Background

To be eligible for Medicaid, individuals must be within certain eligibility  categories, such as children or those who are aged or disabled. In addition,  individuals must meet financial eligibility criteria, which are based on  individuals’ assets—income and resources together. Once eligible for  Medicaid, individuals can receive basic health and long-term care services,  as outlined by each state and subject to minimum federal requirements.  Long-term care includes many types of services needed when a person has  a physical disability, a mental disability, or both. Individuals needing long- term care have varying degrees of difficulty in performing some ADLs and  instrumental activities of daily living (IADL).

		Medicaid Coverage for Long-Term Care

Medicaid coverage for long-term care services is most often provided to  individuals who are aged or disabled. Within broad federal standards,  states determine the need for long-term care services by assessing  limitations in an applicant’s ability to carry out ADLs and IADLs. Most  individuals requiring Medicaid long-term care services have become  eligible for Medicaid in one of three ways: (1) through participation in the  Supplemental Security Income (SSI) program, (2) by incurring medical  costs that reduce their income and qualify them for Medicaid, or (3) by  having long-term care needs that require nursing home or other  institutional care.
The SSI program provides cash assistance to aged, blind, or disabled  individuals with limited income and resources. Those who are enrolled in  SSI generally are eligible for Medicaid.  Individuals who incur high medical costs may “spend down” into Medicaid  eligibility because these expenses are deducted from their countable  income. Spending down may bring their income below the state- determined income eligibility limit. Such individuals are referred to as  “medically needy.” As of 2000, 36 states had a medically needy option,  although not all of these states extended this option to the aged and  disabled or to those needing nursing home care.  Individuals can qualify for Medicaid if they reside in nursing facilities or  other institutions in states that have elected to establish a special income  level under which individuals with incomes up to 300 percent of the SSI  benefit ($1,737 per month in 2005) are Medicaid-eligible. Individuals  eligible under this option must apply all of their income, except for a small  personal needs allowance, toward the cost of nursing home care. The  National Association of State Medicaid Directors reported that, as of 2003,  at least 38 states had elected this option.
SSI policy serves as the basis for Medicaid policy on the characterization  of assets—income and resources. Income is something, paid either in cash  or in-kind, received during a calendar month that is used or could be used  to meet food, clothing, or shelter needs; resources are cash or things that  are owned that can be converted to cash. (Table 1 provides examples of  different types of assets.) States can decide, within federal standards,  which assets are countable or not. For example, states may disregard  certain types or amounts of income and may elect not to count certain  resources.
In most states, to be financially eligible for Medicaid long-term care  services, an individual must have $2,000 or less in countable resources  ($3,000 for a couple). However, specific income and resource standards  vary by eligibility category (see table 2).

		Spousal Impoverishment Protections

The Medicaid statute requires states to use specific income and resource  standards in determining eligibility when one spouse is in an institution,  such as a nursing home, and the other remains in the community (referred  to as the “community spouse”). This enables the institutionalized spouse  to become Medicaid-eligible while leaving the community spouse with  sufficient assets to avoid hardship.
Resources. The community spouse may retain an amount equal to one- half of the couple’s combined countable resources, up to a state-specified  maximum resource level. If one-half of the couple’s combined countable  resources is less than a state-specified minimum resource level, then the  community spouse may retain resources up to the minimum level. The  amount that the community spouse is allowed to retain is generally  referred to as the community spouse resource allowance.
Income. The community spouse is allowed to retain all of his or her own  income. States establish a minimum amount of income—the minimum  monthly maintenance needs allowance (for this report we will refer to it as  the minimum needs allowance)—that a community spouse is entitled to  retain. The amount must be within a federal minimum and maximum  standard. If the community spouse’s income is less than the minimum  needs allowance, then the shortfall can be made up in one of two ways: by  transferring income from the institutionalized spouse (called the “income- first” approach) or by allowing the community spouse to keep resources  above the community spouse resource allowance, so that the additional  funds can be invested to generate more income (the “resource-first”  approach).

