To be eligible for Medicaid, individuals must be within certain eligibility categories, such as children or those who are aged or disabled. In addition, individuals must meet financial eligibility criteria, which are based on individuals’ assets—income and resources together. Once eligible for Medicaid, individuals can receive basic health and long-term care services, as outlined by each state and subject to minimum federal requirements. Long-term care includes many types of services needed when a person has a physical disability, a mental disability, or both. Individuals needing long- term care have varying degrees of difficulty in performing some ADLs and instrumental activities of daily living (IADL). Medicaid coverage for long-term care services is most often provided to individuals who are aged or disabled. Within broad federal standards, states determine the need for long-term care services by assessing limitations in an applicant’s ability to carry out ADLs and IADLs. Most individuals requiring Medicaid long-term care services have become eligible for Medicaid in one of three ways: (1) through participation in the Supplemental Security Income (SSI) program, (2) by incurring medical costs that reduce their income and qualify them for Medicaid, or (3) by having long-term care needs that require nursing home or other institutional care. The SSI program provides cash assistance to aged, blind, or disabled individuals with limited income and resources. Those who are enrolled in SSI generally are eligible for Medicaid. Individuals who incur high medical costs may “spend down” into Medicaid eligibility because these expenses are deducted from their countable income. Spending down may bring their income below the state- determined income eligibility limit. Such individuals are referred to as “medically needy.” As of 2000, 36 states had a medically needy option, although not all of these states extended this option to the aged and disabled or to those needing nursing home care. Individuals can qualify for Medicaid if they reside in nursing facilities or other institutions in states that have elected to establish a special income level under which individuals with incomes up to 300 percent of the SSI benefit ($1,737 per month in 2005) are Medicaid-eligible. Individuals eligible under this option must apply all of their income, except for a small personal needs allowance, toward the cost of nursing home care. The National Association of State Medicaid Directors reported that, as of 2003, at least 38 states had elected this option. SSI policy serves as the basis for Medicaid policy on the characterization of assets—income and resources. Income is something, paid either in cash or in-kind, received during a calendar month that is used or could be used to meet food, clothing, or shelter needs; resources are cash or things that are owned that can be converted to cash. (Table 1 provides examples of different types of assets.) States can decide, within federal standards, which assets are countable or not. For example, states may disregard certain types or amounts of income and may elect not to count certain resources. In most states, to be financially eligible for Medicaid long-term care services, an individual must have $2,000 or less in countable resources ($3,000 for a couple). However, specific income and resource standards vary by eligibility category (see table 2). The Medicaid statute requires states to use specific income and resource standards in determining eligibility when one spouse is in an institution, such as a nursing home, and the other remains in the community (referred to as the “community spouse”). This enables the institutionalized spouse to become Medicaid-eligible while leaving the community spouse with sufficient assets to avoid hardship. Resources. The community spouse may retain an amount equal to one- half of the couple’s combined countable resources, up to a state-specified maximum resource level. If one-half of the couple’s combined countable resources is less than a state-specified minimum resource level, then the community spouse may retain resources up to the minimum level. The amount that the community spouse is allowed to retain is generally referred to as the community spouse resource allowance. Income. The community spouse is allowed to retain all of his or her own income. States establish a minimum amount of income—the minimum monthly maintenance needs allowance (for this report we will refer to it as the minimum needs allowance)—that a community spouse is entitled to retain. The amount must be within a federal minimum and maximum standard. If the community spouse’s income is less than the minimum needs allowance, then the shortfall can be made up in one of two ways: by transferring income from the institutionalized spouse (called the “income- first” approach) or by allowing the community spouse to keep resources above the community spouse resource allowance, so that the additional funds can be invested to generate more income (the “resource-first” approach). Federal law limits Medicaid payments for long-term care services for persons who dispose of assets for less than fair market value within a specified time period to satisfy financial eligibility requirements. As a result, when an individual applies for Medicaid coverage for long-term care, states conduct a review, or “look-back,” to determine whether the applicant (or his or her spouse, if married) transferred assets to another person or party and, if so, whether the transfer was for less than fair market value. Generally, the look-back period is 36 months. If an asset transfer for less than fair market value is detected, the individual is ineligible for Medicaid long-term care coverage for a period of time, called the penalty period. The penalty period is calculated by dividing the dollar amount of the assets transferred by the average monthly private-pay rate for nursing home care in the state (or the community, at the option of the state). For example, if an individual transferred $100,000 in assets, and private facility