with some states having no estate taxes at 
all. However, it is important to recognize that many elderly individuals transfer assets simply as part 
of regular estate planning, not for the purposes of qualifying for Medicaid. Indeed, Medicaid estate 
planning can be viewed as a subset of general estate planning, and most attorneys who do Medicaid 
planning do it as part of a larger estate planning practice. 

In all four states, we found clear evidence of Medicaid estate planning activity. However, the 
level of activity was not uniform across the four states, nor was it even uniform within individual 
states. In some counties, eligibility workers would report a high level of Medicaid estate planning 
activity. In other counties, workers would report very little activity. 

In general, there was a strong relationship between the level of Medicaid estate planning 
reported by local eligibility offices and the level of financial wealth within a geographical area. The 
higher the socioeconomic status of a geographical area, the more Medicaid estate planning was 
reported. Additionally, it was apparent that Medicaid estate planning attorneys concentrated their 
practices in upper middle class areas. Thus, the following three factors generally went together: (1) 
an area with a large population of upper middle class elderly; (2) the presence of a number of attorneys 
who practiced elder law and Medicaid planning as a specialty; and (3) a high level of Medicaid estate 
planning activity. 

There was one notable exception to this generalization. In our site visit to Santa Barbara 
county in California, eligibility workers reported observing almost no Medicaid estate planning activity 
whatsoever. Santa Barbara county is one of the wealthiest counties in the country, and many of the 
nursing facilities in the county are exclusively for private pay patients. Many facilities are not even 
Medicaid-certified, meaning that they do not accept Medicaid as a form of payment. Apparently, the 
wealth of many elderly persons in Santa Barbara county is so high that the cost of paying privately for 
nursing home care is not a financial concern. In addition, if an individual wants to be in one of the 
better facilities in the county, then Medicaid eligibility is not an option, since the more exclusive 
facilities are not even certified to accept Medicaid patients. 

-14- 



In every interview we conducted with eligibility workers and their supervisors, we always asked 
the following question: 

"What percentage of applicants do you think have done something purposively to divest 
or shelter their assets prior to coming in and applying for Medicaid?" 

In cases involving single applicants without spouses, responses to this question generally ranged 
from 5% to 25%, with most workers estimating that between 5 and 10% of single applicants do some 
kind of Medicaid estate planning in the pre-application period. For cases involving married applicants, 
workers consistently estimated a much higher rate of Medicaid planning activity, ranging from 20% to 
"almost every" application in some counties. Most estimates, however, fell into the 20 to 25% range. 
As discussed earlier, however, these responses must be evaluated in the context that we selected 
states and counties where it was generally perceived that a high level of Medicaid estate planning 
activity was going on. If we had randomly selected states, and counties within states, it is reasonable 
to assume that workers would have reported lower levels of Medicaid estate planning activity. 

2.2 Variations Across States 

The magnitude of Medicaid estate planning was not uniform across the four case study states. 
There was more Medicaid planning activity in New York than the other three states. There was 
considerable activity in Massachusetts, and there was certainly a very active elder law "industry" in 
Massachusetts, but it was also clear that recent policy initiatives taken by the Massachusetts Medicaid 
program had made an impact on reducing the magnitude of Medicaid planning there. 

In California, the level of Medicaid planning activity was more sporadic. While most of the 
counties we visited reported some amount of Medicaid planning by long-term care applicants, it was 
considerably less than the levels of activity reported in New York and Massachusetts. In San Luis 
Obispo and Los Angeles counties, eligibility workers reported a fairly high level of Medicaid planning 
among long-term care applicants. 

Similarly, in Florida, the level of Medicaid planning reported by local offices was less than 
reported in New York and Massachusetts. Since Florida is an "income cap" state, the Medicaid estate 
planning industry had been hindered by the fact that even if individuals depleted their countable assets 
through Medicaid estate planning strategies, many were still left with incomes that exceeded Florida's 
income cap. However, with the enactment of the "income trust" provision in OBRA 1993, the level 
of planning activity in Florida has recently increased. 



-15- 



Case studies of each of the four states visited during the course of the study are included as 
Appendices to this report. The case studies provide more detailed information about the magnitude of 
Medicaid estate planning activity in each state, specific Medicaid planning practices used in each state, 
and each state's response to Medicaid estate planning as a policy issue. 

2.3 Common Medicaid Planning Techniques 

This section discusses some of the more common Medicaid planning techniques reported by the 
Medicaid eligibility workers we interviewed. Since these techniques generally differ for married couples 
and for single persons, we divide the presentation of techniques by this applicant characteristic. 

2.3.1 Medicaid Planning Techniques for Married Couples 

Several Medicaid estate planning techniques used in cases involving married applicants stem 
from the spousal impoverishment provisions of the Medicare Catastrophic Care Act (MCCA) of 1988. 
Under the provisions of the MCCA, jointly held financial assets are totalled, then divided equally 
between the institutionalized spouse and the community spouse. 18 One half of the assets are 
considered to belong to each spouse, and the community spouse is allowed to retain his or her half, 
subject to both a minimum and maximum amount. 19 At their option, states can also set the minimum 
amount (called the Community Spouse Resource Allowance, or CSRA) anywhere between the 
established Federal minimum and maximum. Both the minimum and maximum CSRA levels are 
increased each year in accordance with inflation. 20 

The Medicare Catastrophic Coverage Act of 1988 also provided certain income protections for 
community spouses of institutionalized Medicaid recipients. It is important to note that unlike the 
treatment of assets, the incomes of married applicants are not pooled in determining eligibility for 



,8 Prior to the enactment of the Medicaid spousal impoverishment provisions in MCCA, a community spouse could be left as 
destitute as the institutionalized spouse. That is because beyond the first full month of institutionalization, income and assets 
of married couples were considered separately. If all of the assets were held in the name of the institutionalized spouse, or were 
jointly held by both spouses, all of those assets had to be "spent down" prior to Medicaid eligibility. Also, the institutionalized 
spouse was not allowed to transfer assets to the community spouse. Thus, if the community spouse had no assets in his or her 
name only, the community spouse could be left totally destitute. Also, policies for diverting income from the institutionalized 
spouse to the community spouse for the support needs of the community spouse varied from state to state, and were not subject 
to Federal guaranteed minimums. 

,9 ln 1 995, the minimum amount of assets which the community spouse is allowed to retain (even if it equals more than half of 
the couple's total assets) is $14,964. The maximum amount (even if it is less than half) is $74,820. 

20 For a summary of Medicaid eligibility for nursing home coverage see Crown, W., Burwell, B., and Alecxih, L. 1 994. An Analysis 
of Asset Testing for Nursing Home Benefits. Washington, D.C.: American Association of Retired Persons, Public Policy Institute. 



-16- 



Medicaid. Assets are considered jointly, but income is treated separately. However, MCCA contained 
additional provisions to ensure that a community spouse has adequate income on which to live by 
diverting income from the institutionalized spouse. The amount of income to which the community 
spouse is entitled is called the Minimum Monthly Maintenance Needs Allowance (MMMNA). If the 
community spouse's own income is below the MMMNA, income from the institutionalized spouse can 
be diverted to the community spouse, in order to bring the community spouse's income up to the 
MMMNA. 21 Like the CSRA, the MMMNA is subject to both a Federal minimum and a maximum. 22 

Although the spousal impoverishment provisions enable the community spouse to protect a 
substantial amount of assets and monthly income, these provisions are also the impetus for three 
Medicaid estate planning techniques: 

• The "Just Say No" strategy. 

• Raising the CSRA through fair hearings; and 

• Raising the CSRA through court orders; 

The "Just Say No" Strategy 

Of all the Medicaid planning techniques currently utilized, the "just say no" strategy is, by far, 
the most egregious. Use of the technique virtually eliminates Medicaid means-testing for married 
couples when one spouse needs nursing home care. With this technique, the community spouse 
retains all of the couple's assets, regardless of the total amount, while the institutionalized spouse 
obtains Medicaid coverage for nursing home care. 

Under the "just say no" strategy, the institutionalized spouse first transfers all assets (and 
sometimes income) to the community spouse, as specifically permitted (without penalty) under MCCA. 
Then the community spouse simply "refuses" to make any resources available to support the 
institutionalized spouse. In addition, the institutionalized spouse may execute an assignment of his or 
her support from the community spouse in favor of the state Medicaid program. 



2, Note that if the income of the community spouse exceeds the MMMNA, the community spouse may retain all of his or her 
income, and is not required to contribute to the cost of care for the institutionalized spouse (in the vast majority of states) beyond 
the first month of institutionalization. 



"In January 1995, the minimum MMMNA was $1,230 per month (150 percent of the Federal poverty level for a couple) and 
the maximum MMMNA was $1,871 per month. 



-17- 



This strategy emanates from a long-standing Medicaid eligibility policy which allows states to 
provide Medicaid coverage to applicants who have been truly abandoned by a legally responsible 
relative, usually a spouse. Historically, these cases usually involved instances where a mother and child 
have been abandoned by a husband. However, the Medicaid estate planning industry has adopted this 
long-standing Medicaid provision as a Medicaid planning technique for married long-term care 
applicants. 

Eligibility workers in California, Florida, and Massachusetts reported that the "just say no" 
strategy was occasionally attempted, but in New York, workers reported that this technique was used 
widely. Indeed, in Monroe, New York, Nassau, and Suffolk counties, workers reported that "virtually 
every application" for married applicants involved the use of the "just say no" strategy. Operationally, 
the use of this technique often involved nothing more than the community spouse checking a box on 
a form provided to him or her by an attorney or adviser indicating that he or she did not wish to make 
any income or resources available to the institutionalized spouse. 

The use of the "just say no" strategy in New York is due in part to State Social Service Law 
366(3)(a) which states: 

Medical Assistance shall be furnished to applicants in cases where, although such 
applicant has a responsible relative with sufficient income and resources to provide 
medical assistance as determined by regulations of the department, the income and 
resources of the responsible relative are not available to such applicant because of the 
absence of such relative or the refusal or failure of such relative to provide the 
necessary care and assistance. In such cases, however, the furnishing of such 
assistance shall create an implied contract with such relative, and the cost thereof may 
be recovered from such relative in accordance with title six of article three and other 
applicable provisions of the law. 

Elder law attorneys in New York claimed that the New York regulations only reflect the intent 
of MCCA, which they stated includes specific language allowing for the use of the "just say no" 
strategy. It is true that MCCA includes language which requires states to extend eligibility to an 
institutionalized spouse who has assigned his or her support rights from the community spouse to the 
state. In fact, the language of the New York statute was considered when drafting the spousal 
impoverishment provisions of MCCA. The bill language is as follows: 

The institutionalized spouse shall not be ineligible by reason of resources determined 
under paragraph (2) to be available for the cost of care where — 
"(A) the institutionalized spouse has assigned to the state any rights to support from 
the community spouse; [Sec. 1924(c)(3)] 



-18- 



However, the MCCA language is silent on the circumstances under which an assignment of 
support rights is to be considered legitimate and says nothing about the right of a community spouse 
to refuse support to the institutionalized spouse. In states other than New York, a simple verbal refusal 
by the community spouse to support the institutionalized spouse is not accepted as a case of true 
"spousal abandonment" and the Medicaid application is simply denied for excess resources. Indeed, 
one state — Maryland — enacted a law in 1992 that specifically restricted the assignment of support 
rights provisions to those situations where needed to actually protect the institutionalized spouse 
(situations in which the community spouse had truly abandoned the institutionalized and refused to 
provide any financial support for the care of the institutionalized spouse). The Maryland law also 
provides for penalties against a community spouse who refuses to pay for his or her spouse's care. 

Raising the CSRA through Fair Hearings 

If the community spouse's income is below the MMMNA, language in MCCA states that the 
community spouse can receive additional income and/or resources from the institutionalized spouse to 
bring her income up to the MMMNA. 23 Through a fair hearing process, the community spouse can 
have the CSRA raised above the state's CSRA maximum to a higher asset level that is necessary to 
produce enough income to bring the community spouse's income up to the MMMNA. 

At face value, this seems like a reasonable policy as long as the institutionalized spouse's 
income is looked to as the first available resource for increasing the community spouse's income up 
to the MMMNA. However, another section of MCCA dealing with allowable deductions from the 
institutionalized spouse's income states that the deduction for the support of the community spouse 
may only be deducted "...to the extent income of the institutionalized spouse is made available to (or 
for the benefit of) the community spouse. " Medicaid planning attorneys argue that this section of 
MCCA implies that it is not necessary to first transfer available income from the institutionalized spouse 
to the community spouse before determining the additional resources that the community spouse would 
need in order to bring her income up to the MMMNA. 

This point is controversial. If the income of the institutionalized spouse is not looked to first 
in bringing the community spouse's income up to the MMMNA, significant amounts of assets can be 
preserved by having the institutionalized spouse A?of make his or her income available to the community 
spouse. For example, assume that all of the income of an institutionalized spouse is used to pay for 



"For a more detailed explanation of this provision see, for example, Burwell, B. 1991 . Middle-Class We/fare: Medicaid Estate 
Planning for Long-Term Care Coverage. Cambridge, MA: SysteMetrics, pp. 22-23. 



-19- 



the cost of nursing home coverage, and the community spouse has zero income of her own. If the total 
assets of the both spouses are invested in holdings yielding five percent per year, the community 
spouse could retain assets of $448,920 and still have an income below the 1995 maximum MMMNA 
of $1,871 per month. 

Elder law attorneys often argue that the policy should be to raise the CSRA of the community 
spouse without looking first to the income from the institutionalized spouse because the institutionalized 
spouse's income may be transitory. Consequently, they say, it is important to allow the community 
spouse to retain enough assets to enable her to support herself if the institutionalized spouse should 
die. This argument has some merit. However, in deciding whether income should be deemed from the 
institutionalized spouse to the community spouse, it is also important to consider whether, in fact, the 
income is transitory. It is not necessarily the case that income from the institutionalized spouse will 
cease upon death. For example, spousal benefits under Social Security will continue to be paid 
following the death of the institutionalized spouse, as will survivors benefits from private pensions (if 
they have been elected). In fact, some income sources, such as life insurance benefits, may become 
available only upon the death of the institutionalized spouse. 

The strategy of raising the CSRA level through the fair hearing process was most frequently 
cited by eligibility workers in Massachusetts. This approach was not used as frequently in the other 
three states, partly because other planning techniques were equally or more successful and did not 
require applicants to go through a fair hearing process. In 1994, the three long-term care eligibility 
offices in Massachusetts were reporting five to 15 fair hearing appeals per month to raise the CSRA 
in this manner. The workers also found the whole process somewhat frustrating in that they were 
forced to initially deny eligibility to the applicant (for excess resources), and then look like "the bad 
guy" when the application was approved during the fair hearing process through an increase in the 
CSRA for the non-institutionalized spouse. 

At the time of our site visit to Massachusetts in December 1 993, Massachusetts was not using 
the so-called "income first" rule in bringing the community spouse's income up to the MMMNA. 24 
Thus, in those cases in which applicants were requesting fair hearings to increase the MMMNA, 
substantial levels of assets were being protected for community spouses, often in excess of $200,000. 
However, Massachusetts was considering changing its regulatory policies to apply the "income first" 
rule in establishing the MMMNA at the time. 



"This issue is referred to as the "income first" rule because the question is whether a state looks to the income of the 
institutionalized spouse first before increasing the CSRA to bring the community spouse's income up to the MMMNA. 



-20- 



Concurrently, in March of 1994 the Medicaid Bureau in HCFA issued a memorandum that 
indicated that since the language in MCCA is not specific on the "income first" rule, that states are free 
to adopt their own reasonable interpretation of MCCA on this issue: 

...We would now like to clarify that states have the option to use the "income first" rule 
or to apply some other reasonable interpretation of the law until we have issued final 
regulations which specifically address this issue 25 ... 

In June of 1 994, Massachusetts issued new regulations implementing the "income first" policy. 
Although this change in policy was lobbied against fairly aggressively by the elder law industry in 
Massachusetts, the new policy was successfully implemented. State Medicaid officials reported that 
the number of fair hearing appeals to increase the CSRA for community spouses markedly diminished 
after the new policy went into effect. 

However, this issue is also being contested in the courts. In a series of court cases in Ohio, 
the state initially won a case that determined that the state had the right to apply the "income first" 
rule, but two more recent court of appeals decisions have ruled that MCCA is "unambiguous" on this 
issue, and that the statute calls for increasing the MMMNA through a raising of the CSRA level first — 
before looking to the institutionalized spouse's income. 26 There is also a Federal class action suit 
pending in the state of Pennsylvania contesting that the state was not providing applicants with any 
information regarding their rights to seek an increase in the MMMNA by raising the CSRA above the 
Federal maximum. 27 

Raising the CSRA through Court Orders 

Another Medicaid planning technique for raising the CSRA for a community spouse above the 
Federal maximum is to do so through a court order. This technique is also based upon a provision of 
the Medicare Catastrophic Coverage Act of 1988, which states that the maximum amount protected 



"Memorandum from Sally K. Richardson, Director, Medicaid Bureau, HCFA to All Regional Administrators, March 3, 1994. 

25 See Kimnach v. Ohio Department of Human Services (Ct. of Common Pleas, Franklin County, No. 93CVF-06-41 91 , February 
14, 1994); Kimnach v. Ohio Department of Human Services (Ohio Ct. App., Franklin County, No. 93APEo4-520, 1994 WL 
484660, September 8, 1994); and Gruber V. Ohio Dept. of Human Services (Ohio App. Ct., No. 94CAE06015, 1994, WL 
667869, October 28, 1994). These cases are also summarized in The ElderLaw Report, Volume VI, Number 1 (July/August 
1994) Number 3 (October 1994) and Number 6 (January 1995). 



"See Coughlin, Kenneth M. "Class Action Suit Challenges Pennsylvania's 'Income First' Rule." The ElderLaw Report, Volume 
VI, Number 1, July/August 1994. 



-21- 



for a community spouse under the CSRA shall equal the amount provided under a court order, if the 
court ordered protection exceeds the maximum CSRA allowed under Federal law. Although this 
provision of MCCA was simply meant to clarify protected assets for a community spouse in cases 
where a spouse had in fact received assets from a Medicaid applicant under a support order, the 
provision created a new Medicaid estate planning technique, whereby attorneys have sought court 
orders specifically to raise the CSRA level for married Medicaid applicants. 

During our site visits, eligibility workers in Massachusetts, California and New York reported that 
court orders were being used as mechanisms to increase the CSRA for community spouses. The 
technique was particularly common in California, and workers in some counties reported that this 
technique had become a very routine strategy in cases involving married applicants. One worker 
reported a case of a court order protecting a million dollar business asset for a community spouse. 
Workers expressed frustration that there seemed to be nothing they could do to counter this planning 
strategy, since it seemed clearly permissible under Federal Medicaid law. 

In August of 1 994, the HCFA Medicaid Bureau issued a letter to the State Medicaid Directors 
which suggested that states did not have to accept all court orders as replacements for the CSRA. The 
letter stated: 

We do not believe that the statute contemplates allowing a court, prior to the 
institutionalized individual applying for Medicaid, to separately establish a spousal share 
or the protected resource amount. We believe these are administrative determinations 
which are solely the responsibility of the state agency administering the Medicaid 
program. 

Although some state Medicaid programs initially interpreted this transmittal to mean that 
eligibility workers could refuse to accept court orders that had clearly been issued merely as a Medicaid 
estate planning strategy, HCFA issued a subsequent letter to the states in December 1 994 that clarified 
that it only wished to make the point that courts do not themselves have the authority to establish the 
CSRA, only Medicaid programs have such authority. However, if a court order has been issued which 
protects the assets of a community spouse in an amount in excess of the Federal CSRA maximum, then 
the amount protected under the court order does indeed take precedence over the Federal maximum. 

Thus, at the time of this writing, court orders remain a viable Medicaid estate planning 
technique for protecting substantial amounts of assets for community spouses. Without further 
Congressional clarification on this matter, it is likely that court orders will be used increasingly as a 



-22- 



mechanism for protecting assets for community spouses above the current Federal maximum of 
$74,820. 

