Medicaid: Transfers of Assets by Elderly Individuals to Obtain
Long-Term Care Coverage (02-SEP-05, GAO-05-968).
In fiscal year 2004, the Medicaid program financed about $93
billion for long-term care services. To qualify for Medicaid,
individuals' assets (income and resources) must be below certain
limits. Because long-term care services can be costly, those who
pay privately may quickly deplete their assets and become
eligible for Medicaid. In some cases, individuals might transfer
assets to spouses or other family members to become financially
eligible for Medicaid. Those who transfer assets for less than
fair market value may be subject to a penalty period that can
delay their eligibility for Medicaid. GAO was asked to provide
data on transfers of assets. GAO reviewed (1) the level of assets
held and transferred by the elderly, (2) methods used to transfer
assets that may result in penalties, (3) how states determined
financial eligibility for Medicaid long-term care, and (4)
guidance the Centers for Medicare & Medicaid Services (CMS) has
provided states regarding the treatment of asset transfers. GAO
analyzed data on levels of assets and cash transfers made by the
elderly from the 2002 Health and Retirement Study (HRS), a
national panel survey; analyzed states' Medicaid applications;
and interviewed officials from nine states about their
eligibility determination processes.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-05-968
ACCNO: A35540
TITLE: Medicaid: Transfers of Assets by Elderly Individuals to
Obtain Long-Term Care Coverage
DATE: 09/02/2005
SUBJECT: Assets
Elderly persons
Eligibility criteria
Eligibility determinations
Health care programs
Income statistics
Long-term care
Medicaid
Strategic planning
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GAO-05-968
* Results in Brief
* Background
* Medicaid Coverage for Long-Term Care
* Spousal Impoverishment Protections
* Transfers of Assets under Medicaid
* Asset Levels and Extent of Cash Transfers Varied Depending o
* Greatest Proportion of Elderly Had Incomes of $50,000 or Les
* Elderly Households' Level of Assets Varied Depending on Leve
* Likelihood of Cash Transfers and Amount Transferred Varied b
* Methods of Reducing Assets May Not Result in a Penalty Perio
* Some Asset Reduction Methods Do Not Delay Medicaid Eligibili
* Other Methods to Reduce Assets Could Delay Medicaid Coverage
* States Could Not Identify the Extent to Which Individuals Tr
* States Reviewed Did Not Systematically Track and Analyze App
* Nationwide, States Request Information on Assets and Transfe
* Nine States' Identification of Asset Transfers Predominately
* CMS Provides Guidance on Transfers of Assets through the Sta
* Agency and State Comments
* GAO Contact
* Acknowledgments
* Order by Mail or Phone
Report to Congressional Requesters
United States Government Accountability Office
GAO
September 2005
MEDICAID
Transfers of Assets by Elderly Individuals to Obtain Long-Term Care
Coverage
Medicaid and Asset Transfers Medicaid and Asset Transfers Medicaid and
Asset Transfers Medicaid and Asset Transfers Medicaid and Asset Transfers
Medicaid and Asset Transfers Medicaid and Asset Transfers Medicaid and
Asset Transfers Medicaid and Asset Transfers Medicaid and Asset Transfers
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Asset Transfers Medicaid and Asset Transfers Medicaid and Asset Transfers
Medicaid and Asset Transfers Medicaid and Asset Transfers Medicaid and
Asset Transfers Medicaid and Asset Transfers Medicaid and Asset Transfers
Medicaid and Asset Transfers Medicaid and Asset Transfers Medicaid and
Asset Transfers Medicaid and Asset Transfers Medicaid and Asset Transfers
Medicaid and Asset Transfers Medicaid and Asset Transfers Medicaid and
Asset Transfers Medicaid and Asset Transfers Medicaid and Asset Transfers
Medicaid and Asset Transfers Medicaid and Asset Transfers Medicaid and
Asset Transfers Medicaid and Asset Transfers Medicaid and Asset Transfers
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Asset Transfers Medicaid and Asset Transfers Medicaid and Asset Transfers
Medicaid and Asset Transfers Medicaid and Asset Transfers Medicaid and
Asset Transfers Medicaid and Asset Transfers Medicaid and Asset Transfers
Medicaid and Asset Transfers Medicaid and Asset Transfers Medicaid and
Asset Transfers Medicaid and Asset Transfers
GAO-05-968
Contents
Letter 1
Results in Brief 4
Background 6
Asset Levels and Extent of Cash Transfers Varied Depending on Demographic
Factors 13
Methods of Reducing Assets May Not Result in a Penalty Period 20
States Could Not Identify the Extent to Which Individuals Transferred
Assets 26
CMS Provides Guidance on Transfers of Assets through the State Medicaid
Manual and in Response to Specific Questions from States 31
Agency and State Comments 34
Appendix I Information about the Health and Retirement Study 36
