Beware of the Deficit Reduction Act

The Look-Back Period
The DRA increases the look-back period to five years; under the prior law, the look-back period was three years for transfers to individuals and five years for transfers to a trust. While this appears to be the least onerous of the changes, it will affect facilities negatively because Medicaid application processing time will be increased and will ultimately delay Medicaid reimbursement. Often the look-back involves adult children trying to piece together their parents’ financial history, using some unavoidable guesswork. Adding two years to the audit trail will only add to the difficulty.

For example, in the New York metropolitan area, it already takes an average of one year for Medicaid approval to be secured from the various Medicaid agencies. It stands to reason that the increased documentation requirements will result in an even longer processing time and further delay in New York State Medicaid approval. And that means many more residents will be carried as “Medicaid pending” for a far longer time.

Facilities should also expect more denials of Medicaid applications, since families will likely be unable to produce all required documentation dating back five years and/or explain all transactions during that period. It is anticipated that many more Reconsideration Applications and Fair Hearings will be necessary to secure benefit approval, and both of these procedures will result in further delay in Medicaid reimbursement and more serious cash-flow issues.

The Penalty Period
The DRA postpones the start date for a penalty period based on asset transfers. Under prior law, the penalty period commenced on the first day of the month following the date of the asset transfer. As such, nursing home residents maintained enough funds to private pay until the penalty period expired and Medicaid eligibility could begin. Now the penalty period won’t commence until the individual is otherwise eligible for Medicaid benefits except for the asset transfer, meaning that the individual must be both residing in the nursing home and below the resource limit before the penalty period clock will begin.

As a result, individuals entering nursing homes will have neither private-pay funds nor eligibility for Medicaid benefits. A senior who has transferred assets to children, made charitable gifts, etc., may not have access to those previously gifted funds and will be ineligible for Medicaid benefits for months or years (depending on the value of the assets transferred) after admission. To illustrate:

Mrs. Smith has liquid assets totaling $160,000. (She does not own any real property.) Mrs. Smith’s adult child wants to purchase a home and needs help with the down payment, for which Mrs. Smith gives $100,000 on June 15, 2006. Mrs. Smith maintains a balance of $60,000 in her bank account. All is well until one year later, in June 2007, when Mrs. Smith suffers a stroke and goes into a nursing home (for which let’s assume the “regional rate” is $10,000 per month). Mrs. Smith spends down her remaining $60,000 on the costs of her care, which covers her for approximately six months; i.e., through November 2007.

Therefore, Mrs. Smith’s penalty period on the $100,000 gift-an “uncompensated transfer”-made in June 2006 does not begin until December 1, 2007, which is when she is both under the resource limit and in the nursing home receiving care and services. The penalty period now runs from December 2007 through September 2008-10 months, based on the gift of $100,000 made in June 2006. The problem is, however, that Mrs. Smith does not have the funds to private pay during this 10-month period, and she is not eligible for Medicaid benefits. She simply has no source of payment.

There will be two unfortunate results of this increased look-back period: Hospitals will have tremendous difficulty discharging patients such as Mrs. Smith, because nursing homes won’t want to admit them. And once a nursing home has admitted such a resident, subsequent discharge will be very difficult, because no other facility will likely admit the resident, rendering safe discharge impossible.

The Valuable House Rule
The DRA provides that if seniors have equity in a home exceeding $500,000, they will be automatically ineligible for Medicaid benefits. (Individual states have the ability to raise the threshold limit to $750,000.) Under prior law, the homestead was an exempt asset and Medicaid benefits could be secured regardless of the value of a home in the community.

Effective January 2006, this rule again resulted in a large number of residents being ineligible for Medicaid benefits but without liquid assets to pay for their care. Individuals will be forced to sell their homes or reduce their equity by taking reverse mortgages or home equity lines of credit. This, in turn, could result in several months and possibly years of delay in securing payment, especially when families hold out for the highest sale price or title issues cause delays in closings. Facilities will be unpaid during the entire time such matters are pending-again, a cash-flow problem.

Moreover, what if eligibility or mental capacity issues are involved? If the resident has been in a nursing home and therefore not residing in the family home for a period (60 days to a year, depending on the reverse mortgage company), that person is no longer eligible to obtain a reverse mortgage. What if the resident no longer has the capacity to enter into a contract of sale? A guardianship proceeding may be required. Who will pay for that court proceeding? It is likely that the burden for this action will fall on the facility, if only because it is a necessary means for the facility to get paid. This can pose another potential-and expensive-delay of months or years.

Protecting Your Facility
While the new requirements under the DRA have now been implemented in most states, the effects will not likely be felt for some time. However, nursing facilities need to prepare for this now. Nursing homes must revise their admission agreements to reflect new obligations under this law. They must determine the existence and penalty periods of any gifts that might render an applicant ineligible for Medicaid, obtain a current appraisal of the property involved (including whether the applicant’s equity in the home renders them Medicaid-ineligible), and determine the existence of an annuity for which the state must be named the remainder beneficiary. Medicaid waiver forms and hardship waiver consents should be prepared and included in the admission packet. Facilities should consider retaining a notary public in the admissions office to assist with document execution. Fair Hearing authorizations should be secured from every resident and/or designated representative. And, lastly, facility staff must be educated as to the new laws and how to screen for these issues before admitting a resident.

In short, it is essential that nursing facilities prepare for the Medicaid problems and collection issues they will inevitably face under the DRA.