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Medicare vs. Medicaid

I prepared this article about the basics of  Medicare and Medicaid law for the purpose of teaching Attorney's across the country via teleconference and webinar. It provides a comprehensive overview with some pertinent details for any person who is concerned about the costs of nursing home care. 

A. Medicare

Most people confuse the two federal programs Medicare and Medicaid. Generally, Medicare is a health insurance program for people who have worked for at least ten years in Medicare-covered employment and is 65 years of age or older; and, is a citizen or permanent resident of the United States. A person under the age of 65 might also qualify for coverage if the person has a disability or End-State-Renal disease, which is permanent kidney failure requiring dialysis or transplant. Medicare is divided into four parts, as follows:

  1. Part A, hospital insurance, no premium payment.

  2. Part B, medical insurance, now $115.40 per month.

  3. Part C, the Medicare Advantage program.

  4. Part D, the prescription drug program.

Traditional Medicare covers services which include physician services, outpatient services, preventative services, ambulance services, and durable medical equipment.

Part C, the Medicare Advantage program is an alternative delivery system for the patient to receive the Part A and Part B benefits through private insurance companies. The private Medicare Advantage plans must provide the same benefits as traditional Medicare, but they can provide extra benefits, change cost-sharing, and change the benefit package each year.

Part D, prescription drug coverage, is a voluntary benefit through private insurance companies. The senior does not need Part D if the senior has creditable drug coverage through his/her employer, VA, or other source. Some assistance with premiums can be provided for individuals with low-incomes. Medicare pays for medically-necessary care and rehabilitation support, but not “custodial care”, such as help with bathing, dressing, eating, getting in or out of bed or chair, moving around, and using the bathroom. Medicaid pays for that if the patient qualifies to receive Medicaid benefits.

B. Medicaid

Medicaid is a federal-state program that pays for long-term care for needy individuals. The federal government sets the overall rules and pays for about one-half of the cost. The states administer the program and fund the remainder of the expenses. Some states have enacted specific legislation codifying the Medicaid law into the state code. Other states “passed through” the Medicaid law and incorporated it into state law by reference.

The federal Medicaid laws can be found in Title XIX of the Social Security Act, 42 U.S.C. §1396 et seq; and, companion regulations are found at 42 CFR Part 430 et seq. To advise our clients competently, one must know the federal and state law, regulations, policy and administration.

Medicaid is the only broad government program that pays for long-term care. In contrast to Medicaid, Medicare pays only for short-term skilled nursing care and rehabilitative care.

The following scenario, which frequently occurs, helps clarify the differences between the Medicare and Medicaid programs, as follows:

The patient falls at home breaking a hip. The ambulance takes the patient to the hospital where the patient stays for three days. After three days of medical care, which is paid by health insurance/Medicare, the patient is not yet ready to go home. After assessment, the patient is transferred to a nursing home or rehabilitative center paid for by Medicare. If the patient needs medically-necessary requiring skilled nursing or rehabilitative services, Medicare will pay a portion of the cost of such care for a period of up to one hundred days. Typically, the patient does not receive the full one hundred days of Medicare benefits because the patient has “leveled off”, meaning the patient is no longer improving from the services provided.

At this point, if the patient is still not ready to return home, the staff at the nursing home/rehab center meets with the family and tells the family that the Medicaid application must be filed or the patient must pay the cost for private nursing home care, which is approximately $300 per day until the patient qualifies for Medicaid.

II. Other Sources of Long-Term Care Funding

A. Long Term Care Insurance.

Besides Medicaid and private pay, long term care insurance is the third major method used to pay for long term care in a skilled nursing home. Long term care insurance is usually worth pursuing. I suggest that my clients contact a couple different agents who sell long term care insurance and compare the premium and policy terms between two or more policies. Often the premium is unaffordable because the potential insured waited too long. The older and less healthy the potential insured, the more expensive the premium. Moreover, once the health of the potential insured is too compromised, he/she will not be approved for long term care insurance. If this type of insurance is affordable and the applicant is healthy, obtaining this insurance before age 70 is recommended.