		Transfers of Assets under Medicaid

Federal law limits Medicaid payments for long-term care services for  persons who dispose of assets for less than fair market value within a  specified time period to satisfy financial eligibility requirements. As a  result, when an individual applies for Medicaid coverage for long-term  care, states conduct a review, or “look-back,” to determine whether the  applicant (or his or her spouse, if married) transferred assets to another  person or party and, if so, whether the transfer was for less than fair  market value. Generally, the look-back period is 36 months. If an asset  transfer for less than fair market value is detected, the individual is  ineligible for Medicaid long-term care coverage for a period of time, called  the penalty period. The penalty period is calculated by dividing the dollar  amount of the assets transferred by the average monthly private-pay rate  for nursing home care in the state (or the community, at the option of the  state). For example, if an individual transferred $100,000 in assets, and  private facility costs averaged $5,000 per month in the state, the penalty  period would be 20 months. The penalty period begins at approximately  the date of the asset transfer. As a result, some individuals’ penalty  periods have already expired by the time they apply for Medicaid long- term care coverage, and therefore they are eligible when they apply.
Federal law exempts certain transfers from the penalty provisions.  Exemptions include transfers of assets to the individual’s spouse, another  individual for the spouse’s sole benefit, or a disabled child. Additional  exemptions from the penalty provisions include the transfer of a home to  an individual’s spouse, or minor or disabled child; a sibling residing in the  home who meets certain conditions; or an adult child residing in the home  who has been caring for the individual for a specified time period.  Transfers do not result in a penalty if the individual can show that the  transfer was made exclusively for purposes other than qualifying for  Medicaid. Additionally, a penalty would not be applied if the state  determined that it would result in an undue hardship, that is, it would  deprive the individual of (1) medical care such that the individual’s health  or life would be endangered or (2) food, clothing, shelter, or other  necessities of life.

	Asset Levels and Extent of Cash Transfers Varied Depending on Demographic Factors

Elderly households’ asset levels varied on the basis of level of disability,  marital status, and gender; additionally, the extent to which elderly  households transferred cash varied with the level of household assets and  these same demographic factors. In general, disabled elderly households  had lower asset levels than nondisabled elderly households, and the asset  levels decreased as the level of disability increased. Elderly couples made  up 46 percent of elderly households and had higher levels of assets than  single elderly; single elderly females, who made up 41 percent of elderly  households, generally had lower assets than single elderly males, who  made up 13 percent of elderly households. For all elderly households, the  higher their asset levels, the more likely they were to have reported  transferring cash to another individual. Elderly households with both  incomes and nonhousing resources above the elderly household median  were responsible for over one-half of all transfers made. Overall, severely  disabled elderly households—those reporting three or more limitations in  ADLs—were less likely to transfer cash than nondisabled elderly  households. Single individuals were less likely to transfer cash than  couples, and single males had a higher likelihood of transferring cash than  single females.

		Greatest Proportion of Elderly Had Incomes of $50,000 or Less and Nonhousing Resources below $100,000

According to data from the 2002 HRS, total income for the nation’s  approximately 28 million elderly households was $1.1 trillion and total  nonhousing resources were $6.6 trillion. Approximately 80 percent of  elderly households had annual incomes of $50,000 or less. (See fig. 1.) The  median annual income for all elderly households was $24,200 and ranged  from $0 to $1,461,800.
About half of all elderly households had nonhousing resources of $50,000  or less, while almost 20 percent had nonhousing resources greater than  $300,000. (See fig. 2.) For all elderly households, median nonhousing  resources were $51,500 and ranged from less than zero to $41,170,000. In  terms of total resources, elderly households had median total resources of  $150,000, ranging from less than zero to $41,640,000, and a primary  residence with a median net value of $70,000, ranging from less than zero  to $20,000,000.

		Elderly Households’ Level of Assets Varied Depending on Level of Disability, Marital Status, and Gender

Disabled elderly households—which are at higher risk of needing long- term care—had lower levels of assets than nondisabled elderly  households. Generally, as the level of disability increased, the level of  assets decreased. Severely disabled elderly households, which made up  about 6 percent of total elderly households, had significantly lower median  income ($13,200) and median nonhousing resources ($3,200) compared  with all elderly households ($24,200 and $51,500, respectively). (See fig. 3.)
Elderly couples, which made up approximately 46 percent of elderly  households, had higher levels of assets than single elderly individuals. Of  the single elderly, males, who made up approximately 13 percent of elderly  households, were generally likely to be better off financially than females,  who made up approximately 41 percent of elderly households. (See fig. 4.)

		Likelihood of Cash Transfers and Amount Transferred Varied by Level of Assets

The likelihood that elderly households transferred cash and the amounts  they transferred varied with the level of assets held and demographic  characteristics, such as the level of disability, marital status, and gender.  Approximately 6 million, or about 22 percent, of all elderly households  reported transferring cash during the 2 years prior to the HRS survey.  Almost all of these cash transfers were made to children or stepchildren.  Of the elderly households that transferred cash, the median income was  $37,000 and ranged from $0 to $725,600; median nonhousing resources  were $128,000 and ranged from less than zero to $12,535,000. Generally,  elderly households with higher asset levels were more likely to have  transferred cash than households with lower asset levels (see fig. 5).
Of the 22 percent of elderly households that reported having transferred  cash in the 2 years prior to the survey, nondisabled elderly households and  couples were most likely to do so. Among disabled elderly households,  severely disabled households were the least likely to transfer cash. With  regard to the amounts transferred, among single elderly individuals, males  were more likely to transfer larger amounts of cash than females, with  median cash transfer amounts of $4,500 and $3,000, respectively. (See  table 3.)
Transfers of cash were also more likely to occur in households with higher  income and resource levels. Elderly households with both income and  resources above the median—approximately 37 percent of all elderly  households—were the most likely to transfer cash. In contrast, elderly  households with both income and resources at or below the median were  the least likely to transfer cash. With regard to amounts of cash  transferred, the median amounts transferred for elderly households with  both income and resources above the median were twice as high ($4,000)  as those for elderly households with both income and resources at or  below the median ($2,000). (Table 4 shows the cash transferred by elderly  households in relation to the median income and resource levels.)

