SD10 - Medicaid Asset Transfers and Estate Recovery

  • Published: 1993
  • Author: Joint Legislative Audit and Review Commission
  • Enabling Authority: Senate Joint Resolution 91 (Regular Session, 1992)

Executive Summary:
The Virginia Medicaid program is the largest of the State's health care programs for persons who are poor. In FY 1991, total expenditures for the program exceeded $1.2 billion. In Virginia, one of the major and most expensive benefits provided by Medicaid is nursing home care. Although these benefits are provided to less than seven percent of the total number of eligible recipients, they account for more than one quarter - $312 million - of total program spending.

Because of the cost of nursing home care and the general absence of other third party payors, there is a growing concern that many middle- and upper-income residents are transferring their assets to qualify for Medicaid. There is also a concern that if federal and State laws are not adopted to limit this practice, the number of persons who transfer assets with the intent to qualify for Medicaid nursing home benefits could grow significantly.

The potential for an increase in costs for the Medicaid program is further heightened by the growing portion of the population in need of nursing home care, as shown in the graph below. As the elderly become a larger proportion of the population in Virginia, the State's exposure to financial responsibility for long-term care will increase.

In response to these concerns, Senate Joint Resolution 91 was passed during the 1991 session of the General Assembly. This mandate requires JLARC to work with the Joint Commission on Health Care to determine the extent to which Medicaid applicants use asset transfers to qualify for nursing home benefits. In addition to this issue, JLARC staff examined the extent to which Virginia could defray the cost of Medicaid nursing home spending by establishing a formal estate recovery program.

Several actions are recommended which would limit the use of asset transfers in Virginia. A more proactive estate recovery program is also proposed. These modest changes would not eliminate benefits for significant numbers of potentially eligible applicants because relatively small numbers of applicants appear to use asset transfer techniques. Therefore, it may be advantageous for the General Assembly to enact limitations now, when the number of potentially affected applicants is still small.

Medicaid Is the Primary Source of Funding for Nursing Home Care

In 1990, there were more than 240 nursing homes in Virginia. Combined, these facilities provided in excess of 10 million days of care. Medicaid paid for almost 60 percent of these days. The second largest payment source was the private income and resources of uninsured nursing home residents (35 percent). Medicare (2 percent) and private insurance companies (3 percent) paid for considerably smaller amounts of the State's nursing home services.

Federal Law Allows Medicaid Recipients To Retain Significant Resources

In order to be eligible for Medicaid nursing home benefits in Virginia, an applicant's monthly income must be less than the private cost of nursing home care and the total value of the applicant's countable resources cannot exceed $2,000. However, when determining whether an individual meets Medicaid resource standards, federal law requires states to temporarily exclude the applicant's primary residence and permanently exempt any other resource that is not available to pay for care. This includes resources which the applicant previously owned but has given away through irrevocable, non-discretionary trusts. It may also include any property in which the applicant has only a life interest - the right to use the property while they are alive.

Due to these federal resource exemptions, 37 percent of the new Medicaid nursing home enrollees sampled for this study had assets in amounts above the $2,000 threshold. Statewide, it is estimated that individuals who applied for the program's nursing home benefits in FY 1991 owned more than $79 million in assets, most of which was not initially counted when their eligibility was determined.

A Small Number of Applicants Do Not Disclose Their Property

If a person owns property at the time of Medicaid application but does not qualify for an extended exemption, there is an incentive to "hide" the property from the Medicaid eligibility worker by failing to report it. In Virginia, this incentive is made stronger because the State forces all applicants with non-exempt property to sell the real estate after six months.

DMAS has developed a quality control program which indicates that only a small proportion of persons in nursing homes do not fully disclose their property when applying for benefits. However, the sample for this program is taken from the universe of all Medicaid recipients and thus might not adequately represent new applicants for nursing home benefits.

JLARC staff found that approximately eight percent of the persons who were approved for benefits failed to report property. The reasons that applicants did not report this property could not be determined. In some cases, the property may have been transferred prior to the date of Medicaid application. In other cases, ownership of the property may have been challenged in court.

Recommendation. The General Assembly may wish to consider requiring the Clerks of the Court to conduct property checks for all persons applying for Medicaid long-term care benefits. These property checks should cover the three-year period prior to the date that the application for benefits was submitted. To facilitate these checks, the Department of Social Services should require each local office to send to the Clerks of Court, on a monthly basis, the names of new Medicaid applicants.

$14 Million In Assets Is Legally Protected Using Medicaid Loopholes

Due to the complexity of Medicaid eligibility policy, there are a myriad of strategies that applicants can use to divest or shelter resources from the program. In conducting file reviews and interviewing eligibility workers, JLARC staff identified a number of approaches that were used by Medicaid applicants seeking nursing home benefits. In some cases, the applicants paid attorneys to negotiate the eligibility process for them. In other cases, applicants appeared knowledgeable enough to take advantage of certain provisions without legal counsel.

Based on a review of property records, it is estimated that applicants legally protected more than $14 million in assets when applying for nursing home benefits in FY 1991. This is a conservative estimate of the value of assets because JLARC staff did not identify property in other localities or states which may have been owned by these applicants. Some of the techniques used include the following:

• transferring resources in small increments each month so as to minimize the total period of ineligibility;

• using irrevocable trusts to shelter assets from the Medicaid program;

• purchasing expensive term life insurance as a means of passing resources on to relatives;

• paying family members for the "care" they provided in the years before the applicant applied for Medicaid.

