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. 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). 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. 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. 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. 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. 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. 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.) 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. 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. 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.) 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. 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. 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.) 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. 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. 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. 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. 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. 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. 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. 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.

Summary: 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. 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.