2.3.2 Medicaid Planning Techniques for Single Persons 

Planned Gifting: The "Half a Loaf" Method 

Perhaps the largest "loophole" in Medicaid law and regulation that allows significant transfers 
of assets to occur is, ironically, the policy on transfer of asset penalties itself. The Medicare 
Catastrophic Coverage Act of 1988 made a number of amendments to the Medicaid statute to clarify 
how states should treat cases in which asset transfers have occurred, including the imposition of 
transfer of asset penalties. In general, states are required to impose "periods of ineligibility" in cases 
where an applicant has transferred a substantial amount of assets in the 36 month period before 
applying for Medicaid coverage. To use a very simple example, if John Smith transfers $100,000 to 
his daughter on Monday, and then applies for Medicaid on Tuesday, claiming he has no assets of his 
own, the state is required to impose a "period of ineligibility" on Mr. Smith, which would render him 
ineligible for Medicaid coverage until the penalty period runs out. 

However, the loophole in the transfer of asset penalty is created in how Congress required 
states to determine the period of ineligibility. First, the length of the period of ineligibility is determined 
by dividing the amount of the transfer by the average monthly cost of private nursing home care. Thus, 
if the average private cost of nursing home care is $3,000 per month, and an applicant has transferred 
$12,000 prior to applying for Medicaid, then a four-month period of ineligibility would be imposed. 

More importantly, however, MCCA stipulated that the period of ineligibility for asset transfers 
must be imposed from the date of the transfer. It is this provision of the policy which creates the 
loophole. In effect, it allows any applicant to protect at least half of his or her total assets. Example 
1 provides a typical illustration of how this strategy works. 

In effect, the transfer of asset penalty policy allows any individual to transfer half of his or her 
assets at any point in time, to use the remaining half to pay for private nursing home care, and always 
have the period of ineligibility expire by the time the remaining assets are depleted. This is why the 
elder law industry commonly refers to this planning technique as the "half a loaf" method, because one 
can always save at least half of one's assets through this technique, and "half a loaf is always better 
than none." 



-23- 



In our site visits, the "half a loaf" method was by far the most common Medicaid planning 
technique being used by non-married applicants. It is simple, foolproof, and entirely in compliance with 
Medicaid law. Eligibility workers indicated that only rarely did they ever identify an asset transfer in 
a Medicaid application that actually resulted in a real delay in approving Medicaid eligibility, because 
in almost all cases, the period of ineligibility on an identified transfer had expired by the time the 
application was made. 



Example 1 



How the Medicaid Transfer of Asset Penalty Policy Allows 
Applicants to Always Protect At Least Half of Their Total Assets 

In July 1 994, Mrs. Gage, an 86-year-old widow, falls in her own apartment and breaks her hip. 
After a hospitalization, she is admitted to a nursing home. Medicare covers her first 21 -days in the 
nursing home in full, and Mrs. Gage's Medi-gap coverage pays the $87.50 Medicare copayment 
requirement for the 22nd to 100th day. However, after 100 days in a nursing home, Mrs. Gage still 
cannot transfer or ambulate without assistance and therefore cannot be discharged home. She must 
now pay the $1 20 per day nursing home charge out of her own resources. She has $42,000 in savings 
in Certificates of Deposit. 

At this point, Mrs. Gage's son seeks the counsel of a Medicaid estate planning attorney to 
inquire what he can do to prevent his mother from depleting all of her assets in paying for her care. 
The attorney counsels Mrs. Gage's son to have his mother transfer half of her assets to her children. 
As counseled, Mrs. Gage transfers $21,000 to her son and daughter. Almost six months later, Mrs. 
Gage has depleted her remaining assets to $2,000, and she applies for Medicaid. For having 
transferred the $21 ,000 to her children six months previously, the Medicaid eligibility worker imposes 
a "period of ineligibility" on Mrs. Gage. The worker computes the period of ineligibility by dividing the 
amount transferred ($21 ,000) by the average private cost of nursing home care in the state, which is 
determined to be $3,600. The penalty period is thus 5.83 months. By statute, the period of ineligibility 
is also stipulated to begin on the date of the transfer, which was six months prior to the date that Mrs. 
Gage applied for Medicaid. Thus, by the time Mrs. Gage applies for Medicaid, the period of ineligibility 
has already expired and the eligibility worker approves Mrs. Gage's Medicaid coverage effective 
immediately. 



In interviews with Congressional staff about the transfer of asset penalty provision, staff agreed 
that computing the period of ineligibility from the date of the transfer creates a loophole for the 
Medicaid estate planning industry, but claimed that this policy was consistent with Congressional 
intent. The intent of this provision, they said, was to protect the "little guy" from being unduly 
penalized for ingenuous transfers. For example, consider the case of a grandmother who makes a 
$10,000 gift to her grandson, and then six months later needs to be admitted to a nursing home. 
Congress wanted to protect such individuals from having periods of ineligibility imposed on them, in 
cases where relatively small amounts of funds have been transferred or given away without any intent 



-24- 



of depleting assets for Medicaid planning purposes, particularly since the application of penalty periods 
could result in real hardship on some applicants (i.e., if applicants had depleted their assets yet were 
also denied eligibility for Medicaid). 

Trusts 

A major thrust of the OBRA '93 provisions was to limit the use of trusts as a Medicaid planning 
device. In November of 1 994, HCFA issued state Medicaid Manual instructions implementing the OBRA 
'93 trust provisions. 28 These implementing instructions, while not having the force of law, 
nonetheless reflect HCFA's regulatory intent. These provisions provide important clarifications to states 
on how assets held in a trust, as well as how income generated by the principal in a trust, are to be 
counted in the Medicaid eligibility process. While these provisions are quite extensive, important 
components of the new provisions include: 

• Assets held in a revocable trust are always counted as available to the applicant for Medicaid 
eligibility purposes; 

• Payments made from a revocable trust to any individual or third party other than the applicant 
are to be treated as a transfer of assets; 

• Any income or principal that could be paid from an irrevocable trust to the applicant is counted 
as available income or resources respectively; 

• If there are no circumstances under which income or principal from an irrevocable trust can be 
paid to the applicant, then that income and/or principal is not considered available to the 
applicant, but all such income and/or principal is then considered a transfer of assets for 60 
months prior to the Medicaid application date; 

• Transfers of a home into an irrevocable trust is to be counted as a transfer of assets, since a 
home is no longer considered an excluded asset when it is transferred; and 

• The above provisions do not apply to certain types of trusts that are specifically exempted 
under OBRA '93, including (1) special needs trusts, (2) pooled trusts, and (3) income-only, or 
"Miller," trusts. 

Our site visits to four states were conducted prior to the issuance of the HCFA state Medicaid 
Manual instructions, but nonetheless it was apparent that the OBRA '93 provisions had made a definite 
impact on reducing the number of trusts being written for Medicaid planning purposes. For example, 
presenters at a continuing legal education seminar in Boston recommended that attorneys not write any 
Medicaid planning trusts until HCFA implementing instructions were issued. One elder law attorney we 



28 State Medicaid Manual, Part 3--Eligibility, Transmittal Number 64, November 1994. 

-25- 



interviewed indicated to us that he had stopped writing trust instruments altogether, because as an 
attorney, it was his fiduciary obligation not to bring his client's financial interests into jeopardy. 

Our general observation is that while trusts have been used as a Medicaid planning tool in some 
cases, their use even prior to OBRA '93 was not particularly widespread. Eligibility workers reported 
seeing trusts relatively infrequently, maybe one or two per month in their normal caseload. Trusts were 
more often encountered by workers in New York and Massachusetts than in Florida or California. 

Prior to the OBRA '93 provisions, trusts were more frequently used as a Medicaid planning 
device. In the absence of Federal or state guidelines, workers and their supervisors often based their 
decisions on whether assets held in the trust were to be considered available to the applicant by the 
terms of the trust itself. Thus, if a trust specifically stipulated that the trust principal could not be made 
available to provide for the beneficiary's medical or nursing home care, then local eligibility offices 
frequently abided by the terms of the trust and did not consider the resources as available. In many 
cases, these determinations were not made by local workers but by supervisors with special expertise 
or legal counsel who were available to the local offices. 

In summary, Medicaid trusts, prior to OBRA '93, were often an effective Medicaid planning 
device simply because local workers had few state or Federal guidelines by which to make 
determinations about the countability of resources held in trusts. Even so, trusts were encountered 
relatively infrequently by workers in their processing of Medicaid applications. With the enactment of 
the OBRA '93 trust provisions and the subsequent HCFA Medicaid Manual instructions, it is likely that 
the use of trusts as a Medicaid planning tool will decline, particularly since assets placed in a trust are 
now subject to a 60-month look-back period. In our judgment, OBRA '93 had the intended effect of 
greatly limiting trusts as a device for sheltering assets from the Medicaid eligibility process, at least for 
individuals over the age of 65. 29 

The exceptions extended to special needs trusts and pooled disability trusts will continue to 
make trusts an effective Medicaid planning tool for disabled persons under the age of 65 who require 
extended nursing home care, particularly persons with mental retardation and other developmental 
disabilities. These exceptions allow ways for parents and other relatives of disabled persons to create 
trusts that can be used to purchase services, equipment or amenities which are not covered by the 
state Medicaid program for their disabled family members in long-term care facilities. For example, trust 



"Note, however, that trusts can still be used in conjunction with the "half a loaf" method to shelter assets without actually giving 
them away. For example, an applicant could create an irrevocable trust with $50,000 in assets, apply for Medicaid two years 
later, and still not be subject to a penalty period, since the penalty period will already have expired. 



-26- 



resources are sometimes used to purchase assistive technologies such as motorized wheelchairs that 
are too costly to be covered by some state Medicaid programs. 

Annuities 

An annuity is a financial instrument that pays a fixed income stream over a defined period of 
time in return for an initial payment of principal. For example, an individual may buy an annuity for 
$50,000 that pays him a fixed income of $420 per month over his remaining lifetime. Annuities have 
been used as a Medicaid planning tool because they are an easy and effective way to quickly convert 
assets to income. 

A Medicaid applicant who purchases an irrevocable annuity that pays a fixed income stream 
over his remaining lifetime has not really "sheltered" any assets, because the income from the annuity 
must be used to partially offset the cost of his nursing home care. In this manner, purchasing an 
annuity only allows a prospective Medicaid applicant to "pay later rather than sooner." Rather than 
depleting one's assets and then applying for Medicaid, an individual who purchases an annuity might 
immediately become Medicaid eligible, but then pay a higher proportion of his nursing home bill because 
his monthly income is now augmented by annuity payments. 

Annuities are effective Medicaid planning devices, however, when the income received from 
the annuity is not actuarially equivalent to the principal payment. For example, if an 80-year-old 
individual purchases a 20-year annuity, with any remaining payments to be made to heirs upon the 
purchaser's death, then the purchaser has successfully sheltered assets for heirs. 

In our study, we found that annuities were most frequently used as a Medicaid planning tool 
in the state of California. In California, under current state regulations, irrevocable annuities are not 
considered an available resource as long as the purchaser is receiving "periodic payments of interest 
and principal" from the annuity. However, California's regulations are silent on whether the periodic 
payments have to be actuarially equivalent to the purchase price of the annuity. Thus, an obvious and 
relatively common technique used by Medicaid planners was to use an applicant's excess assets to 
purchase an annuity, but then have the annuity make periodic payments of interest and principal of 
minimal amounts, with any remaining principal and interest passing to heirs on the purchaser's death. 
For example, one eligibility office in California encountered an annuity worth over $500,000 which only 
made payments of principal and interest of $5,000 per year (an annual return of about 1 %). 



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Similar examples of excluded annuities with nominal payments of interest and principal were 
cited by workers in other counties in California. Although the use of these types of annuities as a 
Medicaid planning device was not widespread, their use was growing, since they were a relatively easy 
and effective way to quickly shelter assets without incurring a transfer of asset penalty. One eligibility 
office had also encountered a "private annuity" that involved the purchase of an annuity by the 
applicant from a relative, rather than from an insurance company or other financial institution, and had 
been advised by the state to approve it. 

In the three other states, annuities were infrequently used as a Medicaid planning device. In 
these states, eligibility offices generally required annuities to be actuarially equivalent in order to be 
excluded as countable resources. Eligibility workers in Massachusetts expressed some frustration from 
not having an official set of actuarial tables approved by the state by which to evaluate the actuarial 
equivalency of annuities, since elder law attorneys were sometimes presenting their own actuarial tables 
in the application process. Some workers also expressed a desire to gain access to a set of life 
expectancy tables that were specifically developed for nursing home patients, since they believed that 
the life expectancy of nursing home patients was probably less than that of non-institutionalized 
persons of the same age and sex. 

OBRA '93 provisions require that annuities be treated in a manner similar to trusts, and, in the 
November 1 994 state Medicaid Manual transmission, HCFA provided clarification on how annuities are 
to be treated for Medicaid eligibility purposes. The transmittal adopts the position that in order to be 
excluded as a countable resource, the expected return on the annuity must be commensurate with a 
reasonable estimate of the life expectancy of the beneficiary. If not, the beneficiary is presumed not 
to have received fair market value for the annuity, and a transfer of assets penalty is imposed on the 
difference between the fair market value and the actual rate of return. For example, if an 80-year-old 
male purchases a $ 1 0,000 annuity with a payout period of ten years, but the life expectancy for an 80- 
year-old male is only 6.98 years, a transfer of assets penalty is applied to the amount of income that 
would be paid to the beneficiary between 6.98 years and 10 years. In the state Medicaid Manual 
transmission, HCFA included life expectancy tables by age and sex that states and local eligibility 
offices could use to assess the actuarial equivalency of annuities. 

" Spending Money " 

While not really considered a Medicaid estate planning strategy, it is important to discuss simply 
"spending money" as a way for Medicaid applicants to reduce their assets to Medicaid eligibility 
thresholds. Medicaid eligibility workers reported that it is frequently the case that applications will be 

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denied due to excess resources of relatively small amounts. For example, an applicant may have 
savings of $9,000, putting her $7,000 over the Medicaid eligibility level of $2,000. In these cases, 
workers would often advise applicants to spend excess resources on purchases that are excluded in 
the eligibility determination process. Applicants might be advised to pay off mortgages, credit card 
debt, or automobile loans; to make home repairs or improvements; or to make some major purchases, 
such as appliances, furniture, and so forth. 

There is nothing illegal about depleting one's assets through simply spending money, and unlike 
other Medicaid planning techniques, the amount of assets involved are generally minimal. But it is 
nonetheless important to recognize that it is very easy to reduce assets to Medicaid eligibility levels 
through these kinds of purchases for applicants who have relatively few assets. Though not required 
to do so, eligibility workers reported that they often felt an obligation to inform applicants with relatively 
few assets of the things they could do to deplete their assets by simply spending money, rather than 
depleting assets on private nursing home care, particularly when workers saw other applicants 
sheltering significant amounts of wealth with the assistance of elder law attorneys. 

Joint Accounts 

Prior to OBRA '93, another Medicaid planning technique in some states was to transfer assets 
through joint bank accounts. For example, in Florida, it was possible to quickly transfer assets by 
adding a joint signatory to the applicant's bank account, and then have the joint signatory withdraw 
all of the funds from the account. Until OBRA '93 was enacted, Medicaid policy in Florida ruled that 
such actions could not be considered as transfers of assets, since the applicant himself had not actively 
transferred the funds, and the joint owner of the account had every right to withdraw the funds without 
the applicant's approval. 

OBRA '93 clarified that transfers of jointly-held assets that reduce the applicant's ownership 
or control of the assets are to be considered illegal transfers subject to penalties, regardless of how the 
transfer was made. Thus, after OBRA '93 was enacted, Florida changed its policy expeditiously, and 
this Medicaid planning technique is no longer a viable option in Florida. 

Burial Trusts 

Most states allow funds in an irrevocable burial trust to be excluded in determining eligibility 
for Medicaid, so that applicants can set aside funds to pre-pay their funeral expenses without having 
their eligibility for Medicaid affected. These excluded funds are in addition to the $1 ,500 allowed under 

-29- 



Federal Medicaid law that can be set aside for a burial fund. There have been anecdotal accounts of 
applicants sheltering significant amounts of assets in irrevocable burial accounts, with the implication 
that the trustees of such accounts (e.g. a funeral home) may transfer funds not actually used for funeral 
expenses to the heirs of the Medicaid recipient after his or her death. 

Although we asked eligibility workers in all states whether they ever observed funds being 
sheltered in irrevocable burial accounts, there was very little evidence that this was happening. The 
most notable exception to this was in Suffolk County in New York where eligibility workers reported 
that they occasionally saw very large pre-paid burial accounts (e.g. bronze caskets costing twenty to 
thirty thousand dollars). In general, however, we uncovered little evidence that burial accounts were 
being used as a Medicaid planning tool in the four states we visited. 

2.4 The Variable Effectiveness of Estate Recovery Programs 

Another component of Medicaid estate planning involves protecting assets still held by Medicaid 
recipients while they are alive (primarily the Medicaid recipient's home, but also other assets that are 
excluded in the Medicaid eligibility determination process) from being recovered by states after the 
Medicaid recipient dies. The process of recouping costs incurred by Medicaid recipients from their 
estates after their death is called estate recovery. Prior to OBRA '93, Medicaid estate planning to 
protect assets from state recovery was not even needed in many instances, since half the states did 
not even operate estate recovery programs. However, an important provision of OBRA '93 was to 
require all states to implement estate recovery programs. 

In most states that operate estate recovery programs the process works something like the 
following: 

• Medicaid recovery staff collect information for various sources on all recent decedents, all 
recent decedents who were enrolled in Medicaid prior to their death, or all decedents in nursing 
homes; 

• Names (and other identifying information) of decedents are entered into the Medicaid MMIS 
system and matched against Medicaid enrollment and claims files to determine the amount of 
Medicaid payments made for Medicaid-covered services used by decedents prior to their death; 

• If a "hit" is found, a notification letter is sent out to the executor of the estate and/or to 
prospective heirs indicating the amount of the state's claim against the Medicaid recipient's 
estate; 

• The state's claim against the estate is resolved in accordance with state law regarding the 
relative precedence of alternative creditors against an estate. For example, the claim of 



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Medicaid estate recovery programs against the estate is usually secondary to the claims of 
funeral homes and estate administrators; 

• In addition, if the state has imposed a lien on the home of the Medicaid recipient, the lien is not 
released (and, therefore, the home cannot be sold or the deed transferred) until the state's claim 
is settled. 

All of the four case study states operated estate recovery programs prior to OBRA '93, but each 
state's program differed substantially in their effectiveness and structure. Massachusetts and California 
operated centralized estate recovery programs within the Third Party Liability Branches of their state 
Medicaid program offices. In New York, estate recovery was a county responsibility, so that estate 
recovery policies and practices differed from county to county. Florida was operating a minimal estate 
recovery program at the time of our site visit, contracting with one attorney to recover from estates 
on a contingency basis, but was in the process of planning for a major expansion in its estate recovery 
efforts. 

Of the four states, Massachusetts had the most effective estate recovery program. As a result 
of state legislation enacted in 1992, the executors of all probated estates are now required to notify 
the Division of Medical Assistance of the petition to probate. This provides the state with an effective 
system for notification of deaths of Medicaid recipients, which are currently about 2,000 per year. The 
Division of Medical Assistance then cross references the notifications it receives about all probated 
estates with its Medicaid eligibility files to identify persons who have received Medicaid payments for 
services, and if so, the total payments made for the services received. To further protect its claim, 
Massachusetts also places a notification lien on the property of Medicaid recipients without a 
community spouse (or other exempt relative) so that the home cannot be sold or transferred without 
prior settlement of the state's claim on the property. 

California, like Massachusetts, operates a centralized estate recovery program that 
comprehensively identifies all recent Medicaid deaths and pursues recoveries from the probated estates 
of decedents who have received Medicaid-financed services. However, the effectiveness of California's 
estate recovery is limited by two major factors: (1 ) the state does not impose liens on the property of 
single Medicaid recipients to protect its claim; and (2) the state does not impose transfer of asset 
penalties in cases where homes have been transferred for less than fair market value either prior to 
Medicaid application or after Medicaid enrollment. Thus, Medicaid recipients can generally transfer their 
homes prior to death, and thus avoid having their property become part of their probated estates. 
California estate recovery program staff admitted that they generally are successful in making 
recoveries from real property only in cases where Medicaid recipients and their families are uninformed 
about Medicaid estate planning opportunities for transferring homes prior to death. Thus, recoveries 

-31- 



are generally made from "modest" estates, while recipients who own property of significant value are 
more informed about Medicaid estate planning practices and are successful in avoiding the estate 
recovery process. While the California state legislature had enacted a lien program, the program has 
not been implemented since the state believes it would only accelerate the transfer of homes in order 
to avoid the placement of liens. 