The following recommendations could help to tighten restrictions on asset transfers in Virginia.

Recommendation. The Department of Medical Assistance Services should use the authority recently provided by the Health Care Financing Administration to adopt a State regulation permitting eligibility workers to count multiple transfers as a single transaction.

Recommendation. The General Assembly may wish to adopt legislation giving the Department of Medical Assistance Services the authority to count the resources used by Medicaid applicants to purchase term life insurance policies which have benefit to premium ratios that are lower than an established threshold. The time period in which these transfers can be regarded as inadequate compensation should be 30 months prior to the date that the person applies for Medicaid nursing home benefits. The State Bureau of Insurance should assist in the development of an appropriate benefit to cost ratio standard.

Federal Law Permits States to Recover the Cost of Care

Federal law provides states with two methods to help recover resources from recipients to defray the cost of nursing home care. First, states may place liens on the real property of institutionalized Medicaid beneficiaries for whom the state has determined that institutionalization is permanent. If a lien exists, the property holder must first satisfy the lien before the property can be sold or transferred.

Second, states can defray the cost of nursing home care by placing claims against recipients' property after their death. Under this option, the state files a claim against the estate of a deceased Medicaid long-term care recipient for the cost of the benefits provided. As with the placement of liens, however, recovery cannot be made until the spouse or any surviving children under age 21 who are blind or disabled no longer need the home.

DMAS' Current Estate Recovery Policy Yields Little Savings

Estate recovery in Virginia is not a proactive process in that DMAS does not, for the purpose of estate recovery, routinely track or collect data on recipients who own real property. DMAS officials indicated that they will consider recovering from the estates of deceased recipients only if they receive a report that a recipients estate is in probate. This strategy has not, however, resulted in substantial recoveries. Since 1989, the agency has recovered approximately$45,000.

According to DMAS officials, the agency does not have the resources required to initiate recoveries in a timely manner. By the time the agency has been notified of the recipient's death, many of the estates have already been probated. Because the State does not have an opportunity to place a claim against the estate prior to probate, it is unable to realize any of the proceeds of the estate.

Property Is Available to Recover Cost of Nursing Home Care

JLARC's review of the property records of a random sample of 447 recipients who were discharged from a nursing home in 1990shows that 16 percent of these recipients continued to own real property at the time they were terminated from the program. The average property value for these recipients was $47,706. Statewide, ·recipients who were discharged in 1990 owned $41.3 million worth of property. This is a conservative estimate because JLARC staff were unable to identify all property owned by these recipients.

The value of property owned by Medicaid recipients at the time of discharge, in and of itself, is not indicative of the amount of money that could be recovered through estate recovery. The property value (less any mortgage owed) must be compared to the amount of benefits that have been paid on behalf of the recipient. The lesser of the two represents the amount of money that could be recouped.

JLARC staff analysis of both property values and benefits paid indicates that the State could recover as much as two-thirds of the total cost of nursing home care for recipients who were discharged in 1990. In total, it is estimated that approximately $9.7 million could be recovered from these recipients if the State had a proactive recovery program. However, because some of this property would still be considered exempt according to federal law, only a portion of this amount is immediately available for recovery.

Recommendation. In order to defray the cost of nursing home care, the General Assembly may wish to consider requiring the Department of Medical Assistance Services to implement a proactive estate recovery program.

Lien Authority Would Enhance Recovery Potential

It appears that lien authority could improve the State's ability to ensure that the proceeds of the sale of a home are applied to the recipients care. The most obvious advantage of the use of lien authority is that it enhances the State's ability to preserve assets. By placing a lien on property at the time the recipient enters a nursing home, the State is ensured that the home will not be sold or transferred unless the State's interest is first satisfied.

Although states are prevented from foreclosing on a lien if there is a surviving spouse or dependent child in the home, the lien will effectively hold the State's interest in the property until the home is sold. At this time, the State's claim will automatically be considered along with other claimants.

Under current State law, DMAS is prevented from placing liens on nursing home residents receiving Medicaid assistance. Specifically, section 63.1-133.1 of the Code of Virginia states:

"No lien or other interest in favor of the Commonwealth or any of its political subdivisions shall be claimed against, levied or attached to the real or personal property of any applicant for or recipient of public welfare assistance and services as a condition of eligibility therefor or to recover such aid following the death of such applicant or recipient."

By changing this law to permit recoveries from Medicaid recipients, the State's chances of preventing property from being sold or otherwise disposed of before its claim is satisfied could be greatly improved.

Recommendation. To enhance Virginia's ability to recover benefits paid on behalf of institutionalized Medicaid recipients, the General Assembly may wish to consider revising Section 63.1-133.1 of the Code of Virginia to allow liens to be attached to the real property of Medicaid recipients of nursing home benefits.

Programmatic Changes Are Needed for Estate Recovery

In order to implement a more proactive recovery program in Virginia, certain programmatic changes would be required that would allow DMAS to better identify, track, and recover assets. The most significant of these changes would be in the recovery process itself. In order to implement these changes, it is likely that DMAS will require additional resources. Any decision about the structure of a recovery program should incorporate the findings of a detailed analysis of resource requirements.

Recommendation. The General Assembly may wish to direct the Department of Medical Assistance Services to conduct an analysis of the amount of resources that would be required to implement a proactive estate recovery program.