Medicaid: Financial Characteristics of Approved Applicants and Methods Used to Reduce Assets to Qualify for Nursing Home Coverage
Published: 2014-05-22T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Medicaid paid for nearly one-third of the nation's $158 billion in nursing home expenditures in 2012. To be financially eligible for Medicaid, individuals cannot have assets above certain limits. Not all assets are countable in determining Medicaid eligibility; federal law discourages individuals from reducing their countable assets, for example by transferring them to family members, to qualify for Medicaid. Although Congress has acted multiple times to address financial eligibility requirements for Medicaid coverage of nursing home care, methods exist through which individuals, sometimes with the help of attorneys, can reduce their assets and qualify for Medicaid.
GAO was asked for information on the extent to which individuals may be using available methods to qualify for Medicaid coverage. GAO (1) examined financial characteristics of applicants approved for Medicaid nursing home coverage in selected states; (2) identified methods used to reduce countable assets to qualify for Medicaid; and (3) identified information eligibility workers consider the most useful in assessing applicants' financial eligibility. GAO analyzed a random, but nongeneralizeable, sample of Medicaid nursing home applications in two counties in each of three states (Florida, New York, and South Carolina), selected based on several factors including states' asset verification efforts and demographics. GAO also interviewed officials from the Centers for Medicare & Medicaid Services, state Medicaid officials, county-based Medicaid eligibility workers, and attorneys.
section_title: What GAO Found
paragraphs: GAO's review of 294 approved Medicaid nursing home applications in three states showed that 41 percent of applicants had total resources—both countable and not countable as part of financial eligibility determination—of $2,500 or less and 14 percent had over $100,000 in total resources.
Nearly 75 percent of applicants owned some noncountable resources, such as burial contracts; the median amount of noncountable resources was $12,530.
GAO identified four main methods used by applicants to reduce their countable assets—income or resources—and qualify for Medicaid coverage:
1. spending countable resources on goods and services that are not countable towards financial eligibility, such as prepaid funeral arrangements;
2. converting countable resources into noncountable resources that generate an income stream for the applicant, such as an annuity or promissory note;
3. giving away countable assets as a gift to another individual—such gifts could lead to a penalty period that delays Medicaid nursing home coverage; and
4. for married applicants, increasing the amount of assets a spouse remaining in the community can retain, such as through the purchase of an annuity.
Eligibility workers GAO spoke with identified bank statements as the most useful source of information for assessing financial eligibility. They explained that bank statements could lead to the identification of unreported assets, such as life insurance policies, or show patterns of withdrawals that prompt further inquiry.
The Department of Health and Human Services provided technical comments on a draft of this report, which GAO incorporated as appropriate.

section_title: Letter
paragraphs: Long-term care, particularly nursing home care, can be costly; in 2012,  the estimated average annual cost for an individual to receive care in a  nursing home was over $85,000. In that same year, nursing home  expenditures in the United States amounted to $158 billion, more than  half of the nation’s total spending for long-term care services. Medicaid— a joint federal-state health care financing program covering certain  categories of low-income individuals—is the largest payer of long-term  care services and accounted for 32 percent of nursing home expenditures  in 2012. As the number of elderly Americans continues to grow and more  individuals are likely to need long-term care, Medicaid spending for  nursing home care is projected to increase, placing additional burden on  already strained federal and state resources.
Medicaid offers health care coverage, including coverage for long-term  care services, to individuals whose assets—both income and resources— are insufficient to meet the costs of necessary medical services.  Individuals applying for Medicaid coverage for long-term care must meet  certain financial and functional eligibility criteria. To meet the financial  eligibility criteria, individuals must have assets that fall below established  standards, which vary by state, but are within standards set by the federal  government. Not all assets are countable in determining financial  eligibility for Medicaid. For example, states generally exclude—within  specified limits—the value of an individual’s primary residence, car, and  prepaid burial arrangements. Additionally, federal law includes provisions  to discourage individuals from reducing their countable assets—for  example, by transferring them to family members—in order to establish  financial eligibility for Medicaid coverage. Specifically, those who transfer  assets for less than fair market value (FMV) during a specified “look-back”  period—a period of time before applying for Medicaid in which an  individual’s or couple’s assets are reviewed—may be deemed ineligible  for Medicaid coverage for long-term care for a period of time called the  penalty period.
As the day-to-day administrators of the Medicaid program, states are  responsible for assessing applicants’ financial eligibility for Medicaid  coverage for long-term care; that is, determining whether an applicant’s  countable income and resources are below the state-established  standards, and whether an applicant transferred assets for less than FMV  during the look-back period. The processing of Medicaid applications is  generally performed by local or county-based eligibility workers. Our  previous work found that, to determine eligibility, states generally required  applicants to submit applications and provide documentation of certain  assets. States varied, however, in the amount of documentation required  from applicants, the information they obtained from third parties to verify  the accuracy of applicants’ reported assets, and in the proportion of  applicants whom they identified as having transferred assets for less than  FMV during the look-back period. Some of the variation we found raised  questions about whether states had sufficient information about  applicants’ assets to implement federal requirements. Additionally, our  previous work identified methods individuals used to reduce assets to  qualify for Medicaid coverage of long-term care that would not, or may  not, result in a penalty period, as they would not be considered a transfer  for less than FMV.
