Medicaid Long-Term Care: Few Transferred Assets before Applying for Nursing Home Coverage; Impact of Deficit Reduction Act on Eligibility Is Uncertain
Published: 2007-03-26T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Medicaid program paid for nearly one-half of the nation's total long-term care expenditures in 2004. To be eligible for Medicaid long-term care, individuals may transfer assets (income and resources) to others to ensure that their assets fall below certain limits. Individuals who make transfers for less than fair market value (FMV) can be subject to a penalty that may delay Medicaid coverage. The Deficit Reduction Act of 2005 (DRA) changed the calculation and timing of the penalty period and set requirements for the treatment of certain types of assets. GAO was asked to provide data on the extent to which asset transfers for less than FMV occur. GAO examined (1) the financial characteristics of elderly nursing home residents nationwide, (2) the demographic and financial characteristics of a sample of Medicaid nursing home applicants, (3) the extent to which these applicants transferred assets for less than FMV, and (4) the potential effects of the DRA provisions related to Medicaid eligibility for long-term care. GAO analyzed data from the Health and Retirement Study (HRS), a national panel survey, and from 540 randomly selected Medicaid nursing home application files from 3 counties in each of 3 states (Maryland, Pennsylvania, and South Carolina). State and county selections were based on the prevalence of several factors, including population, income, and demographics.
section_title: What GAO Found
paragraphs: Nationwide, HRS data showed that, at the time most elderly individuals entered a nursing home, they had nonhousing resources of $70,000 or less--less than the average cost for a year of private-pay nursing home care. Overall, nursing home residents covered by Medicaid had fewer nonhousing resources and lower annual incomes, and were less likely to have reported transferring cash than non-Medicaid-covered nursing home residents. Similar to the nationwide results, GAO's review of 540 Medicaid nursing home applications in three states showed that over 90 percent of the applicants had nonhousing resources of $30,000 or less and 85 percent had annual incomes of $20,000 or less. One-fourth of applicants owned homes, with a median home value of $52,954. Over 80 percent of applicants had been living in long-term care facilities for an average of a little over 4 months at the time of their application. Of the 540 applicants, 408 were approved for Medicaid coverage for nursing home services the first time they applied and 122 were denied. Of the denied applicants, 56 were denied for having income or resources that exceeded the standards, 41 of whom submitted subsequent applications and were eventually approved, primarily by decreasing the value of their nonhousing resources. For about one-third of these applicants, at least part of the decrease in nonhousing resources could be attributed to spending on medical or nursing home care. Approximately 10 percent of approved applicants in the three states (47 of 465) transferred assets for less than FMV, with a median amount of $15,152. The average length of the penalty period assessed for the 47 applicants was about 6 months. However, only 2 of these applicants experienced a delay in Medicaid eligibility as a result of the transfers because many applicants' assessed penalties had expired by the time they applied for coverage. The extent to which DRA long-term care provisions will affect applicants' eligibility for Medicaid is uncertain. DRA provisions regarding changes to penalty periods could increase the likelihood that applicants who transfer assets for less than FMV will experience a delay in Medicaid eligibility, but the extent of the delay is uncertain. Several factors could affect the extent to which DRA penalty period provisions actually delay eligibility for Medicaid. These factors include whether an applicant transferred assets for less than FMV before or after the DRA was enacted and a potential increase in requests for waived penalty periods due to undue hardship--circumstances under which individuals are deprived of medical care, food, clothing, shelter, or other necessities of life. Other DRA provisions may have limited effects on eligibility. For example, provisions pertaining to home equity may have limited impact because few applicants whose files GAO reviewed had home equity of sufficient value to be affected. CMS, Maryland, and South Carolina generally agreed with the report's findings; Pennsylvania did not provide comments.

section_title: Letter
paragraphs: Long-term care is costly—particularly nursing home care, which is  estimated to average more than $70,000 a year for a private-pay patient.  Medicaid, the joint federal-state health care financing program that covers  certain categories of low-income individuals, paid for nearly one-half of  the nation’s total long-term care expenditures of about $193 billion in 2004.  As such, long-term care expenditures were a significant portion of total  Medicaid expenditures in 2004, comprising 32 percent of the total   $296 billion spent. As the nation’s population ages and more individuals  are likely to need long-term care services, federal Medicaid spending is  expected to nearly double in size during the next 10 years. In light of the  associated increased demand and burden that these trends place on  federal and state budgets, it is important to ensure that Medicaid coverage  for long-term care is limited to those who are truly eligible.
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—both income and  resources—that fall below established standards, which vary by state but  are within standards set by the federal government. Not all assets are  counted in determining financial eligibility for Medicaid. For example,  states generally exclude—within specified limits—the value of an  individual’s home, car, and prepaid burial arrangements. Additionally,  federal law includes provisions to discourage individuals from artificially  impoverishing themselves—for example, by transferring their assets to  certain family members—in order to establish financial eligibility.  Specifically, the law states that those who transfer assets for less than fair  market value (FMV) during a specified “look-back” period—a period of  time before application 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.
Evidence on the extent to which individuals transfer assets for less than  FMV to become financially eligible for Medicaid coverage for long-term  care is generally limited and often based on anecdote. In September 2005,  we reported that none of the nine states we contacted systematically  tracked or analyzed data that would have provided information on the  incidence of asset transfers made for less than FMV and the extent to  which penalties were applied in their states. We also reported that other  methods of reducing assets to qualify for Medicaid—such as using assets  to reduce debt or make home modifications—did not always result in a  penalty period. You asked us to expand on this work to provide more  information on the extent to which asset transfers for less than FMV  occur.