In New York, estate recovery is entirely a county responsibility, so that estate recovery 
practices vary widely from county to county. Estate recovery in New York is a much more haphazard 
process, since there are no uniform procedures across counties for placing liens on exempt property 
(although most counties do place liens) for identifying recent deaths of Medicaid recipients, for 
obtaining information on incurred Medicaid costs by recent decedents, or for pursuing claims against 
estates in local surrogate courts. 

Local county staff in New York involved in estate recovery efforts expressed considerable 
frustration regarding the estate recovery process, and felt there were many barriers in the way of 
enhancing the effectiveness of their efforts. For example, there was considerably more litigation in New 
York regarding Medicaid estate recovery. Heirs to the estates of recent Medicaid recipients were much 
more aggressive in protesting the counties claims for recovery. Local county staff often claimed that 
they did not have the resources to litigate protested claims, and freely admitted that they often do not 
pursue recoveries in many cases because they believe it is going to be "a waste of time." Further, 
many respondents claimed that the local surrogate courts tend to rule in favor of heirs in protested 
cases, thereby reducing the county's incentive to pursue recoveries. 

Florida had the weakest estate recovery program of the four states. Florida's estate recovery 
program consisted of a contract with one attorney who was responsible for seeking Medicaid recoveries 
across the state. Florida's estate recovery efforts are hindered significantly by the fact that the Florida 
state constitution contains a specific "homestead exemption" which protects homes in the probate 
process from the claims of creditors, so that homes are generally allowed to pass to heirs, regardless 
of the amount of claims against the estate by outside creditors. Thus, Florida's estate recovery 
program almost never makes recoveries from the real property of deceased Medicaid recipients, and 
the recoveries it does make are from property other than the home. Since the vast majority of Medicaid 
estate recoveries in other states are derived from real property, Florida's opportunities for substantially 
increasing recoveries without modifying the homestead exemption in the state constitution are severely 
limited. State Medicaid staff believed the likelihood of the state legislature making such a change was 
slim. 



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Seeking Recoveries from the Surviving Spouse's Estate 



Given that the Medicaid spousal impoverishment provisions allow community spouses to retain 
much higher levels of assets (as well as the home) than prior to the enactment of MCCA in 1 988, there 
is considerable opportunity for increasing the effectiveness of estate recovery efforts if states continue 
to pursue claims against the estates of surviving spouses. Federal Medicaid statutes have not 
specifically addressed whether states have the right to pursue claims against surviving spouses, 
although various court decisions have generally ruled that states do have the right to pursue such 
recoveries. 30 

At the time of our site visits, Massachusetts and California were just beginning to pursue 
recoveries from the estates of surviving spouses. California had enacted legislation to impose liens on 
the property of surviving spouses in order to protect its claims over the remaining lifetime of a surviving 
spouse, but had not implemented the lien program. Massachusetts pursued claims on the property of 
surviving spouses, although it did not have a formal lien program. Although counties in New York had 
the right to pursue recoveries from the estates of surviving spouses, few counties pursued such claims 
due to recent judicial decisions that severely restricted the authority of counties to recover their claims. 
Florida was not pursuing recoveries from the estates of surviving spouses at all. Thus, while states 
recognized the potential benefit of pursuing recoveries from the estates of surviving spouses, none of 
the four states in our study were actually making significant recoveries from spousal estates. 

A major barrier to the pursuit of claims against the property of surviving spouses is that without 
a lien on the property of the surviving spouse to protect its claim, there is nothing to prevent the 
surviving spouse from transferring assets out of his or her estate in order to avoid recovery. The only 
situation where transferring assets could have negative consequences is if the surviving spouse later 
applies for Medicaid and incurs a penalty period. On the other hand, the placement of liens on the 
property of surviving spouses can have negative consequences if, for example, the surviving spouse 
needs to sell the property at some point in order to meet basic living expenses. Thus, an equitable 
policy approach for protecting the state's claim to eventually recover from the estate of the surviving 
spouse while at the same time not imposing undue hardship on the surviving spouse during his or her 
remaining lifetime is not a simple matter. 



30 For example, a recent decision in Federal district court in California ruled that the restriction on the placement of liens on the 
property of community spouses is only applicable during the lifetime of the institutionalized spouse, and that the imposition of 
liens against property that has passed to a surviving spouses upon the death of a Medicaid recipient does not conflict with federal 
Medicaid statute. See Lynn Roy Demille et al. v. Kimberly Be/she et al.. No. C-94-0726-VRW. 



-33- 



Of course, if states are going to pursue recoveries from the estates of surviving spouses, they 
must develop systems that can track surviving spouses and notify the state at the time of their deaths. 
This is not a straightforward matter since, for example, surviving spouses could move out of the state 
that is pursuing a claim. 

State Plans for Implementing the Estate Recovery Provisions of OBRA '93 

In May of 1 994, HCFA conducted a survey of the states to gauge the impacts of OBRA '93 on 
their estate recovery programs. Twenty-seven states were found to have been operating estate 
recovery programs prior to OBRA '93. Thirty states indicated that they required legislation to establish 
estate recovery programs or to change their existing ones in response to OBRA '93. Thirty-one states 
indicated that they planned to use liens, 10 had decided that they would not, and the remainder were 
either undecided or did not answer the question. 

These results should be interpreted cautiously, however. Many states may have changed their 
plans for how to implement the estate recovery provisions of OBRA '93 since the survey was taken. 

2.5 Medicaid Estate Planning and State Administrative Practices 

Federal and state initiatives to enact and implement eligibility policies and estate recovery 
programs that address new Medicaid estate planning strategies are important to ensuring that Medicaid 
remains targeted to the truly poor. However, there is another equally important component — the 
administration of Medicaid eligibility procedures. State administrative practices to verify income and 
assets reported by applicants during the eligibility process can be equally, if not more, important as the 
specific eligibility policies adopted by a state. In their efforts to contain Medicaid long-term care costs 
by limiting nursing home coverage to those persons who meet Medicaid's financial criteria, states can 
realize additional savings by not only tightening up their eligibility policies, but by implementing 
administrative practices that improve the verification of income and assets reported on Medicaid 
applications. 

When an individual or married couple apply for Medicaid coverage, they first complete a 
Medicaid application that asks a series of questions about their financial circumstances. These 
applications are not uniform across states; each state Medicaid program develops its own administrative 
procedures for processing applications. Some states use generic applications for all Medicaid 
applicants, while other states have separate applications depending upon the type of applicant and 
coverage requested. In response to the growth in Medicaid estate planning, some states have revised 

-34- 



their applications for nursing home coverage. They now ask much more detailed questions about 
assets held by the applicant, including specific questions about assets held in trusts, annuities, jointly 
held assets, business property, vacation property, and so on. 

Along with the application, applicants must provide documentation of reported financial 
information. This documentation may include the following: 

• Proof of reported income 

• Copies of property tax receipts 

• Bank statements for saving accounts, checking accounts, and other financial accounts 31 

• Insurance policies 

• Car registration 

• Property deed(s) 

• Copies of any pre-paid burial arrangements 

• Annuities 

• Trust documents 

• Documents verifying ownership of stocks, bonds, etc. 

During processing of the Medicaid application, the eligibility worker is responsible for ensuring 
the application is complete and accurate, and the applicant has provided the requisite supporting 
documentation. The eligibility worker must then review all of the material provided by the applicant 
and either approve or deny Medicaid coverage, depending upon whether the applicant has met the 
program's financial criteria. In reviewing the application, the eligibility worker may also conduct further 
investigations on his or her own to assess whether the applicant has reported his or her financial status 
accurately. 

By and large, the eligibility workers we interviewed did not do any "investigative" work of their 
own to ensure that the information provided on applications is complete and accurate. Most workers 
stated that they did not have the time or the resources to do so. For example, applicants are required 
to report all assets held in bank accounts. While workers might verify with the bank that the account 
balances reported on the application are accurate, and that the applicant has no other active accounts 
with the bank, workers generally do not do additional "bank checks" to determine whether the applicant 
may have additional accounts at other local banks that are not reported on the application. Workers 
often stated that it is difficult enough to get cooperation from banks that are reported on applications, 
since banks consider inquiries from local eligibility offices as an administrative burden for which they 
receive no compensation. 



"The number of months of bank statements that applicants must submit with their application varies from state to state. 



-35- 



Additionally, eligibility workers do not generally conduct property checks to assess whether 
applicants may have additional real property not reported on the application. Some workers contended 
that this would be a difficult task in any case, since property owned by the applicant, or jointly owned, 
might be listed under someone else's name in local property records. Most towns and municipalities 
do not have automated listings of property records, so that property checks of this kind can be time 
consuming. Workers also reported that there is generally no way to determine whether applicants may 
own property outside the county (or state) in which the applicant resides. 

Eligibility workers reported that they did not have the time to conduct additional investigative 
work of their own, that it was difficult enough just meeting their processing quotas and obtaining the 
required documentation from applicants. Most of the workers we interviewed stated that they thought 
applicants were "generally honest" and did not consciously withhold information about their financial 
situation. However, a number of workers indicated that while applicants were usually honest when 
asked direct questions about their financial circumstances, that most applicants did not volunteer 
information unless directly asked. 

IRS Matches 

All Medicaid programs are required to participate in the Income Verification Eligibility System 
(IVES). Under IVES, computer matches are conducted with the Social Security numbers of new 
Medicaid applicants and Form 1099 returns submitted by banks and other financial institutions. Thus, 
if a Medicaid applicant has any financial asset which generates interest or dividend income that is 
reported to the IRS on a Form 1099, this income should be identified through the IVES program. 

The primary problem with the IVES program is the time lag of the computer matches. When 
local eligibility offices submit the Social Security numbers of new Medicaid applicants to the IRS for 
matching, the interest and dividend information that is returned to the local offices is usually 18-24 
months out of date. For example, if a local office receives a new Medicaid application in June of 1 994, 
the IRS match will provide the office with information about the applicant's interest and dividend 
income for 1 992. Thus, if the IVES match uncovers a financial account not reported by the applicant 
on his or her application, it may be simply be due to the fact that the applicant closed out the account 
during the intervening period. Thus, every time the IVES match produces a "hit" (a discrepancy) the 
worker must ascertain the reason for the discrepancy. 

A second problem is that the computer matches with IRS data are done through "batch" 
processing rather than through an on-line system. Often the Medicaid application has already been 

-36- 



processed and approved before the information from the IVES match is provided back to the local 
office. Thus, once the computer matches come through, workers must evaluate the information and 
determine whether it is worth "opening the case" again to investigate the "hit." As previously 
discussed, workers often do not have the time to thoroughly investigate all cases. 

Despite these problems, workers were generally supportive of the IVES program, primarily for 
its deterrent effects. Just informing applicants of the fact that the information provided on their 
applications would be checked with IRS computer files, they said, increased the veracity and 
completeness of the applications. 



The Importance of the Long-Term Care Eligibility Worker 



During the course of our site visits to eligibility offices in four different states, it became 
apparent that the training, experience, and diligence of the local eligibility worker was an important 
factor in addressing Medicaid estate planning issues. While most workers felt that applicants were 
generally honest in providing financial information (and it should be recognized that the individual 
completing the application for a nursing home recipient is generally not the applicant him or herself but 
rather another family member) experienced workers also stated that they could generally tell when 
applicants were not being completely forthright about reporting their finances. This was often taken 
as a sign that the application should be reviewed with greater scrutiny. 

Relatedly, it clearly made a difference as to whether a worker specialized in processing long- 
term care applications, or whether a worker was a "generic" worker who processed all types of 
Medicaid applications. Although all of the front-line eligibility workers we interviewed were paid low 
salaries (salaries generally ranged between $1 7,000 and $25,000 annually), the processing of long-term 
care applications requires a high skill level. Workers must be able to evaluate a much wide range of 
financial instruments, including retirement plans, pension funds, stocks, bonds, IRAs, trusts, annuities, 
business investments, real estate holdings, life estates, and so on. Workers with many years of 
experience stated that the complexity of Medicaid applications for long term coverage has increased 
dramatically in the last ten years, since elderly applicants are now much more likely to have a broad 
range of financial assets. The enactment of the Medicaid spousal impoverishment provisions under 
MCCA has also brought a lot more middle-class elderly couples into the Medicaid program. 

Workers who specialized in long-term care applications were clearly more knowledgeable about 
Medicaid planning issues than the "generic" workers we interviewed. In most of the largest counties 
we visited, such as in Los Angeles and Miami, eligibility offices were able to support long-term care 

-37- 



specialists. However, in many of the smaller counties, workers tended to be generic. The largest 
degree of specialization occurred in Massachusetts, which has only three long-term care eligibility 
offices serving the entire state. The workers in these offices, some of whom had many years of 
experience, were impressively knowledgeable about asset divestiture and sheltering strategies. 

Florida had recently implemented an automated welfare eligibility system called FLORIDA. While 
most of the workers we interviewed said that the automated system represented a significant overall 
improvement in processing welfare applications, it was clear that in regard to the processing of 
Medicaid long-term care applications, that the new system had lessened the investigative role of the 
eligibility worker in the eligibility determination process. Rather than relying on the worker's individual 
judgment in evaluating an applicant's financial circumstances, the automated system leads all workers 
through the same series of modules in making inquiries about the applicant's income, liquid assets, 
exempt assets, property, and so on. If a question is not asked as part of the automated system, then 
the question is not asked by the worker. Thus, the "investigative" nature of the eligibility worker's job 
had clearly been mitigated by Florida's automated eligibility system. 



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3.0 DISCUSSION 



3.1 Impact of OBRA 1993 on Medicaid Estate Planning 

The OBRA 1993 provisions on transfers of assets, trusts, and estate recovery programs have 
made a definite impact on Medicaid estate planning, although many opportunities for Medicaid estate 
planning remain unaffected. First, the provisions closed a number of loopholes that were being 
increasingly used by the Medicaid estate planning industry to transfer countable assets without penalty. 
These loopholes included making multiple transfers to incur concurrent penalty periods, transferring 
assets through joint bank accounts, and purchasing annuities that are not actuarially equivalent. 

Second, the OBRA '93 provisions greatly clarified Medicaid eligibility policy in regard to assets 
transferred into trusts. The provisions largely preclude the use of trusts as a Medicaid planning device, 
unless someone is foresighted enough to place their assets into a trust five years prior to making an 
application for Medicaid coverage. All assets held in a trust will be considered countable assets if the 
applicant has any means of accessing the corpus of the trust, or if the trustee has any discretion over 
the distribution of the trust principal, at present or at any time in the future. If trusts assets are not 
available to either the applicant or the trustee, and are not countable, then, the transfer of assets into 
an irrevocable trust will be treated as a transfer subject to penalty with a 60-month look-back period. 

Further, the OBRA '93 provisions and subsequent administrative guidelines have served to make 
the treatment of assets held in trusts much more consistent across all states. Prior to OBRA '93, state 
and local eligibility offices were clearly not evaluating trust assets with any degree of uniformity. 

In regard to their impact on Medicaid expenditures for nursing home care, it is likely that the 
estate recovery provisions of OBRA '93 will have a larger impact than the transfer of asset and trust 
provisions. All states are now required to implement an estate recovery program, whereas prior to 
OBRA '93, only half the states had operational programs. The option to states to expand their scope 
of estate recovery beyond probated estates will also limit the ability of Medicaid estate planners to 
avoid estate recovery by avoiding probate through life estates, rights of survivorship, trusts, and other 
sophisticated estate planning instruments, if states choose to adoptthe expanded definition of "estate." 
However, at the time of this writing, none of the four case study states had adopted the broader 
definition of "estate" for estate recovery purposes. 

OBRA '93 also made an important impact in the message it implicitly sent, i.e., that Congress 
intends to maintain Medicaid as a means-tested program targeted to those people who truly cannot 

-39- 



afford to pay for nursing home care from their own private resources, and that preserving inheritances 
for heirs is not one of Medicaid's policy objectives. This message will have an effect on the elder law 
industry as it seeks to devise new Medicaid estate planning techniques. Since elder law attorneys must 
act in their client's financial self-interest, they are likely be more risk adverse in placing their clients' 
finances into devices that may be subject to further Congressional scrutiny in the future. 

OBRA '93 was not a one-sided piece of legislation, however. It also expanded Medicaid 
coverage to certain individuals who had previously been unable to obtain Medicaid eligibility, namely 
individuals with incomes over 300% of the Federal SSI benefit level who happen to live in "income cap" 
states. As the "income trust" provision of OBRA '93 becomes more fully implemented, it may put 
increasing pressure on income cap states to terminate the "income cap" option altogether and to extend 
nursing home coverage to the medically needy. While many would consider this change a positive step, 
and a more equitable long-term care policy, it will definitely have the effect of increasing Medicaid 
expenditures in income cap states. 

3.2 State Opportunities for Further Tightening the System 

Beyond implementing all of the OBRA '93 provisions (and at the time of this writing, many 
states still have not) what can states do on their own to further tighten their Medicaid eligibility systems 
for nursing home coverage? We believe there are two major areas. First, there are many options 
available to states to increase the effectiveness of their estate recovery programs. Second, there are 
a number of administrative practices which states could implement to ensure that income and assets 
are accurately reported on Medicaid applications. 

Although OBRA '93 requires all states to implement estate recovery programs, it leaves 
considerable discretion to the states in regard to the aggressiveness of such programs. For example, 
Congress allows but does not require states to place liens on the real property of Medicaid recipients 
in nursing homes. The placement of a lien on the homes of single Medicaid recipients without spouses 
(or other exemptions) is the most effective mechanism for ensuring that the equity in a private 
residence is used to offset Medicaid payments for nursing home care upon the recipient's eventual 
death or sale of the home. Without a lien, the likelihood of the home remaining in the recipient's estate 
upon his or her death, and available for recovery, diminishes greatly. 

The pursuit of a claim on a surviving spouse's estate, in order to eventually recover Medicaid 
costs incurred by the deceased spouse, is another mechanism that is potentially available to states to 
increase estate recoveries. At this point in time, very few states pursue estate recovery this 

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extensively. Most states allow estates to pass to surviving spouses without any subsequent recovery 
after the death of the surviving spouse. However, this option may become increasingly attractive to 
states as they implement and expand their estate recovery programs. 

We feel there are also substantial opportunities for states to tighten their Medicaid eligibility 
systems through improved administrative practices. While workers reported that most applicants are 
generally honest in reporting their financial status on Medicaid applications, there are always some who 
are not. As previously discussed, it is usually not the applicant herself who completes the application, 
but a child or other relative who may have a direct financial interest in not revealing all of the parent's 
financial holdings. 

The main barrier to improved administrative practices in the states we visited was staffing 
resources. Eligibility workers do not have the luxury of spending a lot of time investigating their cases. 
With few exceptions, workers are forced to rely almost exclusively on the information provided directly 
by the applicant. 

Computer matches are undoubtedly a cost-effective mechanism for verifying financial data on 
Medicaid applicants. To be effective, however, such matches must be productive (they must actually 
identify resources that would otherwise remain unidentified), timely (they must produce information that 
accurately represents applicants' current financial situation), and efficient (they must not require more 
resources to conduct than are returned to the system through improved resource identification). Thus, 
computer matches should not be conducted just for the sake of providing more information. Workers 
can be overburdened with too much information. But increased computer matching in some cases may 
be warranted. Pilot programs, such as those being tried to increase property checks in Massachusetts, 
are a good way of testing new administrative techniques before implementing them statewide. 

It is difficult to recommend specific types of computer matching initiatives, since the logic of 
such initiatives depends upon the availability of potential databases in each state. However, since 
home equity represents such a large percentage of the total wealth of elderly persons, it is logical to 
consider improved practices to identify real property holdings of Medicaid applicants (or property that 
the applicant may have transferred in the 36-month look-back period) as a priority. 

It is important also not to underestimate the potential benefits of additional investments in 
personnel . Since Medicaid long-term care applications are becoming increasingly complex, states might 
consider increasing investments in long-term care eligibility specialists. This investment could be in 



-41- 



the form of specialized training and/or improved salary compensation. The return on such investments 
could be significant. 