My clients are often surprised to hear that long term care insurance is like a “pot of money” which can be used for home health care as well as for skilled nursing home care. Because nearly everyone would rather stay at home and never enter a nursing home, long term care insurance is a valuable resource to help make that happen. If the insured enters a nursing home, the remaining funds in the “pot of money” are used to pay a certain daily amount. The nursing home resident or Medicaid will pay the difference.

B. Home Care

Long term care is frequently provided in the home. The following approaches are useful to know in assisting clients in their effort to pay for long term care at home.

State and local programs funding home care.
The money available to allow the senior to stay at home varies tremendously from state and state and even from location to location within the same state. In addition, these programs frequently change names, procedures, and benefits. For this reason, establishing contact with someone who is highly knowledgeable of each local program is key. Check with the local representatives who provide services for seniors in your geographical area. Find the most knowledgeable person in this field. This person will usually be a well experienced social worker in an agency devoted to assisting seniors. You can also attend seminars on this topic and follow up with instructors who have such knowledge. From this knowledge base, list each and every source of funding for home health care. For each of these programs, list the requirements, benefits provided, the contact agency and specific forms and procedures utilized. I have this list with me when I meet with my client so I can determine which program(s) might benefit my client. For most programs, a medical assessment is required to determine what, if any, home health care is needed. If benefits are provided, they are usually not retroactive, so it is important to get started on the application process as soon as possible and stay involved so the process does not get stalled. It must be noted that if these funds would prevent or slow the patient’s admission into a skilled nursing home, which is usually much more expensive than home care, there is a good chance funding will be available.

Caregiver Agreements.

Another way to “stretch the money” and allow the person to stay at home as long as possible, is to prepare a caregiver agreement for family members/friends willing to perform home care and be paid for it. Frequently, a caregiver, such as a child or close friend, helps the patient at home for free until a significant sum of money, or even a house, is given to the caregiver. Without having a caregiver agreement in place before such a transfer, the Medicaid caseworker will most likely deem that transfer a gift and not a payment for services rendered. If the gift occurred within five years before the date the Medicaid application was filed, a severe penalty will be imposed. Even when the caregiver insists that the transfer was made to pay for past services the Medicaid caseworker will ask to see the tax returns showing that such payment was in fact treated as income. It is rare that the caregiver receiving such sums has actually reported the income on his/her income taxes. If the payment was not income, it was a gift. It is important to check the law in your state to see how these agreements are treated by the Medicaid caseworkers in your region. I frequently prepare the agreements whenever a family member or friend wants or deserves to be paid for providing home care. As stated above, without such an agreement, the risk is that the Medicaid caseworker will deem the payment a gift and require the money to be paid back by the caregiver. If the money is not paid back, the nursing home patient will have to pay privately during the penalty period. This usually costs more than the gift.

  • ​​If the regulations and case law in your region permit caregiver agreements the following is recommended: 

  • Set an hourly rate less than the hourly rate paid to an agency home health care worker.

  • List the care to be given which is in conformance with a medical assessment by an objective third party. Keep a copy of the assessment with the contract.

  • Have the caregiver keep a daily log, as most professional home care workers do, and keep track of the caregiver’s hours and mileage (such as trips to the doctor).

  • Pay the caregiver every Friday for the hours and expenses submitted by the caregiver that week. 

  • Provide no payments for the work the caregiver provides until on or after the date the contract was signed.

  • The caregiver must pay the income taxes for all money earned as a caregiver. It must be noted that the definition of an employee is so broad

  • it is usually difficult to prove the caregiver was an independent contractor should there be a tax audit. Consultation with a tax expert should be considered. Virtually the same contract can be written either as an independent contractor or employment agreement.

  • To be safest, payments should stop if the patient enters a skilled nursing home because the Medicaid caseworker will likely claim that the services were no longer needed. Check the regulations and case law in your region to determine how long the payments can continue. For example, all caregivers will contend that their services are vital even when the patient is in a nursing home because no nursing home can provide all services needed.

