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Routing 
Seventy-seven million aging baby boomerswill sink America’s retirement security system if we don’t take action soon. A few years ago, theproblem went unrecognized by most Americans.Today, the prospect of a fiscal crisis has forcedpolicymakers to focus on solutions.Social Security has center stage these dayswith a $10 trillion unfunded liability. Medicare isan even greater problem, with $60 trillion inunaccounted-for obligations. The good news isthat these massive “social insurance” programshave finally begun to attract the attention of ana-lysts, policymakers, and legislators. Another social program bears scrutiny butreceives much less attention. Medicaid is the poorrelative among government programs. It is means-tested public assistance—in a word, welfare. WhileSocial Security and Medicare have spurious “trustfunds,” Medicaid draws its financing from gener-al tax revenue without even the pretense of a trustfund. Medicaid is the principal payor for long-term care (LTC), especially nursing home care.LTC is an 800-pound gorilla of social problemsthat lurks just around the bend. If we wait to dealwith Medicaid and LTC until after we handleSocial Security and Medicare, it will be too late. At last, we have a window of opportunity toaddress the challenges of Medicaid and LTCfinancing. Congress has committed to find $10billion in Medicaid savings over the next fiveyears. Despite the handwringing this has caused,such savings and much more can be achievedwhile actually improving the program. Thispaper will explain how that can be done.
 Aging America’s Achilles’ Heel 
 Medicaid Long-Term Care
by Stephen A. Moses
_____________________________________________________________________________________________________
Stephen A. Moses is president of the Center for Long-Term Care Reform. He has been a Medicaid state representa-tive for the Health Care Financing Administration and senior analyst for the inspector general of the U.S. Department of Health and Human Services.
Executive Summary 
No. 549September 1, 2005
 
Introduction
Medicaid expenditures today exceed thecost of Medicare and continue to skyrocket.Medicaid is the biggest item in state budgets,having topped elementary and secondary education combined for the first time in2004.
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Long-term care (LTC) accounts forone-third to one-half of total Medicaidexpenditures in most states, 35 percent onaverage.
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For 2003, total Medicaid expendi-tures were $267 billion. Of this, Medicaid-financed nursing home care accounted forapproximately $51 billion and home care$9.9 billion.
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Medicaid LTC recipients consume a dis-proportionate share of total program expen-ditures. Consider, for example, people whoare eligible for both Medicaid and Medicare.Such “dual eligibles” account for 42 percentof Medicaid spending, although they makeup only 16 percent of Medicaid recipients.
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Dual eligibles are heavy users of LTC andMedicaid-financed acute care services thatare not covered by Medicare. On top of this,Medicaid pays for Medicare premiums andcost sharing for dual eligibles. Aged, blind, and disabled (ABD) individu-als—also heavy users of LTC—make up one-fourth of Medicaid recipients but account fortwo-thirds of program costs, whereas poorwomen and children make up three-quartersof the recipients but account for only one-third of Medicaid expenditures.
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Clearly,there is an imbalance between the types of people who use Medicaid and the resourcesspent on them.
Key Points and Queries
LTC is Medicaid’s most expensive benefit.The heaviest users of LTC—those who are eli-gible for both Medicaid and Medicare andthose who are aged, blind, or disabled—con-sume a disproportionate share of Medicaid’stotal resources.
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Therefore, every actual orpotential dual eligible, ABD, or other LTCrecipient who is kept from becoming depen-dent on Medicaid will result in dispropor-tionate savings to the program. In otherwords, if policymakers can prevent Medicaiddependence for even a small number of theseheavy LTC users, the savings would be extra-ordinarily high.But aren’t dual eligibles, the aged, blind,and disabled, and heavy LTC users the poor-est of the poor? Isn’t Medicaid their only safe-ty net after a catastrophic spend-down hasdevastated their life’s savings and driventhem into financial destitution? Actually, thetruth is not that simple. By confronting thetrue complexity of Medicaid eligibility, wecan find the savings, fix the program, andimprove LTC for everyone.
Examine Your Premises
 Are people on Medicaid necessarily poor?Only if they’re young and need acute or pre- ventive medical care. But not if their eligibility is based on their being aged, blind, or disabledand in need of LTC. Medicaid’s financial eligi-bility rules are relatively tight for poor womenand children. For people over the age of 65who have a medical need for nursing-home-level care, however, Medicaid’s eligibility rules—contrary to conventional wisdom—are very loose.