	Methods of Reducing Assets May Not Result in a Penalty Period

Methods elderly individuals use to reduce their countable assets do not  always result in a penalty period. Reducing debt and making purchases,  such as for home modifications, for example, do not result in a penalty  period and thus would not lead to delays in Medicaid eligibility for long- term care coverage. Other methods, however, could result in a penalty  period, depending on the specific arrangements made and the policies of  the individual state. For example, giving away assets as a gift generally  results in the imposition of a penalty period, but giving away assets valued  at less than the average monthly private-pay rate for nursing home care  may not, depending, in part, on whether the state imposes partial-month  penalties.

		Some Asset Reduction Methods Do Not Delay Medicaid Eligibility

Some methods individuals use to reduce their countable assets do not  result in a penalty period and thus would not lead to delays in eligibility  for Medicaid long-term care coverage. According to several elder law  attorneys and some state officials we contacted, one of the first methods  Medicaid applicants use to reduce assets is to spend their money, often by  paying off existing debt, such as a mortgage or credit card bills, or by  making purchases. When such purchases and payments convert a  countable resource, such as money in the bank, to noncountable  resources, such as household goods, they effectively reduce the assets that  are counted when determining Medicaid eligibility. Common purchases  mentioned included renovating a home to make it more accessible for  persons with disabilities, repairing or replacing items such as a roof or  carpeting, prepaying burial arrangements, buying a home, or having dental  work done. Elder law attorneys explained that once individuals are  Medicaid-eligible, they and their families will have limited means.  Therefore, they advise these individuals to update, renovate, repair, or  replace old or deteriorating items such as homes and cars to reduce the  need for maintenance and repairs in the future. No penalty is associated  with paying a debt or making a purchase as long as the individual receives  something of roughly the same value in return.
Another method married individuals use that does not result in a penalty  period is seeking to raise the community spouse’s resource allowance  above a state’s maximum level, which reduces the amount of income or  resources considered available to the spouse applying for Medicaid  coverage. States establish, under federal guidelines, a maximum amount  of resources that a community spouse is allowed to retain. In general, the  remaining resources are deemed available to be used to pay for the  institutionalized spouse’s long-term care needs. In addition, if the  community spouse’s income is less than the state’s minimum needs  allowance, the state can choose to make up the shortfall by   (1) transferring income from the institutionalized spouse or (2) allowing  the community spouse to keep resources above the resource allowance so  that the additional funds can be invested to generate more income. Under  the latter approach, the community spouse may be able to retain a  significant amount of resources in order to yield the allowable amount of  income. For example, a community spouse might ask to retain a savings  account with $300,000 and an annual interest rate of 2 percent that would  yield an additional $500 in income per month.

		Other Methods to Reduce Assets Could Delay Medicaid Coverage for Long-Term Care Services