costs averaged $5,000 per month in the state, the penalty period would be 20 months. The penalty period begins at approximately the date of the asset transfer. As a result, some individuals’ penalty periods have already expired by the time they apply for Medicaid long- term care coverage, and therefore they are eligible when they apply. Federal law exempts certain transfers from the penalty provisions. Exemptions include transfers of assets to the individual’s spouse, another individual for the spouse’s sole benefit, or a disabled child. Additional exemptions from the penalty provisions include the transfer of a home to an individual’s spouse, or minor or disabled child; a sibling residing in the home who meets certain conditions; or an adult child residing in the home who has been caring for the individual for a specified time period. Transfers do not result in a penalty if the individual can show that the transfer was made exclusively for purposes other than qualifying for Medicaid. Additionally, a penalty would not be applied if the state determined that it would result in an undue hardship, that is, it would deprive the individual of (1) medical care such that the individual’s health or life would be endangered or (2) food, clothing, shelter, or other necessities of life. Elderly households’ asset levels varied on the basis of level of disability, marital status, and gender; additionally, the extent to which elderly households transferred cash varied with the level of household assets and these same demographic factors. In general, disabled elderly households had lower asset levels than nondisabled elderly households, and the asset levels decreased as the level of disability increased. Elderly couples made up 46 percent of elderly households and had higher levels of assets than single elderly; single elderly females, who made up 41 percent of elderly households, generally had lower assets than single elderly males, who made up 13 percent of elderly households. For all elderly households, the higher their asset levels, the more likely they were to have reported transferring cash to another individual. Elderly households with both incomes and nonhousing resources above the elderly household median were responsible for over one-half of all transfers made. Overall, severely disabled elderly households—those reporting three or more limitations in ADLs—were less likely to transfer cash than nondisabled elderly households. Single individuals were less likely to transfer cash than couples, and single males had a higher likelihood of transferring cash than single females. According to data from the 2002 HRS, total income for the nation’s approximately 28 million elderly households was $1.1 trillion and total nonhousing resources were $6.6 trillion. Approximately 80 percent of elderly households had annual incomes of $50,000 or less. (See fig. 1.) The median annual income for all elderly households was $24,200 and ranged from $0 to $1,461,800. About half of all elderly households had nonhousing resources of $50,000 or less, while almost 20 percent had nonhousing resources greater than $300,000. (See fig. 2.) For all elderly households, median nonhousing resources were $51,500 and ranged from less than zero to $41,170,000. In terms of total resources, elderly households had median total resources of $150,000, ranging from less than zero to $41,640,000, and a primary residence with a median net value of $70,000, ranging from less than zero to $20,000,000. Disabled elderly households—which are at higher risk of needing long- term care—had lower levels of assets than nondisabled elderly households. Generally, as the level of disability increased, the level of assets decreased. Severely disabled elderly households, which made up about 6 percent of total elderly households, had significantly lower median income ($13,200) and median nonhousing resources ($3,200) compared with all elderly households ($24,200 and $51,500, respectively). (See fig. 3.) Elderly couples, which made up approximately 46 percent of elderly households, had higher levels of assets than single elderly individuals. Of the single elderly, males, who made up approximately 13 percent of elderly households, were generally likely to be better off financially than females, who made up approximately 41 percent of elderly households. (See fig. 4.) The likelihood that elderly households transferred cash and the amounts they transferred varied with the level of assets held and demographic characteristics, such as the level of disability, marital status, and gender. Approximately 6 million, or about 22 percent, of all elderly households reported transferring cash during the 2 years prior to the HRS survey. Almost all of these cash transfers were made to children or stepchildren. Of the elderly households that transferred cash, the median income was $37,000 and ranged from $0 to $725,600; median nonhousing resources were $128,000 and ranged from less than zero to $12,535,000. Generally, elderly households with higher asset levels were more likely to have transferred cash than households with lower asset levels (see fig. 5). Of the 22 percent of elderly households that reported having transferred cash in the 2 years prior to the survey, nondisabled elderly households and couples were most likely to do so. Among disabled elderly households, severely disabled households were the least likely to transfer cash. With regard to the amounts transferred, among single elderly individuals, males were more likely to transfer larger amounts of cash than females, with median cash transfer amounts of $4,500 and $3,000, respectively. (See table 3.) Transfers of cash were also more likely to occur in households with higher income and resource levels. Elderly households with both income and resources above the median—approximately 37 percent of all elderly households—were the most likely to transfer cash. In contrast, elderly households with both income and resources at or below the median were the least likely to transfer cash. With regard to amounts of cash transferred, the