3.3 The Inequities of Medicaid Estate Planning 

Medicaid eligibility staff in all of the states mentioned the inequities that arise as a result of 
Medicaid estate planning due to unequal access to legal advice. As a result of differential access to 
legal advice, applicants for Medicaid nursing home coverage in equal financial circumstances can retain 
very different amounts of assets and still be eligible for Medicaid. A common example of such an 
inequity occurs in determining the CSRA level in cases involving a community spouse. Applicants with 
access to legal advice are often able to raise the CSRA above the limit determined during the eligibility 
process (and even above the Federal CSRA maximum) through fair hearings or court orders. This, of 
course, enables the community spouse to preserve substantially more assets than would otherwise be 
the case. However, other couples of essentially the same economic status but who do not happen to 
seek legal advice can end up spending down far more of their assets. In essence, eligibility rules are 
more liberal for those with access to legal advice. Similar inequities arise, of course, with regard to 
legal advice concerning other types of Medicaid estate planning techniques (e.g., nondiscretionary 
trusts, life estates, annuities, and asset dispersement strategies). 

Medicaid estate planning also creates equity issues across income classes because those with 
more wealth are more likely to have access to legal advice. This not only influences eligibility for 
Medicaid nursing home coverage, as discussed above, but protection from estate recovery programs 
as well. Because of this, Medicaid estate recovery programs have been referred to as "Picking the 
Bones of the Poor." 32 This equity issue might be dealt with by establishing a threshold value that 
would be exempt from estate recovery, so that estates of low value would be protected. 

3.4 The Politics of Medicaid Estate Planning 

Federal and state initiatives to address Medicaid estate planning as a policy issue involve 
political, as well as technical, considerations. In our study, it was clear that political forces played an 
important factor in states' responses to OBRA '93, in their implementation of the OBRA '93 provisions, 
and in states' administrative practices in the eligibility process. 



"Commission on Legal Problems of the Elderly. 1 994. Medicaid Estate Recovery Under OBRA '93: Picking the Bones of the Poor? 

Washington, DC (November). 



-42- 



We observed diametrically opposed political climates in Massachusetts and New York. 
Massachusetts was moving in a more conservative direction, making a concerted effort to tighten up 
its eligibility system for long-term care, despite political opposition from advocacy organizations and 
the elder law industry. The administration in Massachusetts had made a clear policy decision to reduce 
opportunities for Medicaid planning as part of its overall effort to contain the growth in Medicaid 
program expenditures. Massachusetts had recently implemented a TEFRA lien provision, enhanced its 
estate recovery program, tightened its treatment of Medicaid planning trusts, applied the "income first" 
rule in determining the community spouse's CSRA level, and initiated a pilot program in one of its 
offices to improve the verification of real property holdings. 

In New York, on the other hand, there seemed to be little political motivation to tighten the 
system. 33 Although Medicaid program administrators we interviewed at the state and local level for 
the most part supported efforts to attack Medicaid estate planning, they reported that there was 
virtually no support in the state legislature for doing so. The general observation was that Medicaid 
coverage for long-term care had grown into such a middle class benefit, that the prospects of reverting 
it back to a truly means-tested benefit were gloomy. For example, although one of the OBRA '93 
provisions— the option to impose transfer of asset rules on applicants for noninstitutional long-term care 
services— was specifically included as a result of lobbying by New York state officials, the state 
legislature has so far failed to adopt this provision into state law. 

In California, Medicaid estate planning did not appear to be a visible political issue. California 
has traditionally contained Medicaid nursing home costs by restricting the growth in nursing home 
reimbursement rates. Some respondents believed that low nursing home payment rates had created 
a discernible difference between the quality of care for private patients and for Medicaid patients in 
California, which acted as a deterrent to Medicaid estate planning, at least in some areas. 

A political force that played a critical role in California more than in the other three states were 
elder advocacy organizations. These organizations took a very aggressive position with the state in 
regard to the interpretation of Federal Medicaid statutes, and frequently threatened to sue (and did sue) 
if they felt the state was implementing Federal law in a more restrictive manner than Congress intended. 
This constant threat of litigation appeared to have a definite impact on how California has chosen to 
implement Medicaid eligibility policy for long-term care coverage. 



"Since we conducted our site visit in New York, of course, there has been a shift in administration as a result of the gubernatorial 
election in November of 1 994. 



-43- 



The main political issue in Florida clearly centered on the "homestead exemption." Although 
the state administration was supportive of efforts to enhance estate recovery efforts, the issue of 
whether estate recovery could include placing a lien on the private residences of Medicaid nursing home 
residents was a "hot" political topic. On this issue, the Medicaid program office needed support from 
the state Attorney General's office to pursue the legalities of adopting a TEFRA lien program, given the 
construct of the homestead exemption in the state constitution. After reviewing the issue, the Attorney 
General's office concluded that the state's homestead exemption prohibited the state Medicaid program 
from filing liens (voluntary or involuntary) against homestead property. 

3.5 Options for Further Federal Reform 

Should the Congress decide to enact further reforms to tighten the Medicaid eligibility system 
for long-term care coverage, and to pursue estate recovery efforts more aggressively, there are 
additional options available that were not addressed in OBRA '93. These options include: 

• Amend Federal law to limit transfers from the community spouse to a third party "for the sole 
benefit of the community spouse. " OBRA '93 precludes states from imposing transfer of asset 
penalties on transfers "from the individual's spouse to another for the sole benefit of the 
spouse." This provision creates a loophole that allows married couples the option of 
transferring all of their jointly held assets to the community spouse prior to Medicaid 
application, and then transferring all of the community spouse's assets to a third party for the 
sole benefit of the community spouse. For example, the community spouse could use all of the 
couple's assets to purchase an actuarially equivalent annuity that converts all of his or her 
assets to an income stream paid solely to the community spouse. Since income of married 
couples is treated separately in the Medicaid eligibility process, there is no limit to the amount 
of assets that can be protected through this planning technique. A community spouse can 
potentially convert $1 ,000,000 to an actuarially equivalent annuity, and thus shelter all of the 
assets in this manner. Further, since the community spouse is not required to contribute to the 
cost of care for the institutionalized spouse, none of the income received by the community 
spouse from such an annuity would be required to help pay for the institutionalized spouse's 
care. 34 One option is to limit transfers of this type to those that would increase the 
community spouse's income to the maximum MMMNA allowed. Transfers which would 



"Although we did not observe this technique being used by married applicants during our site visits, it is clear that this technique 
will be increasingly used as a result of HCFA's recent clarification of this provision of OBRA 93. See, for example, "A Gift from 
the Feds to Cheer Everyone Involved in Elder Law." Alexander Bove, The Boston Globe, January 1995, and "HCFA Explains 
OBRA-93...More or Less," The ElderLaw Report , Volume VI, Number 6, January 1 995. 



-44- 



increase the community spouse's income above the MMMNA could be treated as transfers 
subject to penalty. An additional option would be to pool the income as well as the resources 
of both spouses in the initial determination of eligibility for the institutionalized spouse, and only 
allow the community spouse to retain income up to the MMMNA level. 

Address the "half a loaf" strategy by changing the date on which the transfer of asset penalty 
period begins . The success of the "half a loaf" strategy relates to the fact that the penalty 
period for transfers begins on the date of the transfer. An alternative option that would 
preclude applicants from using this strategy is to begin the penalty period on the date the 
applicant would otherwise have been eligible for Medicaid. Thus, if an applicant transferred 
$20,000 in July of 1994 and applied for Medicaid in January 1995 (and was otherwise 
determined eligible) the penalty period might begin in January 1 995, not July 1 994. Should the 
asset transfer provision be so revised, it might be appropriate to retain some flexibility in the 
new provision so that applicants who have unwittingly transferred relatively small amounts of 
assets prior to application are not unduly penalized. 

Amend Federal law to clarify that transfer of asset penalties will be applied to transfers that are 
done for the purpose of establishing eligibility for Medicaid or to avoid estate recovery . 
California does not presently apply transfer of asset penalties to transfers of exempt property, 
including the home, due to a court case ruling that interpreted Federal Medicaid law to mean 
that transfer of asset penalties can only be applied to cases in which transfers are made for the 
purpose of establishing eligibility for Medicaid. Since a home is exempt property in determining 
Medicaid eligibility, the court ruled, then transfer of asset penalties cannot be applied to transfer 
of the home, since such transfers are not done to establish Medicaid eligibility. Rather, 
transfers of the home are usually done to avoid state claims against the home in estate recovery 
programs. Thus, Congress may wish to clarify that transfers made for the purpose of 
establishing eligibility for Medicaid or to avoid estate recovery are both subject to penalties. 

Amend Federal Medicaid law to clarify the circumstances under which an institutionalized 
spouse in long-term care should be deemed eligible for Medicaid when the community spouse 
"refuses to support" the institutionalized spouse . This amendment would preclude applicants 
from utilizing the "just say no" strategy as is presently being used in New York state to 
preserve all of a married couple's assets for the community spouse. The amendment could 
clarify that evidence of true abandonment by the community spouse is necessary before an 
institutionalized spouse can be deemed eligible for Medicaid without counting the resources of 
the community spouse as available to the institutionalized spouse. 

-45- 



• Clarify the rights of Medicaid estate recovery programs to recover from the estates of surviving 
spouses of deceased Medicaid recipients . Medicaid law presently prohibits states from placing 
liens on the homes of the community spouse during the life of the institutionalized spouse 
receiving Medicaid. At the same time, the Medicaid spousal impoverishment provisions, and 
various Medicaid estate planning strategies, have increased opportunities for community 
spouses to retain much higher levels of assets while the institutionalized spouse is on Medicaid. 
Most states do not pursue recovery from the estates of surviving spouses. The legality of 
placing liens upon the property of surviving spouses upon the death of the institutionalized 
spouse on Medicaid is ambiguous in Federal law. Thus, Congress may want to clarify Federal 
law in regard to the right of states to protect its claims through the placement of liens on the 
property of surviving spouses after the death of the institutionalized spouse. 

• Clarify Federal law in regard to the "income first" rule for raising the CSRA. Without 
Congressional clarification on the "income first" rule, it appears that the ambiguity in the MCCA 
language regarding this issue will result in numerous court cases on the matter. A relatively 
simple clarification that stipulates that the income of the institutionalized spouse will be used 
first to bring the community spouse's income up to the MMMNA, before increasing the CSRA, 
would appear to resolve this matter. 

• Clarify Federal law in regard to the use of court orders to increase the CSRA for the community 
spouse . Without clarification of the circumstances under which court ordered levels of 
protected assets for community spouses are to be applied in place of the Federal CSRA 
maximum, it is likely that applicants and elder law attorneys will increasingly seek court orders 
as a mechanism for increasing the CSRA for couples with substantial levels of assets. 

• Allow/reguire Medicaid applicants to provide copies of Federal tax returns as documentation of 
their financial situation in the Medicaid eligibility process . Federal income tax returns provide 
a lot of useful information that can be used to verify the income and assets reported on 
Medicaid applications. For instance, unearned income from savings accounts, stocks, bonds, 
trusts, etc. are reported on Schedule B. Property taxes on real property (regardless of the 
location of the property) are reported as deductions on Schedule A. Gifts in excess of $ 1 0,000 
are also reported. The confidentiality of Federal tax return data are a barrier to requiring 
applicants to submit these data as part of the Medicaid application process. 

The above recommendations focus on relatively minor changes in Federal law to close Medicaid 
eligibility loopholes. They do not include recommendations that would reflect substantial shifts in 

-46- 



Federal policy. Examples of options that would reflect a more aggressive shift in Federal policy might 
include: (1) requiring states to impose liens on real property as part of their estate recovery programs; 
(2) pooling the income as well as the assets of married couples in determining Medicaid eligibility for 
the institutionalized spouse; and/or (3) modifying the "intent to return" rule such that homes would only 
remain an exempt resource as long as there is a medically-certified likelihood that a Medicaid recipient 
will be discharged from nursing home care. 

3.6 Treatment of the Home: What's the Fair Policy? 

Real property of deceased Medicaid recipients (usually the home) is the primary source of 
collections in terms of both frequency and dollar amounts recovered in estate recovery programs. Even 
so, only 14 of the 27 states that currently have estate recovery programs place liens on the property 
of Medicaid long-term care recipients. 35 One reason for this, mentioned earlier, is that some states 
have homestead laws that limit the ability of states to place liens. Given the emotional attachments 
that people have to their homes, and their desire to pass the family home on to heirs, the placement 
of Medicaid liens on homes is also a sensitive political issue that many state legislatures prefer to avoid. 

Were it not for the emotional attachment to the home, Medicaid recoveries from the value of 
the home in the decedent's (or community spouse's) estate would probably be considered "fair" by a 
broader spectrum of the population than is currently the case. For many people, however, especially 
single Medicaid nursing home clients, home equity represents a lifetime of savings. Understandably, 
many people would like to pass the value of their home (if not the home itself) on to their heirs. And 
if there is a rationale for targeting recoveries to the estates of Medicaid nursing home recipients, why 
are recoveries also not sought for health services provided to older clients in other programs like 
Medicare? Isn't the seeking of recoveries in Medicaid, a means-tested program, just another example 
of "picking the bones of the poor"? 

These are all good questions which lack fully satisfactory answers. Nevertheless, it is important 
to recognize that nursing home care is fundamentally different than other types of health services. 
Nursing home care usually is provided in the latter stages of the life cycle and is very expensive. 
Considered in isolation, cost is an insufficient rationale for seeking recoveries from nursing home 
decedents. But when a single elderly person dies in a nursing home there are usually no dependents 
who require use of the economic resources remaining in the individual's estate. This is in contrast to 
the provision of services to younger Medicaid recipients. 



'Office of Inspector General, op. cit. 



-47- 



The fact that Medicare does not seek recoveries for health services provided to older persons 
stems from its different financing mechanism. In contrast to Medicaid, which is funded out of general 
revenues, Medicare is an insurance program. Consequently, on average, participants pay for their care 
through their premiums — there is no need for recoveries. 

These considerations aside, it is undeniably true that most recoveries are sought from the 
estates of single clients with modest means. Most nursing home clients are single and, in the absence 
of Medicaid estate planning, have estates (excluding the home) containing a maximum of $2,000 in 
financial assets. For most single clients, the largest asset in their estate is the equity in their home (if 
they own one). In contrast, affluent single clients are only eligible for Medicaid services in the first 
place because they have been able to shield their assets from recovery through various Medicaid estate 
planning techniques. 

Although it clearly seems fair to seek recovery from the estates of affluent single clients that 
have practiced Medicaid estate planning, the fairness of seeking recoveries from the home equity of 
truly poor single clients is less obvious. Even though Medicaid only recovers expenditures that it has 
made on the behalf of clients, Medicaid is more likely to recover from single poor clients than it is from 
single clients that have engaged in Medicaid estate planning, or from clients with a community spouse. 

3.7 The Feasibility of Empirical Research on Medicaid Estate Planning 

We are skeptical of the feasibility of designing studies that could empirically measure the 
magnitude of Medicaid estate planning with any degree of accuracy, or estimate the amount of savings 
that could be achieved if Medicaid estate planning were eliminated entirely. 

First, it is difficult to establish a clear definition of Medicaid estate planning. Technically, 
Medicaid planning involves the divestiture or sheltering of assets for the purpose of establishing 
eligibility for Medicaid. Empirically, it is extremely difficult to establish the intent of asset divestiture 
and/or sheltering activities. For example, if a Medicaid applicant happens to spend $1 5,000 on a new 
car three months before applying for Medicaid, how do we truly know whether it was done because 
the applicant wanted to shelter assets, or simply because he wanted to buy a new car? 

Second, there are so many ways to divest or shelter assets available to Medicaid estate planners 
that it would be difficult to accurately document Medicaid estate planning strategies during the pre- 
application period without the strong consent and cooperation of people who are participating in 
Medicaid estate planning activities. We are frankly skeptical of the ability of any research effort to 

-48- 



obtain this kind of consent and cooperation, even under assurances of confidentiality. Indeed, surveys 
on the financial circumstances of the elderly often yield low response rates, as well as problems with 
the accuracy of the data from those who do respond. The elderly, in general, do not like to reveal 
information about their financial circumstances. 

Third, the concentration of Medicaid estate planning activity in upper middle class areas makes 
it difficult to design a study that could accurately adjust for the non-random prevalence of Medicaid 
estate planning activity across states and within states. For example, in some areas, high levels of 
Medicaid estate planning activity are associated simply with the location of one or more elder law 
practices that specialize in this area. 

Consequently, we believe that Federal and state governments are better off supporting 
additional qualitative studies that provide quick-turnaround information about new Medicaid estate 
planning techniques, and the impacts of recent policy changes. These quick-turnaround studies can 
support the development of new policy responses to Medicaid estate planning. Front-line eligibility 
workers and supervisors remain the best source of information about what is going on "on the front 
lines" of Medicaid estate planning and efforts to maintain the means-tested nature of Medicaid long- 
term care benefits. 

3.8 The Future of Medicaid Estate Planning 

The OBRA '93 Medicaid eligibility and estate recovery provisions made a definite impact on the 
ability of Medicaid long-term care recipients to shelter or divest their assets, but OBRA '93 cannot be 
considered the final step. Medicaid estate planning is by no means dead, and it never will be, as long 
as Medicaid coverage of nursing home care remains a means-tested benefit. There will always be 
opportunities for elderly people to manage their financial assets in such as a way as to maximize the 
financial security of a community spouse or to preserve inheritances for heirs. The divestiture of 
financial assets by elderly persons is done for a large number of reasons other than for Medicaid estate 
planning, and thus, Medicaid planning strategies will simply remain one component of an elderly 
individual's overall estate planning strategy. In addition, as long as the incentives created by existing 
public policy remain as they are, it is unrealistic to believe that elderly individuals will not act in an 
economically rational manner. It is not fair to chastise the behavior of individuals who do Medicaid 
estate planning when the economic incentives for doing so are so compelling. 

Eligibility workers were consistent in reporting a higher level of Medicaid estate planning activity 
among married applicants than among unmarried applicants. First, there is obviously a greater incentive 

-49- 



to preserve financial assets in the case of married applicants. Second, married couples, on average, 
have more wealth to protect than applicants without spouses. And third, there are more opportunities 
in current Medicaid eligibility provisions to pursue Medicaid estate planning in the case of married 
applicants. It is fair to say that the majority of eligibility workers we interviewed felt that current policy 
was inequitable in regard to the fairly liberal protections afforded married applicants, compared to the 
relatively restrictive requirement that single applicants be allowed to retain only $2,000 in total liquid 
assets. Further, many felt that current policy was unfair to people, who while not married, shared 
financial resources in their households, such as siblings who had lived together for many years, or 
widows and widowers who lived together but preferred not to remarry. 

One future trend is fairly predictable — Medicaid eligibility provisions and estate recovery policies 
will become increasingly specific. Elder law attorneys readily admit that the Medicaid estate planning 
business depends upon the "nooks and crannies" of Medicaid eligibility policy, and that compared to 
the IRS code, for example, there are a lot more vagaries in Medicaid law that can be exploited to the 
benefit of their clientele. As the Medicaid estate planning business continues to develop and devise 
new Medicaid planning techniques, and Medicaid policymakers continue to respond to these techniques, 
we will undoubtedly see increasing specificity in Medicaid law and regulation regarding allowable versus 
unallowable transfers, how transfer of asset penalties are to be applied, what is and what is not a 
countable asset, and what mechanisms are available to states to seek recovery of assets held in the 
estates of deceased Medicaid recipients upon their death. 

There is also a relationship between the future course of public policy regarding Medicaid estate 
planning and the potential growth of private long-term care insurance products. Presently, both 
Medicaid estate planning and private long-term care insurance (or similar risk protection products such 
as Continuing Care Retirement Communities) represent alternative asset protection strategies for elderly 
persons with substantial assets to protect. To the extent that Medicaid estate planning becomes a less 
viable option in the future, the demand for alternative risk protection products may increase 
accordingly. 

Aside from the overarching issue of how liberal or restrictive Medicaid coverage of nursing home 
care should be, policymakers must also address issues of fairness and equity. Medicaid estate planning 
is often rationalized on the basis that Medicaid benefits are not only "means-tested," they are also 
basically "mean." The more the perception exists that public coverage of nursing home care is "unfair," 
the more willing people will be to circumvent the system through Medicaid planning. On the other 
hand, if the means-testing of Medicaid long-term care benefits was perceived as more fair, fewer 
applicants may feel justified in protecting their wealth through Medicaid estate planning techniques. 