Appendix II Methodology for Selecting Sample States 37
Appendix III Characteristics of Medicaid Long-Term Care Application
Processes, by State 39
Appendix IV Characteristics of Medicaid Long-Term Care Applications
Related to Transfers of Assets, by State 42
Appendix V Comments from the Centers for Medicare & Medicaid Services 44
Appendix VI GAO Contact and Staff Acknowledgments 46
Tables
Table 1: Types of Assets and Examples 9
Table 2: Income and Resource Standards for Certain Medicaid Eligibility
Categories, as of 2005 10
Table 3: Cash Transferred in the Previous 2 Years as Reported by Elderly
Households, by ADL Limitation, Marital Status, and Gender, 2002 19
Table 4: Cash Transferred in the Previous 2 Years as Reported by Elderly
Households with Varying Levels of Income and Nonhousing Resources, 2002 20
Table 5: Information Required during States' Application Processes for
Medicaid Eligibility 28
Table 6: Nine States' Requirements for Documentation of Assets 29
Table 7: Proportion of Applicants for Which Nine Sample States Used
Specific Asset Verification Sources 30
Table 8: Clusters Used for State Sample Selection 38
Figures
Figure 1: Distribution of Annual Income as Reported by Elderly Households,
2002 14
Figure 2: Distribution of Nonhousing Resources as Reported by Elderly
Households, 2002 15
Figure 3: Median Assets-Income and Resources-for Elderly Households, by
Level of Disability, 2002 16
Figure 4: Median Assets-Income and Resources-for Elderly Households, by
Marital Status and Gender, 2002 17
Figure 5: Median Income and Nonhousing Resources for Elderly Households
That Reported Transferring Cash Compared with All Elderly Households, 2002
18
Abbreviations
ADL activities of daily living CMS Centers for Medicare & Medicaid
Services HRS Health and Retirement Study IADL instrumental activities of
daily living IEVS Income and Eligibility Verification System SSI
Supplemental Security Income
This is a work of the U.S. government and is not subject to copyright
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separately.
United States Government Accountability Office
Washington, DC 20548
September 2, 2005
The Honorable John D. Dingell Ranking Minority Member Committee on Energy
and Commerce House of Representatives
The Honorable Sherrod Brown Ranking Minority Member Subcommittee on Health
Committee on Energy and Commerce House of Representatives
The Honorable Henry A. Waxman House of Representatives
As people age, their ability to carry out certain basic physical functions
declines, increasing the likelihood that they will need long-term care. In
2003, nearly half of the nation's total expenditures of about $183 billion
for long-term care, including nursing home payments, were paid for by the
Medicaid program, the joint federal-state health care financing program
that covers certain categories of low-income individuals.1 Medicaid
expenditures for long-term care in 2004 were about $93 billion out of
total Medicaid expenditures of $295 billion. With the aging of the
population and the likely increase in demand for long-term care, federal
Medicaid spending is expected to more than double in size over the next 10
years.2
To qualify for Medicaid coverage for long-term care services, individuals
must meet certain financial and functional eligibility criteria.3 To meet
the financial eligibility criteria, individuals must have assets that fall
below established standards, which vary by state but are within standards
set by the federal government. Assets include income, which is anything
received during a calendar month that is used or could be used to meet
food, clothing, or shelter needs; and resources, which are anything owned,
such as savings accounts, stocks, or property, that can be converted to
cash.4 Not all assets are counted in determining financial eligibility for
Medicaid-for example, states generally exclude the value of an
individual's primary residence. Because certain types of long-term
care-particularly nursing home care-are costly (estimated by some to
average over $70,000 a year for a private-pay patient),5 individuals who
pay for an extended stay in a nursing home can quickly deplete their
assets and subsequently qualify for Medicaid. In some cases, individuals
might divest themselves of their assets-for example, by transferring them
to their spouses or other family members-in order to establish financial
eligibility for Medicaid long-term care coverage. However, those who
transfer assets for less than fair market value during a specified
"look-back" period-the period of time before application for Medicaid in
which asset transfers are reviewed-may incur a penalty-a period during
which they are ineligible for Medicaid coverage for long-term care
services. The look-back period is either 36 months or 60 months, depending
on the type of asset. The penalty period begins at approximately the time
assets were transferred.