​​Home Care Agencies.

There are usually numerous home care agencies in your local area, each agency having its own unique services and rates. I recommend that at least three agencies be studied before making the final choice. I suggest to my families that they also speak to well experienced elder representatives in the area for their recommendations, and check for any violations or misconduct by any of your selected agencies. It is important that home care workers be bonded in case valuables become “missing.” 

Reverse Mortgages.

In a reverse mortgage, the borrower obtains the mortgage, receiving the money in monthly or quarterly payments, monthly/regular payments, a lump sum, or a line of credit. The money does not have to be paid back to the bank until the death of the borrower or upon the sale of the house. If the borrower is 62 years of age, roughly one-half of the fair market value of the home can be borrowed. The borrower must use the borrower’s money to pay off any existing encumbrances recorded on the home, such as mortgages, liens, and home equity loans. For each year older than age 62, approximately one percent (1%) more of the fair market value can be borrowed.

Currently interest will accrue on the amount loaned at approximately three percent (3%) per annum. Some argue that the low interest rate justifies obtaining a reverse mortgage to buy assets that will provide a return greater than three percent (3%) plus the cost of the loan.

​In truth, a reverse mortgage is usually done as a last resort. Unfortunately, sometimes our clients need to enter a skilled nursing home simply because Medicaid will pay the cost of care. In other words, the client’s money has run out so the client can no longer pay the cost of home care. A reverse mortgage can delay the client’s entry into a skilled nursing home by using the money borrowed to pay for home care.

III. Medicaid Benefits

To the surprise of many, the skilled nursing facility has to provide the same level of care for its Medicaid residents as it provides for its private pay residents.

Medicaid pays for virtually all of the beneficiary’s nursing home expenses. This includes room and board and all health-related care needs. Medicaid may also pay for the beneficiary’s pre-Medicaid health care expenses for a limited period of time prior to the filing of the application. The only exclusions are between-meals snacks, clothing, and beauty care. Although Medicaid will pay for dental work, eyeglasses and hearing aids, there may be a wait because of the small number of professionals who offer such services and are willing to be reimbursed by Medicaid.

From the special needs account, mentioned above, the Medicaid recipient can obtain haircuts, needed clothing and other miscellaneous items.

IV. Medicaid Eligibility Requirements

A. Proving Medical Necessity.

An applicant may only receive long-term care benefits if he/she has medical need for skilled nursing home care. This is determined by a professional individual who assesses the Medicaid applicant. Each state sets its own standards based upon the daily need for care by the applicant. Often the assessment includes which, if any, Activities of Daily Living (“ADL”) can no longer be performed by the applicant. ADLs include such activities as toileting, dressing, mobility, eating, and bathing.

B. Financial Eligibility Rules.

If the applicant is medically qualified to receive Medicaid payments, the applicant must also meet the financial requirements. If the applicant is single, the applicant’s countable assets must be $2,000 to $4,000 (depending upon your state) and the applicant’s income must qualify. If the applicant is married, the well spouse, called the “community spouse”, is allowed to keep the “Maximum Community Spouse Resource Allowance” (“MCSRA”) of “countable assets.” Most states have their own regulations for its Medicaid program, regulating the amount of MCSRA, which is unique to each state.

The program eligibility standards are not universal, but vary from state to state. Most states treat all people receiving Federal and SSI benefits as automatically eligible for Medicaid. These states, called SSI states, follow the Social Security Administration’s criteria for who is eligible for SSI. These states accept SSI’s determination of disability and its financial qualification criteria. In general, only persons who have assets of $2,000 or less ($3,000) per couple and income of less than the SSI payment amount of ($674 per month single and $1,011 per couple in 2010) are financially eligible to receive SSI.

