Changes to Federal Medicaid Policies

On February 8, 2006 President Bush signed into law the Deficit Reduction Act of 2005, referred to as DEFRA 2005. The act is several hundred pages long; about 10 of those pages make substantial changes to current Medicaid rules and policy regarding coverage of nursing home expense.

Prior to this law, the period of time called the lookback period was 3 years. The lookback period is the length of time prior to a person’s application for Medicaid during which they may have made transfers (for less than fair market value) of any assets. This information is requested on the Medicaid application form. Transfers made before this time were not considered.

The new lookback period is 5 years. Any transfers during the lookback period need to be disclosed and it is posible that they could create a period of ineligibility for Medicaid. Under the old law the number of months of penalty (arrived at by dividing the average monthly cost of a nursing home into the amount transferred) began at the time of the transfer. In many cases, if the transfer occurred several months before, the penalty period may have already gone by.

But the new law makes a significant change. The penalty period now begins running from the date the person is “otherwise eligible,” i.e. when they apply for Medicaid and are determined to be eligible. Thus, transfers made during the previous 5 years may make a new applicant for Medicaid ineligible for a number of months from the date they apply. Any transfers will be lumped together to determine the penalty, another change in the law recently enacted.

The new law also makes changes in how annuities are treated and severely restricts their use as an asset protection device. Now, the state requires that when a person applies for Medicaid they must agree to name the state as the remainder beneficiary on any annuity they own.

Under the changes brought about by DEFRA, a Medicaid applicant’s homestead is still an exempt asset, which means they can continue to own it without affecting their eligibility for Medicaid. However, the new law does not exempt equity in a home over $500,000; and states may raise this to $750,000.

At the time of this writing, it is not known which figure Michigan will chose. Most people who receive Medicaid benefits will not be affected by this change and will be able to continue to keep their home, and pass it on as an inheritance to family members. Thus far Michigan has not passed legislation for estate recovery, i.e. to allow the state to be reimbursed for any Medicaid assistance it has provided, from a deceased person’s estate.

There is still uncertainty about how this will exactly affect the Medicaid rules in Michigan.