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.