The second group of states may offer benefits to the age, blind and disabled based on criteria that are more restrictive than the current SSI rules. These states are called “Section 209(b)” states (named for the section of the Social Security Law that give states this right). However, Section 209(b) states may not implement rules more restrictive than the SSI rules effective on January 1, 1972, except for the spousal impoverishment rules. In addition, these states must subtract certain classes of income before determining eligibility including an individual’s actual SSI benefit and any state supplement to that benefit, the amount of statutory Social Security Benefit increases and medical expenses incurred by the applicant. The Section 209(b) states are Connecticut, Hawaii, Illinois, Indiana, Minnesota, Missouri, New Hampshire, North Dakota, Ohio, Oklahoma, Utah and Virginia.

A “medically needy” person would qualify as a categorically needy person, but for the fact that the person has income and/or assets in excess of the criteria for the categorically needy. Such persons may “spend down” their income and assets in order to qualify for Medicaid. The majority of states are “spend-down” states for the medically needy. In such “spend-down” states, asset limits for single person range from $2,000 to $4,000. States have the option of allowing income limits as high as the actual cost of care or impose an income cap of three times the SSI rate which was $2,022 in 2010.

Most states allow an applicant to be eligible for benefits provided the income does not exceed the private pay cost of care. In a few states called “income cap” states, an applicant can place income exceeding the cap amount into a special irrevocable trust know as a “Miller Trust.” See Miller v. Ibarra, 746 F. Supp. 19 (D. Colo. 1990). A Miller Trust is an explicitly permitted under federal law. See 42 U.S.C. §1396(d)(4)(b). The state has the right to claim assets remaining in the trust at the time of the beneficiary’s death for reimbursement for the cost of care it provided. The income cap states, or states that otherwise limit income for long-term care are Alabama, Alaska, Arizona, Arkansas, Colorado, Delaware, Florida, Idaho, Iowa, Louisiana, Mississippi, Nebraska, Nevada, New Mexico, Oklahoma, Oregon, South Carolina, South Dakota and Wyoming.

Once the Medicaid applicant qualifies to receive Medicaid benefits, the applicant’s income is paid to the nursing home after certain deductions have been subtracted. The deductions are typically a small amount of money, usually referred to as a special needs allowance (to be used for incidentals such as haircuts and clothing, for example) and health insurance. Each state’s Medicaid program pays the nursing home the additional money required above the net income received by the nursing home. The total amount paid by the state to the nursing home is less than the amount of money the nursing home collects from its private pay patients. The actual amount the Medicaid office pays for each patient depends on the actual needs of the patient. The amount paid by the Medicaid office is not voluntarily provided, but can be obtained upon request. Sometimes the difference between the private pay amount and the amount Medicaid pays the nursing home is important for certain planning opportunities.

V. Assessing the Client’s Current and Future Needs

A. Questions to Ask.

Before the appointment with me, I ask my client, if possible, to bring to the appointment as many of the following documents/information as possible:

  1. List of assets stating for each, the type of asset and its value. The assets of both spouses must be included. For Medicaid planning purposes, I do not need the value of personal property such as jewelry, guns or collectables.

  2. As to each asset, the names of all owners and how ownership is held, such as jointly with rights of survivorship or as joint tenants.

  3. State the amount of debt, if any, associated with each asset.

  4. As to each policy of life insurance, the cash surrender value, death benefit, name of owner, and upon whose death will the benefit be paid.

  5. A list of all gifts made the previous five years, including the value. At my session I will ask my clients the story behind each gift and to whom each gift was made. I will also ask if the money has been spent or is being held for safe keeping. A gift is a transfer of an asset (e.g. money; stocks; real property, either outright or the conveyance of a remainder interest) to a third party for less than fair market value. The value of the gift is computed by determining the fair market value of the asset and subtracting the amount actually paid. Lastly, I will obtain the monthly income from all sources from each spouse.

B. Non-countable v. Countable.

I divide the assets into two columns labeled non-countable and countable. Check the regulations in your state, but typically the non-countable assets include the residence, automobile, pre-paid irrevocable funeral contract and perhaps a burial account. The Medicaid applicant and community spouse are entitled to keep all non-countable assets. All other assets are countable.