median amounts transferred for elderly households with both income and resources above the median were twice as high ($4,000) as those for elderly households with both income and resources at or below the median ($2,000). (Table 4 shows the cash transferred by elderly households in relation to the median income and resource levels.) Methods elderly individuals use to reduce their countable assets do not always result in a penalty period. Reducing debt and making purchases, such as for home modifications, for example, do not result in a penalty period and thus would not lead to delays in Medicaid eligibility for long- term care coverage. Other methods, however, could result in a penalty period, depending on the specific arrangements made and the policies of the individual state. For example, giving away assets as a gift generally results in the imposition of a penalty period, but giving away assets valued at less than the average monthly private-pay rate for nursing home care may not, depending, in part, on whether the state imposes partial-month penalties. Some methods individuals use to reduce their countable assets do not result in a penalty period and thus would not lead to delays in eligibility for Medicaid long-term care coverage. According to several elder law attorneys and some state officials we contacted, one of the first methods Medicaid applicants use to reduce assets is to spend their money, often by paying off existing debt, such as a mortgage or credit card bills, or by making purchases. When such purchases and payments convert a countable resource, such as money in the bank, to noncountable resources, such as household goods, they effectively reduce the assets that are counted when determining Medicaid eligibility. Common purchases mentioned included renovating a home to make it more accessible for persons with disabilities, repairing or replacing items such as a roof or carpeting, prepaying burial arrangements, buying a home, or having dental work done. Elder law attorneys explained that once individuals are Medicaid-eligible, they and their families will have limited means. Therefore, they advise these individuals to update, renovate, repair, or replace old or deteriorating items such as homes and cars to reduce the need for maintenance and repairs in the future. No penalty is associated with paying a debt or making a purchase as long as the individual receives something of roughly the same value in return. Another method married individuals use that does not result in a penalty period is seeking to raise the community spouse’s resource allowance above a state’s maximum level, which reduces the amount of income or resources considered available to the spouse applying for Medicaid coverage. States establish, under federal guidelines, a maximum amount of resources that a community spouse is allowed to retain. In general, the remaining resources are deemed available to be used to pay for the institutionalized spouse’s long-term care needs. In addition, if the community spouse’s income is less than the state’s minimum needs allowance, the state can choose to make up the shortfall by (1) transferring income from the institutionalized spouse or (2) allowing the community spouse to keep resources above the resource allowance so that the additional funds can be invested to generate more income. Under the latter approach, the community spouse may be able to retain a significant amount of resources in order to yield the allowable amount of income. For example, a community spouse might ask to retain a savings account with $300,000 and an annual interest rate of 2 percent that would yield an additional $500 in income per month. Some of the other methods elderly individuals use to reduce their countable assets could result in a penalty period and thus could delay Medicaid coverage for long-term care services, according to the elder law attorneys and state and federal officials we contacted. Whether or not an asset reduction method results in a penalty period depends on the specific arrangements made and the policies of the state. Therefore, the extent to which each of the following methods is used is likely to vary by state. Gifts. Under this method, an individual gives some or all assets to another individual as a gift, for example, by giving his or her children a cash gift. Although this is probably the simplest method to reduce assets, some elder law attorneys told us that this method would be one of the last things a person would want to do. Not only would the individual lose control of his or her assets, but giving a gift would likely be a transfer for less than fair market value and therefore result in a penalty period. As with other asset transfers, if individuals can prove that they gave away their assets exclusively for a purpose other than qualifying for Medicaid long-term care coverage, or if the transfer is to a spouse or a disabled child, then there would be no penalty. Additionally, if a state treats each transfer as a separate event and does not impose penalty periods for time periods shorter than 1 month, then transfers for amounts less than the average monthly private-pay rate for nursing home care in that state do not result in a penalty period. Because the penalty period begins at approximately the date of asset transfer, individuals that meet Medicaid income eligibility requirements can give away about half of their resources and use their remaining resources to pay privately for long-term care during which time any penalty period would expire. This is often referred to as the “half a loaf” strategy because it preserves at least half of the individual’s resources. Financial Instruments. Some financial instruments, namely annuities and trusts, have been used to reduce countable assets to enable individuals to qualify for Medicaid. Annuities, which pay a regular income stream over a defined period of time in return for an initial payment of principal, may be purchased to provide a source of income for retirement. According to a survey of state Medicaid offices, annuities have become a