Some of the other methods elderly individuals use to reduce their  countable assets could result in a penalty period and thus could delay  Medicaid coverage for long-term care services, according to the elder law  attorneys and state and federal officials we contacted. Whether or not an  asset reduction method results in a penalty period depends on the specific  arrangements made and the policies of the state. Therefore, the extent to  which each of the following methods is used is likely to vary by state.
Gifts. Under this method, an individual gives some or all assets to another  individual as a gift, for example, by giving his or her children a cash gift.  Although this is probably the simplest method to reduce assets, some elder  law attorneys told us that this method would be one of the last things a  person would want to do. Not only would the individual lose control of his  or her assets, but giving a gift would likely be a transfer for less than fair  market value and therefore result in a penalty period. As with other asset  transfers, if individuals can prove that they gave away their assets  exclusively for a purpose other than qualifying for Medicaid long-term care  coverage, or if the transfer is to a spouse or a disabled child, then there  would be no penalty. Additionally, if a state treats each transfer as a  separate event and does not impose penalty periods for time periods  shorter than 1 month, then transfers for amounts less than the average  monthly private-pay rate for nursing home care in that state do not result  in a penalty period. Because the penalty period begins at approximately  the date of asset transfer, individuals that meet Medicaid income eligibility  requirements can give away about half of their resources and use their  remaining resources to pay privately for long-term care during which time  any penalty period would expire. This is often referred to as the “half a  loaf” strategy because it preserves at least half of the individual’s  resources.
Financial Instruments. Some financial instruments, namely annuities  and trusts, have been used to reduce countable assets to enable  individuals to qualify for Medicaid. Annuities, which pay a regular income  stream over a defined period of time in return for an initial payment of  principal, may be purchased to provide a source of income for retirement.  According to a survey of state Medicaid offices, annuities have become a  common method for individuals to reduce countable resources for the  purpose of becoming eligible for Medicaid because they are used to  convert countable resources, such as money in the bank, to a resource  that is not counted, and a stream of income. If converting the resource to  an annuity results in individuals’ having countable resources below the  state’s financial eligibility requirements, then these individuals can become  eligible for Medicaid if their income, including the income stream from the  annuity, is within the Medicaid income requirements for the state in which  they live. Married individuals can use their joint resources to purchase an  annuity for the sole benefit of the community spouse. Since a community  spouse’s income is not counted in a Medicaid eligibility determination, an  annuity effectively reduces the countable assets of the applicant. Annuities  must be actuarially sound—that is, the expected return on the annuity  must be commensurate with the reasonable life expectancy of the  beneficiary—or they are considered a transfer of assets for less than fair  market value and result in a penalty. Trusts are arrangements in which a  grantor transfers property to a trustee with the intention that it be held,  managed, or administered by the trustee for the benefit of the grantor or  certain designated individuals. The use of trusts as a method of gaining  Medicaid eligibility for long-term care services was addressed in 1993  legislation. The law and associated CMS guidance indicate how assets  held in a trust, as well as the income generated by a trust, are to be  counted in the Medicaid eligibility process. According to CMS, since this  legislation was enacted, the use of trusts as a Medicaid asset reduction  method has declined.
Transfer of Property Ownership. Medicaid allows individuals to  transfer ownership of their home, without penalty, to certain relatives,  including a spouse or a minor child (under age 21). Other transfers of a  home or other property within the look-back period may result in a  penalty period if they were for less than fair market value. For example,  individuals might transfer ownership of their home while retaining a “life  estate,” which would give them the right to possess and use the property  for the duration of their lives. According to the CMS State Medicaid  Manual, this would be a transfer for less than fair market value and thus  would result in a penalty period.
Personal Services Contract or Care Agreement. Personal services  contracts or care agreements are arrangements in which an individual  pays another person, often an adult child, to provide certain services.  Based on CMS guidance, relatives can be legitimately paid for care they  provide, but there is a presumption that services provided without charge  at the time they were rendered were intended to be provided without  compensation. Under this presumption, payments provided for services in  the past would result in a penalty period.    “Just Say No” Method. Under this method, the institutionalized spouse  transfers all assets to the community spouse, which is permitted under the  law. The community spouse then refuses to make any assets available to  support the institutionalized spouse and retains all of the couple’s assets.  In turn, the institutionalized spouse may seek Medicaid coverage for long- term care. Whether this method results in a delay in Medicaid coverage  for long-term care services depends on the policies of the individual state.
Promissory Notes. A promissory note is a written, unconditional  agreement, usually given in return for goods, money loaned, or services  rendered, whereby one party promises to pay a certain sum of money at a  specified time (or on demand) to another party. According to CMS and  state officials, some individuals have given assets to their children in  return for a promissory note as a means to reduce their countable assets.  For example, we were told of a case in which a mother gave her daughter  money in return for a promissory note with a schedule for repayments.  Although the note was scheduled to be repaid during the mother’s  expected lifetime, the payment arrangements called for the child to repay  only the interest until the final payment, when the entire principal was  due. Additionally, each month the mother forgave a portion of the note  that equaled slightly less than the average monthly nursing home cost.  Whether promissory notes result in a delay in Medicaid coverage for long- term care would depend on the specific details of the note and the policies  of the state.

	States Could Not Identify the Extent to Which Individuals Transferred Assets

None of the nine states we reviewed systematically tracked or analyzed  data that would provide information on the incidence of asset transfers  and the extent to which penalties were applied in their states. Nationwide,  all states requested information about applicants’ assets, including  transfers of assets, through Medicaid application forms, interviews to  determine Medicaid eligibility, or both. The nine states we reviewed  generally relied on applicants’ self-reporting of financial information and  varied in the amount of documentation they required and in the extent to  which they verified the assets reported. According to officials in these  states, transfers that were not reported by applicants were difficult to  identify.