-50- 



For example, some argue for raising the Medicaid asset threshold above the current $2,000 limit, so 
that single Medicaid recipients could leave some modest inheritance to heirs. Others have argued for 
a modest homestead exemption to protect homes of modest value (e.g., homes with values of 
$50,000) or less from estate recovery. 

The policy refinements that need to be made to Medicaid statutes in order to combat the use 
of Medicaid estate planning techniques may seem highly technical and arcane, but their importance 
should not be underestimated if Medicaid is to remain a health insurance program for the truly poor. 



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Appendix A 



CALIFORNIA CASE STUDY 

Background 

Medicaid expenditures for nursing home care in California are significantly below the national 
average. In FY 1 994, total Medi-Cal payments for nursing home care in California totalled $1 .9 billion. 
Although these expenditures are clearly substantial, only about 14.4 percent of total Medi-Cal 
payments in FY 1994 were for nursing home care, compared to a national average of 20.6 percent. 36 
On a per capita basis, Medi-Cal spending for nursing home care is about 30 percent below the national 
average. 

California has been successful in containing Medicaid expenditures for nursing home care by 
(1 ) developing alternative residential options for elderly persons who require intermediate levels of care, 
and (2) maximizing the use of Medicare SNF services for post-acute care. While the number of 
licensed nursing home beds in California per capita is significantly below the national average, 
California also has a large number of alternative residential care facilities (board and care homes) that 
serve elderly persons with minimal needs for skilled nursing care. 37 To a much larger degree than in 
other states, nursing homes in California are more extensively used for short-term care in the post- 
acute care period. Patients needing long-term intermediate care are frequently discharged from nursing 
homes to alternative residential facilities. 

This emphasis on post-acute is also reflected in the use of Medicare-covered SNF care in 
California. Medicare SNF utilization and expenditures per 1,000 enrollees are significantly higher in 
California than the national average. Thus, while Medi-Cal spending for nursing home care represents 
only 7 percent of total Medicaid spending for nursing home care nationwide, California accounted for 
over 17 percent of total Medicare SNF payments in 1992. 38 



36 Source: Health Care Financing Administration, HCFA 64 data. 

37 Health Care Financing Administration. Extramural Report: State Data Book on Long-Term Care Program and Market 
Characteristics, HCFA Pub. No. 03354, August 1994. 

38 Source: Health Care Financing Administration. Health Care Financing Review: Medicare and Medicaid Statistical Supplement. 
HCFA Pub. No. 03348, February 1995. 



A-1 



Level of Medicaid Estate Planning Activity 



Site visits were conducted to San Joaquin, Santa Clara, San Luis Obispo, Santa Barbara and 
Los Angeles counties. In all counties, eligibility workers were "generic" workers and were not 
specifically assigned to long-term care applications, except in Los Angeles county which had a separate 
long-term care eligibility office. In general, the level of Medicaid estate planring activity reported by 
eligibility workers in California was less than reported in Massachusetts or New York, and more 
comparable with the level of activity reported by workers in Florida. The highest level of activity was 
reported by workers in San Luis Obispo and Los Angeles counties. 

It was interesting that although higher levels of Medicaid estate planning activity were generally 
reported in wealthier geographical areas in all states, workers in Santa Barbara county, one of the 
wealthiest counties in the entire country, were aware n f almost no cases involving asset transfers in 
order to obtain Medicaid. Workers reported that many elderly in Santa Barbara county are so wealthy 
that the private cost of nursing home care is not a financial concern. In addition, many nursing home 
facilities in Santa Barbara are not even Medicaid-certified and do not accept Medicaid as a form of 
payment. Thus, if someone divests their assets and applies for Medicaid, they would have to move 
from the "private" facility they are in to one that accepts Medicaid. This obviously acts as a deterrent 
to Medicaid planning for people who want to stay in private facilities. 

It is interesting to hypothesize whether the lower level of Medicaid estate planning activity 
reported in California could be related to the structure of the long-term care system in the state. As 
previously discussed, the California nursing home system uses more Medicare-covered services than 
other states. Thus nursing home users may be at somewhat lower financial risk for incurring "privately 
financed" care. 

During the site visit, some respondents also claimed that nursing home users in California faced 
a quality incentive not to become eligible for Medicaid. These persons claimed that Medicaid patients 
receive lower quality care than private pay patients in many homes. We did not hear these same 
claims about quality differentials between private care and Medicaid-financed care in the other three 
states. However, other respondents in California claimed there was very little or no quality differential 
between privately financed care and Medicaid-financed care in nursing homes. 



A-2 



Protecting Assets Through the Use of Court Orders 

Eligibility workers reported that the most common Medicaid planning technique used by married 
applicants was to raise the Community Spouse Resource Allowance (CSRA) through the use of court 
orders. Both workers and elder law attorneys agreed that it was a relatively simple process to petition 
the local surrogate court to set the CSRA at whatever level the couple desired (i.e., at a level equal to 
their total combined assets). Once the court approved the petition, the applicants would simply bring 
the court order with them to the local Medi-Cal eligibility office and submit it along with their 
application. Workers reported that current state policy offered them no alternative but to accept these 
court orders and allow the community spouse to retain assets at whatever level directed by the court 
order. 

As discussed in Section 2.3.1, the use of court orders as a Medicaid estate planning technique 
for preserving assets for the community spouse is based upon a provision of the Medicare Catastrophic 
Coverage Act which clarified that assets transferred to a community spouse under a court order shall 
be used in place of the usual CSRA level in cases where such a court order exists. Thus, until there 
is a change in Federal law which provides clarification on the circumstances under which court orders 
for support of a community spouse are used in place of the usual CSRA maximums established by 
states, the use of this Medicaid estate planning will continue to grow in California and other states. 

Protecting Assets Through Annuities 

For single applicants, the simplest and most common Medicaid planning technique was to 
convert assets to income through the purchase of an annuity. Unlike the other states we visited, 
California did not require that an annuity be actuarially equivalent in order to exempt the annuity as a 
countable asset. California's eligibility regulations require only that the applicant be "receiving periodic 
payments of interest and principal" in order for the annuity to be considered unavailable as a countable 
resource. Consequently, workers reported cases in which they had to exclude annuities with very high 
cash values but with very low payments of income and principal. For example, as previously 
discussed, one office reported having to exempt as a countable resource an annuity worth over 
$500,000 which only made payments of principal and interest of about $5,000 annually, a rate of 
return of only 1 percent. 

California had established this policy on annuities because the Medi-Cal Eligibility Branch 
believed that it could not apply transfer of asset penalties if there was no way of predicting the 
uncompensated value of any single annuity purchase (i.e., it was not possible to predict how long any 



single annuitant would actually live and therefore how much principal would be returned to the 
annuitant during his or her remaining lifetime). However, with HCFA's issuance of its November 1 994 
Medicaid Manual transmittal (regarding some of the OBRA '93 provisions) which states that transfer 
of assets penalties can be applied to annuities that are not "actuarially equivalent," California now 
intends to change its policy on annuities to conform with HCFA's administrative guidelines. However, 
this change in policy regarding annuities will not take effect until California's own regulations on OBRA 
'93 are implemented, which is not likely to occur for some time, since many levels of review are 
required before new regulations can go into effect. 

Transfer of Asset Penalties Not Generally Applied to Transfers of Primary Residences 

California was the only state visited that generally did not apply transfer of asset penalties in 
cases where a primary residence has been transferred by an applicant either prior to applying for 
Medicaid, or after Medicaid eligibility has been established. This policy was based largely on a 1981 
court case in California [Beltran v. Myers) which ruled that the state could not apply transfer of asset 
penalties on transfers of exempt assets. The argument of the ruling was that since a home is an 
exempt asset if retained by the applicant/recipient, then the transfer of a home is obviously not done 
for the purpose of establishing eligibility for Medicaid. The court ruled that since Federal law on asset 
transfers clearly state that penalties are only to be applied on transfers that have been made for the 
purpose of establishing Medicaid eligibility, penalties cannot be applied on transfers of a primary 
residence. 

The issue then revolves around the question of whether the home is or is not an exempt asset. 
Federal Medicaid law is clear on the issue that a home remains an exempt asset as long as the 
Medicaid applicant/recipient expresses an intent to return home. One can seriously question, however, 
whether a home that has been transferred can retain this exemption, since it is reasonable to doubt 
an applicant's/recipient's intent to return home if he or she gives it away. However, legal advocates 
have successfully argued that it is possible for applicants/recipients to give away a home (e.g., to a 
son or daughter) and still have an intent to return to the home if discharged from the nursing home. 
Thus, if an eligibility worker encounters a case in which an applicant or recipient has transferred a 
primary residence, a letter from whomever has received the home stating their willingness to care for 
the applicant/recipient if he or she is ever discharged from the nursing home is considered sufficient 
documentation to maintain the home "exemption" and to prevent the application of transfer of asset 
penalties. 



A-4 



The ability of Medicaid applicants and recipients to transfer homes without penalty in California 
may partly explain the lower level of Medicaid estate planning activity reported by eligibility workers 
there, since a major objective of Medicaid estate planning in other states is to protect the primary 
residence for heirs. The Medi-Cal Eligibility Branch indicated that it did not believe it could change its 
policy in the face of Beltran v. Myers until there is a change in Federal law which states that transfer 
of asset penalties can be applied to transfers done for the purpose of establishing eligibility for 
Medicaid or for the purpose avoiding estate recovery. This change in Federal law would overcome the 
legal arguments used in the Beltran v. Myers case. 

An Aggressive, But Frustrated, Estate Recovery Program 

Despite the fact that California does not impose transfer of asset penalties on transfers of 
homes, the state nonetheless has one of the most active and developed estate recovery programs in 
the country. The Third Party Liability Branch of the California Department of Health Services recovered 
approximately $26 million in FY 1995 from the estates of deceased Medi-Cal recipients. 

California law requires that any executor or administrator of an estate of a deceased Medicaid 
beneficiary, or anyone who is in possession of property of the beneficiary, must provide the 
Department of Health Services with a notice of the death, including a death certificate, no later than 
90 days from the date of death. Upon receipt of such notices, the Third Party Liability Branch then 
has four months in which to file a creditor's claim for either the entire amount of Medi-Cal services 
received by the deceased Medi-Cal beneficiary after the age of 65, or for the total amount of assets 
in the estate, whichever is less. 

In addition to receiving death notices from heirs, executor and estate administrators, the Third 
Party Liability Branch sends letters of inquiry to the last know address of Medi-Cal recipients whose 
deaths have been identified by either the Social Security Death List and/or the State Vital Statistics 
Death List. The letter of inquiry requests information that is used to determine if there are any assets 
in the estate and whether the state can legally make a claim against these assets. 

As in other states, the Third Party Liability Branch in California indicated that it was difficult 
to obtain information about the amount of assets which may be left in the estates of deceased Medi- 
Cal recipients. Thus, it is often the case that the state issues a creditor's claim for the total potential 
liability — the total amount of Medi-Cal payments made for the deceased Medi-Cal recipient after the 
age of 65. The amount of the state's claim is often far in excess of the amount of assets left in the 



A-5 



estate, and therefore payments made in response to the claim ere usually only a small percentage of 
the total claim. 

Since Medi-Cal recipients can transfer homes without penalty in California, the Third Party 
Liability Branch is only able to recover real property in cases where a home has not been transferred 
and remains in the recipient's estate after death. The staff of the Third Party Liability Branch agreed 
that this state of affairs generally resulted in inequitable outcomes, since persons with larger estates 
were generally better informed and had transferred their homes prior to death, while poorer recipients 
were generally less well informed and were more likely to still have their homes remaining in their 
estates upon death. However, the Third Party Liability Branch admitted that there was nothing they 
could about this inequity and their job was to pursue recoveries wherever possible, regardless of 
whether the estate was large or small. 

In June 1993, the California legislature enacted legislation authorizing the Medi-Cal program 
to impose liens against the property of Medicaid recipients in nursing homes who are unlikely to return 
home, and at the time of the site visit (June 1994) the Third Party Liability Branch was preparing to 
implement this new TEFRA lien program. 39 In our interviews with representatives of the Third Party 
Liability, staff were very aware, however, that the imposition of a TEFRA lien program would be largely 
ineffective if it just served as an incentive for applicants or recipients to transfer their homes prior to 
the placement of the lien, since no penalties would be associated with such transfers. 

Subsequent to the site visit, a Federal dis tr ict court also issued a ruling which required the 
Department, under due process laws, to give recipients (and surviving spouses) notice of its intent to 
impose a lien prior to the actual imposition of the lien itself/ Since such notice would simply give 
recipients even more opportunity to transfer their property prior to the placement of the lien, the 
Department decided to withhold implementation of its TEFRA lien provision for the time being. 



39 lt was also interesting that administration of the TEFRA lien program in Californis fell to the Third Party Liability Branch, 
whereas in most states, TEFRA liens are imposed as part of the normal eligibility process. 



'Lynn Roy Demille, eta/, v. Kimberly Belshe, etal., No. C-94-0726-VRW. 



A-6 



Appendix B 



FLORIDA CASE STUDY 

Background 

Despite a large and growing elderly population, Florida has been successful historically in 
containing the growth of Medicaid expenditures for nursing home care. Persons over the age of 65 
comprise 18.4 percent of Florida's total population, compared to a national average of 12.7 percent. 
Yet Florida spends about 20 percent of its total Medicaid budget on nursing home care, which is about 
equal to the national average. As shown in Table 1, Medicaid spending for nursing home care on a 
per capita basis in Florida is less than half the average among all states, and Florida ranks 49th among 
the 50 states and the District of Columbia on Medicaid spending for nursing home care per elderly state 
resident. 

Florida has been successful in containing Medicaid nursing home expenditures by (1) limiting 
the supply of nursing home beds, and (2) election of the "income cap" option for Medicaid nursing 
home eligibility under its state Medicaid plan. In 1992, Florida had 28.6 licensed nursing home beds 
per 1 ,000 persons over the age of 65, compared to national average of 53.1 licensed beds per 1 ,000 
elderly. 41 Thus, the supply of nursing home beds on a per capita basis in Florida is only about half 
the national average. Like California, many elderly persons in Florida who require intermediate levels 
of care reside in alternative residential facilities, including board and care homes. In 1992, in addition 
to the 71 ,1 62 licensed nursing home beds in Florida, there were 61 ,086 other licensed residential care 
beds to serve elderly and disabled persons in need of 24-hour supervisory care. 42 

Florida is also one of 15 states that have elected to limit Medicaid coverage for nursing home 
care to persons with incomes below a "special income level" (or "income cap"). In these states, 
Medicaid eligibility for nursing home care is limited to individuals whose countable incomes do not 
exceed 300 percent of the Federal SSI benefit level for a single individual. In 1994, the Federal SSI 
benefit level was $446 for a single individual; thus the "income cap" in Florida in 1994 was $1,338 



"Source: Health Care Financing Administration. Extramural Report. State Data Book on Long-Term Care Program and Market 
Characteristics, HCFA Pub. No. 03354, August 1994. 

"Ibid. 



B-1 



per month. Therefore, Medicaid coverage for nursing home care in Florida was limited (for single 
individuals) to persons with annual incomes of less than $16,056 in 1994. 

Since the average cost of private nursing home care is about $30,000 per year, the Medicaid 
"income cap" is often criticized for restricting access to nursing home care for persons with incomes 
above the "income cap" but below the private cost of nursing home care. Incapable of paying private 
rates, these individuals may not be able to gain access to nursing home care because they also failed 
to qualify for public assistance under Medicaid. Persons in this situation are often referred to as 
"falling in the Medicaid gap." Anecdotally, it is often said that many elderly persons who have retired 
to Florida, once they become at risk of needing long-term care services, migrate back to their state of 
origin so (a) they can be closer to their children and (b) they can gain access to public long-term care 
services. 

Level of Medicaid Estate Planning Activity 

Local site visits were conducted to Palm Beach, Dade, Sarasota, and Pinellas counties. In 
several counties, interviews were conducted at more than one eligibility office within the county. 

In most of the offices we visited, workers reported relatively low levels of Medicaid planning. 
This was primarily related to the fact that the elderly population served by most of the offices was 
relatively poor. Workers in these offices reported that most applicants did not have many financial 
assets to begin with. However, two eligibility offices, one in Delray Beach and one in Sarasota, 
reported high levels of Medicaid planning activity. These offices were located in areas where there 
was a relatively large population of upper middle class elderly. Thus, the site visits in Florida 
corroborated our finding in other states — there is more Medicaid estate planning activity in wealthier 
geographical areas. 

Impact of OBRA '93 on Transfers Through Joint Bank Accounts 

Workers in all offices indicated that a common Medicaid planning technique prior to OBRA '93 
was the transfer of funds through joint bank accounts. This technique was remarkably simple. A 
prospective Medicaid applicant could simply add a joint signatory (e.g., a son or daughter) to his or her 
savings account, and then have the joint signatory withdraw all of the funds at a later date. The 
argument made in these cases was that under Florida state banking laws, all joint tenants on a bank 
account have a 1 00% ownership interest in the assets held in the account. Thus, a joint signatory has 
equal ownership rights to the assets held in the account as The Medicaid applicant, and the withdrawal 

B-2 



of funds from the account by a joint tenant cannot legally be considered a "transfer." Elder law 
attorneys also cited a 1986 letter from HCFA which they claimed prohibited the state from applying 
transfer of asset penalties to such cases. However, the letter dealt with a case involving the 
withdrawal of funds from a joint account by an ineligible spouse prior to the enactment of the Medicaid 
spousal impoverishment provisions under MCCA, which made significant changes to Medicaid eligibility 
rules for Medicaid nursing home applicants who are married. 

One of the provisions of OBRA '93, however, specifically addressed this issue; clarifying that 
any withdrawals from joint accounts that reduced the applicant's control or ownership over the assets 
in the account are to be treated as transfers subject to penalty. Thus, upon the enactment of OBRA 
'93, Florida quickly implemented this specific provision of OBRA '93 in its own regulatory policies, and 
eligibility workers reported that this change had made a uefinite impact on eliminating this Medicaid 
planning technique in Florida. 

Qualified Income Trusts 

As an income cap state, Florida is one of the 15 states that are affected by the Qualified 
Income Trust provisions of OBRA '93. This provision essentially enables individuals who are denied 
Medicaid eligibility because they have incomes over the "income cap" to become eligible for Medicaid 
by temporarily transferring their income into a so-called "income trust." In fact, this provision acts 
almost like a Congressional mandate on "income cap" states to implement a medically needy program 
for nursing home coverage, since the income trust provision works operationally much like a medically 
needy program. The main difference is that the OBRA '93 Qualified Income Trust provision requires 
applicants to establish an income trust as a means for gaining accessing to Medicaid benefits for which 
they would otherwise not qualify. 

Upon the enactment of OBRA '93, local and state Medicaid eligibility offices immediately began 
receiving inquiries from elder law attorneys about how Florida was going to regulate Qualified Income 
Trusts and when implementing regulations were going to be issued. Applications with Qualified Income 
Trusts were left pending in local eligibility offices until the state could receive administrative guidance 
from HCFA and issue instructions to the local eligibility offices. These instructions were first issued 
in June of 1994, and then revised several times thereafter. 

Essentially, Florida's Qualified Income Trust provisions allow applicants to establish an income 
trust as a "shell." Income is transferred into the trust prior to submission of the Medicaid application. 
If approved, all of the income in the trust must then be used as the recipient's contribution to the cost 

B-3 



of his or her nursing home care, except for the recipient's personal needs allowance and any allowable 
contributions to the community spouse. 

At the time of the site visit, Florida indicated that there about 1,000 income trusts either 
approved or pending. While many state and local officials we interviewed agreed that the whole 
Qualified Income Trust (QIT) provision was basically a "shell game" that temporarily moves an 
applicant's income around simply to establish Medicaid eligibility, most were generally supportive of 
the policy intent of the QIT provision. Being in an income cap state, Medicaid staff in Florida had 
witnessed the plight of many elderly individuals who were stuck in the situation of having income in 
excess of the Medicaid eligibility threshold, but below the private cost of nursing home care. 