common method for individuals to reduce countable resources for the purpose of becoming eligible for Medicaid because they are used to convert countable resources, such as money in the bank, to a resource that is not counted, and a stream of income. If converting the resource to an annuity results in individuals’ having countable resources below the state’s financial eligibility requirements, then these individuals can become eligible for Medicaid if their income, including the income stream from the annuity, is within the Medicaid income requirements for the state in which they live. Married individuals can use their joint resources to purchase an annuity for the sole benefit of the community spouse. Since a community spouse’s income is not counted in a Medicaid eligibility determination, an annuity effectively reduces the countable assets of the applicant. Annuities must be actuarially sound—that is, the expected return on the annuity must be commensurate with the reasonable life expectancy of the beneficiary—or they are considered a transfer of assets for less than fair market value and result in a penalty. Trusts are arrangements in which a grantor transfers property to a trustee with the intention that it be held, managed, or administered by the trustee for the benefit of the grantor or certain designated individuals. The use of trusts as a method of gaining Medicaid eligibility for long-term care services was addressed in 1993 legislation. The law and associated CMS guidance indicate how assets held in a trust, as well as the income generated by a trust, are to be counted in the Medicaid eligibility process. According to CMS, since this legislation was enacted, the use of trusts as a Medicaid asset reduction method has declined. Transfer of Property Ownership. Medicaid allows individuals to transfer ownership of their home, without penalty, to certain relatives, including a spouse or a minor child (under age 21). Other transfers of a home or other property within the look-back period may result in a penalty period if they were for less than fair market value. For example, individuals might transfer ownership of their home while retaining a “life estate,” which would give them the right to possess and use the property for the duration of their lives. According to the CMS State Medicaid Manual, this would be a transfer for less than fair market value and thus would result in a penalty period. Personal Services Contract or Care Agreement. Personal services contracts or care agreements are arrangements in which an individual pays another person, often an adult child, to provide certain services. Based on CMS guidance, relatives can be legitimately paid for care they provide, but there is a presumption that services provided without charge at the time they were rendered were intended to be provided without compensation. Under this presumption, payments provided for services in the past would result in a penalty period. “Just Say No” Method. Under this method, the institutionalized spouse transfers all assets to the community spouse, which is permitted under the law. The community spouse then refuses to make any assets available to support the institutionalized spouse and retains all of the couple’s assets. In turn, the institutionalized spouse may seek Medicaid coverage for long- term care. Whether this method results in a delay in Medicaid coverage for long-term care services depends on the policies of the individual state. Promissory Notes. A promissory note is a written, unconditional agreement, usually given in return for goods, money loaned, or services rendered, whereby one party promises to pay a certain sum of money at a specified time (or on demand) to another party. According to CMS and state officials, some individuals have given assets to their children in return for a promissory note as a means to reduce their countable assets. For example, we were told of a case in which a mother gave her daughter money in return for a promissory note with a schedule for repayments. Although the note was scheduled to be repaid during the mother’s expected lifetime, the payment arrangements called for the child to repay only the interest until the final payment, when the entire principal was due. Additionally, each month the mother forgave a portion of the note that equaled slightly less than the average monthly nursing home cost. Whether promissory notes result in a delay in Medicaid coverage for long- term care would depend on the specific details of the note and the policies of the state. None of the nine states we reviewed systematically tracked or analyzed data that would provide information on the incidence of asset transfers and the extent to which penalties were applied in their states. Nationwide, all states requested information about applicants’ assets, including transfers of assets, through Medicaid application forms, interviews to determine Medicaid eligibility, or both. The nine states we reviewed generally relied on applicants’ self-reporting of financial information and varied in the amount of documentation they required and in the extent to which they verified the assets reported. According to officials in these states, transfers that were not reported by applicants were difficult to identify. Although officials from the nine states reviewed reported that some individuals transferred assets for purposes of qualifying for Medicaid, these states did not systematically track and analyze data on the incidence of asset transfers or associated penalties. As a result, the states could not quantify the number of people who transferred assets, the assets transferred, or the penalties applied as a result of transfers for less than fair market value. Officials in four of the nine states informed us that they had computer-based systems for recording applicant information, including data on penalties that resulted in a delay in Medicaid eligibility but they did not regularly analyze these data and thus did not have information available on the number of applicants who transferred assets. One of these