		States Reviewed Did Not Systematically Track and Analyze Applicants’ Transfers of Assets

Although officials from the nine states reviewed reported that some  individuals transferred assets for purposes of qualifying for Medicaid,  these states did not systematically track and analyze data on the incidence  of asset transfers or associated penalties. As a result, the states could not  quantify the number of people who transferred assets, the assets  transferred, or the penalties applied as a result of transfers for less than  fair market value. Officials in four of the nine states informed us that they  had computer-based systems for recording applicant information,  including data on penalties that resulted in a delay in Medicaid eligibility  but they did not regularly analyze these data and thus did not have  information available on the number of applicants who transferred assets.  One of these states—Hawaii—was able to determine that there were no  individuals serving a penalty at the time of our interview. However,  because the state’s system only kept data on applicants currently serving a  penalty, the state could not provide us with data on the number of people  who had served penalties in the past. One state—Montana—that did not  report having a computer-based application system, did report collecting  several months of data on asset transfers from its counties in the fall of  2004, but a state official told us that as of mid-July 2005, the data had not  been analyzed.
Although states could not systematically track and analyze asset transfers,  state officials were familiar with and had observed different methods that  elderly individuals used to transfer assets in their states. For example,  state officials frequently identified cash gifts as the most common method  used to reduce the amount of countable assets. Some states had taken  steps to try to deter the use of financial instruments, such as annuities. For  example, two states reporting changing their laws to expand the  circumstances under which annuities are counted as available resources  for purposes of determining Medicaid eligibility for long-term care.
Similarly, some states have tried to deter the use of the “Just Say No”  method by pursuing financial support from the community spouse or by  requiring the institutionalized spouse to take the community spouse to  court to recover his or her share of the assets.
Some officials commented that as states took actions to identify and  prevent methods used to make transfers in order to become eligible for  Medicaid long-term care coverage, new ways emerged to make transfers  for this purpose that are permitted under the law. For example, one state  took action to try to deter multiple small transfers by adding the amount of  the transfers together, under certain circumstances, for purposes of  calculating the penalty period. According to this state’s officials,  however, some attorneys had advised their clients to transfer very small  amounts of money in consecutive months and make one final transfer of a  significant amount before applying for Medicaid. Under the state’s policy,  these transfers are added together and the penalty period begins at the  month of the first transfer, as opposed to the month of the final transfer.  As a result, some or all of the penalty period may have expired by the time  the applicant applies for Medicaid long-term care coverage.

		Nationwide, States Request Information on Assets and Transfers of Assets as Part of the Medicaid Application Process

Nationwide, states used the application process—application forms,  interviews, or both—to determine the level of assets held by Medicaid  applicants and whether applicants transferred assets. Applications in 38  states requested comprehensive information about assets—for example,  by requiring applicants to respond to questions regarding whether they  had certain types of assets, such as checking accounts or real estate.  Another 7 states’ applications requested general information about  applicants’ assets, and the remaining 6 states reported relying on the  interview process to collect information on assets. Thirty states required  in-person or telephone interviews with either the applicant or an  applicant’s appointed representative. Table 5 summarizes states’  application processes. (See app. III for more details on the application  processes in each state.)
Medicaid application forms in 44 states asked applicants to report whether  they had transferred assets. Eleven of the 44 states’ applications asked  whether applicants had transferred assets in the past 36 months, the  required look-back period for most assets; 13 asked applicants whether  they had transferred assets in the past 60 months, the required look-back  period for trusts; and 17 did both. Of the applications in the remaining 3  states, 1 asked about assets ever transferred; 1 asked applicants to report  any transfers, including the date of the transfer, on a separate form; and 1  asked about transfers in the prior 30 months. (See app. IV for details on  the characteristics of Medicaid application questions related to transfers  of assets in each state.) Although the 7 remaining states did not have a  question about transfers on their applications, they all required interviews  as part of the application process.

		Nine States’ Identification of Asset Transfers Predominately Relied on Applicant Reporting

The nine states we reviewed generally relied on the information applicants  reported during the application process—the application, supporting  documentation, and interviews—to identify transfers of assets. The states  generally required applicants to submit documentation of their assets as  part of the application process (see table 6). The type of documentation  required varied by type of asset. For example, for trusts, annuities, and life  insurance, states generally required a copy of the agreement or policy; for  real estate, states generally required a copy of the deed or documentation  of the value from a tax assessment or broker. For more liquid assets, such  as checking and savings accounts, four of the nine states contacted  reported requiring a copy of 1 month’s statements. However, the remaining  five states reported requiring or collecting documentation for longer  periods of time ranging from 3 months to 3 years. For example, Florida  generally collected at least 3 months of bank statements from individuals  seeking nursing home coverage, South Carolina required applicants to  submit a total of 14 months of statements covering points in time over a 3- year period, and Montana generally collected bank statements dating back  3 years.
To verify applicants’ assets, the nine states used other information  sources, to varying degrees, in addition to the documentation provided by  applicants. Generally, states were more likely to verify information related  to possible income sources for applicants, such as the Social Security  Administration and unemployment offices, than for data sources on  possible resources, such as motor vehicle departments and county  assessor offices. For example, seven of the nine states reported using  information from an Income and Eligibility Verification System (IEVS), a  system that matches applicant-reported income information with data  from the Internal Revenue Service, the Social Security Administration, and  state wage reports and unemployment benefits, for all or almost all of their  applicants. In contrast, five of the nine states used information from  county assessor offices that provide information on property taxes and  thus property ownership, and four of these states used this source to  verify resources for half of their Medicaid applicants or less. (See table 7  for the proportion of applicants for which the nine states used specific  sources to verify applicants’ assets.)
Regarding transfers of assets, the nine states asked on their Medicaid  application forms, in interviews, or both, whether applicants had  transferred assets. Officials from the nine states indicated that transfers  that are not reported by applicants or a third party are generally difficult to  identify. Three of the nine states did not have a process to identify  unreported transfers. The remaining six states generally relied on certain  indicators from applicants’ asset documentation, the states’ asset  verification data, case worker interviews, or a combination of these  factors to try to identify unreported transfers. Following are two examples  of how states used these indicators:    South Carolina asked for the previous 12 months of bank statements and  also asked for statements from the 24th and 36th month preceding the  application. South Carolina officials reviewed these bank statements to  ascertain whether there had been large reductions in the amount of money  in the account over the past 3 years. If a large reduction was detected, the  state would ask the applicant for information regarding the use of the  money.
Ohio officials told us that the state generally relied on case workers’  experience to decide whether additional review was necessary, noting that  there are certain indications that a transfer might have occurred, which  would prompt additional review of the application. Examples include the  opening of a new bank account, an applicant who is living beyond his or  her means, and an applicant who recently sold his or her house but reports  having no resources.