Subsequent to your request, in February 2006, the Deficit Reduction Act of  2005 (DRA), which amended certain existing provisions regarding asset  transfers for less than FMV and introduced new requirements related to  financial eligibility for Medicaid coverage for long-term care, was enacted.  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 federal requirements regarding certain types of assets,  including an individual’s home.
Given your request and the passage of the DRA, for this report we   (1) examined the financial characteristics of elderly nursing home  residents nationwide, including the extent to which they transferred cash;  (2) for selected states, reviewed the demographic and financial  characteristics of elderly individuals who applied for Medicaid coverage  for nursing home care and if they applied more than once; (3) determined  the extent to which elderly Medicaid nursing home applicants in selected  states transferred assets for less than FMV and were subject to penalty  periods; and (4) assessed the potential effects of the DRA provisions  related to eligibility for Medicaid coverage for long-term care.
To examine the financial characteristics of elderly nursing home residents  nationwide, including the extent to which they transferred cash, we  analyzed data from the Health and Retirement Study (HRS), a longitudinal  national panel survey, sponsored by the National Institute on Aging and  conducted every 2 years by the University of Michigan. We used HRS data  from 1992 through 2004 to estimate the (1) level of assets (nonhousing  resources and income) held by elderly nursing home residents and (2) the  percentage of residents who transferred cash or the deed to their home  and the amount of the transfer. We further analyzed the above based on  the reported source of payment to the nursing home—Medicaid or non- Medicaid (self-pay, Medicare, or other third-party insurance)—and  assessed nonhousing resources relative to the average cost of a year of  private-pay nursing home care. Because HRS only addressed cash and  home deed transfers made to relatives, our analysis understates the  percentage of residents who transfer and the amount of transfers by  excluding transfers of other types of assets or transfers made to other  individuals. Because HRS did not inquire about the reason for the  transfers, no conclusions can be drawn regarding whether the survey  respondents made these transfers for purposes of establishing eligibility  for Medicaid coverage for nursing home care. To examine the  characteristics of elderly individuals who applied for Medicaid coverage  for nursing home care and the extent to which they transferred assets for  less than FMV, we reviewed 540 randomly selected Medicaid nursing home  application files from three selected counties in 3 selected states (180 files  from each of the selected states). To select states, we assessed the  prevalence of five factors in each of the 50 states and the District of  Columbia; on the basis of this assessment, we ranked the states into three  clusters (low, medium, and high) based on the prevalence of the five  factors and judgmentally selected one state from each cluster. The   3 selected states were South Carolina (low), Maryland (medium), and  Pennsylvania (high). We then judgmentally selected three counties in each  state based on the prevalence of four factors. From the 540 Medicaid  nursing home application files, we collected and analyzed data on the  applicants’ demographic characteristics, income, nonhousing resources,  and home value. We also collected and analyzed data on the number of  applicants who transferred assets for less than FMV and the amount they  transferred. Because of the parameters set in our methodology, the data  from the 540 Medicaid nursing home application files can be generalized to  the county level but cannot be generalized to the state or national level.  To assess the potential effects of the DRA, we relied on data from HRS and  the 540 Medicaid nursing home application files, as well as interviewing  officials from the 3 selected states regarding Medicaid eligibility  determination practices, including the process for identifying whether  applicants had transferred assets. We reviewed applicable federal law  related to Medicaid and asset transfers, as well as related guidance from  the Centers for Medicare & Medicaid Services (CMS). We also spoke with  researchers and CMS officials. We considered the HRS data as well as data  from the Medicaid application files to be sufficiently reliable for our  purposes. (See app. I for more information about our scope and  methodology.) We performed our work from October 2005 through  January 2007 in accordance with generally accepted government auditing  standards.
subsections: section_title: Background
paragraphs: To qualify for Medicaid coverage for long-term care, individuals must be  within certain eligibility categories, such as children or those who are aged  or disabled, and meet functional and financial eligibility criteria. Within  broad federal standards, states determine if an individual meets the  functional criteria by assessing limitations in an individual’s ability to  carry out activities of daily living (ADL) and instrumental activities of daily  living (IADL). The financial eligibility criteria are based on individuals’  assets—income and resources together. The Medicaid statute requires  states to use specific income and resource standards in determining  eligibility; these standards differ based on whether an individual is married  or single. If a state determines that an individual has transferred assets for  less than FMV, the individual may be ineligible for Medicaid coverage for  long-term care for a period of time.
subsections: section_title: Financial Eligibility for Medicaid Coverage for Long-Term Care
paragraphs: Most individuals requiring Medicaid coverage for long-term care services  become financially eligible for Medicaid in one of three ways:  1.  Individuals who participate in the Supplemental Security Income (SSI)  program, which provides cash assistance to aged, blind, or disabled  individuals with limited income and resources, generally are eligible  for Medicaid.  2.  Individuals who incur high medical costs may “spend down” into  Medicaid eligibility because these expenses are deducted from their  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.  3.  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 eligible for Medicaid.  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.
Medicaid policy bases its characterization of assets—income and  resources—on SSI policy. 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 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.) In establishing policy for determining financial eligibility  for Medicaid coverage for long-term care, 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 coverage for 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 depending on the way an individual becomes eligible for  Medicaid (see table 2).
section_title: Spousal Impoverishment Protections
paragraphs: The Medicaid statute requires states to use specific minimum and  maximum resource and income 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 eligible for Medicaid while  leaving the community spouse with sufficient assets to avoid  impoverishment.