1In addition to nursing home services, other health care services for
long-term care include home health, personal care services, assisted
living, and noninstitutional group living arrangements.
2Congressional Budget Office, The Budget and Economic Outlook: Fisca Years
2006 to2015 (Washington, D.C.: January 2005).
3The functional eligibility criteria are established by each state and
generally involve a degree of impairment measured by the level of
assistance an individual needs to perform activities of daily living (ADL)
such as eating, bathing, dressing, using the toilet, getting in and out of
bed, and getting around the house, as well as instrumental activities of
daily living (IADL) such as preparing meals, shopping for groceries, and
getting around outside.
Opinions differ over the extent to which individuals transfer assets to
qualify for Medicaid coverage for long-term care. Some contend that asset
transfers are prevalent and that individuals, on the advice of elder law
attorneys, transfer assets that are sometimes significant in order to
qualify for Medicaid long-term care coverage, thus substantially
increasing Medicaid costs. Others contend that, while such transfers may
occur, they are not a large-scale problem that unduly increases Medicaid
program costs and that individuals expecting to need nursing home care
tend to save more assets than others in order to pay for their care.
Evidence on the extent to which individuals transfer assets to become
eligible for Medicaid long-term care is generally limited and often based
on anecdotes.
4This terminology is based on definitions provided in the State Medicaid
Manual issued by CMS, which specifies that assets include both income and
resources.
5Congressional Budget Office, The Cos and Financing of Long-Term Care
Services, April 19, 2005, Statement before the Subcommittee on Health,
Committee on Ways and Means, U.S. House of Representatives; and
Metropolitan Life Insurance Company, The MetLifeMarket Survey of Nursing
Home & Home Care Costs (Westport, Conn.: September 2004).
The President's fiscal year 2006 budget proposed to save an estimated $1.5
billion over 5 years by tightening existing rules related to asset
transfers. According to the Centers for Medicare & Medicaid Services
(CMS), the agency within the Department of Health and Human Services that
oversees states' Medicaid programs, the proposal changes the start of the
penalty period from the date of the asset transfer to the later of (1) the
date of the asset transfer, or (2) the point at which an individual is
eligible for Medicaid and is receiving long-term care services. In light
of the current budget proposal, you asked us to provide data on transfers
of assets by elderly individuals in order to obtain Medicaid-covered
long-term care.
For this report, we reviewed (1) the level of assets held by the elderly,
including those who transferred cash and the amounts they transferred; (2)
methods that the elderly use to reduce available assets that may result in
a penalty period; (3) states' experiences in identifying the extent of
asset transfers to establish Medicaid eligibility for long-term care
coverage; and (4) guidance and technical assistance that CMS provided to
states regarding individuals' transfers of assets in order to qualify for
Medicaid long-term care coverage.
To examine these issues, we analyzed data from the 2002 Health and
Retirement Study (HRS), a longitudinal national panel survey, sponsored by
the National Institute on Aging and conducted every 2 years by the
University of Michigan. (See app. I for more information about the HRS.)