	CMS Provides Guidance on Transfers of Assets through the State Medicaid Manual and in Response to Specific Questions from States

To help states comply with requirements related to asset transfers and  Medicaid, CMS has issued guidance primarily through the State Medicaid  Manual. The agency has also provided technical assistance, through its  regional offices, to individual states in response to their questions;  communicated to states through conferences; and funded a special study  on the use of annuities to shelter assets. Officials from the majority of CMS  regional offices and the nine states we contacted indicated that some  additional guidance, such as on the use of financial instruments, would be  helpful. CMS officials, however, noted that it would be difficult to issue  guidance that would be applicable in all situations given the constantly  changing methods used to transfer assets.
In response to provisions in the Omnibus Budget Reconciliation Act of  1993, CMS updated the State Medicaid Manual in 1994 to include  provisions relating to transfers of assets, including the treatment of trusts.  The portion of the manual relating to asset transfers and trusts generally  includes definitions of relevant terms, such as assets, income, and  resources; information on look-back periods; penalty periods and  penalties for transfers of less than fair market value; exceptions to the  application of such penalties; and spousal impoverishment provisions. The  portion of the manual regarding trusts includes other definitions relating  specifically to trusts, provisions on the treatment of the different types of  trusts (such as revocable and irrevocable), and exceptions to the  specified treatment of trusts. CMS is in the process of revising certain  policies in the manual related to funeral and burial arrangements. CMS  officials were not able to provide a date for when revisions to the manual  would be completed and stated that they did not anticipate any major  revisions to the asset transfer provisions in the Medicaid manual.
CMS has provided additional guidance to states about asset transfers  through conferences and one special study:    Conferences. CMS officials reported providing states with information on  asset transfer issues at its annual Medicaid eligibility conference. At this  conference, issues regarding transfers of assets have been discussed as a  formal agenda item, in panels on state experiences, or in question and  answer sessions.
Special study. In 2005, the agency released a report that examined the  use of annuities as a means for individuals to shelter assets to become  Medicaid-eligible. While this study did not identify a universal  recommendation for the policy on annuity use or determine the extent to  which the use of annuities is growing or declining, it suggested that  annuities established for the purpose of becoming Medicaid-eligible do  lead to additional costs for federal and state governments in that  individuals may shift assets from countable resources into a resource that  is not counted, and into a stream of income. In some cases, the use of  annuities results in individuals qualifying for Medicaid more quickly. Using  the estimated cost of annuities to Medicaid from a sample of five states  and an examination of policies regarding annuities in all states, the study  estimated that annuities cost the Medicaid program almost $200 million  annually.
Officials from CMS’s regional offices informed us that they provided  technical assistance on asset transfer issues to 29 states over the past year.  The types of technical assistance provided to these states ranged from  confirming existing Medicaid policy to advising them on ways to address  specific asset transfer methods. When asked for examples of the specific  issues for which states sought technical assistance, officials in seven  regional offices said they had responded to states’ questions about  annuities. Other issues for which states requested technical assistance  included the treatment of trusts, the policy on spousal impoverishment,  and promissory notes.
Officials from the majority of CMS regional offices noted that the states in  their regions could benefit from additional guidance. Additionally, the  majority of states we contacted concurred that guidance related to  transfers of assets would be helpful. These states and regional office  officials indicated a need for more guidance on topics such as annuities,  trusts, and the relationship between asset divestment and spousal  impoverishment. CMS central office officials said that the agency faces  challenges in issuing guidance that would be applicable to all situations  given the constantly changing methods individuals use to transfer assets in  a manner that avoids the imposition of a penalty period. CMS officials said  that states’ efforts to identify and address asset transfer issues are  constantly changing, as methods for reducing countable assets are  identified, increase in use, and then diminish. For example, CMS officials  cited the use of personal care agreements, where the individual applying  for Medicaid long-term care coverage hires a family member to perform  services, as a practice that at one time was frequently used to transfer  assets. In some cases, these agreements paid exorbitant fees for the  services provided, and CMS officials provided technical assistance to  states to help them limit the use of such agreements, at which point the  practice diminished in use. CMS officials maintain that blanket guidance  from the agency cannot necessarily address all of the issues that states  face.