Efforts to Expand the Estate Recovery Program 

At the time of the site visit to Florida in August of 1 994, Florida had a relatively weak estate 
recovery program but was in the stages of planning for greatly expanding its estate recovery efforts. 
In August of 1994, Florida's entire estate recovery program consisted of a contingency contract with 
one attorney to pursue estate recoveries across the entire state. Local county eligibility offices were 
supposed to inform the state Office of Third Party Liability of all deaths of Medicaid recipients through 
the submission of HRS Form 325, but compliance by many counties was half-hearted at best. Many 
of the more populated counties were not submitting the forms at all. 

Another problem in Florida's estate recovery program was in obtaining timely information from 
the Medicaid Third Party Recovery Unit on the amount of the state's claim (incurred Medicaid costs 
subject to recovery). Due to other data processing priorities, delays occurred in extracting data from 
the state's MMIS system on the amount of the state's claim for a requested case. Once the amount 
of the state's claim was obtained from the data processing unit, it was then up to the contracted 
attorney to determine whether there were any funds in the deceased recipient's estate and to pursue 
recoveries on a case by case basis through the probate courts. 

At the time of the site visit, Florida was in the process of developing a plan for enhancing its 
estate recovery program for consideration by the administration and the state legislature. A draft plan 
was submitted in September of 1994. 43 



43 Agency for Health Care Administration, Office of Medicaid Third Party Liability. Estate Recovery Development Plan, September 
29, 1994. 



B-4 



The plan recommends a greatly invigorated estate recovery effort with improved methods for 
identifying recent deaths, faster mechanisms to determine the state's claims, and more aggressive 
mechanisms to recover claims from probated estates of significant size. 

Since the site visit, the Third Party Recovery Unit reports that the problem of obtaining 
information on recent Medicaid decedents has been greatly alleviated. Local Clerks of the Court are 
now routinely notifying the state of the opening of new estates. 

Estate Recovery and the Exemption of the Homestead 

The major issue in Florida's effort to enhance its estate recovery program was whether the 
state would be able to seek recovery from real property (the home) in the Medicaid recipient's estate, 
and, if so, whether the state could impose a TEFRA lien on a recipient's home to protect its claim while 
the recipient was still alive. The barrier to recovery of real property was Florida's own state 
constitution which contains a very explicit "homestead exemption." 44 The exemption protects an 
individual's homestead from virtually all creditors, and prevents the placement of liens, other than 
voluntary liens such as mortgages, on homesteads by creditors. Florida's Supreme Court has ruled that 
the homestead generally passes to heirs free from the claim on any outside creditors to a decedent's 
estate. 

During the development of its plan to expand its estate recovery program, the Medicaid Third 
Party Recovery Unit researched the subject and history of the homestead exemption in Florida and 
elicited the assistance of the state Attorney General's Office for it's legal opinion on whether the state 
could recover homestead property without an outright amendment to the state constitution. The 
Attorney General's office concluded that without an amendment to the state constitution the Agency 
could not file liens (voluntary or involuntary) against homestead property and could only seek recovery 
in cases where the property had lost its homestead character. 

An amendment to the Florida Constitution can only be adopted by a three-fifths vote of the 
membership of each house of the legislature or by petition from the populace and passed by a majority 
vote of the citizens. The staff of the Third Party Recovery Unit felt that such an amendment to the 
state constitution had no chance of passage. Thus, the only cases in which the state will seek 



Constitution of the State of Florida, Article X, Section 4. Homestead; exemptions. 



B-5 



recovery from real property under its estate recovery program will be cases where it petitions the 
courts to determine the applicability of the homestead exemption on a case by case basis when 
Agency staff believe that the property may have lost its homestead character. 



B-6 



Appendix C 



MASSACHUSETTS CASE STUDY 

Background 

Massachusetts is known as one of the "birthplaces" of the Medicaid estate planning industry. 
Much of the literature that has written on Medicaid estate planning strategies has been written by elder 
law attorneys from the Boston area, and state Medicaid officials confirmed that there are a number of 
Medicaid planning attorneys who have developed quite sophisticated techniques through many years 
of experience. This is one reason why Massachusstts was selected as one of the four case study 
states. Additionally, the magnitude of Medicaid estate planning was reported to be high in 
Massachusetts due to its relatively affluent older population and the high costs of nursing home care 
in the state. 

Medicaid expenditures for nursing home care in Massachusetts are higher than the national 
average. In 1992, Massachusetts had 63.3 nursing home beds per 1,000 elderly 
persons — considerably higher than Florida (28.6), California (40.3), or New York (44.7), and also higher 
than the national average of 53.1 beds per 1,000 elderly. In addition, average reimbursement rates 
for Medicaid coverage in Massachusetts ($96/day) were high relative to California ($73/day), Florida 
($77/day) and the national average ($75/day) — although they were less than Medicaid rates in New 
York state ($123/day). Not surprisingly, given higher reimbursement rates, the average annual 
Medicaid payments per nursing home recipient were also higher in Massachusetts ($22,299) and New 
York ($31,199) relative to California ($13,889), Florida ($8,898), and the national averaye 
($14,889). 1 

Massachusetts also had the highest 1989 oer-capita income of the four states ($17,224), 
followed by New York ($16,501), California ($16,409), and Florida ($14,698); the national average 
was $14,420. Florida of course, had the highest elderly population percentage in 1992 (18.4%), 
followed by Massachusetts (13.9%), New York (13.1%), and California (10.5%). The elderly 
population percentage for the entire nation was 12.7 percent. Finally, all of the states were highly 
urbanized relative to the U.S. metropolitan population percentage of 79.4 percent. California had the 



'Brian O. Burwell and William H. Crown. 1 994. Public Financing of Long-Term Care: Federal and State Roles. The MEDSTAT 
Group, Cambridge, MA (September). 

C-1 



highest metropolitan population percentage (96.8%), followed by Massachusetts (96.2%), Florida 
(92.9%), and New York (91.8%). 

In addition to its nursing home market and demographic characteristics, Massachusetts differed 
from the other three case study states in that it operated only three eligibility offices for Medicaid long- 
term care services. We were interested in stud/ing whether the "tightness" or "looseness" of 
Medicaid nursing home eligibility procedures were related to specialization of eligibility workers in long- 
term care applications — particularly given the highly technical knowledge about various types of 
financial instruments (e.g., trusts, annuities, retirement plans, pensions, etc.) that is often required in 
reviewing applications for Medicaid nursing home coverage. 

Finally, Massachusetts was known to have taken several steps in the late 1990s to tighten 
Medicaid nursing home eligibility and strengthen its estate recovery efforts. For example, at the time 
of our site visit, Massachusetts was the only one of the four case study states to uniformly place liens 
on the real property of Medicaid recipients in nursing homes. 2 

Case Study Methodology 

Our site visit to Massachusetts took place in December of 1993. The "visit" was actually a 
series of visits to several state offices and to each of the three long-term care eligibility offices. We 
began by interviewing state officials in Medicaid Eligibility Operations, legal staff in the Department of 
Public Welfare, and staff in the Medicaid Estate Recovery Unit. The purpose of these visits was to gain 
an understanding of the state perspective on Medicaid estate planning policy issues. 

Following interviews with state-level sta^f, interviews were conducted at each of the three 
long-term care eligibility offices. As indicated earlier, Massachusetts differed from the other case study 
states in having separate eligibility offices for Medicaid nursing home services. Each of the three 
offices serves a region of the state. The Springfield office handles applications in the western portion 
of the state. The Taunton office serves the southeastern portion, and the Charlestown office serves 
the northeastern portion (including the Boston metropolitan area). 

Individual eligibility staff members were the key focus of the interviews. Front-line eligibility 
workers were in the best position to judge the extent and forms of Medicaid estate planning, since they 



2 New York used TEFRA liens at the discretion of the counties. 



are the ones who process applications every day. Several eligibility workers were interviewed at each 
site. In Taunton, we interviewed the director of the office, an eligibility worker supervisor, four 
eligibility workers, and one redetermination worker. In Springfield, we interviewed the office director, 
two eligibility work supervisors, and three eligibility workers. Finally, in Charlestown, we interviewed 
the director, two eligibility worker supervisors, and three eligibility workers. 

The workers interviewed in all three offices in Massachusetts were, on balance, quite 
sophisticated in their knowledge of Medicaid estate planning techniques and seemed more highly 
trained than eligibility workers interviewed in the other three states. This suggests that specialization 
in long-term care applications enables eligibility workers to attain a higher level of expertise than is 
possible for generic eligibility workers in other states. Even though the other three states all had at 
least one or more offices that specialized in long-term care applications, the establishment of an 
entirely separate long-term care eligibility division in Massachusetts clearly had contributed to the high 
level of expertise evidenced by the workers we interviewed. 

Overview of Findings 

Estimates of the prevalence of Medicaid estate planning given by eligibility workers ranged from 
"no more than 2 percent" to 75 percent of all long-term care applicants. These estimates were the 
extremes, however; the majority of workers estimated that between 20 to 33 percent of all applicants 
had done some Medicaid planning prior to the date of application. Workers also reported that the 
practice of Medicaid estate planning had definitely increased over time— particularly following 
implementation of the spousal impoverishment provisions in the Medicare Catastrophic Care Act of 
1988. Consistent with this observation, workers reported that Medicaid estate planning was more 
common in applications involving a community spouse (generally estimated to be 1 5 to 33 percent of 
cases, depending upon the worker and site). 

Eligibility workers reported that Medicaid estate planning involved a variety of techniques 
including trusts, the "half a loaf" method, annuities, spousal refusal, and using the fair hearing process 
to raise the community spouse resource allowance (CSRA) level. However, workers also reported a 
virtual halt in the use of trusts following the passage of OBRA 93. 

The variety of techniques observed in Medicaid nursing home applications no doubt influenced 
worker estimates of the prevalence of Medicaid estate planning. For example, some workers might 
view increased spending during the pre-application period to be evidence of Medicaid estate planning 

c-3 



while others might not. Such gray areas in defining Medicaid estate planning make it difficult to assign 
hard numbers estimating its magnitude. On the other hand, other techniques are more clearly evidence 
of Medicaid estate planning. A good example of the latter is the use of the fair hearing process to raise 
the CSRA level in order to allow the community spouse to retain a higher level of assets. 

Raising the CSRA through Fair Hearings 

Raising the CSRA through the fair hearing process is one of several Medicaid estate planning 
techniques that stem from the spousal impoverishment provisions of the Medicare Catastrophic Care 
Act (MCCA) of 1 988. Under the provisions of the MCCA, jointly held financial assets are totalled, then 
divided equally between the institutionalized spouse and the community spouse when determining 
eligibility for Medicaid nursing home coverage. One half of the assets are considered to belong to each 
spouse, and the community spouse is allowed to retain his or her half, subject to both a minimum and 
maximum amount. 3 At their option, states can also set the minimum amount retained (called the 
Community Spouse Resource Allowance, or CSRA) anywhere between the established Federal 
minimum and maximum. Both the minimum and maximum CSRA levels are increased each year in 
accordance with inflation. 4 In Massachusetts, the CSRA level is set at the established Federal 
minimum, which at the time of our site visit in 1994 was $14,532. 

The Medicaid spousal impoverishment provisions also established Federal rules for protecting 
the income level of community spouse. These provisions were designed to ensure that the community 
spouse would retain an adequate level of income on which to live. Like the CSRA, :he MMMNA is 
subject to both a Federal minimum and a maximum. 3 If the community spouse's income is below the 
MMMNA, language in MCCA states that the community spouse can receive additional income and/or 
resources from the institutionalized spouse to bring her income up to the MMMNA. 6 



3 ln 1 995, the minimum amount of assets which the community spouse is allowed to retain (even if it equals more than half 
of the couple's total assets) is $14,964. The maximum amount (even if it is less than half) is $74,820. 

'For a summary of Medicaid eligibility for nursing home coverage see Crown, W., Burwell, B., and Alecxih, L 1994. An 
Analysis of Asset Testing for Nursing Home Benefits. Washington, D.C.: American Association of Retired Persons, Public Policy 
Institute. 

5 ln January 1 995, the minimum MMMNA was $1 ,230 per month (1 50 percent of the Federal poverty level for a couple) and 
the maximum was $1,870.50 per month. Note that if the community spouse's income is in excess of the MMMNA, the 
community spouse is not required to contribute to the cost of care for the institutional spouse beyond the first month of 
institutionalization. Thus, while the assets of a married couple are treated jointly in determining eligibility for the institutionalized 
spouse, income is still treated separately. 

6 For a more detailed explanation of this provision, see Burwell, B. 1991. Medicaid Estate Planning for Long-Term Care 
Coverage. Cambridge, MA: SysteMetrics, pp. 22-23. 



C-4 



Through a fair hearing process, the community spouse can also have the CSRA raised above 
the state's CSRA maximum to the asset level that is necessary to produce enough income to bring the 
community spouse's income up to the MMMNA. 

Eligibility workers reported that, with low interest rates, community spouses were often able 
to retain assets in excess of $200,000 by using the fair hearing process to raise the CSRA. Although 
nearly all of the workers felt that the spousal impoverisnment provisions of MCCA were a good idea, 
most felt that the process of raising the CSRA level in fair hearings often allowed the community 
spouse to retain an excessive level of assets. Eligibility workers also expressed frustration that the fair 
hearing process made them look like the "bad guys." Under Massachusetts Medicaid eligibility rules, 
workers had no choice but to deny Medicaid nursing home eligibility to applicants having a spouse with 
assets greater than the CSRA maximum — even though th&/ knew that this decision would often be 
overturned in the fair hearing. In 1993, the three long-term care eligibility offices reported about five 
to fifteen fair hearing appeals were held each month to increase the CSRA above the federal maximum 
of $70,740. 

The "Income First" Rule 

The raising of the CSRA through fair hearing appeals was a particularly attractive strategy 
because Massachusetts at the time was not using the so-called "income first" rule. The "income first" 
rule has to do with whether the income of the institutionalized spouse is looked to as the first source 
for raising the income of the community spouse up to the MMMNA, prior to raising the CSRA. At the 
time of site visit, this was not the case. Rather, the income of the institutionalized spouse was not 
being diverted to the community spouse, and in fair hearing appeals, only the income of the community 
spouse was being taken into account in decisions about raising the CSRA above the Federal maximum. 

However, Massachusetts was in the process of changing its Medicaid eligibility regulations to 
adopt the "income first" rule. Massachusetts' decision to change its policy was further supported by 
HCFA in March of 1994, when the Medicaid Bureau issued a memorandum which stated that the 
language in MCCA was not specific on the "income first" rule. As a result, HCFA stated in the 
memorandum, states were free to adopt their own reasonable interpretations of MCCA on this issue: 



C-5 



...We would now like to clarify that states have the option to use the "income first" 
rule or to apply some other reasonable interpretation of the law until we have issued 
final regulations which specifically address this issue 7 ... 

Massachusetts issued its new regulations implementing the "income first" rule in June of 1 994. 
As a result of this policy change, the income from the institutionalized spouse (except for the personal 
needs allowance) is now diverted to the community spouse before the CSRA can be raised through 
a fair hearing appeal. 8 In a follow-up interview, the Medicaid program office reported that after the 
implementation of the "income first" rule, the number of fair hearing appeals to raise the CSRA 
declined significantly. 

However, the "income first" rule remains controversial. In other states where the "income 
first" rule has been applied, the issue is being contested in the courts. In a series of court cases in 
Ohio, the state initially won a case that determined that the state had the right to apply the income 
first rule, but two more recent appeals court decisions have ruled that MCCA is "unambiguous" on this 
issue, and that the statute calls for increasing the MMMNA through a raising of the CSRA level first, 
before looking to the institutionalized spouse's income. ^ There is also a Federal class action suit 
pending in the state of Pennsylvania contesting that the state was not providing applicants with any 
information regarding their rights to seek an increase in the MMMNA by raising the CSRA above the 
Federal maximum. 10 

The argument for raising the CSRA of the community spouse without looking first to the 
income from the institutionalized spouse stems from the potentially transitory nature of the 
institutionalized spouse's income. Elder law attorneys argue that it is important to allow the 
community spouse to retain enough assets to enable her to support herself if and when the 
institutionalized spouse dies. Although this argument has merit, it is important to assess the degree 



'Memorandum from Sally K. Richardson, Director, Medicaid Bureau, HCFA to All Regional Administrators, March 3, 1994. 
s 130 CHR: Division of Medical Assistance, 505.190 Rev. 6/3/94. 

9 See Kimnach v. Ohio Department of Human Services (Ct. of Common Pleas, Franklin County, No. 93CVF-06-41 91 , February 
14, 1994); Kimnach v. Ohio Department of Human Services (Ohio Ct. App., Franklin County, No. 93APEo4-520, 1994 WL 
484660, September 8, 1994); and Gruber V. Ohio Dept. of Human Services (Ohio App. Ct., No. 94CAE06015, 1994, WL 
667869, October 28, 1994). These cases are also summarized in The ElderLaw Report, Volume VI, Number 1 (July/August 
1994) Number 3 (October 1994) and Number 6 (January 1995). 



,0 See Coughlin, Kenneth M. "Class Action Suit Challenges Pennsylvania's 'Income First' Rule." The ElderLaw Report, Volume 
VI, Number 1, July/August 1994. 



C-6 



to which the institutionalized spouse's income is, in fact, transitory. For example, spousal benefits 
under Social Security will continue to be paid following the death of the institutionalized spouse, as 
will survivors benefits from private pensions. Some income sources, such as life insurance, may 
become available only upon the death of the institutionalized spouse. 

Other Medicaid Planning Techniques 

The Medicaid estate planning business is well developed in Massachusetts, and eligibility 
workers reported that a number of attorneys have employed very sophisticated techniques to shelter 
assets for their clients. However, the use of any single technique was not widespread. In addition to 
the more common strategies, such as the "half a loaf" method and raising the CSRA through fair 
hearing appeals, workers reported occasional use of the "just say no" strategy, the sheltering of assets 
in revenue-producing business property, and the construction of new forms of Medicaid trusts. One 
example of the latter was a life estate with "super-added" retained powers. The argument of the 
Medicaid planning attorneys who crafted these life estate trusts is that the "super-added" powers of 
these instruments decrease the value of the assets "transferred" under the life estate, and therefore 
reduces the length of the penalty period. 

Massachusetts was the only state in which workers reported that applicants occasionally 
appealed transfer of asset penalties on the basis that the transfer had not been made with the purpose 
of establishing eligibility for Medicaid, and applicants had sometimes won these fair hearing appeals. 

Massachusetts was also the only state visited in which some workers were fairly "strict" in 
applying transfer of asset penalties in situations where non-exempt assets were being converted to 
exempt assets. For example, if a number of major purchases had been made just prior to the 
submission of the Medicaid application that were inconsistent with the applicant's usual lifestyle (e.g. 
an expensive car, art, expensive presents for family members) some workers ruled such purchases as 
transfers subject to penalty. 

Estate Recovery in Massachusetts 

Massachusetts' estate recovery program has undergone major changes in the past few years 
and, of the four case study states, Massachusetts' estate recovery program was the most effective 
and comprehensive. Between 1991 and 1995, estate recoveries increased from $7.7 million to an 



C-7 



estimated $14 million, an increase of 82 percent." About 90 percent of the recoveries come from 
real estate property in recipients' estates, with the remaining 10 percent accruing from court 
settlements, assets remaining in personal accounts, and miscellaneous other sources. The estate 
recovery program is centralized in the Office of Benefit Coordination and Recoveries in the Division of 
Medical Assistance in Boston, which in FY 1995, employs 6.5 estate recovery staff, with additional 
support from legal staff of the umbrella human services agency. 

