Cutting Through Medicaid Myths

It's perhaps unfortunate that the federal government chose two such similar names, Medicare and Medicaid, for two completely different programs. Confusion has reigned ever since.

For instance, a study by Medicare a few years ago found that many people reaching age 65 assumed that Medicare would pay for their long-term care, such as a nursing home. "They were shocked to find out that wasn't covered," reports Bernard Krooks, a Manhattan attorney and president of the National Academy of Elder Law Attorneys (www.naela.org). "There's a big misconception out there." Indeed, it's just one of many.

Medicare pays for short-term nursing home care only following a hospital stay. Long-term care falls under Medicaid, a federal program funded jointly by the federal and state governments. Because nursing home costs vary widely across the country, each state has its own Medicaid eligibility rules. This leads to even more confusion about a topic most people would rather avoid thinking about at all.

But the question doesn't go away: How will you pay for long-term care, if you need it someday? Medicaid is only one answer. You could pay out of your own pocket or buy long-term care insurance. Of those options, Medicaid holds the least appeal. Assisted-living facilities, which allow more independence, seldom accept Medicaid patients. Also, not all nursing homes take Medicaid patients. Most do, but most also limit how many Medicaid patients they accept. You could face a long wait for the home you prefer, or end up in a facility farther away from family.

Know the rules

While Medicaid may be a last resort, it's the only choice for those who can't afford long-term care insurance premiums or nursing home costs, now averaging more than $60,000 a year. Those who likely will need Medicaid worry about whether they'll qualify, when the time comes.

Eligibility depends on your state's rules. Learn about these from your local or state Medicaid agency or long-term care ombudsman. To find out how to contact these offices, go to Eldercare Locator or call 800-677-1116. The American Public Human Services Association also provides links to each state's Medicaid information.

Generally, to qualify you must: Have $2,000 or less in assets, excluding your house, car, burial fund, and perhaps a few other assets. Apply your income, such as Social Security and pension income, toward paying for your care. Each state allows you to keep a small monthly allowance of at least $30 for personal use; some states allow slightly more.

Elders cringe at these requirements, envisioning themselves reduced to poverty before they can get help from Medicaid. That's another misconception about this program, says Ruth Phelps, an elder law attorney in Pasadena, Calif. Take, for instance, an elderly couple with $25,000 in savings. He's 85 and needs nursing home care; she's 82 and is wearing herself out trying to care for him at home because they don't want to deplete their life savings by paying for a nursing home.

"They've heard you have to spend down to $2,000," Phelps explains, "so they're scared to death they'll have to spend most of their $25,000. They don't know that they're eligible for Medicaid right now. They could be rid of this crushing burden."

Medicaid has rules, again varying by state, to prevent spousal impoverishment. Federal guidelines say a spouse may retain monthly income of at least $1,451 for his or her own use. States can boost that as high as $2,232 per month, the federal upper limit. Also, the spouse can keep assets of at least $17,856, up to $89,280, again varying by state. That's in addition to such assets as your home, car, and burial expenses. What's more, Phelps notes, advance planning can protect even more assets, beyond your state's maximum.

Planning can prevent heartache

If you have no surviving spouse, protecting and spending down assets becomes more complicated. "But it's never too late to plan," Krooks emphasizes. "And it's always better to plan early, rather than later ... In every state there are planning steps you can take that will protect a portion of your assets." That's true, he adds, even if your entry into a nursing home is imminent. But planning early lets you protect more of your assets.

You can, for instance, give away assets, within strict guidelines. When you apply for Medicaid, the state has the right to look at your financial statements to see what assets you've given away in the previous three years. This is commonly known as the look-back rule. If you've transferred assets to a trust, the look-back period expands to five years.

Here again, misinformation abounds, experts say. Elders think if they've given away any assets in the previous three (or five) years, they're doomed to be ineligible for Medicaid.

In fact, your gifts will affect your eligibility, but not for as long as you may fear. Say you gave your children $50,000 during the past three years, and you live in a state where a month in a nursing home costs $5,000. The state figures you could have used that $50,000 to pay for 10 months of care, so you're declared ineligible for Medicaid for 10 months, calculated from the time you gave the gift (some states, however, have begun to start ineligibility from the date of application for Medicaid).

But even if you give away the money on the same day you apply for Medicaid, as long as you preserve at least another $50,000 for your own use, you'll have enough to cover those 10 months. In other words, if you give away half or less of your assets, you'll always have enough to cover whatever time you're ineligible. "But that doesn't mean the best you can do is save half your assets," Krooks notes. "If you plan early enough, you can retain control over more of your assets."

Still, experts caution against giving away your money. "My advice is that people should hang onto their money," Phelps says, "because it represents the ability to have choices. Your children might say they'll hang onto it for you and give it back if you need it. But that doesn't always work. Their boiler goes or their car dies, and there goes your money."

Perhaps you're hoping to leave your house to your heirs. As noted earlier, this asset isn't counted in weighing your Medicaid eligibility. The state can't make you sell your home while you're alive to pay for nursing home costs, as long as there's a chance you may return to your home, or have a living spouse or dependents.

Once you die, however, and your house becomes part of your estate, the state can place a lien on your home to recover what it spent on your nursing home care. But again, proper advance planning can assure that your home will go to your heirs.

Get expert advice

The actions you can take to spend down, transfer, or retain control over assets while safeguarding your Medicaid eligibility vary greatly from state to state. You might be able to buy a house, purchase an annuity, set up an irrevocable trust, to name a few possibilities.

The rules are complex, so see an elder law attorney or other adviser who specializes in this area. Be sure that person knows the Medicaid rules for the state in which you will be seeking nursing home care, which may differ from where you currently live.

"Find someone who can tell you what choices you have," Phelps advises. "Once people know that, they can relax. They know there is a safety net out there."

Published December 16, 2002