states—Hawaii—was able to determine that there were no individuals serving a penalty at the time of our interview. However, because the state’s system only kept data on applicants currently serving a penalty, the state could not provide us with data on the number of people who had served penalties in the past. One state—Montana—that did not report having a computer-based application system, did report collecting several months of data on asset transfers from its counties in the fall of 2004, but a state official told us that as of mid-July 2005, the data had not been analyzed. Although states could not systematically track and analyze asset transfers, state officials were familiar with and had observed different methods that elderly individuals used to transfer assets in their states. For example, state officials frequently identified cash gifts as the most common method used to reduce the amount of countable assets. Some states had taken steps to try to deter the use of financial instruments, such as annuities. For example, two states reporting changing their laws to expand the circumstances under which annuities are counted as available resources for purposes of determining Medicaid eligibility for long-term care. Similarly, some states have tried to deter the use of the “Just Say No” method by pursuing financial support from the community spouse or by requiring the institutionalized spouse to take the community spouse to court to recover his or her share of the assets. Some officials commented that as states took actions to identify and prevent methods used to make transfers in order to become eligible for Medicaid long-term care coverage, new ways emerged to make transfers for this purpose that are permitted under the law. For example, one state took action to try to deter multiple small transfers by adding the amount of the transfers together, under certain circumstances, for purposes of calculating the penalty period. According to this state’s officials, however, some attorneys had advised their clients to transfer very small amounts of money in consecutive months and make one final transfer of a significant amount before applying for Medicaid. Under the state’s policy, these transfers are added together and the penalty period begins at the month of the first transfer, as opposed to the month of the final transfer. As a result, some or all of the penalty period may have expired by the time the applicant applies for Medicaid long-term care coverage. Nationwide, states used the application process—application forms, interviews, or both—to determine the level of assets held by Medicaid applicants and whether applicants transferred assets. Applications in 38 states requested comprehensive information about assets—for example, by requiring applicants to respond to questions regarding whether they had certain types of assets, such as checking accounts or real estate. Another 7 states’ applications requested general information about applicants’ assets, and the remaining 6 states reported relying on the interview process to collect information on assets. Thirty states required in-person or telephone interviews with either the applicant or an applicant’s appointed representative. Table 5 summarizes states’ application processes. (See app. III for more details on the application processes in each state.) Medicaid application forms in 44 states asked applicants to report whether they had transferred assets. Eleven of the 44 states’ applications asked whether applicants had transferred assets in the past 36 months, the required look-back period for most assets; 13 asked applicants whether they had transferred assets in the past 60 months, the required look-back period for trusts; and 17 did both. Of the applications in the remaining 3 states, 1 asked about assets ever transferred; 1 asked applicants to report any transfers, including the date of the transfer, on a separate form; and 1 asked about transfers in the prior 30 months. (See app. IV for details on the characteristics of Medicaid application questions related to transfers of assets in each state.) Although the 7 remaining states did not have a question about transfers on their applications, they all required interviews as part of the application process. The nine states we reviewed generally relied on the information applicants reported during the application process—the application, supporting documentation, and interviews—to identify transfers of assets. The states generally required applicants to submit documentation of their assets as part of the application process (see table 6). The type of documentation required varied by type of asset. For example, for trusts, annuities, and life insurance, states generally required a copy of the agreement or policy; for real estate, states generally required a copy of the deed or documentation of the value from a tax assessment or broker. For more liquid assets, such as checking and savings accounts, four of the nine states contacted reported requiring a copy of 1 month’s statements. However, the remaining five states reported requiring or collecting documentation for longer periods of time ranging from 3 months to 3 years. For example, Florida generally collected at least 3 months of bank statements from individuals seeking nursing home coverage, South Carolina required applicants to submit a total of 14 months of statements covering points in time over a 3- year period, and Montana generally collected bank statements dating back 3 years. To verify applicants’ assets, the nine states used other information sources, to varying degrees, in addition to the documentation provided by applicants. Generally, states were more likely to verify information related to possible income sources for applicants, such as the Social Security Administration and unemployment offices, than for data sources on possible resources, such as motor vehicle departments and county assessor offices. For example, seven of the nine states reported using information from an Income and Eligibility Verification System (IEVS), a system that matches