A single Medicaid applicant is permitted to only have non-countable assets of $2,000 to $4,000, depending upon the regulations in your state. If the applicant has a spouse who resides in the home and not in a skilled nursing home, the community spouse can keep the Maximum Community Spouse Resource Allowance (“MCSRA”), typically an amount in excess of $100,000 of countable assets. The countable assets that exceed the maximum allowed amounts are considered “excess assets” and must be spent down or reduced in some other way. This is the essence of Medicaid planning. The community spouse can occasionally receive more than the MCSRA amount. For example, if the community spouse depends upon the income generated by the excess assets, upon appeal the community spouse may be permitted to keep the excess asset amount.

C. Records to Obtain.

If a Medicaid application must be prepared, the following documents must be collected:

  • At least one year’s of statements for each bank account, investment account and retirement account. After the Medicaid application has been filed, the caseworker may ask for older statements, theoretically up to five years’ worth.

  • Statements from every life insurance company for every life insurance policy stating the death benefit, cash surrender value if any, and the owner. While I am looking at each life insurance policy, I ask the premium amount and whose life is insured. The cash surrender value of each life insurance policy owned by the applicant and community spouse is countable.

  • If burial accounts have been set up, a copy of each page of the passbook savings bank account.

  • If an irrevocable pre-paid funeral was purchased, a copy of the contract.

  • If a burial plot has been purchased, a copy of this information.

  • Health insurance cards, both front and back.

  • Statements for the cost of health insurance and annuities.

  • Real estate deeds.

  • Motor vehicle information.

  • Copies of all Trusts.

  • Documents supporting the expenses of the community spouse, if any.

  • If any gifts have been made, the paper trail in connection with each gift.

D. Agreements/Documents to Sign.

  1. Caregiver Agreement.
    As stated above, a caregiver agreement can be a useful tool in certain situations. For example, if only a couple of children are taking care of a parent in the home, but other children are too busy or do not want to care for the parent, I have discovered that quite often the receipt of even a modest amount of money for the caregiver services reduces the guilt of the non-caregiver children and makes the caregiver children feel more appreciated. Just as important, the caregiver agreement avoids the problem of payments for services rendered looking to the Medicaid caseworker as if impermissible gifts were made to the caregiver child. The caregiver agreement, executed before services were rendered, provides legitimacy for payments made from parent to child.

  2. Estate Plan.
    Every adult of sound mind should have the basic estate plan, which consists of the Will, Durable Power of Attorney, Health Care Proxy; and, an Advance Directive, if desired. During the appointment dealing with Medicaid, it is an excellent opportunity to review the client’s existing estate plan or prepare one for the client, if needed.

    A new estate plan must be prepared for the community spouse when it is known which spouse is at risk of entering a nursing home. A typical example of this occurs when one spouse receives a diagnosis that he/she has Alzheimer’s Disease.

    At the emotionally appropriate time, the community spouse will have to prepare a new estate plan. Most couples prepare “mirror wills” leaving all of their assets to each other upon death. Unfortunately, about half the time, the community spouse dies before the death of the nursing home spouse who is already receiving Medicaid benefits. If this occurs, upon notice to the Medicaid office, the Medicaid payments will stop because the now single nursing home spouse usually inherits assets well above the $2,000 to $4,000 allowed for a single person.

    This can be avoided by changing the community spouse’s will. Instead of leaving the assets outright to the nursing home spouse, the new will “pours over” into a testamentary trust leaving the assets to a trustee, for example a child, to be held to supplement, but not replace Medicaid benefits. With this technique, the nursing home spouse will continue to receive Medicaid benefits uninterrupted.

    Changing the will to leave the marital estate outright to the children while the nursing home spouse is still alive should be avoided. If the new will skips the spouse and leaves the marital assets outright to the children, there is a risk that the state Medicaid office will attempt to force a spousal election. The testamentary trust avoids this problem.