Congress has acted on multiple occasions to address financial eligibility  requirements for Medicaid coverage for long-term care. Most recently, the  Deficit Reduction Act of 2005 (DRA), enacted in February 2006, amended  some existing provisions regarding asset transfers and introduced new  requirements related to financial eligibility for Medicaid coverage for long- term care. For example, the DRA extended the look-back period from   36 months to 60 months for transfers occurring on or after its enactment,  changed the calculation and timing of the penalty period for those  transfers, and introduced new requirements for how certain types of  assets—such as an individual’s primary residence and an annuity— should be considered when determining Medicaid eligibility. Nevertheless,  methods exist through which applicants, sometimes with the assistance of  attorneys or financial planners, can reduce their assets in a manner  consistent with existing law to qualify for Medicaid coverage.
Given our past work related to states’ Medicaid financial eligibility  determination processes, you asked us to provide information on the  extent to which individuals may be using available methods to become  eligible for Medicaid coverage for long-term care. In this report, we   (1) examine the financial characteristics of applicants approved for  Medicaid nursing home coverage in selected states; (2) identify the  methods used to reduce countable assets to qualify for Medicaid  coverage for nursing home care; and (3) identify the information eligibility  workers considered the most useful for identifying and verifying  applicants’ financial eligibility.
To examine the financial characteristics of applicants approved for  Medicaid nursing home coverage in selected states, we reviewed a  random sample of Medicaid nursing home application files in selected  counties in three states. To select the states, we determined the extent to  which all states took one or more of three actions to verify applicants’  reported assets using results from a 2011 GAO web-based survey of  Medicaid officials from each of the 50 states and the District of Columbia.  On the basis of this assessment, we ranked the states on the extent to  which they reported taking these actions and placed them into three  groups (low, medium, and high) using naturally occurring breaks in the  data. We determined whether they could provide us with needed data in  order to select a sample of application files from counties within the  states. We then selected 3 states—1 from the low group (Florida) and 2  from the high group (South Carolina and New York). Within each state,  we selected two counties that, relative to other counties in the state, had  a large number of elderly individuals (aged 65 and older), high median  income of elderly households, and a high number of Medicaid nursing  home applications. In total, we reviewed 350 Medicaid application files,  294 of which were approved, including those that were approved and  incurred a penalty period.applications reviewed.) From the 294 approved application files, we  collected and analyzed data on applicants’ assets (both income and  resources), whether the resources were countable toward Medicaid  eligibility, and whether applicants were found to have transferred assets  for less than FMV. Our analysis was limited to information included in the   (See app. I for information about the  application files, which states used to make their eligibility determinations.  We did not independently verify the accuracy of this information.  However, we examined the data we collected for obvious errors and  tested the data; based on this, we determined that the data were  sufficiently reliable for the purposes of this report. The data from the 294  approved application files cannot be generalized to other approved  applicants.
To identify the methods used to reduce countable assets to qualify for  Medicaid coverage for nursing home care, we reviewed applicable federal  laws and guidance, and spoke with officials from the Centers for Medicare  & Medicaid Services (CMS), the agency within the Department of Health  and Human Services (HHS) that oversees the Medicaid program. We  interviewed nine attorneys recommended to us by the Director of the  American Bar Association’s Commission on Law and Aging and  conducted undercover calls with representatives from 17 law offices  whose websites indicated that they provided assistance to elderly  individuals seeking Medicaid coverage for long-term care. We also  interviewed state Medicaid officials from 12 states, and Medicaid eligibility  workers from two counties in 6 of these 12 states, selected in part based  on information collected from our interviews with attorneys, undercover  calls with representatives from law offices, information from background  literature, and demographic data on the population aged 65 and older.  We supplemented this information with data collected from our review of  Medicaid nursing home application files.
To identify the information eligibility workers considered the most useful  for identifying and verifying applicants’ financial eligibility, we used  information from our interviews with county eligibility workers in two  counties in each of the six states. (See app. II for more information about  our scope and methodology.)
We conducted this performance audit from September 2012 to May 2014  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives. We conducted our related  investigative work in accordance with investigation standards prescribed  by the Council of the Inspectors General on Integrity and Efficiency.
subsections: section_title: Background
paragraphs: To qualify for Medicaid coverage for long-term care, including nursing  home care, individuals must be within certain eligibility categories—such  as those who are aged or disabled—and meet functional and financial  eligibility criteria. The financial eligibility standards differ based on  whether an individual is married or single. Federal law also limits  Medicaid payments for long-term care for individuals who have  transferred assets for less than FMV during a specified time period.  States are responsible for assessing applicants’ financial eligibility for  Medicaid.
subsections: section_title: Financial Eligibility for Medicaid Coverage for Long-Term Care
paragraphs: Common ways individuals become financially eligible for Medicaid  coverage of long-term care, including nursing home care, are provided  below.
Supplemental Security Income (SSI). Individuals who participate in  SSI, a program that provides cash assistance to aged, blind, or  disabled individuals with limited income and resources, are generally  eligible for Medicaid.
Medically needy. Individuals who incur high medical costs may be  able to “spend down” their income below the state-determined income  eligibility limit for Medicaid. Such individuals are referred to as  “medically needy.” In 2012, 32 states and the District of Columbia had  a medically needy option, although not all extended this option to  those who needed nursing home care.