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—a minimum needs  allowance—that a community spouse is entitled to retain. Prior to the  DRA, if the community spouse’s income was less than the minimum needs  allowance, then states could allow the difference to be made up in one of  two ways: by requiring the transfer of 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 resources could be used to generate  more income (the resource-first approach). Under the DRA, states must  apply the income-first method.
section_title: Transfers of Assets
paragraphs: Federal law limits Medicaid payments for long-term care services for  persons who transfer 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 individual (or his or her spouse, if married) transferred assets  to another person or party and, if so, whether the transfer was for less  than FMV. If a transfer of assets for less than FMV is detected, the  individual is ineligible for Medicaid coverage for long-term care 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 $10,000 in assets, and private facility costs averaged $5,000 per  month in the state, the penalty period would be 2 months.
Federal law exempts certain transfers for less than FMV from the penalty  provisions even if they are made within the look-back period. Exemptions  include transfers of assets to the individual’s spouse, another individual  for the spouse’s sole benefit, or a child who is considered to be disabled  under federal law. Additional exemptions from the penalty provisions  include the transfer of a home to an individual’s spouse, or minor or  disabled child who meets certain criteria; an adult child residing in the  home who has been caring for the individual for a specified time period; or  a sibling residing in the home who meets certain conditions. Transfers do  not result in a penalty if the individual can demonstrate to the state 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 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 of life.
Prior to the DRA, the look-back period for asset transfers was generally   36 months. If the state identified transfers for less than FMV during this  period, then the state was required to impose a penalty period that began  at approximately the date of the asset transfer. As a result, some  individuals’ penalty periods had already expired by the time they applied  for Medicaid coverage for long-term care and therefore they were eligible  when they applied.
section_title: The DRA
paragraphs: The DRA modified some of the eligibility requirements for Medicaid  coverage for long-term care, including provisions related to asset  transfers, and introduced new requirements. Most, but not all, of these  DRA provisions became applicable on the date the law was enacted,  February 8, 2006. In general, these DRA provisions do not apply to  transfers that occurred prior to the law’s enactment.
The DRA extended the look-back period, changed the beginning date of  the penalty period, and provided additional conditions on the application  process for undue hardship waivers. (See table 3.)
The DRA also introduced several new provisions, which are summarized  in table 4.
section_title: Nationwide, Most Nursing Home Residents’ Nonhousing Resources Were Lower than Annual Nursing Home Costs
paragraphs: Nationwide, most elderly individuals had nonhousing resources valued  under $70,000 at the time they entered the nursing home; nursing home  care is estimated to cost over $70,000 a year for a private-pay patient. In  general, Medicaid-covered elderly nursing home residents had lower  nonhousing resources and income at the time of entry than non-Medicaid- covered residents. The percentage of Medicaid-covered elderly nursing  home residents who reported transferring cash was lower and the median  amounts they reported transferring were similar to those for non- Medicaid-covered residents.
subsections: section_title: Medicaid-Covered Nursing Home Residents Generally Had Fewer Assets than Those Not Covered by Medicaid
paragraphs: According to data from the HRS, nursing home residents covered by  Medicaid had fewer assets than residents not covered by Medicaid. Over  70 percent of all elderly nursing home residents had nonhousing resources  of $70,000 or less at the time they entered the nursing home, which is less  than the estimated average annual cost for nursing home care. Median  nonhousing resources for all elderly nursing home residents were $5,794 at  the time they entered the nursing home. (See fig. 1.) Sixty-two percent of  all elderly nursing home residents had nonhousing resources of $25,000 or  less while 11 percent had nonhousing resources of $300,000 or above.  Median nonhousing resources for Medicaid-covered elderly nursing home  residents ($48) were lower than for non-Medicaid-covered residents  ($36,123). Approximately 92 percent of Medicaid-covered residents had  nonhousing resources of $25,000 or less compared to 46 percent of non- Medicaid-covered residents.
Approximately 92 percent of all elderly nursing home residents had an  annual income of $50,000 or less at the time they entered the nursing  home; about 65 percent of elderly nursing home residents had incomes of  $20,000 or less. Median annual income for elderly nursing home residents  was $14,480 at the time of entry. (See fig. 2.) Median annual income of  Medicaid-covered elderly nursing home residents ($9,719) was about half  that of non-Medicaid-covered residents ($18,600). Approximately   90 percent of Medicaid-covered elderly nursing home residents had annual  incomes of $20,000 or less compared to approximately 53 percent of non- Medicaid-covered residents.
section_title: Nationwide, Fewer Medicaid-Covered Nursing Home Residents Reported Transferring Cash Compared with Non- Medicaid-Covered Residents
paragraphs: Nationwide, the percentage of Medicaid-covered elderly nursing home  residents who reported transferring cash was about half that of non- Medicaid-covered residents at the time they entered the nursing home and  during the 4 years prior to entry. For example, at the time they entered the  nursing home, 9.2 percent of Medicaid-covered residents reported  transferring cash, compared with 23.2 percent of non-Medicaid-covered  residents. However, the median amount of cash transferred as reported by  Medicaid-covered residents and non-Medicaid-covered residents did not  vary greatly. (See table 5.)