    This is called a testamentary trust because this trust comes into existence upon the death of the community spouse. Because it supplements, but does not replace, Medicaid benefits, the nursing home spouse will continue to receive Medicaid benefits uninterrupted. Upon the death of the nursing home spouse, the testamentary trust typically directs that any funds remaining are distributed to the named beneficiaries outright.

    As well as changing the will, the health care proxy and durable power of attorney documents will have to be changed. The now ill spouse was usually named previously as the various agents for the well spouse. At this point, it is usually the case that the ill spouse will be unable to perform these jobs.

  3. Independent Living Complexes, Assisted Living Facilities, Pre-Skilled Nursing Homes, and Skilled Nursing Homes.
    As our clients seek to downsize by selling their homes, their new home often has complex contracts. For example, independent living complexes, assisted living facilities, pre-skilled nursing homes, and skilled nursing homes have its own set of contracts and questionnaires.

    It is important to get involved as early in the process as possible and attempt to review each contract before the client signs it. Unfortunately, frequently the clients will show the attorney the contracts after the clients have signed them. The most troublesome issue is when the agent, for example, a child or best friend signs the document as if he/she is personally liable. I always advise my agents to sign, “…as agent for ….” or “…as DPA for …”

​E. Special Family Considerations.

Often intertwined with Medicaid issues are the following issues which must be addressed.

  1. Irrevocable Income Only Trust (“IIOT”).
    If legally accepted in your state, this irrevocable income only trust (“IIOT”) works very well. After the trust has been created, the client decides how much to fund it. The grantor is not permitted to access the principal but can receive the income generated from the principal. The transfer of assets into this trust is considered a gift by Medicaid. After the five year look back period has passed, in other words after more than five years has passed since the transfer of principal into the trust, this gift need not be reported on the Medicaid application. If the grantor needs to apply for Medicaid benefits before the five year look back period has passed, the grantor can use the lifetime special power of appointment provision contained within the IIOT, and the grantor can direct that all or any of the money be given to one trusted child. That trusted child shall then immediately give the money to the grantor. This can be referred to as a “cure”, reversing the gift so the penalty period is not imposed. If this occurs, the money will be paid to the nursing home until the applicant spends down to the level needed to receive Medicaid benefits. The goal was not achieved, but at least no penalty will be suffered as a result of attempting to shelter this money.

  2. Special Needs Trust.
    Occasionally the parent entering the nursing home has been taking care of a special needs child. This is a critical time to develop a system for substitute care for the dependant special needs child. It is important to meet with extended family members and determine potential trustees. A special needs trust can be prepared in order to supplement, but not replace, public benefits received by the special needs dependant.

  3. The “Bad Child”.
    Unfortunately, the elder law attorney has to watch out for the individual I generically refer to as the “bad child.” What I mean by this is, for example, the adult child who is taking advantage of the elder to such a degree that it rises the level of elder financial abuse. Often the bad child is living with the parent, taking advantage of him/her and must be evicted. Typically, a call to the local elder abuse hotline will trigger an immediate investigation into the situation upon the filing of your concerns with the agency. The caseworker will meet with the elder and first determine whether or not the elder is competent or not. If the elder is deemed competent, then the protective agency will not get involved because the elder has a right to choose, even if the elder’s choices are not safe. If the elder is deemed incompetent, protective systems can be imposed.

  4. Guardianship/Conservatorship.
    Often individuals are deemed incompetent before they executed a health care proxy and durable power of attorney. At the point the client enters the nursing home, documents need to be signed and money needs to be paid to the nursing home. This is frequently the point when the nursing home representative advises family members that they must find an attorney to petition for a guardian so health care decisions can be made; and, for a conservator so the money can be properly handled.

  5. Special Orders for Antipsychotic Medications.
    Many states have unique rules and court requirements if the physician recommends that the nursing home resident needs anti-psychotic medications. It is important to check the case law, statutes and regulations in your state.

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