We used data from this survey to estimate the (1) level of assets (both
income and resources) held by elderly households (defined as those in
which at least one member is aged 65 or over), (2) extent to which they
transferred cash, and (3) amount transferred.6 Our analysis includes data
from all elderly households; we did not assess whether the respondents had
or were seeking Medicaid coverage. Because the HRS only addressed cash
transfers-cash provided to relatives or other individuals-our analysis
understates the extent and amount of all transfers by excluding transfers
of property and other types of assets. Since the HRS did not inquire about
the reason for the cash transfers, no conclusions can be drawn regarding
the extent to which the survey respondents transferred cash for purposes
of establishing Medicaid eligibility for long-term care. In addition to
analyzing the survey data, we collected and analyzed Medicaid applications
in use during June and July 2005 for long-term care, from all 50 states
and the District of Columbia.7 We reviewed the federal laws related to
Medicaid and asset transfers, as well as related CMS guidance. We also
interviewed officials from 9 states regarding Medicaid eligibility
determination practices, including the process for identifying whether
applicants had transferred assets. To select states, we assessed the
prevalence of five factors in each state;8 on the basis of this
assessment, we grouped the states into three clusters (low, medium, and
high) based on the prevalence of the five factors. We then selected 3
states from each cluster based on randomly generated numbers, for a total
sample of 9. The 9 states in the sample were Arkansas, District of
Columbia, Florida, Hawaii, Montana, Ohio, Oregon, South Carolina, and
Wisconsin. (See app. II for more information about our methodology for
selecting the sample states.) We also interviewed several elder law
attorneys, researchers, and officials from CMS and its 10 regional
offices. We conducted our work from April through August 2005 in
accordance with generally accepted government auditing standards.
6HRS asked respondents whether they had transferred cash to another
individual during the 2 years prior to the interview. The data we report
here, therefore, refer only to these transfers.
Results in Brief
Overall, in 2002, elderly households' asset levels varied depending on
demographic factors such as the level of disability, marital status, and
gender; additionally, transfers of cash also depended on these
demographics as well as the overall level of a household's assets. Of the
approximately 28 million elderly households, about 80 percent of
households had annual incomes of $50,000 or less, and about one-half of
elderly households had nonhousing resources, which exclude the primary
residence, of $50,000 or less, according to data from the 2002 HRS.9 The
median annual income for all elderly households was $24,200, and their
median nonhousing resources were $51,500. Households with a disabled
elderly individual (reporting at least one limitation in activities of
daily living (ADL)) tended to have lower asset levels than nondisabled
elderly households, and as the level of disability increased, the level of
household assets decreased. Elderly individuals reporting three or more
limitations in ADLs-who are at higher risk of needing long-term care-had a
median income of $13,200 and median nonhousing resources of $3,200. With
regard to transfers of cash during the 2 years prior to the HRS study,
approximately 6 million elderly households (about 22 percent) reported
transferring cash, with a median transfer amount of $3,000. In general,
households with higher asset levels were more likely to have transferred
cash; hence, nondisabled elderly households and couples were most likely
to have transferred cash.
7Throughout this report, the term state refers to the 50 states and the
District of Columbia.
8The five factors were (1) percentage of the population aged 65 and over,
(2) cost of a nursing home for a private-pay patient, (3) proportion of
elderly with income at or above 250 percent of the federal poverty level
($23,925 for a single-person household in 2005), (4) reported Medicaid
nursing home expenditures, and (5) availability of legal services through
elder law attorneys specifically to meet the needs of individuals who are
elderly or disabled.
9We excluded the primary residence from this analysis because states'
Medicaid programs generally do not include a residence as a countable
resource. The median total resources for all elderly households, including
the primary residence, were $150,000.
Methods individuals use to reduce their assets for purposes of
establishing Medicaid eligibility do not always result in a penalty period
and thus may not lead to a delay in Medicaid coverage for long-term care
services. For example, reducing debt or making home modifications does not
result in a penalty period. Other methods, however, could result in a
penalty period and thus a delay in Medicaid coverage for long-term care
services. Methods used that may result in a penalty period include giving
away assets as gifts, making use of certain financial instruments such as
annuities and trusts, and transferring property ownership. Whether or not
an asset reduction method results in a penalty period depends on the
specific arrangements made and the policies of the individual state. For
example, giving away assets generally results in a penalty period, but
exceptions exist, including assets given to a spouse or disabled child
without penalty.
Although most of the officials in the nine states we reviewed reported
that some individuals transferred assets for purposes of qualifying for
Medicaid coverage for long-term care, none of these systematically tracked
or analyzed data that would provide information on the incidence of asset
transfers and the extent to which penalties were applied in their states.