Special income level for residents of a nursing home or institution.
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 (300 percent of the benefit was $2,163 per month in  2014) are eligible for Medicaid. In 2012, 43 states and the District of  Columbia had elected this option.
Some states also allow applicants to place income in excess of the  special income level into a qualified income trust and receive Medicaid  coverage for their care. This type of trust, also known as a Miller trust, is  available in states that offer the special income level option but do not  also offer the medically needy option for nursing home care.
The Medicaid program generally bases its characterization of assets— income and resources—for individuals who are 65 years or older or have  disabilities on that used by SSI.
Income is anything received during a calendar month, paid either in  cash or in-kind, that is used or could be used to meet food or shelter  needs.
Resources are cash or real or personal property that are owned that  can be converted to cash and be used for food or shelter. (See table 1  for examples of different types of assets.)
In establishing policy for determining financial eligibility for Medicaid  coverage for long-term care, including nursing home care, states can  decide, within federal standards, which assets are countable. For  example, states may disregard certain types or amounts of income, and  may elect not to count certain resources toward financial eligibility.
Although the resources that are considered not countable varies by  state, for the purposes of determining Medicaid eligibility for long-term  care, they generally include an individual’s primary residence  (typically if the individual expresses the intent to return home), an  automobile, household goods and personal effects, burial spaces,  burial arrangements up to a certain value, and certain types of life  insurance.
While an individual’s primary residence is generally not a countable  resource for determining Medicaid eligibility, federal law specifies that  an individual with substantial equity interest in his or her home is to be  excluded from eligibility for Medicaid payment for long-term care; the  amount of allowable equity interest is established by each state within  federal guidelines. For 2014, these guidelines specified that state  established allowable equity interest amounts could range from  $543,000 to $814,000.
In most states, to be financially eligible for Medicaid coverage for long- term care, including nursing home care, individuals must have $2,000 or  less in countable resources ($3,000 for a married couple). However,  specific income and resource standards vary depending on the way an  individual becomes eligible for Medicaid. (See table 2.) Eligible individuals  generally must contribute a portion of their income toward the costs of  nursing home care but are allowed to retain a small personal needs  allowance, which varies by state but must be at least $30 per month, to  pay for the individual’s clothing and other personal needs.
section_title: Spousal Impoverishment Protections
paragraphs: Federal law requires states to use specific minimum and maximum  income and resource standards in determining Medicaid eligibility for  married applicants when one spouse is in an institution (referred to as the  institutionalized spouse), such as a nursing home, and the other remains  in the community (referred to as the community spouse). These  provisions enable the institutionalized spouse to become eligible for  Medicaid, while leaving the community spouse with sufficient assets to  avoid impoverishment.
Resources. The resources of both the institutionalized spouse and  the community spouse are considered when determining initial  financial eligibility for Medicaid coverage for nursing home care. The  community spouse may retain an amount equal to one-half of the  couple’s combined countable resources, up to the state-specified  maximum resource level. States’ maximum resource levels cannot  exceed the maximum federal standard, which was $117,240 for  2014. generally referred to as the community spouse resource allowance.
If one-half of a 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. States’ minimum resource levels cannot be less than the federal minimum  resource standard, which was $23,448 for 2014. to make up the difference. As of January 1, 2014, federal standards  specified that most states’ minimum needs allowance can be no lower  than $1,938.75, and no higher than $2,931.00 per month.
section_title: Transfers of Assets
paragraphs: Federal law limits Medicaid payment for long-term care services,  including nursing home care, for individuals who divest themselves of—or  “transfer”—their assets for less than FMV within a specified time period.  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. Per the DRA, the look-back period for transfers  made on or after February 8, 2006, is 60 months; prior to the DRA, the  look-back period was generally 36 months. If the state determines that an  applicant transferred an asset for less than FMV during the look-back  period, the individual may be ineligible for Medicaid coverage for long-  The penalty  term care for a period of time, called the penalty period.period generally begins on the later of (1) the first day of a month during  or after an individual transfers assets for less than FMV, or (2) the date on  which the individual would otherwise be eligible to receive coverage for  services were it not for the penalty period.
Federal law exempts certain transfers made during the look-back period  from the penalty provisions. Exemptions include certain transfers of  assets to a spouse or a disabled child, among other things. A transfer  does not result in a penalty period if the individual can demonstrate to the  state that the transfer was made exclusively for purposes other than  qualifying for Medicaid.the state determined that application of the penalty 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 for life.