section_title: Majority of Medicaid Applicants in Selected Counties in Three States Had Few Nonhousing Resources and Were Approved upon Initial Application
paragraphs: Similar to the nationwide results, the majority of the 540 applicants whose  Medicaid nursing home application files we reviewed in selected counties  in three states (Maryland, Pennsylvania, and South Carolina) had few  nonhousing resources. The majority of applicants (approximately   65 percent) were single females. About 76 percent of all applicants were  approved the first time they applied, while the remaining applicants   (23 percent) were initially denied, often for financial reasons—having  income or resources that exceeded the states’ financial eligibility  standards. About three-quarters of the applicants initially denied only for  financial reasons were subsequently approved, primarily after the value of  their nonhousing resources decreased. For the applicants who were  initially denied for financial reasons, the time span between their initial  and subsequent applications averaged a little over 5 months. During this  time, their median nonhousing resources decreased from $22,380 to  $10,463, with a maximum decrease of $283,075. For about one-third of  these applicants who were initially denied for financial reasons and were  subsequently approved, at least part of the decrease in their nonhousing  resources could be attributed to spending on medical or nursing home  care.
subsections: section_title: Majority of Medicaid Applicants Reviewed Were Single, Female, and Had Nonhousing Resources of Less than $30,000
paragraphs: Of the 540 Medicaid nursing home application files we reviewed in  selected counties in three states, about 75 percent of the applicants were  female, most of whom were single. Over 80 percent of the applicants were  already living in a long-term care facility. These individuals had been living  in facilities for an average of a little over 4 months at the time of  application. About 90 percent—488 applicants—had total nonhousing  resources of $30,000 or less. (See fig. 3.) Eleven percent—59 applicants— did not have any nonhousing resources, while about 5 percent had total  nonhousing resources of $60,000 or more. For all applicants whose files  we reviewed, median nonhousing resources were $3,365. Married  applicants, who made up about 21 percent of the applicants, had higher  median nonhousing resources ($8,407) than single applicants. Of the  single applicants, females, who made up approximately 65 percent of all  applicants, had higher median nonhousing resources ($3,109) than males  ($1,628), who made up about 14 percent of all applicants.
Eighty-five percent of the Medicaid applicants whose files we reviewed  (459 applicants) had annual incomes of $20,000 or less. The median annual  income of all applicants was $11,382. (See fig. 4.) Single male applicants  generally had higher annual incomes than single females.
Applicants had several different types of nonhousing resources, some of  which were not counted toward determining eligibility for Medicaid  coverage for nursing home care. For example, a little over half   (53 percent) of all applicants whose files we reviewed had prepaid burial  or funeral arrangements, with a median value of $2,614. Additionally,  about 38 percent of the applicants had life insurance. Whether the burial  arrangements or life insurance policies counted toward determining  Medicaid eligibility depended on their type and value as well as the state in  which the applicant applied.
Of the 540 applicants whose files we reviewed, 137 applicants (25 percent)  owned homes and 83 of the home owners (about 61 percent) were single.  Based on the applications we reviewed, home ownership varied by state,  with 32 percent of the applicants we reviewed in selected counties in  South Carolina owning homes, compared with 28 percent and 16 percent  in Pennsylvania and Maryland, respectively. For the 112 applicants in all  selected counties for whom we were able to determine a value for their  homes, the median value was $52,954.
section_title: Most Medicaid Applicants Reviewed Were Approved upon Initial Application
paragraphs: About 76 percent of the Medicaid applicants whose files we reviewed were  approved upon initial application (408 applicants), while 23 percent   (122 applicants) were denied. The majority of the approved applicants  were single and female. Of the 122 applicants who were initially denied,   57 were approved upon submitting a subsequent application. Therefore,  465 applicants, or 86 percent of all applicants whose files we reviewed,  were eventually approved. Figure 5 provides a breakdown of applicants  by application status.
Almost half of the denied applicants (56 of 122) were denied only for  financial reasons—having income or resources that exceeded the  standards, most having to do with resources exceeding the standards. For  those applicants who were denied for having excess resources, their  resources exceeded the standards by an average of $25,116; the median  amount of excess resources was $13,260. Other reasons for denial  included failing to provide the requested documentation, not being in a  nursing home or meeting functional eligibility criteria, or a combination of  two or more of these reasons. (See fig. 6.)
section_title: Majority of Medicaid Applicants Reviewed Who Were Initially Denied Only for Financial Reasons Were Eventually Approved
paragraphs: Of the 56 applicants who were initially denied only for financial reasons,  41 (73 percent) reapplied and were later approved. The time span between  their initial and subsequent applications averaged a little over 5 months  and ranged from less than 1 month to 31 months.
Of the 41 applicants who were initially denied only for financial reasons  and were subsequently approved, their nonhousing resources generally  decreased between the initial and subsequent applications, while their  annual incomes stayed about the same. (See fig. 7.) Between the two  applications, median nonhousing resources decreased from $22,380 to  $10,463, with a maximum decrease of $283,075. For most of these  applicants, the overall decrease in nonhousing resources was specifically  due to a decrease in financial holdings such as checking or savings  accounts, stocks, and mutual funds. For example, a married applicant  initially applied and was denied for having countable resources that  exceeded the state standards by $51,213. The applicant applied again just  over 9 months later and had resources within the state standards.  Therefore, the applicant was approved.
Some of the files of applicants who were initially denied for financial  reasons and were subsequently approved indicated that the applicants  spent at least some of their resources on medical expenses or nursing  home care, although this was not the case for all of them. In the files we  reviewed for 13 of these applicants (32 percent), there were indications  that the applicant had spent at least some of his or her resources on  medical expenses, nursing home care, or both. For example, one applicant  sold stock and received cash in exchange for a life insurance policy,  spending about $12,150 for 3 more months of nursing home care before  being approved for Medicaid. In the remaining 28 applicants’ files   (68 percent), there was no indication that their resources were used for  medical or nursing home care. For example, one married applicant was  initially denied for having resources of $205,440 above the state’s standard.