	Agency and State Comments

We provided CMS and the nine states in our sample an opportunity to  comment on a draft of this report. We received written comments from  CMS (see app. V). We also received technical comments from CMS and  eight of the nine states, which we incorporated as appropriate.
CMS noted that the Medicaid program will only be sustainable if its  resources are not drained to provide health care assistance to those with  substantial ability to contribute to the costs of their own care. CMS  acknowledged, however, the difficulty of gathering data on the extent and  cost of asset transfers to the Medicaid program. In particular, CMS  commented that the law is complex and that the techniques individuals  and attorneys devise to divest assets are ever-changing. CMS reiterated the  President’s budget proposal to tighten existing rules related to asset  transfers, and associated estimated savings, which we had noted in the  draft report. CMS further noted one limitation to our analysis that we had  disclosed in the draft report—that the HRS only addressed cash transfers  provided to relatives or other individuals. CMS commented that it believes  that substantial amounts of assets are sheltered by individuals who  transfer homes, stocks and bonds, and other noncash property. We agree  with CMS’s view that information on such noncash transfers would be  valuable, but as we noted in the draft report the HRS does not include  such data.
As agreed with your offices, unless you publicly announce its contents  earlier, we plan no further distribution of this report until 30 days after its  issue date. At that time, we will send copies of this report to the  Administrator of the Centers for Medicare & Medicaid Services. We will  also make copies available to others upon request. In addition, the report  will be available at no charge on the GAO Web site at http://www.gao.gov.
If you or your staffs have any questions about this report, please contact  me at (202) 512-7118 or allenk@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. GAO staff who made major contributions to this report are  listed in appendix VI.

Appendix I: Information about the Health and Retirement Study

The Health and Retirement Study (HRS) is a longitudinal national panel  survey of individuals over age 50 sponsored by the National Institute on  Aging and conducted by the University of Michigan. HRS includes  individuals who were not institutionalized at the time of the initial  interview and tracks these individuals over time, regardless of whether  they enter an institution. Researchers conducted the initial interviews in  1992 in respondents’ homes and conducted follow-up interviews over the  telephone every second year thereafter. HRS questions pertain to physical  and mental health status, insurance coverage, financial status, family  support systems, employment status, and retirement planning.
For this report, we used the most recent available HRS data (2002), for  which the data collection period was February 2002 through March 2003.  These data include information for over 18,000 Americans over the age of  50. We limited our analysis to data for households with at least one elderly  individual, which we defined as an individual aged 65 or older. Thus, the  data we used were from a sample of 10,942 individuals (8,379 households)  that represented a population of 28.1 million households.
From these data we estimated the nationwide level of assets held by  households with at least one elderly individual, the extent to which these  households transferred cash, and the amounts transferred. Our analysis  underestimates the extent to which elderly households transferred assets  and the amounts of assets transferred because the study data included  only cash transfers, not other types of transfers. HRS also did not assess  whether the transfers were related to individuals’ attempts to qualify for  Medicaid coverage for long-term care services.
To assess the reliability of the HRS data, we reviewed related  documentation regarding the survey and its method of administration, and  we conducted electronic data tests to determine whether there were  missing data or obvious errors. On this basis, we determined that the data  were sufficiently reliable for our purposes.

Appendix II: Methodology for Selecting Sample States

To select a sample of states to review in more detail regarding their  Medicaid eligibility determination practices, including the process for  identifying whether applicants had transferred assets, we assessed the  prevalence of five factors in each of the 51 states.  1.  The percentage of the population aged 65 and over, which we  determined using 2000 census data from the Census Bureau.  2.  The cost of a nursing home stay for a private room for a private-pay  patient based on data from a 2004 survey conducted for the MetLife  Company.  3.  The proportion of elderly (aged 65 and over) with incomes at or above  250 percent of the U.S. poverty level, which was based on information  from the Census Bureau using the 2000 and 2002 Current Population  Surveys.  4.  Medicaid nursing home expenditures as reported by states to CMS.  5.  The availability of legal services specifically to meet the needs of the  elderly and disabled, based on membership data from the National  Academy of Elder Law Attorneys.
For each factor, we ranked the states from low to high (1 to 51) and then  summed the five rankings for each state. On the basis of these sums, we  grouped the states into three clusters (low, medium, and high) using  natural breaks in the data as parameters (see table 8). We then selected  three states from each cluster using randomly generated numbers, for a  total sample of nine states.