Additionally, a penalty would not be applied if  The DRA also specified circumstances under which the purchase of  certain assets—such as an annuity, promissory note, or loan—is  considered a transfer for less than FMV for purposes of determining  Medicaid eligibility. (See table 3 for a summary of these selected DRA  provisions.) Most, but not all, of these provisions became applicable on  the date of the DRA’s enactment, February 8, 2006.
section_title: States’ Determination of Applicants’ Financial Eligibility
paragraphs: To assess applicants’ financial eligibility for Medicaid coverage for long- term care, including nursing home care, and to determine whether they  transferred assets for less than FMV, states generally require applicants  to submit applications and to provide documentation of certain assets  reported on the applications. Our prior work has shown that states varied  in the amount of documentation required from applicants; for example,   17 states required all applicants to provide 60 months of documentation  of financial and investment resources, while 27 states required applicants  to provide just the current month’s documentation. We also previously  found that all state Medicaid programs obtained some amount of asset  information from third parties, such as financial institutions or other  government agencies, such as the Social Security Administration.information helps states verify the accuracy of applicants’ reported  assets, and to determine if applicants have assets they failed to report or  transferred for less than FMV during the look-back period. The processing  of Medicaid applications—including the collection of documentation and  information from applicants and third parties—is generally performed by  local or county-based eligibility workers.
section_title: Files Reviewed Showed 41 Percent of Approved Applicants Had Total Resources at or below $2,500, and 5 Percent Transferred Assets
paragraphs: Forty-one percent of the 294 approved applicants whose Medicaid  nursing home application files we reviewed had total resources—both  countable and not countable resources—of $2,500 or less; and nearly   75 percent of the approved applicants owned at least some resources  that were not countable in their financial eligibility determination. Almost  two-thirds of approved applicants had annual gross incomes of $20,000  or less, and 5 percent were found to have transferred assets for less than  FMV.
subsections: section_title: Forty-One Percent of Approved Applicants Reviewed Had Total Resources of $2,500 or Less; Nearly Three- Quarters Had Some Resources Not Countable for Eligibility Determination
paragraphs: Of the 294 approved Medicaid nursing home applicants whose files we  reviewed in selected counties in three states, 41 percent—121  applicants—had total resources of $2,500 or less. Total resources  included both resources that were countable and those that were not  countable as part of applicants’ Medicaid financial eligibility determination  and, for married applicants, resources of both the applicant and the  spouse. Another 44 percent of approved applicants—129 applicants— had between $2,501 and $100,000 in total resources, and   14 percent of approved applicants—42 applicants—had over $100,000 in  total resources. Median total resources for all approved applicants was  $7,660, which was less than the median net worth of elderly households  in the United States. Married applicants, who made up 24 percent of the  approved applicants, had higher median resources ($70,137) than single  applicants ($3,034). (See fig. 1.) (See fig. 2.)
section_title: Almost Two-Thirds of Approved Applicants Reviewed Had Income of $20,000 or Less
paragraphs: Sixty-five percent of approved applicants whose files we reviewed—192  applicants—had annual gross incomes of $20,000 or less, another   30 percent—88 applicants—had annual gross incomes between $20,001  and $50,000, and 5 percent—14 applicants—had annual gross incomes  greater than $50,000. The median annual gross income of approved  applicants was $16,260 ($1,355 per month), which was less than the  median annual income of the elderly in the United States. In contrast to  resources, the median annual gross income of married approved  applicants ($16,260) was nearly the same as that of their single  counterparts ($16,284); consistent with how Medicaid eligibility is  determined, applicants’ income includes just that of the applicant,  regardless of marital status. (See fig. 4.)
Social Security was the primary source of income for approved applicants  we reviewed, comprising three-quarters of their annual income, on  average. Almost all approved applicants—95 percent—received Social  Security, and nearly half—45 percent—received income from a retirement  account or pension. Few applicants received income from other sources,  such as an annuity, trust, or promissory note.
For slightly more than half (33) of the 60 married approved applicants  who had a spouse living in the community, the community spouse was  allowed to retain at least some of the applicant’s income to bring their  monthly income up to the state’s minimum needs allowance. The median  value of the amount of the applicant’s income that the community spouse  was allowed to retain was $1,102 per month.
section_title: Files Reviewed Showed Five Percent of Approved Applicants Transferred Assets for Less Than Fair Market Value
paragraphs: Files for 5 percent of approved applicants reviewed—15 applicants— showed transfers of assets for less than FMV during the look-back period;  such transfers are to result in the assessment of a penalty period. The  median amount of assets transferred was $24,608, and the amounts  ranged from $5,780 to $296,221. The majority of applicants identified as  transferring assets for less than FMV—14 of the 15 applicants— transferred money. Applicants typically transferred assets to a child or  grandchild (9 of the 15 applicants). Thirteen of the 15 applicants found to  have transferred assets were not married. All but one of the applicants  found to have transferred assets were from New York, the remaining  applicant was from South Carolina.transferred assets, the median length of the penalty period assessed was  nearly 4 months, and the length ranged from half a month to nearly   25 months.
section_title: Applicants Used Four Main Methods to Reduce Countable Assets and Qualify for Medicaid
paragraphs: We identified four main methods used by applicants—or described by  eligibility workers, state officials, attorneys, or other representatives from  law practices—to reduce countable assets and qualify for Medicaid  coverage for nursing home care. These four methods are: (1) spending  countable resources on goods and services that are not countable,   (2) converting countable resources into noncountable resources that  generate an income stream, (3) giving away countable assets, and   (4) increasing the amount of assets the community spouse retains.
subsections: section_title: Spending Countable Resources on Goods and Services That Are Not Countable Toward Financial Eligibility
paragraphs: One method Medicaid applicants could use to reduce assets is paying off  existing debt or making certain purchases. When such purchases and  payments convert a countable resource, such as money in the bank, into  a good or service that is not countable toward Medicaid financial  eligibility, they effectively reduce the applicants’ assets. Eligibility workers  mentioned possible goods that would not be countable that applicants  could purchase.