The file indicated that when the applicant reapplied and was approved  about 6 months later, $140,000 of the applicant’s resources was used to  purchase an annuity to create an income stream for the community  spouse, which was not counted toward the applicant’s eligibility.
section_title: Few Transfers below FMV Identified for Applications Reviewed and Penalties Rarely Delayed Eligibility
paragraphs: Few of the approved applicants whose files we reviewed in selected  counties in three states were found to have transferred assets for less than  FMV during the 36-month look-back period, and those who did transfer  assets for less than FMV rarely experienced a delay in eligibility for  Medicaid coverage for nursing home care as a result. The proportion of  approved applicants found to have transferred assets for less than FMV  varied both within and among the three states, and the variation may be  due, in part, to counties’ or states’ Medicaid application review  procedures. At the time these applicants applied for Medicaid—state fiscal  year 2005 or earlier—none of the three states reviewed imposed penalties  for partial months, and the penalty period began at the time of the asset  transfer; under these circumstances, only two of the applicants received a  penalty that delayed their eligibility for Medicaid coverage for nursing  home care as a result of transferring assets for less than FMV. The other  applicants were either not assessed a penalty, because the penalty would  have been for less than 1 month of coverage, or the penalty they were  assessed had expired by the time they submitted their Medicaid  application. Thus, these applicants did not experience a delay in their  Medicaid coverage as a result of transferring assets for less than FMV. The  total amount of assets transferred for less than FMV varied by applicant,  as did the number of transfers each applicant made. In terms of the kinds  of assets transferred for less than FMV, applicants most commonly  transferred financial holdings such as cash or stocks, and their children or  grandchildren were the most common recipients of the transfer.
subsections: section_title: Approximately 10 Percent of Approved Applicants Transferred Assets for Less than FMV
paragraphs: Of the 465 approved applicants whose files we reviewed from selected  counties in three states, the files for 47 applicants (10 percent) indicated  that the applicants had transferred assets for less than FMV during the   36-month look-back period. The proportion of approved applicants found  to have transferred assets for less than FMV varied both within and among  the states reviewed, ranging from a high of approximately 24 percent of  approved applicants in Orangeburg County, South Carolina, to a low of  approximately 4 percent in Allegheny County, Pennsylvania (see table 6).
The variation in the proportion of applicants who were identified as having  transferred assets for less than FMV may be due, in part, to states’ ability  to identify transfers not reported by the applicant. About half of the assets  transferred for less than FMV by applicants in South Carolina were  identified by the eligibility workers as opposed to being reported by an  applicant. Eligibility workers in Maryland and Pennsylvania identified   9 percent and 4 percent of transfers, respectively.
The approved applicants who transferred assets for less than FMV were  predominately single females. Although single females accounted for   65 percent of approved applicants, they accounted for over 78 percent of  the approved applicants who transferred assets for less than FMV. (See   fig. 8.) Additionally, 89 percent of approved applicants who transferred  assets for less than FMV resided in a long-term care facility before  applying for Medicaid. These individuals were in the facility for an average  of over 5 months before they applied for Medicaid coverage.
Approved applicants who transferred assets for less than FMV were better  off financially (i.e., they had higher income and resources), even after  excluding the amount transferred, compared with the universe of  approved applicants. For example, approved applicants who transferred  assets had higher median nonhousing resources ($8,138) compared with  all approved applicants ($2,940). (See fig. 9.)
section_title: Transfers for Less than FMV Rarely Delayed Medicaid Eligibility
paragraphs: Transfers for less than FMV rarely led to delays in eligibility for Medicaid  coverage for nursing home care, as most applicants’ assessed penalty  periods expired before they applied for Medicaid. Among the 47 approved  applicants who transferred assets for less than FMV, the length of the  penalty period assessed averaged about 6 months, with a median penalty  period of 2 months. (See fig. 10.) At the time these applicants applied for  Medicaid (state fiscal year 2005 or earlier), the three states in which we  reviewed applications did not assess penalties for partial months; that is,  the length of penalties assessed was rounded down to the closest whole  month. As a result, 9 of the 47 approved applicants who transferred  assets for less than FMV (about 19 percent) were not assessed a penalty  because they transferred assets valued at less than the cost of a month of  nursing home coverage for a private-pay patient in their state.  Furthermore, because penalty periods began at approximately the date of  the asset transfer, 36 applicants’ penalty periods expired prior to the  submission of their application for Medicaid coverage for nursing home  care. Thus, only 2 applicants experienced delays in Medicaid coverage  resulting from their transfers of assets for less than FMV; the delays were  for 1 and 6 months, respectively.
section_title: Amounts of Assets Transferred for Less than FMV Varied
paragraphs: Among those who transferred assets for less than FMV, the total amount  of the assets transferred varied, with a median amount of $15,152. The  applicant with the lowest total transfer amount made a onetime cash gift  of $1,000 to her child, while the applicant with the highest total transfer  amount used funds from a trust established for her care to buy and resell  property. Since the trust fund should have only been used for the  applicant’s care, the use of the funds to pay real estate fees, which totaled  $201,516, was considered a transfer of assets for less than FMV. Figure 11  shows the distribution of the amounts of transfers for less than FMV per  approved applicant. Nearly half of the applicants who transferred assets  for less than FMV (22 of 47) transferred $10,000 or less; 10 of the   22 applicants transferred $5,000 or less. In contrast, 6 of the 47 applicants  (about 13 percent) transferred more than $80,000 in assets.