Nationwide, all states requested information about applicants' assets,
including transfers of assets, through Medicaid application forms,
interviews to determine Medicaid eligibility, or both. The nine states we
reviewed generally relied on this applicant-reported information to
identify transfers of assets. These states required applicants to provide
documentation of their assets as part of the application process but
varied in the amount of documentation they required. For example, all nine
states required bank statements but differed in the length of time the
statements were to cover. Although these states also differed in the
extent to which they verified reported assets, they were more likely to
verify information on income and less likely to verify information on
resources. According to officials in these nine states, transfers that
were not reported by applicants were difficult to identify. Some of these
states, however, reported using certain indicators from applicants' asset
documentation, the states' asset verification data, case worker
interviews, or a combination of these factors to try to identify
unreported transfers.
To help states comply with federal requirements related to asset transfers
and Medicaid eligibility for long-term care coverage, CMS issued guidance
primarily through the State Medicaid Manual. The agency also released a
special study in 2005 to help states address the issue of using annuities
as a means of sheltering assets. Although CMS officials provide ongoing
technical assistance to individual states in response to their questions,
some said that the agency faces challenges in issuing guidance that would
be applicable to all situations. In particular, CMS officials said that
states' efforts to identify and address asset transfer issues are
constantly changing, as certain methods to convert countable assets are
identified, increase in use, and then diminish. For example, CMS officials
cited the use of personal care agreements, in which the individual
applying for Medicaid long-term care coverage hires a family member to
perform services, as a practice that at one time was frequently used to
transfer assets, and then diminished in use. The officials added that they
provided technical assistance to states to help them limit the use of
certain personal care agreements.
We provided CMS and the nine states in our sample an opportunity to
comment on a draft of this report. In written comments, CMS noted that the
complexity of current law provides opportunities for attorneys and
individuals to devise asset transfer schemes that have the effect of
shielding substantial financial assets for certain individuals who
consequently qualify for Medicaid coverage for long-term care. CMS also
commented that data on the precise extent and cost of asset transfers to
the Medicaid program have been difficult to gather.
Background
To be eligible for Medicaid, individuals must be within certain
eligibility categories, such as children or those who are aged or
disabled. In addition, individuals must meet financial eligibility
criteria, which are based on individuals' assets-income and resources
together. Once eligible for Medicaid, individuals can receive basic health
and long-term care services, as outlined by each state and subject to
minimum federal requirements.10 Long-term care includes many types of
services needed when a person has a physical disability, a mental
disability, or both. Individuals needing long-term care have varying
degrees of difficulty in performing some ADLs and instrumental activities
of daily living (IADL).
Medicaid Coverage for Long-Term Care
Medicaid coverage for long-term care services is most often provided to
individuals who are aged or disabled.11 Within broad federal standards,
states determine the need for long-term care services by assessing
limitations in an applicant's ability to carry out ADLs and IADLs. Most
individuals requiring Medicaid long-term care services have become
eligible for Medicaid in one of three ways: (1) through participation in
the Supplemental Security Income (SSI) program, (2) by incurring medical
costs that reduce their income and qualify them for Medicaid, or (3) by
having long-term care needs that require nursing home or other
institutional care.
o The SSI program provides cash assistance to aged, blind, or
disabled individuals with limited income and resources. Those who
are enrolled in SSI generally are eligible for Medicaid.12
o Individuals who incur high medical costs may "spend down" into
Medicaid eligibility because these expenses are deducted from
their countable income. Spending down may bring their income below
the state-determined income eligibility limit. Such individuals
are referred to as "medically needy." As of 2000, 36 states had a
medically needy option, although not all of these states extended
this option to the aged and disabled or to those needing nursing
home care.
o Individuals can qualify for Medicaid if they reside in nursing
facilities or other institutions in states that have elected to
establish a special income level under which individuals with
incomes up to 300 percent of the SSI benefit ($1,737 per month in
2005) are Medicaid-eligible. Individuals eligible under this
option must apply all of their income, except for a small personal
needs allowance, toward the cost of nursing home care.13 The
National Association of State Medicaid Directors reported that, as
of 2003, at least 38 states had elected this option.14
SSI policy serves as the basis for Medicaid policy on the
characterization of assets-income and resources. Income is
something, paid either in cash or in-kind, received during a
calendar month that is used or could be used to meet food,
clothing, or shelter needs; resources are cash or things that are
owned that can be converted to cash. (Table 1 provides examples of
different types of assets.) States can decide, within federal
standards, which assets are countable or not. For example, states
may disregard certain types or amounts of income and may elect not
to count certain resources.15
Table 1: Types of Assets and Examples
Source: GAO analysis of SSI requirements.
