The general aging of our population along with advances in medical science have greatly increased the likelihood that we will live beyond the point that we can care for ourselves. The delivery of long term care to the elderly has evolved to include various forms of home care and long term nursing home care, all of which are very expensive. Long term care (LTC) ranges from help with day-to-day activities in the home (such as bathing, dressing, preparing meals, etc.), to more sophisticated services such as skilled nursing care. While typical health care services are cure oriented, long-term care involves treatment of chronic conditions and thus is said to be care oriented. Long term care can be provided in one's own home, an adult day care setting, in an assisted living/residential care facility, or a skilled nursing care facility.

The greatest concern for older Americans is that their entire wealth accumulation will be dissipated if they experience an extended stay in a skilled nursing care facility. According to a recent report, the average cost of a year in a nursing home was approximately $55,000 in 2001, roughly equating to $150 per day. Further, according to the New England Journal of Medicine, more than 50% of those who require 24-hour care will need such care for more than one year. On average, that group will need care for 2 1/2 years.

The high cost of skilled nursing care is of special concern to "community spouses," that is, the non-institutionalized spouse of a skilled nursing care patient. This Chapter 19 focuses on the sources of funding for the payment of LTC:

1. Medicare;
2. private pay (including long term care insurance for those eligible and able to provide their own); and finally
3. Medicaid.

MEDICARE

Medicare covers LTC only under limited circumstances, and only for a limited period of time. Medicare will reimburse the cost of a stay in an approved skilled nursing facility that immediately follows a three-day or more hospital stay. Further, to be eligible, you must enter the skilled nursing facility within 30 days of your discharge from the hospital, and the skilled nursing facility stay must be for the same reason as the hospitalization.

Medicare covers only the first 100 days of the skilled nursing care stay, covering 100% percent of the cost of the first 20 days, and only the cost of the remaining 80 days to the extent that the cost exceeds $101.50. Slightly augmented coverage may be provided under private "medigap" coverage during the 100-day period, but medigap coverage does not otherwise cover LTC. The likelihood that you will private-pay is high, considering that Medicare paid only 14% of skilled nursing home cost in 2001.

PRIVATE PAY

The cost of LTC, after Medicare benefits have been exhausted (if eligible at all), falls to the patient. The patient will continue to be obligated to pay the cost of his or her own LTC until his or her assets are sufficiently exhausted to be eligible for Medicaid. Individuals with adequate means and who enjoy reasonably good health may insure against this potentiality by purchasing long term care insurance. Perhaps to compensate for reductions in Medicaid, Congress in The Health Insurance Portability and Accountability Act of 1996, provided new tax incentives to owners of private long term care insurance. Qualified premium payments are now considered as medical expenses and are therefore deductible to the extent that when added to other medical expenses they exceed 7.5% of adjusted gross income. Under the 1996 Act, benefit payments from the long-term care insurance policy are income tax free. For those able to afford it, the new legislation has made long term care insurance an attractive method of insuring long term, quality care.

MEDICAID

Medicaid is a federally funded, state-administered welfare program restricted to the financially indigent. Accordingly, to qualify for Medicaid the patient must have exhausted substantially all of his or her non-exempt assets. Individuals may be tempted to gift their assets to family members in order to qualify for Medicaid. This process, called "divestment," can be perilous. The better skilled the nursing home facility, the less likely it is that they will accept Medicaid patients. Some facilities are entirely private-pay, accepting no Medicaid patients. Others limit the number of Medicaid beds available, giving priority to private pay patients. In light of the national shortage of skilled nursing care facilities and beds, patients attempting entry as Medicaid patients may land at the most undesirable facilities.

The following is a thumbnail sketch of the Medicaid eligibility rules as they apply to long-term nursing home care. For ease of discussion, the individual applying for Medicaid will be called the "Applicant."

An individual will be eligible for Medicaid only if he or she is at least age 65, demonstrates financial need, and follows the procedures for applying for Medicaid. With respect to financial need, the Applicant may have no more than $2,000 of assets and limited income. Counted assets encompass all assets including IRAs, the cash value of life insurance, stocks, and savings bonds. Assets owned in the Applicant and Applicant's spouse's name are counted as entirely owned by the Applicant, as are assets held in a revocable trust.

However, the following assets (sometimes referred to as "excluded assets") are not considered for purposes of the $2,000 limit:

1. An automobile of any value;
2. The Applicant's principal residence of any value ("homestead");
3. Household goods, furniture and personal affects, including clothing and jewelry;
4. A prepaid irrevocable funeral contract;
5. Cemetery plot;
6. Cash value of life insurance up to $1,500;
7. Income producing real property where the income derived from rents is at least 6% of the Applicant's equity in the rented property; and
8. Miscellaneous other exemptions not relevant here.

If medical expenses exceed income, then the income test is met. Medicaid will pay medical expenses to the extent they exceed income. Income is defined as both earned and unearned income including interest, dividends, rents, social security benefits and retirement benefits.

Clients often ask: "How does the State know what we have?" The simple answer to this question is that under the penalty of perjury the Applicant must file an Asset Declaration Form (FIA-4574-B) attached as Exhibit B, and provide independent verification of the ownership and value of each asset and source of income.