The number of transfers for less than FMV made by applicants also varied,  averaging slightly over two transfers per applicant. Specifically, 23  applicants made a single transfer and 1 applicant made eight transfers (see  fig. 12). The eight transfers spanned a 1½-year period and ranged from an  over $4,000 cash gift to a grandchild to a stock transaction in which the  applicant gave a relative over $33,000 of her stock.
The majority of asset transfers for less than FMV (approximately   84 percent) involved the transferring of financial holdings such as cash or  stocks. However, the types of assets transferred varied by state (see   table 7). This variation may be related, in part, to differences in counties’  or states’ Medicaid application review procedures. Specifically, based on  our review of the files, county officials in South Carolina conducted  searches of real property tax databases, which likely allowed South  Carolina eligibility workers to identify property transfers that were not  reported by the applicant. For example, a South Carolina applicant was  penalized because the eligibility worker identified that the applicant had  transferred property for less than FMV—a house valued at $84,700 to her  son for $5. In contrast, although Maryland eligibility workers could search  the state’s property tax records, state officials told us that workers’  searching abilities were limited because they needed to know the county  and street name of the property. As a result, it likely would be difficult for  Maryland eligibility workers to identify unreported transfers of property.
Applicants most frequently transferred assets to their children and  grandchildren. Approximately 47 percent of transferred assets were given  to children or grandchildren, 15 percent were given to other relatives, and  38 percent were given to other individuals.
section_title: Extent to Which Some DRA Long-Term Care Provisions May Affect Eligibility Is Uncertain
paragraphs: The extent to which some DRA long-term care provisions may affect  applicants’ eligibility for Medicaid coverage for long-term care is  uncertain. Our review of a sample of Medicaid applications indicated that  the DRA penalty period provisions could increase the likelihood that  individuals who transfer assets for less than FMV on or after the date of  enactment will experience a delay in eligibility for Medicaid coverage for  long-term care. However, the extent of the delay is uncertain. The effects  on eligibility of other DRA provisions—specifically those related to  annuities, home equity, the allocation of assets to community spouses, and  life estates—may be limited because they only apply to a few applicants,  affect applicants in some states but not in others, or both.
subsections: section_title: DRA Provisions Related to Penalty Periods Could Delay Eligibility for Those Who Transfer Assets for Less than FMV, but the Extent of the Delay Is Uncertain
paragraphs: The DRA requires states to change when a penalty period is applied and  how it is calculated. First, the DRA changes the beginning date of a  penalty period from approximately the date of the transfer—which could  precede the date of a Medicaid application by days, months, or years—to  the later of (1) generally the first day of a month during or after which an  asset has been transferred for less than FMV or (2) the date on which the  individual is eligible for Medicaid and would otherwise be receiving  coverage for long-term care services, were it not for ineligibility due to the  imposition of the penalty period. All applicants who transfer assets for less  than FMV during the look-back period on or after February 8, 2006 (the  date the DRA was enacted) will experience a delay in eligibility for  Medicaid coverage for long-term care, whereas before that date, some  applicants’ penalty periods expired before they applied for Medicaid  coverage. Second, regarding the calculation of the penalty period, the  DRA prohibits states from “rounding down” or disregarding fractional  periods of ineligibility when determining the penalty period. This provision  could result in longer penalty periods for some applicants. (See fig. 13,  which illustrates the potential effects of the DRA penalty period  provisions.)
If these DRA penalty period provisions had been in effect for the  applicants whose files we reviewed, all 47 approved applicants who  transferred assets for less than FMV would have experienced a delay in  Medicaid coverage, compared with only 2 who actually experienced a  delay. Additionally, the penalty period would have been longer for 45 of  the 47 approved applicants. The increase in the penalty period would have  ranged from less than 1 day to almost 6 months, with a median increase of  about 2½ weeks. As a result, the median delay in eligibility would have  been approximately 3 months and ranged from about 1 week to over   47 months.
An increase in the number of applicants whose eligibility is delayed may  be mitigated by two factors. First, states may see an increase in the  number of approved applicants seeking to waive their penalty periods  because they would create an undue hardship—that is, the application of  the penalty would deprive the applicants of (1) medical care that would  endanger the applicants’ health or life or (2) food, clothing, shelter, or  other necessities of life. Officials from the three states in which we  reviewed applications commented that they received few undue hardship  requests prior to the DRA but expected to see an increase in requests as  the DRA provisions are implemented. Second, the extent to which  individuals are subject to penalty periods may change as individuals may  make different decisions regarding the transferring of assets as a result of  the DRA.
section_title: Other DRA Provisions May Have Limited Effects on Eligibility
paragraphs: The effects on eligibility for Medicaid coverage for long-term care of other  DRA provisions may be limited. This is primarily because few Medicaid  applicants appear to have resources that are specifically addressed by the  DRA, namely annuities, home equity of more than $500,000, or life estates.  Additionally, the provision on allocating income and resources to the  community spouse will only affect married applicants in certain states,  thus limiting the effects that the DRA might have on eligibility.
Annuities. The DRA added requirements for states regarding the  treatment of annuities. A state must treat the purchase of an annuity as a  transfer for less than FMV unless certain conditions, such as a requirement  that the state be named as a remainder beneficiary, are met. However, the  effect of this provision may be limited because few Medicaid applicants  appear to have annuities. We found that 3 percent of the approved  applicants (14 of 465) whose application files we reviewed owned an  annuity. These 14 applicants’ annuities would have been considered  transfers for less than FMV under the DRA because they did not name the  state as a remainder beneficiary, had a balloon payment, or both. While the  incidence of annuities among Medicaid beneficiaries is not nationally  known, a January 2005 study undertaken at the request of CMS estimated  that, among the five states examined, the percentage of Medicaid long- term care beneficiaries who had an annuity ranged from less than   1 percent in two states to more than 3 percent in one state.