Appendix III: Characteristics of Medicaid Long-Term Care Application Processes, by State

Appendix III: Characteristics of Medicaid  Long-Term Care Application Processes, by  State New York  The state had a brief application that did not ask about assets.
While the state asked applicants to respond to whether they had certain types of assets, the  application was limited with respect to the types of assets applicants were required to address. For  example, the application may have only asked about cash, bank accounts, life insurance, real  property, and “other.”
The state required interviews for applicants who the state deemed to have complex assets, including  those who reported transferring assets.
The state had applicants complete their application during the interview process with eligibility case  workers.

Appendix IV: Characteristics of Medicaid Long-Term Care Applications Related to Transfers of Assets, by State

Appendix IV: Characteristics of Medicaid  Long-Term Care Applications Related to  Transfers of Assets, by State North Carolina  The state’s application had a specific question about trusts that could be used to indicate whether  further review for a transfer of assets was necessary.
While the state’s application did not include specific questions regarding transfer of assets, it  included a separate form for the applicant to report any transfers of assets, including the date of such  transfers.
The state’s application asked about transfers within 30 months. Prior to the Omnibus Budget  Reconciliation Act of 1993, the federally mandated look-back period for transfers of assets was 30  months.
The state’s application did not ask about transfers of assets.
The state had applicants complete their application during the interview process with eligibility case  workers.
The state’s application asked if an applicant had ever transferred assets.

Appendix V: Comments from the Centers for Medicare & Medicaid Services

Appendix VI: GAO Contact and Staff Acknowledgments

	GAO Contact

	Acknowledgments

In addition to the contact named above Carolyn Yocom, Assistant  Director; JoAnn Martinez-Shriver; Kaycee Misiewicz; Elizabeth T.  Morrison; Michelle Rosenberg; Sara Sills; LaShonda Wilson; and Suzanne  M. Worth made key contributions to this report.

Summary:
Why GAO Did This Study

In fiscal year 2004, the Medicaid program financed about $93 billion for long-term care services. To qualify for Medicaid, individuals' assets (income and resources) must be below certain limits. Because long-term care services can be costly, those who pay privately may quickly deplete their assets and become eligible for Medicaid. In some cases, individuals might transfer assets to spouses or other family members to become financially eligible for Medicaid. Those who transfer assets for less than fair market value may be subject to a penalty period that can delay their eligibility for Medicaid. GAO was asked to provide data on transfers of assets. GAO reviewed (1) the level of assets held and transferred by the elderly, (2) methods used to transfer assets that may result in penalties, (3) how states determined financial eligibility for Medicaid long-term care, and (4) guidance the Centers for Medicare & Medicaid Services (CMS) has provided states regarding the treatment of asset transfers. GAO analyzed data on levels of assets and cash transfers made by the elderly from the 2002 Health and Retirement Study (HRS), a national panel survey; analyzed states' Medicaid applications; and interviewed officials from nine states about their eligibility determination processes.

What GAO Found

In 2002, over 80 percent of the approximately 28 million elderly households (those where at least one person was aged 65 or over) had annual incomes of $50,000 or less, and about one-half had nonhousing resources, which excluded the primary residence, of $50,000 or less. About 6 million elderly households (22 percent) reported transferring cash, with amounts that varied depending on the households' income and resource levels. In general, the higher the household's asset level, the more likely it was to have transferred cash during the 2 years prior to the HRS study. Overall, disabled elderly households--who are at higher risk of needing long-term care--were less likely to transfer cash than nondisabled elderly households. Certain methods to reduce assets, such as spending money to pay off debt or make home modifications, do not result in penalty periods. Other methods, such as giving gifts, transferring property ownership, and using certain financial instruments, could result in penalty periods, depending on state policy and the specific arrangements made. None of the nine states GAO contacted tracked or analyzed data on asset transfers or penalties applied. These states required applicants to provide documentation of assets but varied in the amount of documentation required and the extent to which they verified the assets reported. These states generally relied on applicants' self-reporting of transfers of assets, and officials from these states informed GAO that transfers not reported were difficult to identify. To help states comply with requirements related to asset transfers, CMS has issued guidance primarily through the State Medicaid Manual. CMS released a special study in 2005 to help states address the issue of using annuities as a means of sheltering assets. Additionally, CMS officials provide ongoing technical assistance in response to state questions, but noted the challenge of issuing guidance applicable to all situations given the constantly changing methods used to transfer assets in an attempt to avoid a penalty period. In commenting on a draft of this report, CMS noted the complexity of the current law and commented that data on the precise extent and cost of asset transfers to the Medicaid program have been difficult to gather.