Eligibility workers in 10 of the 12 counties interviewed stated that  purchasing burial contracts and prepaid funeral arrangements, which  are generally noncountable resources, was a common way applicants  reduced their countable assets; and eligibility workers from one state  said they recommend making such purchases to applicants.
Eligibility workers also reported that applicants spend down their  countable resources on upgrades to their homes, such as a new roof  or carpeting.
States may require applicants to provide documentation related to these  purchases, such as construction contracts or receipts, to verify that the  purchases were not made for less than FMV.
Applicants can also use countable resources to purchase services, which  are not considered a resource. For example, applicants may pay for a  personal service contract, also referred to as a care agreement, which is  an arrangement in which an individual pays another person, often an  adult child, to provide certain services—such as grocery shopping or  transportation to medical appointments—over a period of time. Although  personal service contracts are not considered a resource, payment for the  contracts involve a transfer of resources, and thus must be assessed to  determine whether the transfer was made for less than FMV. If such  contracts are determined to have been made for less than FMV, then the  applicant would be subject to a penalty period. According to CMS, states  can establish reasonable standards for assessing whether or not a  transfer using a personal service contract is made for less than FMV. Our  interviews with state Medicaid officials indicate that states’ standards for  assessing the FMV of personal service contracts vary.
Some states require that payments under the contract be made at the  time the services are rendered; thus, these states would consider a  lump sum payment made for services that had been provided  sometime in the past or for services that will be provided in the future  to be a transfer for less than FMV.
In contrast, officials from one state we spoke with indicated that the  state does not have standards regarding when payment must be  made. Officials from this state reported seeing at least 100  applications each month containing personal service contracts.
Personal Service Contracts  The files we reviewed included a $7,055  personal service contract between an  applicant and her daughter for the provision of  10 hours of care per week at a rate of $11 per  hour for an estimated 1.2 years. Another  applicant had a $134,316 contract with her  son to provide 20 hours of services per week  at a rate of $35 per hour for an estimated   3.7 years. Under both personal service  contracts, the provider received one lump sum  payment.
Among the Medicaid application files that we reviewed in selected states,  16 of the 294 approved applicants (5 percent) had a personal service  contract—all of which were determined to be for FMV. The median value  of the personal service contracts was $37,000; the value of the contracts  ranged from $4,460 to $250,004.
section_title: Converting Countable Resources into Noncountable Resources That Generate an Income Stream for the Applicant
paragraphs: Applicants may reduce their countable resources by purchasing certain  financial instruments that generate an income stream. While the income  stream is likely countable, the principal of the financial instrument might  not be a countable resource when determining an applicant’s financial  eligibility. For these purchases to be effective in helping the individual  qualify for Medicaid coverage, the income generated would need to be  less than the applicant’s expenses, including the cost of nursing home  care; otherwise the applicant would not likely be income-eligible for  Medicaid coverage for nursing home care. Additionally, the principal  would need to be a noncountable resource, otherwise the applicant would  not likely be resource-eligible for Medicaid coverage.
Irrevocable Annuities  In certain circumstances an irrevocable  annuity can be considered a countable  resource. For example, according to CMS, if  the annuity can be sold on the secondary  market because its owner or payee may be  changed (i.e. the annuity is assignable), then  the annuity is a countable resource.
One instrument applicants can purchase to convert countable resources  into noncountable resources with an income stream is an irrevocable and  nonassignable annuity that complies with the DRA. A representative  from one law office that we spoke to in an undercover capacity indicated  that an annuity is an option that could allow at least some resources to be  left for the applicant’s heirs. While the individual noted that the income  generated from the annuity must be spent on nursing home care, he  explained that the applicant may be able to save some money to leave to  his children because the amount the applicant would have to pay toward  his nursing home care would be based on the Medicaid nursing home  payment rate, which is likely less than what the applicant would have  otherwise had to pay privately. Medicaid officials from more than half the  states for which we conducted interviews indicated that the use of  annuities has increased over the past few years, and officials from one of  these states indicated that this increase was a result of clearer guidelines  in the DRA on annuities.
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. states’ standards for determining whether to treat the principal of  promissory notes as a countable resource vary.
Medicaid officials from one state told us that the principal of  promissory notes could be considered a countable resource if it were  negotiable.
Medicaid officials from another state said that the principal would be a  countable resource if the note could be converted into cash within   20 days.
section_title: Giving Away Some or All Countable Assets
paragraphs: Applicants may reduce their countable assets by giving some or all of  their assets as a gift to another individual, such as an adult child. Such  gifts are typically treated as a transfer for less than FMV and, if given  during the look-back period, would likely result in a penalty period. The  length of the penalty period is calculated based on the value of the gift  and the private payment rate for nursing home services in the state or  locality. However, our interviews identified mechanisms that either  reduce the length of the penalty period after it has started or provide  funds to pay for care during the penalty period. These mechanisms are  referred to as “reverse half-a-loaf” because they can be used to preserve  at least half of an individual’s resources.
