Medicaid

The Medicaid program pays for healthcare for the poor of all ages. Unlike Medicare, Medicaid provides extensive benefits for long-term care, but only to those who are impoverished. However, some people who are not poor when they first need long-term care are eventually able to rely on Medicaid to cover the costs of their care. They spend their assets and income on care until they have very little left, at which point they meet Medicaid’s definition of poverty and qualify for benefits. This practice is called spending down, and it is a viable means of meeting long-term care needs, but it has significant drawbacks.

Medicaid is a federal-state program. The federal government establishes broad guidelines for its operation, and each state administers its own program and determines, within these guidelines, eligibility criteria; the type, amount, and duration of services its program pays for; and rates of payment for services. Thus, a person who is eligible for Medicaid in one state may not be eligible in another. For information on a particular state’s program, we suggest visiting the National Association of State Medicaid Directors website, which includes links to state Medicaid websites.

Medicaid is jointly funded by the federal government and the state governments. The federal government provides between 50 and 76 percent of funds depending on the state, with an average federal contribution of approximately 59 percent. Despite the disadvantages, Medicaid accounts for approximately 49 percent of all long-term care expenditures nationally.

In simplest terms, to be eligible for Medicaid a person must be poor. Some people are deemed categorically needy — defined as poor and eligible because they fall into certain categories, such as recipients of Supplemental Security Income (SSI). The maximum monthly SSI benefit is $994 for individuals and $1,491 for couples.

Most state Medicaid programs also extend eligibility to some people who are considered medically needy — those whose income and assets were above the poverty level but have been depleted by medical or long-term care expenses. To qualify, a person must spend down her assets and income below the state’s eligibility limits.

The Medicaid eligibility rules are applied somewhat differently to individuals who participate in a state long-term care partnership program. If their LTCI benefits run out and they are forced to apply to Medicaid, they are allowed to keep some assets that others would be required to spend down. These details are covered later in this course.

The Deficit Reduction Act (DRA) of 2005, effective February 8, 2006, made significant changes in the rules governing Medicaid eligibility, highlighted throughout the discussion below.

The asset eligibility limit varies by state, but it is generally about $2,000 for an individual and $3,000 for a married couple.

Countable assets are those considered in determining whether a person exceeds the eligibility limit. They include:

• Cash, savings and checking accounts, and certificates of deposit
• Stocks and bonds
• IRAs, Keogh accounts, and other retirement funds
• Trusts
• The cash surrender value of life insurance policies with a combined face value greater than $1,500
• Items that may be converted into cash, including vacation homes, second vehicles, and collectibles
• In some cases, the applicant’s home (see below)

Noncountable (exempt) assets are not counted in calculating whether the eligibility limit is exceeded and do not have to be sold. They include:

• Household goods and personal effects, such as furniture and clothing
• One automobile, regardless of value, if used for day-to-day transportation
• The cash surrender value of life insurance policies with a combined face value of less than $1,500
• One wedding and one engagement ring
• Burial plots for the applicant and immediate family, as well as burial funds for the applicant and spouse
• The applicant’s home in most cases (see below)

Medicaid’s treatment of a person’s primary residence has been modified by the DRA:

• If the applicant is living in the home and not applying for long-term care services, the home is noncountable regardless of value.
• If the applicant is applying for long-term care benefits, the home is countable if the equity value is more than $752,000 (the federal minimum home equity limit for 2026; states may set a higher limit) unless a spouse, dependent child, or disabled child lives in it.
• If the applicant has left her home permanently to live in a nursing home, the home is countable regardless of value, unless a spouse, dependent child, or disabled child lives in it.

Where a home is deemed noncountable, a lien may be placed on it so that if it is sold, Medicaid must be reimbursed for long-term care benefits out of the proceeds.

Many states also have income eligibility limits. Like asset limits, income limits vary by state, but in all states they are very low — generally no higher than the federal poverty level (in 2026, $15,960 annually for an individual and $21,640 for a couple) or, for those who qualify for special eligibility options, 300 percent of SSI levels.

In calculating whether a person’s income exceeds the eligibility limit, Medicaid counts all but the first $20 per month of unearned income, including Social Security benefits, other government and private pensions, veterans’ benefits, workers’ compensation, annuity payments, and investment income.

Whether a state has income eligibility limits or not, if a person qualifies for Medicaid and enters a nursing home, almost all her income must be spent on care. She may retain only a small personal needs allowance (usually between $30 and $90 per month depending on the state) to cover items such as toiletries and reading material.

Medicaid rules have evolved to prevent spousal impoverishment — to ensure that the spouse who remains at home (called the community spouse) while the other spouse enters a nursing home retains a reasonable amount of financial resources.

