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.