A “reverse half-a-loaf” mechanism that reduces the length of the penalty  period involves gifting countable assets to someone else and then, after  eligibility has been determined and the penalty period begins, having a  portion of the gift returned to the applicant. This option only works in  states that choose to consider a partial return of transferred assets in  recalculating the penalty period. According to CMS, states can choose  whether or not to consider a partial return of transferred assets. In states  that consider partial returns, the original length of the penalty period  would be shortened in proportion to the amount of assets returned.
Another “reverse half-a-loaf” mechanism involves an applicant gifting a  portion of their countable resources, incurring a penalty, and converting  other countable resources into an income stream for the applicant—such  as through an annuity or promissory note—to pay for nursing home care  during the penalty period. The amount of income generated from the  annuity or promissory note would be equivalent to the shortfall between  the applicant’s other monthly income, such as Social Security and  retirement income, and the cost of his/her nursing home care during the  penalty period. A representative from one law office we spoke to in an  undercover capacity suggested that the applicant could gift about   50 percent of her resources, and while serving a penalty period, the  applicant would use monthly income from a promissory note plus other  monthly income to pay for the nursing home care. Another representative  from a law office mentioned that the larger the applicant’s income, the  larger the amount that the applicant can gift. This is because an applicant  with higher income would need less additional income from an annuity or  promissory note to cover the costs of nursing home services during the  penalty period. Thus, an applicant with higher income would need to  place a smaller amount of their countable resources into an annuity or  promissory note, allowing them to gift more of their countable resources  even if it may result in a longer penalty period.
Reverse Half-a-Loaf  One applicant who appeared to use the  “reverse half-a-loaf” mechanism gifted  $62,470 to his children and was assessed a   6 month penalty period. This applicant also  loaned $63,118 to one of his children in return  for a promissory note that provided $10,543 in  income per month during the 6 months of the  applicant’s penalty period.
Among the 294 approved applicants whose files we reviewed, we  identified 5 applicants (2 percent) who appeared to have used one of the  “reverse half-a-loaf” mechanisms; 4 of the applicants appeared to use the  mechanism that involved creating an income stream through a  promissory note to pay for nursing home care during the penalty period.  These 4 applicants gifted between $20,150 and $227,250 worth of  resources, and had penalty periods of between 2 months and 22 months.
section_title: Increasing the Amount of Assets the Community Spouse Retains
paragraphs: An additional method married applicants could use to reduce countable  assets is to increase the amount of assets that the community spouse is  able to retain. Given the federal law regarding the treatment of the  community spouse’s resources and provisions intended to protect married  individuals, there are several different mechanisms for increasing the  assets retained by the community spouse.
subsections: section_title: Spousal Refusal
paragraphs: Federal law permits the community spouse to retain an amount equal to  one-half of the couple’s combined countable resources, up to the state- specified maximum resource level. However, our work identified a  mechanism that could result in a community spouse retaining more than  the maximum standard in instances where the state did not exercise its  right to sue the community spouse to recoup the resources due to the  institutionalized spouse. Under this mechanism, an institutionalized  spouse may transfer all his or her resources to the community spouse,  while assigning to the state the right to bring a support proceeding against  the community spouse. In this way, a community spouse who refuses to  make any resources available to the institutionalized spouse may be able  to retain all of the couple’s resources unless the state chooses to sue the  community spouse for support.officials, some states take legal action to recoup funds from the  community spouse in cases of spousal refusal, while other states do not.
According to information from state
Medicaid officials from one state told us that they do not see many  applications claiming spousal refusal, adding this is likely because the  state would take legal action against the community spouse to recoup  expenses.
Officials from other states told us that, in cases of spousal refusal,  they do not take action against the community spouse.
Of the 70 married approved applicants whose files we reviewed, 13 had  applications that contained a claim of spousal refusal. (See table 5.)  These 13 applicants resided in two states and the community spouse  retained a median value of $291,888 in nonhousing resources; two of the  community spouses were able to retain over $1 million in nonhousing  resources. Six of the 13 applicants also provided monthly income  support to their community spouse.
Married applicants may reduce their countable assets by purchasing an  irrevocable and nonassignable annuity that pays out income to the  community spouse. Although annuities for the community spouse must be  actuarially sound—that is, they must pay out during the community  spouse’s life expectancy—and must name the state as a remainder  beneficiary, there are no other limitations on the time period in which  annuities must pay out. Additionally, there is no limit on the amount of  income from the annuity, as the community spouse’s income is not  countable as part of the institutionalized spouse’s eligibility. While any  portion of the income from the annuity that is not spent in the month it is  received becomes a resource, a community spouse’s resources are  generally not assessed again after his or her spouse is initially deemed  eligible, and thus would not affect the institutionalized spouse’s  eligibility.
Annuities for the Community Spouse  State Medicaid officials, county eligibility  workers, and attorneys who provided  information on the value of annuities for the  community spouse reported average values  ranging from $50,000 to $300,000. Officials  from one state reported seeing annuities for  the community spouse worth more than   $1 million. Medicaid officials from one state  indicated that they have seen annuities that  disbursed all of the payments to the  community spouse shortly after the annuity  was purchased, while officials from another  state said that annuities can have large  monthly payments for the community spouse,  such as $10,000 per month.