applicant-reported income information with data from the Internal Revenue Service, the Social Security Administration, and state wage reports and unemployment benefits, for all or almost all of their applicants. In contrast, five of the nine states used information from county assessor offices that provide information on property taxes and thus property ownership, and four of these states used this source to verify resources for half of their Medicaid applicants or less. (See table 7 for the proportion of applicants for which the nine states used specific sources to verify applicants’ assets.) Regarding transfers of assets, the nine states asked on their Medicaid application forms, in interviews, or both, whether applicants had transferred assets. Officials from the nine states indicated that transfers that are not reported by applicants or a third party are generally difficult to identify. Three of the nine states did not have a process to identify unreported transfers. The remaining six states generally relied on certain indicators from applicants’ asset documentation, the states’ asset verification data, case worker interviews, or a combination of these factors to try to identify unreported transfers. Following are two examples of how states used these indicators: South Carolina asked for the previous 12 months of bank statements and also asked for statements from the 24th and 36th month preceding the application. South Carolina officials reviewed these bank statements to ascertain whether there had been large reductions in the amount of money in the account over the past 3 years. If a large reduction was detected, the state would ask the applicant for information regarding the use of the money. Ohio officials told us that the state generally relied on case workers’ experience to decide whether additional review was necessary, noting that there are certain indications that a transfer might have occurred, which would prompt additional review of the application. Examples include the opening of a new bank account, an applicant who is living beyond his or her means, and an applicant who recently sold his or her house but reports having no resources. To help states comply with requirements related to asset transfers and Medicaid, CMS has issued guidance primarily through the State Medicaid Manual. The agency has also provided technical assistance, through its regional offices, to individual states in response to their questions; communicated to states through conferences; and funded a special study on the use of annuities to shelter assets. Officials from the majority of CMS regional offices and the nine states we contacted indicated that some additional guidance, such as on the use of financial instruments, would be helpful. CMS officials, however, noted that it would be difficult to issue guidance that would be applicable in all situations given the constantly changing methods used to transfer assets. In response to provisions in the Omnibus Budget Reconciliation Act of 1993, CMS updated the State Medicaid Manual in 1994 to include provisions relating to transfers of assets, including the treatment of trusts. The portion of the manual relating to asset transfers and trusts generally includes definitions of relevant terms, such as assets, income, and resources; information on look-back periods; penalty periods and penalties for transfers of less than fair market value; exceptions to the application of such penalties; and spousal impoverishment provisions. The portion of the manual regarding trusts includes other definitions relating specifically to trusts, provisions on the treatment of the different types of trusts (such as revocable and irrevocable), and exceptions to the specified treatment of trusts. CMS is in the process of revising certain policies in the manual related to funeral and burial arrangements. CMS officials were not able to provide a date for when revisions to the manual would be completed and stated that they did not anticipate any major revisions to the asset transfer provisions in the Medicaid manual. CMS has provided additional guidance to states about asset transfers through conferences and one special study: Conferences. CMS officials reported providing states with information on asset transfer issues at its annual Medicaid eligibility conference. At this conference, issues regarding transfers of assets have been discussed as a formal agenda item, in panels on state experiences, or in question and answer sessions. Special study. In 2005, the agency released a report that examined the use of annuities as a means for individuals to shelter assets to become Medicaid-eligible. While this study did not identify a universal recommendation for the policy on annuity use or determine the extent to which the use of annuities is growing or declining, it suggested that annuities established for the purpose of becoming Medicaid-eligible do lead to additional costs for federal and state governments in that individuals may shift assets from countable resources into a resource that is not counted, and into a stream of income. In some cases, the use of annuities results in individuals qualifying for Medicaid more quickly. Using the estimated cost of annuities to Medicaid from a sample of five states and an examination of policies regarding annuities in all states, the study estimated that annuities cost the Medicaid program almost $200 million annually. Officials from CMS’s regional offices informed us that they provided technical assistance on asset transfer issues to 29 states over the past year. The types of technical assistance provided to these states ranged from confirming existing Medicaid policy to advising them on ways to address specific asset transfer methods. When asked for examples of the specific issues for which states sought technical assistance, officials in seven regional offices said they had responded to states’ questions about annuities. Other issues for which states requested technical assistance included the treatment of trusts, the policy on spousal impoverishment, and promissory