aSome resources produce income. For example, an annuity is a
financial instrument that provides a fixed income over a defined
period of time in return for an initial payment of principal. The
principal of an annuity is considered a resource, while the
payments it generates are considered income.
bA trust is any arrangement in which a grantor transfers property
to a trustee with the intention that it be held, managed, or
administered by the trustee for the benefit of the grantor or
certain designated individuals.
In most states, to be financially eligible for Medicaid long-term
care services, an individual must have $2,000 or less in countable
resources ($3,000 for a couple). However, specific income and
resource standards vary by eligibility category (see table 2).
Table 2: Income and Resource Standards for Certain Medicaid
Eligibility Categories, as of 2005
Source: GAO analysis of Medicaid eligibility requirements and
Schneider, et al., The Medicaid Resource Book (Washington, D.C.:
The Kaiser Commission on Medicaid and the Uninsured, July 2002),
p. 30.
aNot all SSI recipients automatically qualify for Medicaid. Under
Section 1902(f) of the Social Security Act, states may use
Medicaid eligibility standards that they had in place in 1972
rather than federal SSI rules. As of June 2003, 11 states had
opted to use these standards. These states are often referred to
as 209(b) states because the origin of this provision was S:209(b)
of the Social Security Amendments of 1972, Pub. L. No. 92-603, 86
Stat. 1329, 1381.
The Medicaid statute requires states to use specific income and
resource standards in determining eligibility when one spouse is
in an institution, such as a nursing home, and the other remains
in the community (referred to as the "community spouse"). This
enables the institutionalized spouse to become Medicaid-eligible
while leaving the community spouse with sufficient assets to avoid
hardship.
o Resources. The community spouse may retain an amount equal to
one-half of the couple's combined countable resources, up to a
state-specified maximum resource level.16 If one-half of the
couple's combined countable resources is less than a
state-specified minimum resource level, then the community spouse
may retain resources up to the minimum level.17 The amount that
the community spouse is allowed to retain is generally referred to
as the community spouse resource allowance.18
o Income. The community spouse is allowed to retain all of his or
her own income. States establish a minimum amount of income-the
minimum monthly maintenance needs allowance (for this report we
will refer to it as the minimum needs allowance)-that a community
spouse is entitled to retain. The amount must be within a federal
minimum and maximum standard.19 If the community spouse's income
is less than the minimum needs allowance, then the shortfall can
be made up in one of two ways: by transferring income from the
institutionalized spouse (called the "income-first" approach) or
by allowing the community spouse to keep resources above the
community spouse resource allowance, so that the additional funds
can be invested to generate more income (the "resource-first"
approach).20
Federal law limits Medicaid payments for long-term care services
for persons who dispose of assets for less than fair market value
within a specified time period to satisfy financial eligibility
requirements. As a result, when an individual applies for Medicaid
coverage for long-term care, states conduct a review, or
"look-back," to determine whether the applicant (or his or her
spouse, if married) transferred assets to another person or party
and, if so, whether the transfer was for less than fair market
value.21 Generally, the look-back period is 36 months.22 If an
asset transfer for less than fair market value is detected, the
individual is ineligible for Medicaid long-term care coverage for
a period of time, called the penalty period. The penalty period is
calculated by dividing the dollar amount of the assets transferred
by the average monthly private-pay rate for nursing home care in
the state (or the community, at the option of the state). For
example, if an individual transferred $100,000 in assets, and
private facility costs averaged $5,000 per month in the state, the
penalty period would be 20 months. The penalty period begins at
approximately the date of the asset transfer.23 As a result, some
individuals' penalty periods have already expired by the time they
apply for Medicaid long-term care coverage, and therefore they are
eligible when they apply.
Federal law exempts certain transfers from the penalty provisions.
