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Beware of the Deficit Reduction Act

October 1, 2006
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Medicaid problems and collection issues are potential consequences of this new law by Jennifer B. Cona, Esq.
BY JENNIFER B. CONA, ESQ. Beware of the Deficit Reduction Act
A law seeking to reform long-term care financing can pose problems. Facilities should be ready On February 8, 2006, President George W. Bush signed into law the Deficit Reduction Act of 2005 (DRA), which severely restricts Medicaid eligibility for many elderly by drastically changing the Medicaid asset transfer laws. The new law, aimed at reducing Medicaid fraud, risks severely affecting healthcare facilities by inadvertently creating a population that has neither private-pay funds nor Medicaid eligibility to cover the costs of care. This is the result of three major changes wrought by the DRA: (1) an increased look-back period for Medicaid eligibility, (2) a new penalty period start date, and (3) changes to the homestead exemption. While these provisions are well intended, they may subject facilities to the "law of unintended consequences."

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.