Home Equity. Under the DRA, certain individuals with home equity  greater than $500,000 are not eligible for Medicaid payment for long-term  care, including nursing home care. The effect of this provision may be  limited because it appears that few individuals who apply for Medicaid  coverage for nursing home care have homes valued at more than $500,000.  For example, 23 percent of the 465 approved Medicaid nursing home  applicants whose files we reviewed owned homes. Of the homes for which  we could determine values, the median value was $57,600. Only one  approved applicant owned a home valued at more than $500,000. Although  we do not know this applicant’s equity interest in the home, the applicant  would not have been subject to the DRA home equity provision, since the  applicant’s spouse lived in the home. Additionally, our review of 2004 HRS  data indicated that no elderly nursing home residents owned a home  valued at more than $500,000.
Life Estates. The DRA requires states to treat the purchase of certain life  estates as a transfer of assets for less than FMV unless the purchaser (the  applicant) lived in the house for at least 1 year after the date of purchase.  The effect of this provision may be limited because we found that few  approved Medicaid nursing home applicants whose files we reviewed had  life estates. Specifically, the proportion of approved applicants who owned  life estates ranged from zero in Pennsylvania to 2 percent in South  Carolina.
Income First. The DRA’s income-first provision has the potential to affect  married applicants in states that did not already use the income-first  methodology. Under the income-first methodology the difference between  a community spouse’s income and his or her minimum needs allowance is  made up by transferring income from the institutionalized spouse.  According to CMS, approximately half of all states did not use the income- first methodology before the passage of the DRA. Of the three states we  reviewed, only Pennsylvania will be affected by this provision. Among  approved applicants in Pennsylvania, 6 of the 42 married applicants whose  files we reviewed would have been affected by this change because these  applicants had retained resources in excess of the standards to create  income streams for their community spouses. Specifically, they created  annuities for the community spouses with values ranging from $7,372 to  $77,531, with a median value of $39,912. Pennsylvania officials told us that  almost all institutionalized spouses in their state have enough income to  supplement the income needs of their community spouses. As a result,  under the DRA, applicants would not be allowed to retain resources in  excess of the standards as they had previously through the creation of  annuities. Rather, resources in excess of those allowed by the Medicaid  program would need to be reduced in order for the institutionalized  spouse to be eligible for Medicaid.
section_title: Agency and State Comments and Our Evaluation
paragraphs: We provided copies of a draft of this report to CMS and the three states in  which we reviewed Medicaid nursing home application files: Maryland,  Pennsylvania and South Carolina. We received written comments from  CMS (see app. II) and South Carolina (see app. III). Maryland provided  comments via e-mail, while Pennsylvania did not comment on the draft  report.
In its written comments, CMS generally agreed with our findings, but  noted the limited number of states in which we reviewed applications and  that study was done before the effects of the DRA could be assessed. We  agree that the actual effects of the DRA are not yet known. However, our  findings based on applications submitted prior to the implementation of  the DRA provide insight into what its effects may be. CMS also  commented that the DRA will be working as Congress intended if  applicants experience delays in Medicaid eligibility as a result of  transferring assets for less than FMV.
Maryland and South Carolina generally agreed with our findings. In  addition, Maryland emphasized the difficulties faced by Maryland  eligibility workers in identifying unreported transfers of assets due to their  limited ability to search the state’s property tax records. South Carolina  highlighted our finding that 15.6 percent of the approved applicants whose  files we reviewed in South Carolina were found to have transferred assets  for less than FMV, as compared to 10.4 percent and 5.4 percent in the  other two selected states. The state attributed this difference to the  effectiveness of South Carolina’s eligibility process and its training of  eligibility workers to enable them to identify transfers of assets not  reported by an applicant. In response to our finding that only 2 of the 47  approved applicants who transferred assets for less than FMV experienced  a delay in Medicaid eligibility as a result of transferring assets, South  Carolina recommended that we clarify that this occurred despite the fact  that the states were adhering to federal requirements. We did not make a  change, as we believe the report clearly states why the other applicants  did not experience a delay in Medicaid eligibility.
Technical comments from CMS were incorporated into the report as  appropriate.
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 provide copies 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 IV.
section_title: Appendix I: Scope and Methodology
paragraphs: To examine the financial characteristics of elderly nursing home residents  nationwide, including the extent to which they transferred cash, we  analyzed data from the Health and Retirement Survey (HRS). 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 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 analysis, we used HRS data from 1992 to 2004. We limited our  analysis to elderly nursing home residents who had been surveyed at least  once before they entered a nursing home. We defined an elderly individual  as anyone 65 years of age or older. On the basis of individuals’ answers on  HRS, we defined a nursing home resident as anyone who met one of the  following three criteria:  1.  answered “yes” to permanently living in a nursing home;  2.  answered “no” to permanently living in a nursing home but spent more  than 360 nights in a nursing home; or  3.  answered “no” to permanently living in a nursing home but spent 180  to 360 days in one and  a.  died in a later survey period;  b.  had three or more limitations in activities of daily living (ADL); or  c.  had cancer, lung disease, or heart disease and some difficulty   (rating of three or more) with mobility.