notes. Officials from the majority of CMS regional offices noted that the states in their regions could benefit from additional guidance. Additionally, the majority of states we contacted concurred that guidance related to transfers of assets would be helpful. These states and regional office officials indicated a need for more guidance on topics such as annuities, trusts, and the relationship between asset divestment and spousal impoverishment. CMS central office officials said that the agency faces challenges in issuing guidance that would be applicable to all situations given the constantly changing methods individuals use to transfer assets in a manner that avoids the imposition of a penalty period. CMS officials said that states’ efforts to identify and address asset transfer issues are constantly changing, as methods for reducing countable assets are identified, increase in use, and then diminish. For example, CMS officials cited the use of personal care agreements, where the individual applying for Medicaid long-term care coverage hires a family member to perform services, as a practice that at one time was frequently used to transfer assets. In some cases, these agreements paid exorbitant fees for the services provided, and CMS officials provided technical assistance to states to help them limit the use of such agreements, at which point the practice diminished in use. CMS officials maintain that blanket guidance from the agency cannot necessarily address all of the issues that states face. We provided CMS and the nine states in our sample an opportunity to comment on a draft of this report. We received written comments from CMS (see app. V). We also received technical comments from CMS and eight of the nine states, which we incorporated as appropriate. CMS noted that the Medicaid program will only be sustainable if its resources are not drained to provide health care assistance to those with substantial ability to contribute to the costs of their own care. CMS acknowledged, however, the difficulty of gathering data on the extent and cost of asset transfers to the Medicaid program. In particular, CMS commented that the law is complex and that the techniques individuals and attorneys devise to divest assets are ever-changing. CMS reiterated the President’s budget proposal to tighten existing rules related to asset transfers, and associated estimated savings, which we had noted in the draft report. CMS further noted one limitation to our analysis that we had disclosed in the draft report—that the HRS only addressed cash transfers provided to relatives or other individuals. CMS commented that it believes that substantial amounts of assets are sheltered by individuals who transfer homes, stocks and bonds, and other noncash property. We agree with CMS’s view that information on such noncash transfers would be valuable, but as we noted in the draft report the HRS does not include such data. As agreed with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after its issue date. At that time, we will send copies of this report to the Administrator of the Centers for Medicare & Medicaid Services. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-7118 or allenk@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix VI. The Health and Retirement Study (HRS) is a longitudinal national panel survey of individuals over age 50 sponsored by the National Institute on Aging and conducted by the University of Michigan. HRS includes individuals who were not institutionalized at the time of the initial interview and tracks these individuals over time, regardless of whether they enter an institution. Researchers conducted the initial interviews in 1992 in respondents’ homes and conducted follow-up interviews over the telephone every second year thereafter. HRS questions pertain to physical and mental health status, insurance coverage, financial status, family support systems, employment status, and retirement planning. For this report, we used the most recent available HRS data (2002), for which the data collection period was February 2002 through March 2003. These data include information for over 18,000 Americans over the age of 50. We limited our analysis to data for households with at least one elderly individual, which we defined as an individual aged 65 or older. Thus, the data we used were from a sample of 10,942 individuals (8,379 households) that represented a population of 28.1 million households. From these data we estimated the nationwide level of assets held by households with at least one elderly individual, the extent to which these households transferred cash, and the amounts transferred. Our analysis underestimates the extent to which elderly households transferred assets and the amounts of assets transferred because the study data included only cash transfers, not other types of transfers. HRS also did not assess whether the transfers were related to individuals’ attempts to qualify for Medicaid coverage for long-term care services. To assess the reliability of the HRS data, we reviewed related documentation regarding the survey and its method of administration, and we conducted electronic data tests to determine whether there were missing data or obvious errors. On this basis, we determined that the data were sufficiently reliable for our purposes. To select a sample of states to review in more detail regarding their Medicaid eligibility determination practices, including the process for identifying whether applicants had transferred assets, we assessed the prevalence of five factors in each of the 51 states. 1. The percentage of the population aged 65 and over, which we determined using 2000 census data from the Census Bureau. 2. The cost of a nursing home stay for a private room for a private-pay patient based on data from a 2004 survey conducted for the MetLife Company. 3. The proportion of elderly (aged 65 and over) with incomes at or above 250 percent of the U.S. poverty level, which was based on information from the Census Bureau using the 2000 and 2002 Current Population Surveys. 