Exemptions include transfers of assets to the individual's spouse,
another individual for the spouse's sole benefit, or a disabled
child. Additional exemptions from the penalty provisions include
the transfer of a home to an individual's spouse, or minor or
disabled child; a sibling residing in the home who meets certain
conditions; or an adult child residing in the home who has been
caring for the individual for a specified time period.24 Transfers
do not result in a penalty if the individual can show that the
transfer was made exclusively for purposes other than qualifying
for Medicaid. Additionally, a penalty would not be applied if the
state determined that it would result in an undue hardship, that
is, it would deprive the individual of (1) medical care such that
the individual's health or life would be endangered or (2) food,
clothing, shelter, or other necessities of life.
Elderly households' asset levels varied on the basis of level of
disability, marital status, and gender; additionally, the extent
to which elderly households transferred cash varied with the level
of household assets and these same demographic factors.25 In
general, disabled elderly households had lower asset levels than
nondisabled elderly households, and the asset levels decreased as
the level of disability increased.26 Elderly couples made up 46
percent of elderly households and had higher levels of assets than
single elderly; single elderly females, who made up 41 percent of
elderly households, generally had lower assets than single elderly
males, who made up 13 percent of elderly households.27 For all
elderly households, the higher their asset levels, the more likely
they were to have reported transferring cash to another
individual. Elderly households with both incomes and nonhousing
resources above the elderly household median were responsible for
over one-half of all transfers made. Overall, severely disabled
elderly households-those reporting three or more limitations in
ADLs-were less likely to transfer cash than nondisabled elderly
households.28 Single individuals were less likely to transfer cash
than couples, and single males had a higher likelihood of
transferring cash than single females.
According to data from the 2002 HRS, total income for the nation's
approximately 28 million elderly households was $1.1 trillion and
total nonhousing resources were $6.6 trillion. Approximately 80
percent of elderly households had annual incomes of $50,000 or
less. (See fig. 1.) The median annual income for all elderly
households was $24,200 and ranged from $0 to $1,461,800.
Figure 1: Distribution of Annual Income as Reported by Elderly
Households, 2002
About half of all elderly households had nonhousing resources of
$50,000 or less, while almost 20 percent had nonhousing resources
greater than $300,000. (See fig. 2.) For all elderly households,
median nonhousing resources were $51,500 and ranged from less than
zero to $41,170,000.29 In terms of total resources, elderly
households had median total resources of $150,000, ranging from
less than zero to $41,640,000, and a primary residence with a
median net value of $70,000, ranging from less than zero to
$20,000,000.
Figure 2: Distribution of Nonhousing Resources as Reported by
Elderly Households, 2002
Disabled elderly households-which are at higher risk of needing
long-term care-had lower levels of assets than nondisabled elderly
households. Generally, as the level of disability increased, the
level of assets decreased.30 Severely disabled elderly households,
which made up about 6 percent of total elderly households, had
significantly lower median income ($13,200) and median nonhousing
resources ($3,200) compared with all elderly households ($24,200
and $51,500, respectively). (See fig. 3.)
Figure 3: Median Assets-Income and Resources-for Elderly
Households, by Level of Disability, 2002
Elderly couples, which made up approximately 46 percent of elderly
households, had higher levels of assets than single elderly
individuals. Of the single elderly, males, who made up
approximately 13 percent of elderly households, were generally
likely to be better off financially than females, who made up
approximately 41 percent of elderly households. (See fig. 4.)
Figure 4: Median Assets-Income and Resources-for Elderly
Households, by Marital Status and Gender, 2002
The likelihood that elderly households transferred cash and the
amounts they transferred varied with the level of assets held and
demographic characteristics, such as the level of disability,
marital status, and gender. Approximately 6 million, or about 22
percent, of all elderly households reported transferring cash
during the 2 years prior to the HRS survey. Almost all of these
cash transfers were made to children or stepchildren. Of the
elderly households that transferred cash, the median income was
$37,000 and ranged from $0 to $725,600; median nonhousing
resources were $128,000 and ranged from less than zero to
$12,535,000. Generally, elderly households with higher asset
levels were more likely to have transferred cash than households
with lower asset levels (see fig. 5).