Thus, married applicants may use countable resources to purchase an  irrevocable annuity that pays potentially large amounts of income for the  community spouse over a short period of time without affecting the  institutionalized spouse’s eligibility. A representative from one law office  we spoke to in an undercover capacity suggested that the creation of an  annuity can be done quickly and therefore, is a tool for last minute  planning. Similar to the annuities for the applicant, Medicaid officials from  several states said that the use of annuities for the community spouse  has increased over the past few years. Officials from three states said  that the increase may be a result of the passage of the DRA, because it  clarified how annuities for the community spouse could be set up.
section_title: Court Order of Support
paragraphs: Married applicants may seek a court order that requires the  institutionalized spouse to pay a specified monthly income or provide  additional resources to support the community spouse. Such court orders  could allow the community spouse to receive income or resources in  excess of maximum standards. Federal law requires that a community  spouse’s income allowance be no less than the amount of the court order  of support.
One state Medicaid official that we spoke to said that applicants who use  court orders will have a preeligibility asset test, or needs assessment,  conducted to determine the amount of excess resources that the married  couple would have to spend down before applying for Medicaid, after  which they will seek a court order of resource support that allows the  spouse to keep an amount of the couple’s combined resources that is  above the state’s maximum resource allowance. Of the 70 married  approved applicants whose files we reviewed, 1 applicant had a court  order of spousal income support that required the institutionalized  applicant to divert $5,014 of her monthly income to the community  spouse, which was greater than the state’s minimum needs allowance.
section_title: Eligibility Workers Considered Bank Statements the Most Useful Source to Identify and Verify Applicants’ Financial Eligibility
paragraphs: Eligibility workers from all 12 counties in which we conducted interviews  stated that bank statements were the most useful source of information  for identifying and verifying applicants’ financial eligibility. According to the  eligibility workers we spoke with, bank statements show transactions,  such as payments of life insurance premiums, the movement of lump  sums of money over time, or transfers of money in and out of accounts.  Presumably, these workers had access to itemized bank statements— periodic statements issued by a financial institution to its customers  detailing all account activity for that period. Eligibility workers from one  county said that bank statements allowed them to best understand an  applicant’s financial history. Additionally, bank statements can include red  flags or triggers that can lead eligibility workers to ask the applicant for  additional information.
For example, eligibility workers from counties in which we conducted  interviews indicated that large withdrawals or patterns of withdrawals,  incomplete documentation (e.g., missing pages), or an applicant  having a large number of accounts can prompt further inquiry.
Eligibility workers also reported that reviews of bank statements could  lead to the identification of unreported assets or accounts. The most  commonly unreported asset those eligibility workers reported finding  in bank statements were life insurance policies. Specifically, eligibility  workers from 7 of the 12 counties in which we conducted interviews  reported that life insurance policies are commonly not reported and  may be found while reviewing itemized bank statements because the  statements may show a payment for the life insurance premium. Life  insurance policies that have a cash value could affect an applicant’s  eligibility.
Although eligibility workers indicated that bank statements are the most  useful source of information on applicants’ assets, we have previously  found that over half of states require only a single month’s documentation  for financial and investment resources, such as bank accounts. Having  only a single month’s bank statement could be sufficient to determine the  current value of an applicant’s account, but it may not allow eligibility  workers to identify patterns of withdrawals over time which could indicate  the need for additional review. All the eligibility workers we interviewed,  however, said they ask for additional information if they see large  withdrawals in the bank statements that were submitted. For example,  eligibility workers from one county that requires only a single month of  documentation said if there is questionable information in the  documentation they will request that the applicant submit additional  months of documentation. Additionally, we previously found that few  states require applicants to provide itemized bank statements as  documentation of their resources.bank statements even if not required, without such detailed statements,  eligibility workers may not be able to discover unreported assets, such as  life insurance policies.
While applicants may submit itemized  Some eligibility workers we interviewed indicated that applicants’ income  tax returns were also a helpful source of information to identify applicants’  unreported assets. Specifically, eligibility workers from three counties (in  two states) told us that that they ask applicants for a copy of their federal  tax return. For example, eligibility workers from one county stated that  they require applicants to provide 5 years of tax returns. These workers  indicated that income tax returns include much information that workers  would otherwise not be able to access, such as information about  ownership of life insurance policies, stocks, or any other asset that earns  dividends. In our previous work, we found that only one state requires the  submission of income tax returns.
In addition to bank statements and tax returns, eligibility workers also  reported finding some asset-related search tools helpful in identifying and  verifying applicants’ assets and transfers. Workers from one county in  Florida that had recently begun piloting an electronic asset verification  system (AVS)—a system that allows workers to contact multiple  financial institutions to determine if an applicant has, or had, an account  and the value of any existing accounts—noted that this new system has  been useful in identifying unreported assets and transfers. The state’s  AVS collects information from participating banks on any accounts held  by an applicant for nursing home coverage in the prior 60 months. If a  bank account is found, the information is populated into the state’s  electronic eligibility system for eligibility workers to use in evaluating  applicants’ financial eligibility. Officials from Florida told us that their AVS  is connected to the vast majority of banks operating in their state.  Although all states were required to have an electronic AVS in place by  the end of fiscal year 2013, only 2 of the 12 states for which we  conducted interviews reported having implemented an AVS. In our prior  work, we found that states identified challenges to implementing an AVS,  including a lack of resources—money, staff, or time—to implement the  system, and challenges getting financial institutions to participate.
