Senate Takes On Medicaid Loopholes

Congress is considering a crackdown on financial planning strategies increasingly favored by middle-class families to shift the cost of nursing home care for elderly parents onto the federal government.

Senate Finance Committee Chairman Charles E. Grassley (R-Iowa) denounced the practices Wednesday as “legal shenanigans” and vowed to help stop maneuvers he said were turning Medicaid into an asset protection program, instead of what it was supposed to be -- an insurer of last resort for elderly people too poor to afford care.

Under present law, Medicaid, the federal program providing healthcare benefits to the poor, covers nursing home costs if residents can show that they do not have sufficient assets to pay for their own care -- which experts say now averages $50,000 to $70,000 a year.

As costs have risen, it has become commonplace for families to transfer elderly relatives’ assets to others -- often to adult children or to grandchildren -- through gifts or other legal devices, to keep the assets instead of letting them be used for nursing home care. So widespread is the practice that some estate planners hold seminars complete with video presentations, refreshments and spreadsheets.

Tightening the rules could save Medicaid $1 billion to $2 billion over five years, Grassley said, though Medicaid’s long-term care bill is projected at $290 billion over the next five years.

But some policy experts say the answer is not to make it harder to get into Medicaid, but to recognize a need for a national long-term care program.

“Solutions that focus only on making Medicaid ‘meaner’ ... do our nation a disservice,” said Judith Feder, dean of the Georgetown Public Policy Institute, who was a senior official at the Department of Health and Human Services during the Clinton administration.

“The nation lacks a policy that assures people access to quality long-term care, when they need it, without risk of impoverishment,” Feder said.

On the second of two days of hearings on waste, fraud and abuse in Medicaid, Grassley’s committee heard from an elderly woman who lived in a continuing care community and who complained that some of her neighbors had figured out how to shield hundreds of thousands of dollars while qualifying for Medicaid.

“Some have been persuaded by their greedy children,” said 71-year-old Ruth Pundt, who lives at Oak Crest Village in Parkville, Md., in an interview.

Pundt fears her neighbors’ gains could be her loss, because the fees for residents who pay their own way -- as she does -- go up because Medicaid payments do not cover the full cost of residential care.

“As a taxpayer, I believe people with assets should not be able to use loopholes to preserve their assets and shift the burden of paying for their care to others,” Pundt told the committee.

One couple entered Oak Crest with about $500,000, which they pledged to make available for their care, according to the company that operated the facility.

Later, the assets were shifted to an annuity and the husband went on Medicaid. Maryland courts upheld the arrangement.

Attempting to close such loopholes -- as President Bush also wants to do -- could trigger a political backlash.

Medicaid has lost its stigma as a welfare program and now enjoys widespread popularity, a poll released Wednesday found.

The survey, by the nonpartisan Kaiser Family Foundation, found that 80% of Americans want the government to maintain or increase Medicaid spending and 12% favor a cut.

Congress is seeking to slow the growth of the program by $10 billion over five years as part of a deficit-reduction bill lawmakers will consider this fall.

But cutting back on the program has proved to be difficult in the past.

In 1996, during the Clinton administration, for example, Congress passed a law establishing criminal penalties for individuals who deliberately got rid of assets to qualify for Medicaid. Dubbed the “Granny Goes to Jail” law, it generated such protests that Congress repealed it the following year.

A subsequent law that sought to penalize estate planners was declared unconstitutional.

A federal-state partnership, Medicaid has become the nation’s largest health insurer, providing coverage for about 53 million Americans. Beneficiaries include children in low-income working families, the disabled and some others, but the bulk of the program’s budget goes to the elderly poor.

When it comes to nursing home care, the program covers about half of the nation’s total bill. A 1% reduction in Medicaid spending for long-term care would save the government $2.9 billion over five years.

For most families, nursing home bills would quickly wipe out prospects for an inheritance. Yet to qualify for Medicaid coverage, a person’s assets cannot exceed $2,000. (The value of a home and one car are not counted.)

That creates incentives for the elderly to shift their savings and stock holdings to other relatives.

Current laws attempt to penalize families who shift assets by delaying or denying Medicaid coverage for a period of time based on the amount of money transferred.

Transfers within 36 months before a person applies for Medicaid can trigger the coverage penalty.

That has not deterred estate planners from finding ways around the restrictions.

“An industry of elder lawyers specializing in Medicaid has sprung up across the nation,” said Julie Stone-Axelrad, a social policy analyst with the Congressional Research Service.

She identified more than half a dozen techniques that could be used to protect a family’s wealth. Some of the techniques are legal, though others are questionable. In any event, the risk of prosecution is low.

One popular method is called “half-a-loaf”: a person transfers half of their assets, and keeps the other half to pay for the cost of care during the penalty period. The amounts can be calculated so that Medicaid coverage will take effect about the time the retained funds run out.

The Bush administration has proposed to make such transfers more difficult to carry out.

Other government strategies for countering asset shifts include attempts to recover a portion of nursing home expenses from a person’s estate.

Currently, states can seek such recoveries, yet in total the states recover less than 1% of what they contribute to Medicaid nursing home coverage. Arizona and Oregon are exceptions, recovering 10% and 5% of their costs, respectively.

Now, however, there seems to be a consensus among the nation’s governors that new action is needed. The National Governors Assn. has endorsed Bush’s proposal, though governors favor a carrot-and-stick approach that would not solely rely on increased penalties.

For example, the governors want to allow the use of untapped home equity, currently excluded from Medicaid calculations, to help pay the cost of nursing home care.

Individuals would be encouraged to take out reverse mortgages to pay for long-term care. In exchange they would be able to shelter $50,000 -- indexed for inflation -- without incurring penalties. With a reverse mortgage, a homeowner can draw money from a bank that will be repaid when the house is sold.

The governors are also calling for more widespread use of long-term care insurance.

“Now what we have is an all-or-nothing system,” Virginia Gov. Mark R. Warner, a Democrat and the NGA chairman, said recently. “We encourage people to game the system.”

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Limited means

Most elderly Americans don’t have enough assets to pay for even one year in a nursing facility.

Can pay for less than a year in nursing facility: 65%

Can pay for 3 years or more: 19%

Can pay for 1 to 3 years: 16%

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Note: Based on a cost of $70,000 for one year

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Source: Kaiser Commission on Medicaid and the Uninsured