Prior to 1990, estate recovery in Massachusetts was characterized as "haphazard," and 
depended largely upon referrals by local eligibility workers to the central estate recovery unit. In order 
to increase the effectiveness of its estate recovery program, the Massachusetts state legislature 
initially enacted legislation in 1 990 to place an automatic lien on all probated estates in Massachusetts, 
regardless of whether the estate was that of a Medicaid recipient or not. The automatic lien provision 
was never implemented. It became apparent that the administration of the automatic lien provision 
would be extremely burdensome on both the state and the probate courts. Although the state's claim 
on the probated estates of deceased Medicaid recipients would be protected, the law required the state 
to release liens on the greater majority of estates of people who had not been on Medicaid. The law 
would also have tied up the ability of the probate courts to issues licenses to sell real estate while 
estates were being settled. Thus, the law was amended several times to delay the implementation 
date of the automatic lien provision, and a Special Commission was established to review the law and 
recommend alternatives. The Special Commission issued its report in November 1991. 12 

The Special Commission recommended that the automatic lien law be repealed, and made a 
series of recommendations for alternative legislative approaches. All of the Commission's 
recommendations were enacted into law on July 1, 1992, and this legislation basically provides the 
construct for the state's current estate recovery program. The foundation of the program is a 
legislative requirement that executors of all probated estates notify the Division of Medical Assistance 
(DMA) when a deceased individual's estate is probated, regardless of whether the individual was a 
Medicaid recipient or not. The petitioner is required to send a copy of the death certificate and a copy 
of the petition by certified mail to DMA. Since the death certificate includes the decedent's Social 
Security number, DMA then conducts a match between death certificates and its Medicaid eligibility 



"In comparison, Massachusetts' Medicaid payments for nursing home care increased only 7 percent from 1 991 to 1 994. 
^Special Commission on Estate Recovery: Report and Proposed Legislation, November 1991. 



C-8 



files to determine whether the decedent was a Medicaid recipient, and, if so, calculates the total 
Medicaid payments made on the person's behalf beyond the age of 65. In 1994, there were about 
26,000 probated estates in Massachusetts, and of these, about 2,000 had a Medicaid claim against 
the estate (although many estates have no assets available for recovery). 

The state's claim on probated estates is made either through a "Notice of Claim" that is filed 
in the probate court (known as the "informal method") or through the filing of a civil suit in probate 
court within one year of the recipient's date of death (known as the "formal" method). Most of the 
state's recoveries, about 85%, are made through the informal "Notice of Claim" method. The "formal" 
method is used primarily in cases where heirs protest the state's Notice of Claim, and the state's right 
to recovery must be pursued through a civil suit. 

The 1992 enabling legislation also enhanced the state's position as a priority creditor in 
instances where there are multiple creditors against the estate. Under the new law, only costs of 
estate administration, funeral expenses, unpaid medical bills, federal taxes, and other specified taxes 
take precedent over DMA's claim (however, the state's claim takes precedence over back property 
taxes). The estate recovery unit indicated that generally about the first $10,000 of an estate is not 
recoverable, due to administrative fees and burial costs. It usually takes the Department nine months 
after the decrth of a Medicaid recipient to settle a claim and the average amount recovered is about 
$20,000. 

Through another process, the Estate Recovery Unit has methods to identify Medicaid recipients 
who have recently died. This process identifies deceased Medicaid recipients who do not have 
probated estates. If the Department does not receive notice of petition to probate for these persons 
after a period of time, the 1992 legislation allows the Department to petition the probate court to 
appoint a public administrator to probate the estate. In addition, the law allows the Division to 
designate a voluntary administrator for estates with assets (excluding real estate) valued at less than 
$1 5,000. In these cases, DMA actively pursues family members to inquire about the status of estate 
administration. In cases where there are no apparent family heirs, DMA also can recover from bank 
account balances maintained by nursing facilities on behalf of recipients.' 3 Only a small amount of 
recoveries are achieved through these other methods, however, since estates that are not probated 
usually have few or no assets. 



13 Since Medicaid eligibility requires recipients to have less than $2,000 in liquid assets, these account balances tend to be 
very low, consisting of deposits of recipients' personal needs allowances. 



C-9 



Once the heirs to the estate receive a "Notice of Claim," they have 60 days to file a protest 
with the state. DMA indicated that about 25 percent of all estate recovery cases are protested, and 
in these cases, DMA receives legal support from its umbrella agency on contested cases. However, 
the state reported that there is considerably more acceptance by families of the state's claim against 
the estate, partly because most claims involve settlement of a lien that has been placed on the 
recipient's real property, and families have been mace aware of the state's lien since the point of initial 
Medicaid eligibility (see below). 

Pursuit of Deferred Claims 

At the time of our site visit, Massachusetts was just beginning to pursue recoveries in cases 
where recovery is required to be deferred under Federal law (i.e., when there is a surviving spouse, 
disabled child, or child under age 21 , and/or when there is some other exempt relative still living in the 
decedent's home). Although no liens may be imposed upon the property of surviving relatives, the 
state's claim for recovery on property that passes to heirs remains valid. The state had also initiated 
a program that allows heirs to pay off the state's claim up front, at a discount, rather than wait for the 
state to recover from the estates of surviving relatives. This program relieves the state from tracking 
deferred claims over the remaining lifetimes of relatives. 

Liens on Property 

As a further protection of the state's claim on the property of Medicaid recipients, both during 
their lifetime and after they die, Massachusetts implemented a lien program on homes in July of 1 991 . 
At the point of initial eligibility, workers determine whether applicants own homes, and whether there 
are any relatives living in the home that would preclude the placement of a lien under Federal law. 14 
A lien is also not placed on the home if there is certification by a medical authority that the recipient 
is likely to return home within six months. In addition, if the recipient returns home or loses Medicaid 
eligibility, then the lien is released. 



14 Under Federal law, states may not impose liens on property in which any of the following persons reside: a spouse, a sibling 
with an equity interest who has lived in the home for at least one prior to the applicant's nursing home admission, a permanently 
and totally disabled child, a blind child, or a child under the age of 21 . 



C-10 



Exemption for Purchasers of Long-Term Care Insurance 

Although Massachusetts is not a participant in the Robert Wood Johnson PartnershiD Program 
for Long Term Care, and therefore does not directly subsidize the purchase of long-term care policies, 
the state still has a small provision to encourage the purchase of private long-term care insurance. If 
a Medicaid recipient had private long-term care insurance coverage that met the requirements of the 
regulations of the Massachusetts Division of Insurance, but still was forced to go on Medicaid after 
their private insurance benefits were exhausted, the state will make no recovery from their estate upon 
death. 

Ongoing Issues in Massachusetts' Estate Recovery Program 

Recovery staff reported four remaining problems with the current estate recovery program. 
First, the Department may fail to recover on property that does not pass to heirs through probate. 
These can be homes that are jointly owned, homes placed in trusts, and homes placed in life 
estates. 15 These situations often involve cases where a lien cannot be placed on the property due 
to the fact that an exempt relative still lives in the home. Thus, although the state still has a legal 
claim on the recipient's ownership interests in such property upon the recipient's death, the fact that 
(a) no lien has been placed on the home, and (b) the property passes to heirs outside of the probate 
process, makes it unlikely that the state will be able to make a recovery in these kinds of cases. 
Interview respondents reported that they had no idea to what extent property held by Medicaid 
recipients passes to heirs unnoticed through these kinds of financial instruments. 

The second problem with the current estate recovery program relates to the state's "window 
of opportunity" for filing the "Notice of Claim" in the local probate court. Although the recovery unit 
is notified by the estate executor of an initial petition for probate, it is not notified of when the estate 
is actually scheduled to come up for probate. Under current law, the state is required to file its "Notice 
of Claim" in probate court within four months of approval of the official bond of the executor or 
administrator. However, the state has no way of knowing when the approval of the official bond has 
been made, other than by continually checking with the probate courts. Since the probate courts are 
backlogged, the state cannot predict when estates are likely to be probated. As a result, Medicaid 
staff must physically visit the probate courts and look at dockets to see when various cases are 



15 Legislation was proposed by the state to expand the definition of the estate beyond the probated estate in an effort to deal 
with this problem but it was not passed by the 1995 state legislature. 



C-1 1 



scheduled for probate. Once the state knows the schedule for a particular estate, it must submit its 
claim to the court directly. If the state does not make its claim within the four-month window, the 
legal division has one year to seek recovery through the formal method of filing a civil action. Estate 
recovery staff said the process of checking on schedules with the local probate courts was time 
consuming, and constituted a large percentage of the costs of administering the program. 

A third problem is that families sometimes take Medicaid recipients off of Medicaid just prior 
to death in order to avoid estate recovery. Although the state still has a right to seek recovery for 
costs incurred while the recipient was on Medicaid, estate recovery staff admitted that the system is 
not fool proof in identifying recipients who were once on Medicaid, but whose eligibility was 
terminated prior to death. Liens on property must also be dissolved if a recipient goes off Medicaid, 
so that it is easier for families to transfer or sell the house before recovery can occur. 

A final problem is that families sometimes cannot settle their claim with the state until they sell 
the house, and they cannot sell the house until the state releases the lien. Ideally, the state informs 
the heirs (and other parties in the proposed sale of the property) that the lien will be released upon the 
sale of the property and the family's settlement of the claim. However, the state admitted that less 
than efficient communications about the release of liens in such cases sometimes impedes the ability 
of families to close sales on property, which understandably cause some families to become upset. 
The state admitted that it need to improve procedures for releasing liens expeditiously in these kinds 
of situations. 

The House as a Countable Asset 

In 1991, Massachusetts tried to revise its Medicaid regulations to include the home as a 
countable asset in cases where there was little likelihood that a Medicaid recipient would ever return 
home. Regulations were promulgated to require all Medicaid recipients or applicants in nursing homes 
to obtain a doctor's certification regarding the likelihood of returning home within the following six 
months. In the absence of such a certification, the recipient or applicant would be given nine months 
to sell the home, after which the owner would be required to accept any offer for the home greater 
than two-thirds of its assessed value. However, HCFA aisallowed this policy change on the basis that 



C-12 



Massachusetts's criteria on exclusion of the home was more restrictive than SSI eligibility rules, and 
the new policy was never implemented. 16 

Pilot Program to Identify Unreported Properties 

At the time of the site visit, the state was undertaking a pilot program at its Springfield office 
to identify real estate holdings of applicants or recipients that might have been previously unreported. 
The office had bought a subscription to a real estate on-line inquiry program that provided the office 
with data on all real estate transactions over $1 ,000 in the local area. Over the first three months of 
operation, the office had identified information from the on-line program on four cases involving 
applicants or recipients that differed from information provided on applications, and was further 
investigating those cases. The cost of the on-line prograr,, was approximately $300 per month, and 
therefore the pilot program was considered cost-effective. A shortcoming of the program was that it 
only identified parties in real estate transactions by name, so matching common names with Medicaid 
applicants/recipients required additional manpower. 

Discussion 

Massachusetts was clearly distinguished from the other three states selected for this study in 
that it is a both a state that has a very well developed, aggressive, and sophisticated Medicaid estate 
planning industry, but also a state where the growth of Medicaid estate planning has led to a strong 
policy response from the state administration to redress its potential impacts. Recognizing that 
Medicaid estate planning, if not checked, could increase the growth of Medicaid expenditures, both 
the legislature and the administration have made a strong policy statement of their intent to keep 
Medicaid a means-tested program for people who truly need public assistance. In the past few years, 
the state had initiated a lien program, significantly strengthened its estate recovery program, 
implemented the "income first" rule, and had attempted to implement a new policy for counting the 
home as an available asset in cases where there was no objective evidence that the recipient would 
be discharged home. Further, unlike the other three states we visited, it was much more apparent that 
long-term care eligibility workers felt it was their personal and professional responsibility to identify and 
deter Medicaid estate planning practices, where allowable under the law, and to preserve Medicaid for 
the truly poor. While several workers reported that they felt like were fighting a "losing battle," this 



^Massachusetts is a so-called " 1 634" state which follows SSI rules in determining eligibility for the aged, blind, and disabled. 
In 1634 states, SSI regulations regarding exclusion of the home as a countable asset in eligibility determinations must be 
followed for SSI-related Medicaid applicants and recipients. 



C-13 



sense of mission by front-line workers was clearly not as evident in the other three states selected for 
the study. 

The marginal impacts of OBRA '93 itself on Medicaid estate planning activities in 
Massachusetts is difficult to judge. Probably the greatest impact of OBRA '93 in Massachusetts will 
be on the use of trusts as Medicaid planning devices. Eligibility workers reported that the percentage 
of applications involving trusts or annuities dropped off dramatically following the passage of OBRA 
93. At an elder law conference held in Boston dealing with the Medicaid estate planning provisions 
of OBRA 93, elder law attorneys were pessimistic about the ability to continue using trusts and 
annuities as Medicaid estate planning tools. 17 Part of this hesitancy was due to the uncertainty about 
how trusts and annuities would be treated in eligibility determinations. Although some of the 
uncertainty has since been removed by clarifications from HCFA, the OBRA 93 provisions are 
restrictive enough to reduce the use of trusts and annuities as Medicaid estate planning tools in the 
future. 

The restrictions on trusts as Medicaid planning tools could possibly have the added impact of 
discouraging more attorneys from specializing in Medicaid estate planning. We interviewed one elder 
law attorney who had built a large practice around Medicaid estate planning and who said that, as a 
result of OBRA 93, the use of trusts (with the possible exception of income-only trusts) for Medicaid 
estate planning was "basically dead." He also felt that OBRA 93 was designed by Congress to send 
a message to Medicaid estate planners that "we know what you are doing and we don't like it." He 
admitted that a large percentage of his fees emanated from writing trusts for Medicaid estate planning, 
and that there was little money to be made in just general counseling about Medicaid eligibility rules 
and methods for divesting assets. However, in his opinion, Medicaid estate planning was ethically 
indistinguishable from estate planning in general or income tax planning. He felt that if policymakers 
do not like the way people respond to various financial incentives such as attempts to preserve their 
estates in the face of high nursing home costs, it is up to policymakers to change the incentives. 

In sum, Massachusetts can be characterized as a state in which Medicaid estate planning had 
grown into a significant policy problem, but due to recent policy responses, independent of OBRA '93, 
is also a state where Medicaid estate planning is on the decline. While OBRA '93 certainly helped to 
support the state's policy initiatives, the Massachusetts example suggests that state policy and 



" Trusts. Transfers and Estate Recovery: Under the New Medicaid Law, What is a Planner to Do? Massachusetts Continuing 
Legal Education, Inc.: Boston. MA (September 14, 1993). 



C-14 



implementation is of at least equal importance to Federal policy in addressing Medicaid planning 
policy problem. 



C-15 



Example of Form for Using the "Just Say No" 
Strategy in New York State 



I hereby refuse to contribute any of my income or resources toward the 
cost of my spouse's medical care. Please consider the income and 
resources of my spouse alone in determining eligibility for Medicaid, as 
dictated by Social Services Law Section 366. 



Signature 

Sworn to me this 

day of , 1 9 



Notary Public 



D-1 



Appendix D 



NEW YORK CASE STUDY 

Background 

In Fiscal Year 1994, New York's Medicaid program spent $4.3 billion for nursing home care, 
more than twice the $1.9 billion spent by California's Medicaid program for nursing home services in 
the same year, despite the fact that there are about one million more elderly persons living in California 
than in New York. 18 On a per capita basis (expenditures per elderly state resident) Medicaid spending 
for nursing home care in New York is about two and a half times the national average. 

New York's higher level of Medicaid spending for nursing home care is primarily attributable 
to differences in price rather than to differences in utilization. While the number of elderly persons 
receiving Medicaid-financed nursing home care relative to the total number of elderly persons enrolled 
in the Medicaid program is approximately the same in New York as the national average, the average 
cost per recipient of nursing home care in New York is more than twice the national average. The 
average Medicaid cost per nursing home recipient in New York was $33,775 in FY 1993, compared 
to a national average of $15,798 per nursing home recipient.' 9 

In New York, Medicaid payments also account for a higher percentage of total expenditures 
for nursing home care across all payment sources than in other states. According to the 1 987 National 
Medical Expenditures Survey, approximately 60 percent of all persons in nursing homes on any given 
day are enrolled in the Medicaid program. 20 State Medicaid officials indicated that in New York, 
Medicaid pays for approximately 85 percent of all nursing home days used in the state. Thus, 
Medicaid accounts for a larger percentage of total nursing home revenues in New York than in other 
states. 



18 Source: Burwell, Brian. Medicaid Long Term Care Expenditures in FY 1994, Memorandum, The MEDSTAT Group, April 
1995. Population data are from the Bureau of the Census, Statistical Abstract of the United States, 1994 . 

,9 Source: Health Care Financing Administration, Bureau of Data Management and Strategy, HCFA 2082 data. 

20 Short, P., S. Feinleib, and P. Cunningham (1 994, April). Expenditures and sources of payment for persons in nursing and 
personal care homes (AHCPR Pub. No. 94-0032). National Medical Expenditure Survey Research Findings 1 9, Agency for Health 
Care Policy and Research. Rockville, MD: Public Health Service. 



D-2 



State Medicaid officials in New York have been long concerned about the growth of Medicaid 
estate planning and its impact on Medicaid program expenditures. Relatedly, New York has been an 
ardent participant in the Robert Wood Johnson (RWJ) Foundation Partnership for Long Term Care. The 
RWJ Parternship program provides potential public subsidies (in the form of Medicaid reinsurance) to 
individuals who purchase Partnerhsip-approved private long-term care insurance. In the New York 
model of the RWJ Partnership program, individuals who purchase a minimal Partnership long term care 
insurance policy (defined as a policy which provides at least three years of nursing home coverage at 
$110 per day) do not have to spend down their assets to qualify for Medicaid after the policy's 
benefits are exhausted. The Partnership model used in New York state provides higher subsidies for 
private long term care insurance purchasers than other states participating in the RWJ Partnership 
program, partly due to the impact of high nursing home rates on the amounts involved in spenddown 
cases (up to $250,000 for an average length of stay), and partly due to the fact that state officials 
believe that higher subsidies have to be provided to potential purchasers in New York, given the ease 
with which it is otherwise possible to qualify for Medicaid coverage through the use of Medicaid estate 
planning techniques. 

Data Collection 

Medicaid is a state-supervised, and county-administered program in New York. Each county 
office of the Department of Social Services has a Medicaid program administrator who has overall 
operational responsibility for Medicaid eligibility operations in the county, plus limited other 
administrative responsibilities, including rate negotiation, licensing, and estate recovery. New York 
county governments also have a financial incentive to control Medicaid spending, since counties pay 
20 percent of the state share (10 percent of total paymenats) of Medicaid payments for long term 
care. 

In addition to interviews with representatives of the Division of Medical Assistance in the New 
York Department of Social Services (DSS), site visits were conducted to six county Departments of 
Social Services and the city of New York. Three counties (Monroe, Nassau, Suffolk) plus New York 
City were urban, densely populated area, while the remaining three counties (Delaware, Broome and 
Wayne) were small rural counties with much sparser populations. The variation in size and scope 
across these different counties must be appreciated. For example, New York City alone accounts for 
over half of Medicaid spending for nursing home care in the state, and the city spends more than 1 50 
times what Wayne county spends for nursing home care. The four urban counties included in the site 



D-3 



visits all had eligibility staff who specialized in long term care applications, while the rural counties had 
generic staff who processed all Medicaid applications, regardless of type. 

In addition to interviews with State and local DSS staff, we also conducted interviews with 
representatives from the New York State Department on Aging, with two elder law attorneys who had 
large Medicaid estate planning practices, and with a financial adviser who counseled elders on planning 
for their future long term care needs. 

The "Just Say No" Strategy 

By far the most common Medicaid planning technique reported by eligibility workers in New 
York was the "Just Say No" strategy. Under the "just say no" strategy, all of the assets of the 
institutionalized spouse (and sometimes income as well) is first transferred to the community spouse. 
Then, the community spouse simply "refuses" to provide any financial support to the institutionalized 
spouse. The Medicaid agency extends eligibility to the institutionalized spouse and decides whether 
or not it wishes to pursue legal action against the community spouse for failing to provide support. 

The "just say no" strategy is made possible through the combination of two separate Medicaid 
program provisions. The first provision is a fairly long-standing provision in the Medicaid program 
which allows states to provide Medicaid coverage to persons who have been truly abandoned by 
legally responsible relatives. Historically, these cases primarily involved poor mothers and children who 
were abandoned by husbands/fathers. Although Medicaid eligibility rules require that the financial 
resources of legally responsible relatives (spouses and parents of children under the age of 18) are 
deemed available to Medicaid applicants in determining eligibility for Medicaid, this provision recognized 
that it was not fair to deny eligibility to a poor mother who did not have access to the financial 
resources of her husband due to financial abandonment. In New York, this provision is recognized in 
State Social Services Law 366(3), which states in part: 

Medical Assistance shall be furnished to applicants in cases where, 
although such applicant has a responsible relative with sufficient 
income and resources to provide medical assistance as determined by 
regulations of the department, the income and resources of the 
responsible relative are not available to such applicant because of the 
absence of such relative or the refusal or failure of such relative to 
provide the necessary care and assistance. In such cases, however, 
the furnishing of such assistance shall create an implied contract with 
such relative, and the cost thereof may be recovered from such relative 



D-4 



in accordance with title six of the article three and other applicable 
provisions of the law. 