Eligibility workers from one county reported using certain commercial  investigative software that pulls together publically available information  nationwide to help verify or identify applicants’ assets or transfers. This  software can help eligibility workers find information on unreported assets  and transfers, such as information about property deeds or ownership of  a business. The workers reported that this software is used in cases  where the eligibility worker suspects the applicant owns, for example, an  out-of-state unreported asset. In this county, only the two eligibility worker  supervisors and investigative staff have access to this software.
section_title: Agency Comments
paragraphs: We provided a draft of this report to HHS for review. HHS had no general  comments but provided technical comments that we incorporated as  appropriate.
As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to the Administrator of CMS  and other interested parties. In addition, the report will be available at no  charge on the GAO website at http://www.gao.gov.
If you or your staffs have any questions about this report, please contact  me at (202) 512-7114 or yocomc@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 key contributions to this report  are listed in appendix III.
section_title: Appendix I: Summary of Application Files Reviewed in Selected Counties in Three States
paragraphs: Of the 350 Medicaid applicants whose files we reviewed in selected  counties in three states (Florida, New York, and South Carolina), most  were over 75 years old, single, and female. (See table 6.) The median  age of applicants was 84 years old. A majority of applicants—  80 percent—had been living in a long-term care facility, such as a nursing  home, at the time they applied for Medicaid coverage of nursing home  care. The median length of time these applicants had been living in  facilities was 2.3 months; the length of time ranged from less than   1 month to 6 years. Some applicants—15 percent—were already covered  under Medicaid for basic medical services at the time that they applied for  coverage of nursing home care. Additionally, 24 percent of the applicants  had evidence in their application file that they received assistance from an  attorney or financial planner in applying for Medicaid coverage for nursing  home care.
Over 80 percent of the applicants whose files we reviewed (294 of 350)  were approved for Medicaid coverage for nursing home care, while   15 percent of applicants (52 of 350) were initially denied Medicaid  coverage. (See fig. 5.) Most of these applicants (39 of 52) were denied  because they failed to provide required documentation, a few were  denied because they were not functionally eligible (4 of 52), and some  applicants (11 of 52) were denied for financial reasons, including having  income or resources that exceeded financial eligibility standards. For  applicants denied for having excess income, the median amount of  excess income was $77 per month; for those denied for excess  resources, the median amount of excess resources was $20,407. Most  applicants (9 of 11) who were initially denied for financial reasons  reapplied and were later approved for Medicaid coverage for nursing  home care. Of the 9 applicants who were later approved for Medicaid,   3 applicants spent down assets on long-term care or medical expenses,   2 applicants spent down assets on other goods or services, 2 applicants  placed excess income into a qualified income trust, and 2 applicants were  later approved for other or unknown reasons.
section_title: Appendix II: Scope and Methodology
paragraphs: To examine the financial characteristics of applicants approved for  Medicaid nursing home coverage, we reviewed a random sample of  Medicaid nursing home application files in selected counties in three  states. To select states, we used information from a 2011 GAO web- based survey of Medicaid officials from each of the 50 states and the  District of Columbia. We scored states based on their survey responses  to questions on the extent to which they:  1.  verify applicants’ assets with financial institutions;  2.  conduct property record searches; and  3.  obtain information covering the 60-month look-back period.
Weighing each question equally, we ranked states on the basis of their  total score and placed them into three groups (low, medium, and high)  using naturally occurring breaks in the data. (See table 7.) In selecting  states, we considered the geographic dispersion of states, as well as the  following: among states in the “low” group, we focused on states that reported  generally obtaining only 1 month of documentation; and among states in the “high” group, we focused on states that reported  conducting all three activities to some extent—verifying assets with  financial institutions, conducting property searches, and obtaining   60 months of documentation.
From the ranked group of low and high states, we selected an initial set of  states plus additional alternative states, and conducted interviews with  state officials to determine whether they could provide us with needed  data in order to select a sample of counties and application files to  review. If a state informed us they were unable to provide such data, we  replaced the state with the next alternative state from the respective  group. We interviewed officials from a total of 11 states. Officials from   6 states (2 high and 4 low) told us they were unable to produce needed  data due to data system limitations. Officials from 1 state (a high state)  told us they were technically able to produce needed data but would not  be able to do so within a reasonable timeframe due to competing  demands for their information technology resources. This left us with   4 states—2 high states and 2 low states—that were able to produce the  data we needed. Based on these interviews, we selected one state from  the low group (Florida) and two states from the high group (New York   and South Carolina). In 2012, Medicaid spending for institutional long- term care was $3.3 billion in Florida, $11.5 billion in New York, and   $801 million in South Carolina.
To choose counties in our selected states, we considered three factors.  1.  Size of the population aged 65 and older.2.  Median income of households with householders aged 65 and older.3.  Number of Medicaid nursing home applications received.
section_title: Appendix III: Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
paragraphs: Carolyn L. Yocom, (202) 512-7114 or yocomc@gao.gov.
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Michelle B. Rosenberg, Assistant  Director; Kaycee M. Glavich; Robert Graves; Drew Long; Katherine Mack;  Linda McIver; Vikki Porter; Daniel Ries; Laurie F. Thurber; and   Jennifer Whitworth made key contributions to this report.