Income Eligibility 
Even substantial income is rarely an obsta-cle to Medicaid eligibility for the elderly whorequire LTC. If they have too little income topay all their medical expenses, including nurs-ing home care, they’re eligible.
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Medicaid“income eligibility” is determined in one of two ways. According to the Social Security  Administration, 35 states and the District of Columbia have “medically needy” income eli-gibility systems.
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Those states deduct eachMedicaid applicant’s medical expenses—including private nursing home costs, insur-ance premiums, medical expenses not coveredby Medicare, and so forth—from the appli-cant’s income.
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If the applicant has too littleincome to pay for all of these expenses, he or
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For people overthe age of 65 whohave a medicalneed for nursing-home-level care,Medicaid’seligibility rulesare very loose.
 
she is eligible for Medicaid—not just for LTCbut for the full array of Medicaid’s optionalservices, which often stretch far beyond whatMedicare covers.The remaining states have “income cap”Medicaid eligibility systems.
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In those states,anyone with income of $1,737 or less permonth (300 percent of the SSI monthly bene-fit of $579) is eligible for LTC benefits.
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Butany additional income makes the applicantineligible for Medicaid, even though thatamount is not enough to pay privately fornursing home care. Thus, Congress approved“Miller income diversion trusts” in theOmnibus Budget Reconciliation Act of 1993(OBRA ’93). These special financial instru-ments allow people to siphon excess incomeinto a trust to become eligible for Medicaid.The trust proceeds must then be used to offsetthe Medicaid recipient’s cost of care, and any balance in the trust at death is supposed torevert to Medicaid. Nevertheless, Millerincome trusts allow people with incomes sub-stantially over the ostensible limit to qualify for Medicaid, take advantage of the program’slow reimbursement rates, and receive an exten-sive range of additional medical services.No one has to be poor to qualify forMedicaid. There is no set limit on how muchincome you can have and still qualify as longas your private medical expenses are highenough or, if you live in an “income cap” state,you have a Miller income diversion trust. Allanyone needs to qualify for Medicaid is a cash-flow problem—that is, too little income afterall medical expenses are deducted.
Asset Eligibility 
One might ask, “So what?” Everyoneknows that people must spend down theirassets before becoming eligible for Medicaid.
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Here again the truth belies the conventionalwisdom. Medicaid beneficiaries can easily retain unlimited assets while qualifying forMedicaid LTC benefits, as long as those assetsare held in an exempt form. For example,Medicaid exempts one home and all contigu-ous property regardless of value. A simple“intent to return” to the home keeps itexempt, whether or not anyone resides in thehome or the Medicaid applicant has any objec-tive medical possibility of ever returning.
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How is this rule used to protect assets? Hereare some examples:
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 Another sheltering strategy is to con- vert available, countable assets intononcountable, exempt assets. Forexample, money in checking or savingsaccounts may be used, without creat-ing a period of ineligibility, to purchaseor improve a home, pay off a mortgage. . . pre-pay residence-related taxes andinsurance, or even pay outstandingbills, including legal fees.
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Once Medicaid eligibility is estab-lished, the community spouse may acquire unlimited assets in her ownname. Such assets might be received by gift, inheritance, or by selling the homeand, thereby, converting an exemptasset into a non-exempt asset (cash)with impunity.
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 A transfer of the home with reservedspecial powers of appointment canprovide the best of all possible worlds.It can completely protect the homefrom the reach of Medicaid after theapplicable waiting period while allow-ing the powerholder to retain controlof the property and preserve all desir-able tax benefits with no exposure toestate recovery.
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Medicaid also allows an exemption for onebusiness, including the capital and cash flow of unlimited value.
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How is this rule used toprotect assets? Here are some examples: A new amendment to the SocialSecurity Act allows an exemption forthe family business, farm or ranchfrom countable assets for Medicaid eli-gibility. The advocate should take max-imum advantage of this exemption toachieve immediate or very rapid eligi-
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Medicaidbeneficiaries caneasily retainunlimited assetswhile qualifyingfor Medicaid LTCbenefits, as longas those assets areheld in an exemptform.
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