If a community spouse has income of his own, he retains it and does not have to spend it on his spouse’s nursing home care. If the community spouse has little or no income, the spousal impoverishment rules provide for a minimum monthly maintenance needs allowance (MMMNA) ranging from $2,643.75 to $4,066.50 per month depending on the state and the community spouse’s actual housing costs (higher in Alaska and Hawaii):

• If the community spouse has no income, he receives the entire MMMNA from the nursing home spouse’s income.
• If the community spouse has some income, he receives enough from the nursing home spouse to bring his total up to the MMMNA level.
• If his own income exceeds the MMMNA, he receives nothing from the nursing home spouse.

A couple must spend countable assets above the eligibility limit on care, except for a protected resource amount (PRA) reserved for the community spouse. All states must allow the community spouse to retain countable assets up to a minimum of $32,532. States may allow the community spouse to keep up to a federal maximum of $162,660.

If even allotting all the nursing home spouse’s income to the community spouse is insufficient to reach the MMMNA level, the community spouse may retain enough additional assets to generate the needed income.

Some individuals reduce their assets to the Medicaid eligibility limit by giving them to family members rather than spending them on care. Medicaid’s transfer of assets rules address this practice. They apply to transfers for less than fair market value made during a look-back period of 60 months before the Medicaid application (for transfers made on or after February 8, 2006).

If a disqualifying transfer has occurred, a penalty period is imposed. The length of the penalty period is determined by dividing the value of the transferred asset by the state’s average monthly private-pay rate for nursing facility care. There is no limit to the length of a disqualification period.

Before the DRA, the penalty period began on the first day of the month in which the transfer occurred — creating a loophole where the penalty could elapse before the Medicaid application was even filed.

Certain transfers are permitted, including transfers to a spouse; to a third party for the sole benefit of the spouse; to certain disabled individuals or trusts; for a purpose other than to qualify for Medicaid; and where imposing a penalty would cause undue hardship.

The DRA clarified how the asset transfer rules apply to loans. The following rules apply to loans, promissory notes, and mortgages created on or after April 1, 2006:

• Repayment terms must be actuarially sound — based on the lender’s life expectancy, it must be reasonable to expect repayment in full during her lifetime.
• Repayment must be made in equal payments over the term of the loan. Balloon payments and deferred payments are not permitted.
• The balance of the loan may not be cancelled on the death of the lender.

If an individual purchases an annuity during the look-back period, it is not considered a transfer of assets for less than fair market value, provided the payout is actuarially sound. Under the DRA, annuities purchased on or after February 8, 2006 must name the state as beneficiary (or, for a married person, as secondary beneficiary after the spouse). This prevents the remaining annuity value from passing to family members instead of the state.

When assets are transferred to a trust by a Medicaid applicant or recipient, they are treated as follows:

• Amounts paid from the trust to the grantor are treated as the grantor’s income.
• Amounts that could be paid to the grantor but are not are treated as available assets of the grantor.
• Amounts that could be paid to the grantor but are paid to someone else are treated as a transfer of assets for less than fair market value.
• Amounts that cannot in any way be paid to the grantor are also treated as a transfer of assets.

For most trusts the look-back period is 60 months. A few trusts are exempt, including most trusts established for disabled persons and certain trusts whose assets consist only of the grantor’s pension, Social Security benefits, and other income.

When a Medicaid recipient dies, Medicaid generally seeks to recover from the estate the money it paid in benefits. Estate recovery normally applies to recipients in nursing homes and to those who began receiving benefits for home-based and community-based care after age 55.

Medicaid may not recover a decedent’s home before the death of a surviving spouse, and in some cases the home may be protected from recovery and preserved for surviving children or siblings. States differ considerably in how they administer estate recovery.

For those who qualify, Medicaid provides extensive benefits. Unlike Medicare, Medicaid pays benefits for personal and supervisory care even if skilled care is not also needed, and covers ongoing care needed to cope with a chronic impairment. However, there are some important limitations:

• Coverage of home and community-based services is still limited — nationally, only about 33 percent of Medicaid long-term care spending goes to home and community-based services.
• Only a few states offer benefits for care in an assisted living residence, and generally only for long-term care services, not room and board.
• Medicaid covers nursing home care only if it is provided in a Medicaid-certified facility.

Those who are not poor but are considering spending down to obtain Medicaid benefits should be aware of several disadvantages:

• Loss of independence — spending down leaves a person with extremely limited assets and income, making them dependent on the government.
• No inheritance — hard-earned assets cannot be left to heirs or used to help grandchildren.
• Limited care options — home and community-based benefits are not offered everywhere; some Medicaid recipients who could be cared for at home are forced into nursing homes.
• Limited facility choice — because Medicaid pays less than private rates, some desirable nursing homes do not accept Medicaid recipients. Recipients may end up wherever a bed is available, possibly far from family and friends.