We used the HRS data from the 1,296 individuals who met these criteria;  this sample represented a population of 4,217,795 individuals. From these  data, we estimated the financial characteristics of elderly nursing home  residents as well as the percentage of residents who transferred cash or  deeds to their homes, the amount transferred, and whether it varied by  how they paid for their care (i.e., Medicaid-covered or non-Medicaid- covered). This analysis underestimates the percentage of elderly  households that transferred assets and the amount of assets transferred  because HRS data included only transfers of cash and deeds to the home.  Additionally, HRS does not assess whether the transfers relate to  individuals’ attempts to qualify for Medicaid coverage for nursing home  services.
In order to assess the reliability of the HRS data, we reviewed related  documentation regarding the survey and its methods of administration. We  also conducted electronic data tests to determine whether there were  missing data or obvious errors. On the basis of this review, we determined  that the data were sufficiently reliable for our purposes.
To analyze the demographic and financial characteristics of elderly  individuals who applied for Medicaid coverage for nursing homes and if  they applied more than once, as well as the extent to which they  transferred assets for less than fair market value (FMV) and were subject  to penalty periods, we reviewed Medicaid eligibility determination  practices and Medicaid nursing home application files in three states. To  select states, we assessed the ranking of five factors for each of the   51 states.  1.  The percentage of the population aged 65 and over, which we  determined using 2000 census data from the U.S. 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 U.S. Census Bureau using the 2000 and 2002 Current  Population Surveys.  4.  The extent of Medicaid nursing home expenditures as reported by  states to the Centers for Medicare & Medicaid Services (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 judgmentally selected one state from each cluster. In making this  selection, we excluded some states, such as states that did not have the  technical ability to generate the data needed to select Medicaid nursing  home application files for review. The states we selected were South  Carolina (low), Maryland (medium), and Pennsylvania (high).
To choose counties in our selected states, we considered four factors.  1.  Number of individuals aged 65 and over who applied for, or were  enrolled in, Medicaid coverage for nursing home services.  2.  Number of licensed nursing home beds.  3.  Population aged 65 and over.  4.  Median and range of household income.
For the first three factors, we ranked the counties within each selected  state from high to low. Separately, we ranked the counties by median  household income and split them into low, medium, and high groups,  using natural breaks in the data as parameters. Of the counties that  appeared in the top 10 ranking of each of the first three factors, we  matched them with their respective median household income groups.  Based on this assessment, we chose a county from each median household  income group for each of the three states (see table 9).
We reviewed a total of 180 nursing home application files in each selected  state, for a total of 540 files. Within each selected state, we based the  number of application files reviewed in each county on the proportion of  the county’s population of individuals aged 65 and over. (See table 10.)
Each selected state sent us a list of individuals aged 65 or over who  submitted an application for Medicaid coverage for nursing home care  during state fiscal year 2005. These lists also included individuals who  applied in previous years but whose files had activity during fiscal year  2005. For example, an individual may have applied in state fiscal year  2004, but had his or her application approved in state fiscal year 2005.  From the lists provided by the states, we randomly selected application  files by unique identifying numbers. In order to compensate for application  files that would need to be skipped because they did not meet our criteria  or lacked adequate information, we requested additional files (10 to   15 percent) in each county. Therefore, when we determined that an  application file was unusable, we included the next application file on our  randomly generated list.
We established a file review protocol whereby we reviewed and recorded  the earliest Medicaid application for nursing home services in each file  regardless of the date of the application. If the earliest application was  denied, then we recorded data from that application as well as data from  the earliest subsequently approved application, if there was one. From  each application, we collected and analyzed data on the applicants’  demographic characteristics, income, nonhousing resources, and home  value. We also collected and analyzed data on the number of applicants  who transferred assets for less than FMV and the amount they transferred.
Since the selected counties used the information in these application files  to determine eligibility for Medicaid coverage for nursing home services,  we did not independently verify the accuracy of the information contained  in the files. However, to ensure that the information we entered into our  data collection instrument was consistent with the information found in  the application files, we conducted independent file verifications, which  resulted in a total verification of at least 20 percent of entries. Additionally,  we conducted electronic tests of the data collected to determine whether  there were missing data or obvious errors. In some cases, we combined  variables to create new ones. For example, we collected and identified  several types of applicant resources but ultimately combined them into  two categories—housing and nonhousing resources. Based on these  procedures, we determined that the data were sufficiently reliable.  Moreover, these data can be generalized to the individual county level but  cannot be generalized to the state or national level.
To assess the potential effect of provisions of the DRA, we used (1) HRS  data and (2) data from our application file reviews. Specifically, we used  2004 HRS data to identify the number of elderly individuals in nursing  homes who had houses in excess of $500,000 and could be affected by the  DRA home equity provision. Additionally, we used the data from our  review of Medicaid application files in three counties in each of the three  states to analyze the potential effects of the DRA provisions pertaining to  penalty periods, annuities, home equity, and income-first.
We performed our work from October 2005 through January 2007 in  accordance with generally accepted government auditing standards.
section_title: Appendix II: Comments from the Centers for Medicare & Medicaid Services
section_title: Appendix III: Comments from the State of South Carolina Department of Health and Human Services
section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: Acknowledgments
paragraphs: In addition to the contact named above Carolyn Yocom, Assistant  Director; Kaycee Misiewicz Glavich; Grace Materon; Kevin Milne;  Elizabeth T. Morrison; Daniel Ries; Michelle Rosenberg; Laurie Fletcher  Thurber; and Suzanne M. Worth made key contributions to this report.