4. Medicaid nursing home expenditures as reported by states to CMS. 5. The availability of legal services specifically to meet the needs of the elderly and disabled, based on membership data from the National Academy of Elder Law Attorneys. For each factor, we ranked the states from low to high (1 to 51) and then summed the five rankings for each state. On the basis of these sums, we grouped the states into three clusters (low, medium, and high) using natural breaks in the data as parameters (see table 8). We then selected three states from each cluster using randomly generated numbers, for a total sample of nine states. Appendix III: Characteristics of Medicaid Long-Term Care Application Processes, by State New York The state had a brief application that did not ask about assets. While the state asked applicants to respond to whether they had certain types of assets, the application was limited with respect to the types of assets applicants were required to address. For example, the application may have only asked about cash, bank accounts, life insurance, real property, and “other.” The state required interviews for applicants who the state deemed to have complex assets, including those who reported transferring assets. The state had applicants complete their application during the interview process with eligibility case workers. Appendix IV: Characteristics of Medicaid Long-Term Care Applications Related to Transfers of Assets, by State North Carolina The state’s application had a specific question about trusts that could be used to indicate whether further review for a transfer of assets was necessary. While the state’s application did not include specific questions regarding transfer of assets, it included a separate form for the applicant to report any transfers of assets, including the date of such transfers. The state’s application asked about transfers within 30 months. Prior to the Omnibus Budget Reconciliation Act of 1993, the federally mandated look-back period for transfers of assets was 30 months. The state’s application did not ask about transfers of assets. The state had applicants complete their application during the interview process with eligibility case workers. The state’s application asked if an applicant had ever transferred assets. In addition to the contact named above Carolyn Yocom, Assistant Director; JoAnn Martinez-Shriver; Kaycee Misiewicz; Elizabeth T. Morrison; Michelle Rosenberg; Sara Sills; LaShonda Wilson; and Suzanne M. Worth made key contributions to this report.

Summary: In fiscal year 2004, the Medicaid program financed about $93 billion for long-term care services. To qualify for Medicaid, individuals' assets (income and resources) must be below certain limits. Because long-term care services can be costly, those who pay privately may quickly deplete their assets and become eligible for Medicaid. In some cases, individuals might transfer assets to spouses or other family members to become financially eligible for Medicaid. Those who transfer assets for less than fair market value may be subject to a penalty period that can delay their eligibility for Medicaid. GAO was asked to provide data on transfers of assets. GAO reviewed (1) the level of assets held and transferred by the elderly, (2) methods used to transfer assets that may result in penalties, (3) how states determined financial eligibility for Medicaid long-term care, and (4) guidance the Centers for Medicare & Medicaid Services (CMS) has provided states regarding the treatment of asset transfers. GAO analyzed data on levels of assets and cash transfers made by the elderly from the 2002 Health and Retirement Study (HRS), a national panel survey; analyzed states' Medicaid applications; and interviewed officials from nine states about their eligibility determination processes. In 2002, over 80 percent of the approximately 28 million elderly households (those where at least one person was aged 65 or over) had annual incomes of $50,000 or less, and about one-half had nonhousing resources, which excluded the primary residence, of $50,000 or less. About 6 million elderly households (22 percent) reported transferring cash, with amounts that varied depending on the households' income and resource levels. In general, the higher the household's asset level, the more likely it was to have transferred cash during the 2 years prior to the HRS study. Overall, disabled elderly households--who are at higher risk of needing long-term care--were less likely to transfer cash than nondisabled elderly households. Certain methods to reduce assets, such as spending money to pay off debt or make home modifications, do not result in penalty periods. Other methods, such as giving gifts, transferring property ownership, and using certain financial instruments, could result in penalty periods, depending on state policy and the specific arrangements made. None of the nine states GAO contacted tracked or analyzed data on asset transfers or penalties applied. These states required applicants to provide documentation of assets but varied in the amount of documentation required and the extent to which they verified the assets reported. These states generally relied on applicants' self-reporting of transfers of assets, and officials from these states informed GAO that transfers not reported were difficult to identify. To help states comply with requirements related to asset transfers, CMS has issued guidance primarily through the State Medicaid Manual. CMS released a special study in 2005 to help states address the issue of using annuities as a means of sheltering assets. Additionally, CMS officials provide ongoing technical assistance in response to state questions, but noted the challenge of issuing guidance applicable to all situations given the constantly changing methods used to transfer assets in an attempt to avoid a penalty period. In commenting on a draft of this report, CMS noted the complexity of the current law and commented that data on the precise extent and cost of asset transfers to the Medicaid program have been difficult to gather.