Two of the most misunderstood and complicated aspects of Medicaid eligibility are the divestment and spousal impoverishment rules.

DIVESTMENT

Divestment is the transfer of countable (i.e., non-excluded) assets for less than fair market value within sixty (60) months of applying for Medicaid nursing home benefits for transfers to or from a trust, and thirty-six (36) months for all other transfers. It is important to understand that divestment does not occur if countable assets are converted to exempt assets of equal value.

For example, paying off the mortgage on your home, buying a new car or purchasing an irrevocable funeral arrangement do not constitute divestment. The period of disqualification on account of divestment is measured by dividing the "uncompensated value" of the transferred assets by the average monthly private paid nursing home costs of the particular nursing home facility applied for.

For example, if on the eve of entering a nursing home and applying for Medicaid, Wendy gives her son, Sam, $120,000, Wendy will be ineligible for Medicaid for twenty-five (25) months ($120,000 divided by the average monthly cost of long term care in Michigan ($4,703 in 2002183). There is no limit on the length of disqualification resulting from divestment.

Finally, a rule that appears to have no logical basis on its face is that transfer of the Applicant's homestead within the thirty-six (36) month period, unless the transfer is to the spouse or a disabled child of the Applicant, is considered a divestment (despite the fact that the asset is an exempt asset). A transfer of the Applicant's homestead to a revocable living trust is considered a divestment. Transfers of other exempt assets within the thirty-six (36) month period are not considered to be divestments.

SPOUSAL IMPOVERISHMENT RULES

Spousal Impoverishment Rules were enacted in 1988 as part of the Medicare Catastrophic Coverage Act. In order to prevent the economic devastation of the community spouse (a term used to describe the non-institutionalized spouse), the Spousal Impoverishment Rules treat the assets and income of the husband and wife as part of a common pot with the community spouse entitled to a guaranteed share. First, with respect to income, the community spouse's income may be supplemented from income of the resident spouse up to a minimum of $ 1,493 and a maximum of $2,232 per month in 2002. The community spouse is also entitled to one-half (1/2) of the countable assets (in addition to all of the excluded assets) not to exceed $89,280 but with a guaranteed minimum of $17,856. These values are indexed for inflation. The Spousal Impoverishment Rules are an important development and allow retention of a much greater amount of assets by the community spouse.

ESTATE RECOVERY

As part of 1993 federal Legislation, Michigan is required to establish an estate recovery program to seek reimbursement of the Medicaid benefits paid on behalf of the decedent from the estate of a deceased Medicaid recipient. For purposes of the Act, "estate" may be defined as the decedent's probate estate, or all assets of the decedent, including jointly held property and property owned by the decedent's living trust. The estate recovery program was effective October 1, 1993. However, as of this writing, Michigan is the only state in the country that has not implemented an estate recovery program.

PLANNING TECHNIQUES AND STRATEGIES

There are several steps that can be taken to preserve the estate of someone needing long term nursing home care:

1. Purchase long term care insurance to cover the exigency of long term care.
2. Hold on to your exempt assets, especially the principal home.
3. Convert counted assets into exempt assets. Examples include paying down the mortgage on the home, improving the home, or acquiring a more expensive home.
4. Since the 6% income rule does not apply to homesteads, the homestead can be rented to family members for a very modest amount while the Applicant is in the nursing home. Family members could in turn re-rent the property at the current fair market value rent. This arrangement would prevent all of the rental income from being treated as income eligible for nursing home care payment.
5. Investment real estate could be acquired (even a common tenancy in a family member's residence would qualify) as long as the 6% income to equity ratio is met.
6. Outright gifts and gifts to an irrevocable or testamentary trust provide the greatest planning opportunity. Outright transfers more than thirty-six (36) months from the month in which application for Medicaid is made, or trusts more than sixty (60) months prior to such date are not counted for purposes of Medicaid eligibility. Use of trusts avoids an outright transfer of assets to family members who may dispose of the assets in a fashion unacceptable to the Applicant.
7. Consider monthly gifts in what has come to be known as "serial divestment." This technique involves monthly gifts in an amount that is less than the average monthly nursing home cost, as determined by the state. For example, if the average monthly nursing home cost is $4,703 (2002), a gift of $4,702 results in no disqualification, since Michigan does not recognize partial period disqualifications and always rounds down to the next whole number of months. Since each month is a new time period for computing gifts, $4,702 could be gifted each month with no disqualification. A gift of $9,404 would result in only one month of disqualification even though the divestment was 1.99 times the monthly amount. Serial divestment depends on two quirks in the law: first, that each month must be treated as a new gifting period, and second, that there be no partial period disqualification for gifts of less than the average monthly nursing home cost. Applicants should consult with an attorney familiar in such matters to determine if there have been any changes in the law that affect serial divestment.
8. Purchase an actuarially sound annuity ("ASA"). An ASA is a commercially available or private annuity that does not guarantee a period longer than the life expectancy of the Applicant.

The rules discussed herein apply specifically to Michigan. The Medicaid rules change frequently. Therefore, any planning strategy must be reviewed in light of current and future law changes. Each client's strategy will also depend on his or her particular situation.