The second Medicaid program provision which makes the "just say no" strategy possible is the 
spousal impoverishments provisions of the Medicare Catastrophic Coverage Act of 1 988. The spousal 
impoverishment provisions allow married applicants for nursing home services to transfer all of their 
assets between them without penalty, since another part of MCCA provides that the combined assets 
of both spouses are to be considered available in determining eligibility for the institutionalized 
spouse. 21 Thus, the MCCA spousal impoverishment provisions created a situation in which a 
Medicaid applicant could transfer his or her assets without penalty, while the prior Medicaid program 
provision on spousal abandonment allowed one spouse to refuse financial support to the other spouse 
without impairing the eligibility of the "abandoned" spouse. 

It is reasonable to assume that the architects of the Medicaid spousal impoverishment 
provisions did not consider the possibility that one spouse might refuse to provide financial support to 
the other without impairing the Medicaid eligibility of the "unsupported" spouse, or that the new 
spousal impoverishment provisions might lead to the utilization of the "just say no" strategy. Elder law 
attorneys often disagree, pointing to still another provision of the Medicare Catastrophic Coverage Act, 
which states: 

The institutionalized spouse shall not be ineligible by reason of resources determined 
under paragraph (2) to be available for the cost of care where— 

"(A) the institutionalized spouse has assigned to the state any rights to support from 
the community spouse;" [Sec. 1924(c)(3)] 

Elder law attorneys suggest that the inclusion of trus section implies that it was the intent of 
Congress to explicitly require states to provide Medicaid eligibility in cases where a community spouse 
has elected not to provide financial support to the institutionalized spouse. Attorneys have also argued 
that the "just say no" strategy is actually a preferable public policy, since it avoids the administrative 
costs of fair hearing procedures to raise the CSRA, or the legal costs of obtaining court orders to raise 



2 ' 2 'Prior to the enactment of the Medicaid spousal impoverishment provisions, only the assets of the institutionalized 
spouse were deemed available in determining Medicaid eligibility beyond the first full month of institutionalization. Thus, prior 
to MCCA, the financial circumstances of the community spouse were highly dependent upon in whose name the financial assets 
of the married couple were held. If all of the married couple's assets were in the name of the institutionalized spouse, the 
community spouse could be left with nothing, but if all of the assets were in the name of the community spouse, no assets 
belonging to the community spouse had to be spent down prior to obtaining Medicaid for the institutionalized spouse (beyond 
the first month of institutionalization). 



D-5 



the CSRA. 22 To the authors, it is indeed somewhat curious why Congress included the explicit 
provision cited above, and the Committee Report includes no explanatory language about it. 

The use of the "just say no" strategy was rampant in some counties. Eligibility workers in the 
urban counties (Monroe, New York City, Nassau, and Suffolk) indicated that virtually every long-term 
care application involving a community spouse employed the "just say no" strategy. Eligibility workers 
in the three rural counties reported that the use of the technique was sometimes used, but was not 
widespread, presumably because applicants were not as aware of the option and had not consulted 
attorneys prior to making application. The policy impact of the "just say no" strategy must be fully 
realized: it essentially eliminates means-testing of Medicaid nursing home benefits for persons who 
still have a living spouse at the time of nursing home admission. 

Another reason for the widespread use of the spousal refusal approach in New York is the ease 
with which it can be accomplished. In Suffolk county, for example, upon receipt of a long-term care 
application, DSS sent a letter to the community spouse informing him or her of their rights and 
responsibilities for supporting the care of the institutionalized spouse. If the available resources of the 
couple were above the state CSRA level (which was $72,660 in 1 994), the letter informed the spouse 
on the amount of resources that had to be contributed to the institutionalized spouse's care before 
eligibility will be granted. However, the same letter also informed the community spouse of the option 
to refuse to contribute resources to the care of the community spouse, and allowed the community 
spouse to indicate their refusal simply by checking a box. Furthermore, the letter stated that if the 
community spouse did not respond at all, that the county would assume that the community spouse 
was refusing to comply and was not providing support. 

State Medicaid officials indicated that this policy in Suffolk County of informing the community 
spouse of his or her rights to refuse to provide financial support was done pursuant to a pre-spousal 
impoverishment court order (Brill v. Perales) which required the state to provide such notice to the 
spouse in the community. However, with the implementation of the MCCA spousal impoverishment 
provisions, the use of this form has since been discontinued in Suffolk County. 



22 22 See, for example, Koldin, Stephen. '"Spousal Refusal' in New York State," The ElderLaw Report, Vol. VI, No. 9, April 
1 995. Koldin writes: "In New York State, the spousal refusal option accomplishes an important public policy objective: avoiding 
litigation." 



D-6 



In other counties, eligibility workers showed us similar forms that had been drawn up by 
advocacy organizations and elder law attorneys which simply provided documentation of the 
community spouse's refusal to support the institutionalized spouse. These forms only required the 
community spouse to check a box indicating his or her refusal to provide a support, and to add his or 
her signature. Eligibility workers reported that under state law, they were required to accept such 
forms as sufficient documentation of spousal abandonment, and to approve Medicaid eligibility for the 
institutionalized spouse. 

If a community spouse indicates a refusal to support the institutionalized spouse, or does not 
respond to the letter at all, an assignment of support letter is drawn up by the Medicaid Department 
and signed by the institutionalized spouse (if able) which allows the state to proceed against the excess 
resources (those resources in excess of statutory limits) of the community spouse for the cost of 
nursing home care provided to the institutionalized spouse by Medicaid. However, state officials 
reported that approximately 95 percent of applicants in community spouse cases a/ready have an 
assignment of support letter when they apply for Medicaid, along with the documentation of spousal 
refusal. 

Theoretically, the assignment of support letter gives the county the legal authority to pursue 
the community spouse for failing to provide financial support to the institutionalized spouse. However, 
in all of the counties we visited, DSS attorneys indicated that legal actions were rarely taken against 
a community spouse for failing to provide financial support to the institutionalized spouse. 
DSS attorneys stated that they were overwhelmed with other DSS-related legal issues that were of 
higher priority, such as child abuse and abandonment cases, and besides, they were generally 
pessimistic about the likelihood of making successful recoveries from community spouses if such cases 
were pursued. DSS legal staff believed that the courts would likely rule in favor of the right of the 
community spouse to refuse support if such cases were litigated. 

Although the "just say no" strategy was the most widely used technique to preserve assets 
for a community spouse, local workers reported that some applicants instead employed the strategy 
of using the fair hearing process to raise the CSRA level in order to bring the community spouse's 
MMMNA allowance up to the allowable amount of $1,817 per month. Presumably, this strategy is 
used by some couples who prefer not to create a situation where the local DSS district has the 
authority to pursue the community spouse for financial support, even if there is little real threat of the 
local DSS office taking such action. 



D-7 



Penalty Periods for Multiple Transfers 

Eligibility workers reported that in past years, the use of multiple transfers to create concurrent 
penalty periods was a relatively common phenomenon. OBRA '93 clarified that when Medicaid 
applicants have made multiple transfers during the look-back period (now 36 months prior to the date 
of application) the penalty period is to be calculated by summing the total amount of all transfers 
made. However, even prior to the enactment of OBRA '93, New York DSS had issued an 
Administrative Directive in October 1992 changing the method of calculating penalty periods for 
multiple transfers, so that OBRA '93 merely provided stronger statutory justification for New York's 
administrative directive. 23 Eligibility workers reported that this was a welcome change, since the prior 
method of applying concurrent penalty periods allowed applicants to transfer significant assets without 
incurring any delay in Medicaid eligibility. 

Workers also reported relatively high use of the "half a loaf" method as a method for 
transferring assets among non-married applicants. Elder law attorneys in New York appeared to be 
universally knowledgeable of the "half a loaf" strategy and employed this strategy liberally. Local DSS 
offices use regional "private pay" rates to compute the penalty period for identified asset transfers, and 
since the private cost of nursing home care is very high in some areas of New York, particularly in the 
New York City metropolitan area, more assets can be transferred in New York under the "half a loaf" 
method than in other states. For example, if the private cost of nursing home care is $5,000 per 
month, prospective Medicaid applicants can transfer up to $5,000 per month in the pre-application 
period without incurring a penalty period after they apply. 

Transfers to Qualify for Home Care Services 

In addition to high spending rates for Medicaid-covered nursing home care, New York also has 
very high Medicaid expenditures for home care services. In FY 1 994, New York spent over $1 .8 billion 
for Medicaid-financed personal care services, accounting for 62 percent of total Medicaid spending for 
personal care services nationwide. In 1993, about 88,000 Medicaid enrollees received personal care 



23 23 New York DSS Administrative Directive: Transfer of Resources: Changes in the Method of Calculating Transfer Penalty 
Periods. 92 ADM-44, October 28, 1992. 



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services, and each recipient of personal care services averaged 139 hours of personal care services 
per month (about 32 hours per week). 24 

The Medicare Catastrophic Coverage Act also changed SSI and Medicaid eligibility policy by 
eliminating transfer of asset penalties for SSI eligibility, and Medicaid eligibility other than eligibility for 
long-term care services. The rationale for this change was that there is little incentive for individuals 
to transfer all of their wealth simply to receive an SSI check of about $440 per month (or less, 
depending upon the amount of Social Security income also received) or to receive Medicaid-covered 
services other than long-term care, and because the application of transfer of asset rules for SSI 
applicants was administratively burdensome for the Social Security Administration. 

Although there may be little incentive for elderly persons to transfer assets to qualify for 
Medicaid benefits other than long-term care benefits, the generous coverage of home care services in 
New York's Medicaid program creates a larger incentive in New York. In 1993, the average recipient 
of personal care services in New York received an annual equivalent of $16,000 in services. 25 Thus, 
elder law attorneys reported that another Medicaid estate planning strategy was to have their clients 
transfer all of their assets, apply for Medicaid home care services, and "hang on" as long as possible 
before applying for nursing home admission. The longer a client could be maintained in the community 
through the use of home care services, the more assets could be protected under the "half a loaf" 
method. 

Since transfer of asset penalties are applied once recipients of home care services enter nursing 
homes, DSS maintains records of applicants of home care services who have transferred assets prior 
to Medicaid application (in the event that applicants subsequently enter nursing homes). In the six 
month period from October 1993 through March 1994, local DSS offices reported an average of 28 
home care applicants per month who had transferred all of their assets in the pre-application period. 

Largely a result of lobbying efforts by the New York state delegation, Congress included a 
provision in OBRA '93 allowing states, at their option, to apply transfer of asset penalties on transfers 
made for the purpose of qualifying for Medicaid-covered home care services. However, after the 



"Personal communication, New York State Department of Social Services. July 1994. 

!5 The actual value would be higher in the private home care market, and additional value is received through coverage of 
other Medicaid services, such as prescription drugs. 



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enactment of OBRA '93, the New York state legislature failed to enact this provision into state law, 
and has still not done so at the time of this writing. 

Use of Trusts 

DSS officials, elder law attorneys and local eligibility workers all reported that Medicaid trusts 
were used relatively infrequently as a Medicaid planning device in New York. The infrequent use of 
trusts relates to the fact that other Medicaid planning strategies, such as the "just say no" strategy, 
were equally or more effective strategies for preserving assets, and were also less costly in terms of 
the attorney fees required to implement the strategy. 

Furthermore, elder law attorneys and eligibility workers reported that this was an area where 
a lot of "bad" Medicaid planning was occurring. They reported that in many cases attorneys with little 
or no expertise in Medicaid eligibility policy were writing trusts for clients that offerred no protection 
of trust assets and/or income from being counted as available resources in the event of subsequent 
application for Medicaid. 

One type of trust that had been used in prior years as a Medicaid planning device was the so- 
called "trigger trust." Trigger trusts include language which give the trustee discretion to distribute 
trust principal or income as he or she so chooses until such time the settlor applies for Medicaid or 
enters a nursing home, at which time the trustee's discretion to distribute income or principal is 
terminated, with all subsequent distributions from the trust becoming non-discretionary. The purpose 
of trigger trusts was to prevent the assets of the trust from being deemed available as a countable 
resource under Medicaid eligibility rules in the event the settlor of the trust required nursing home care. 
However, in 1 992, the New York legislature amended its Estate, Powers and Trust Law to render such 
provisions in any trust instrument void. 

Although OBRA '93 provided further statutory authority to limit trusts as a Medicaid planning 
device, DSS had not issued implementing regulations at the time of our site visit in May of 1994. In 
any case, since trusts were not perceived as a common Medicaid planning tool prior to OBRA '93 in 
New York, DSS did not anticipate that the OBRA '93 trust provisions would have much of an additional 
effect. 

Estate Recovery Programs in New York 



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Estate recovery in New York is a highly decentralized orocess. Each local DSS district is 
responsible for operating its own estate recovery program, and local districts are given broad leeway 
in their organizational approach to estate recovery. In many districts, estate recovery activities are a 
subset of each district's third party liability functions, and there are often not local DSS staff who are 
exclusively dedicated to estate recovery functions. In addition, estate recovery functions usually fall 
under the overall administrative jurisdiction or the local DSS general counsel, who has a broad range 
of responsibilities of which estate recovery activities are only a small part. Even in the reporting of 
local DSS districts to the state DSS office, the reporting of dollars recovered through estate recovery 
are often not disaggregated from funds recovered through other third party liability, so that the state 
does not even have good data on the amount of money recovered by local districts from estate 
recovery efforts. 

As in other states, estate recovery in New York generally involves the following process: 

• The local DSS district identifies Medicaid recipients over the age of 65 who have recently died. 
The state DSS reported that the larger DSS districts use computerized matches to identify 
deaths while many of the smaller districts simply follow the local obituary columns. 

• The district determines whether there is a surviving relative that would preclude the placement 
of a claim against the decedent's estate. This information is usually obtained from the 
deceased Medicaid recipient's case record. 

• The district establishes the amount of Medicaid payments made on behalf of the Medicaid 
recipient since his or her 65th birthday. Local districts reported considerable problems 
obtaining these data, which often require a six to eigiit week turnaround. The inability to 
obtain data on the potential amount of the claim limits the local districts' ability to pursue 
estate recoveries in a timely manner. 

• The DSS district files a lien against the estate of the deceased Medicaid recipient in the 
appropriate surrogate court. 

• Local districts attempt to ascertain the vaiue of assets held in the estates of deceased Medicaid 
recipients, and pursue those cases where there is the greatest likelihood of making recovery. 

Local DSS attorneys interviewed during the site visit indicated that estate recovery efforts in 
New York are highly litigious. Attorneys representing the heirs of a Medicaid recipient's estate 
frequently contest the claim of DSS against the estate. DSS legal staff also reported that the local 
courts often rule in favor of the heirs against DSS. Since local judges are elected officials, DSS 
attorneys claimed that decisions in favor of heirs were often politically motivated. 

In addition, local DSS offices indicated that they had little financial incentive to pursue estate 
recoveries. Local county taxes pay for 10 percent of all Medicaid long-term care costs, so that the 



C-1 1 



county only receives ten cents back on every dollar recovered. Forty cents of every dollar recovered 
goes to the state, and fifty cents goes back to the Federal government. However, local DSS districts 
are required to pay 50 percent of the state share of administrative costs, or 25 percent of the total 
cost. Thus, local DSS offices reported that estate recovery activities, in many instances, are money 
"losers," meaning that it costs the county government more to pursue estate recoveries than it gets 
back from the recoveries it makes. 

Consequently, although New York does not have good data on funds returned through estate 
recovery efforts, it was generally felt that estate recovery efforts in the state are not particularly 
effective, and could be improved substantially. For example, if one assumes that New York City 
accounts for half of all spending for nursing homes (1 990 data from DSS indicates that NYC accounted 
for 52 percent of all nursing spending in that year), in 1993, NYC DSS recovered 0.4 percent of 
Medicaid nursing home payments through estate recovery. In contrast, the state of Oregon recovered 
2.5 percent of its Medicaid payments for nursing home care in 1993, or six times the rate recovered 
by New York City. 26 

The state had implemented a lien program in 1 992 to protect the state's claim against the real 
property held by Medicaid nursing home recipients in the event of sale or transfer of the property prior 
to death. A survey conducted by the state in October of 1993 indicated that 3,334 liens were filed 
by local DSS districts in 1992. 

Local DSS district staff interviewed during the site visit were generally supportive of the idea 
of centralizing estate recovery functions in Albany, particularly for the small districts that have few 
administrative resources to devote to estate recovery activities. Some local districts had also hired 
attorneys (ex-DSS attorneys with strong track records in estate recovery) on a contingency basis rather 
than pursue recoveries themselves. The state was also providing guidance to local DSS districts on 
the methods which districts could use in contracting for estate recovery services with private entities 
on a contingency basis. 

Since Medicaid estate planning strategies are widespread in New York, and very effective in 
protecting assets for community spouses, the state DSS and local districts were interested in the 



26 New York City DSS attorneys estimated total estate recoveries in 1993 of $9.0 million. Data for estate recoveries in 
Oregon obtained from Department of Health and Human Services Office of Inspector General report, "Medicaid Estate Recovery 
Programs," October 1994 (draft). 



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possibility of pursuing estate recoveries from the estates of surviving spouses upon their subsequent 
death. While pursuing recoveries from the estates of surviving spouses was allowed under state law 
in New York, most counties indicated they did not pursue legal action was because they felt that their 
chances of winning cases were very slim. In so claiming, DSS attorneys cited a 1993 court case 
(Matter of Estate of Craig) which they believed limited the chances of their winning a suit against a 
community spouse for failing to support an institutionalized spouse. 27 

The Craig case involved a situation in which a county had attempted to recover from the estate 
of a spouse for Medicaid costs incurred by her predeceased husband. The crux of the case centered 
on the definition of "responsible relative," since under New York state Social Services Law, an "implied 
contract" for reimbursement for services provided to a medical assistance recipient is only applicable 
to responsible relatives. In the Craig case, the appeals court defined a responsible relative as one who 
has sufficient ability to pay for the Medicaid recipient's expenses at the time that expenses were 
incurred, and since Mrs. Craig did not have sufficient ability to pay at the time her husband was 
receiving Medicaid, the state could not recover from her estate after her death. 

State Medicaid officials and local DSS estate recovery staff believed that the Craig case served 
as a significant barrier to recovering from the estates of surviving spouses. Also, since the state is 
precluded under Federal law from filing liens on the property of surviving spouses, there is nothing to 
prevent surviving spouses from transferring all or most of their assets to heirs prior to death in order 
to avoid recovery (unless the surviving spouse also applies for Medicaid at some future point). 

Impacts of OBRA '93 and Recent Legislative Initiatives 

State Medicaid officials felt that OBRA '93 would probably have little effect on Medicaid estate 
planning in New York. New York had already implemented policies to treat multiple transfers 
concurrently, had limited the use of trigger trusts, and already had an estate recovery program in 
effect. Although trusts had not been used frequently as a Medicaid planning device, DSS felt that the 
trusts provisions of OBRA '93 would reduce the use of trusts even further, and the elder law attorneys 
we talked to agreed with this prediction. 

Since the site visit to New York was conducted, there has been a change in administration as 
a result of the gubernatorial election of November 1 994. State Medicaid officials believed that the new 



"Matter of Estate of Craig 604 N.Y.S. 2d 908 (Ct. App. 1993). 

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political climate would improve chances for the enactment of legislation to tighten up eligibility policies 
to achieve Medicaid program savings. The Administration developed legislation to (a) address the "just 
say no" strategy, (b) apply transfer of asset penalties to home and community-based care recipients 
(c) expand the scope of allowable recovery efforts to include property outside the probated estate, and 
to allow recoveries against the estates of responsible relatives, and (d) to reduce the minimum 
Community Spouse Resource Allowance. However, in July of 1995, all of the Administration's 
proposed changes were rejected, and the legislature chose to instead achieve Medicaid program 
savings in long-term care through cuts in provider reimbursements. 



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ens 



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