Figure 5: Median Income and Nonhousing Resources for Elderly
Households That Reported Transferring Cash Compared with All
Elderly Households, 2002
Of the 22 percent of elderly households that reported having
transferred cash in the 2 years prior to the survey, nondisabled
elderly households and couples were most likely to do so. Among
disabled elderly households, severely disabled households were the
least likely to transfer cash.31 With regard to the amounts
transferred, among single elderly individuals, males were more
likely to transfer larger amounts of cash than females, with
median cash transfer amounts of $4,500 and $3,000, respectively.32
(See table 3.)
10States are required to provide certain mandatory services and may, at
their option, offer additional services. Mandatory services include
inpatient and outpatient hospital care; physician services; nursing home
care; laboratory and x-ray services; immunizations and other early and
periodic screening, diagnostic, and treatment services for children;
family planning services; health center and rural health clinic services;
and nurse midwife and nurse practitioner services. Services that are
optional include outpatient prescription drugs, institutional care for
persons with mental retardation, personal care, and dental and vision care
for adults.
11A chronic physical or mental disability may occur at any age, but as a
person ages the likelihood increases that a disability will develop or
worsen.
12Not all SSI recipients automatically qualify for Medicaid. Under Section
1902(f) of the Social Security Act, states may use Medicaid eligibility
standards that they had in place in 1972 rather than rules that would
otherwise apply under the SSI program. As of June 2003, 11 states had
opted to use these standards. These states are often referred to as 209(b)
states because the origin of this provision was S:209(b) of the Social
Security Amendments of 1972, Pub. L. No. 92-603, 86 Stat. 1329, 1381.
13A personal needs allowance is an amount, subject to a federal minimum
($30), excluded from an institutionalized individual's countable income to
pay for the individual's clothing and other personal needs.
14See National Association of State Medicaid Directors, Aged, Blind and
Disabled EligibilitySurvey (Washington, D.C.: American Public Human
Services Association, 2002). Downloaded from
http://www.nasmd.org/eligibility/default.asp on July 31, 2005.
15Although noncountable resources vary by state, for purposes of
determining Medicaid eligibility for long-term care, they generally
include an individual's primary residence (typically if the individual
expresses the intent to return home), an automobile, household goods and
personal effects, burial spaces, and life insurance and burial
arrangements up to a certain value, among other things.
Spousal Impoverishment Protections
16States' maximum resource levels must be within federal standards. As of
January 1, 2005, the federal maximum was $95,100.
Transfers of Assets under Medicaid
17States' minimum resource levels must be within federal standards. As of
January 1, 2005, the federal minimum was $19,020.
18Technically, the community spouse resource allowance is the amount of
additional resources that the community spouse keeps above the spousal
share of resources. Generally, however, the community spouse resource
allowance is used to refer to the total resources that the community
spouse is permitted to retain. See 42 U.S.C. S: 1396r-5(f)(2); see aso
Wisconsin Deparmen of Health and Famy Services v. Blumer, 534 U.S. 473,
482-3 (2001). According to CMS, the community spouse resource allowance
means "the amount of a couple's combined jointly and separately-owned
resources . . . allocated to the community spouse and considered
unavailable to the institutionalized spouse when determining his or her
eligibility for Medicaid." 66 Fed. Reg. 46763, 46768 (2001).
19As of July 1, 2005, federal standards specified that the minimum needs
allowance can be no lower than $1,603.75 and no higher than $2,377.50 per
month.
20If the shortfall in income cannot be made up completely using one of the
approaches, then a combination of both approaches may be used.
21Federal law requires states to apply the transfer of asset provisions to
institutionalized individuals, who are defined in the State Medicaid
Manual as individuals who are inpatients in a nursing facility or a
similar institution or recipients of home and community-based services.
States have the option to apply such provisions to noninstitutionalized
individuals.
22For individuals in institutions, the look-back period is 36 months from
the date the individual is institutionalized and applies for Medicaid. For
those who are not institutionalized, the look-back period is 36 months
before the later of (1) the date the individual applies for Medicaid or
(2) the date the person disposed of his or her assets for less than fair
market value. For certain types of trusts, the look-back period is 60
months.
23States have the option to begin the penalty period on either the first
day of the month in which the asset was transferred for less than fair
market value or the first day of the month following the month of
transfer.
24For the transfer of a home to a sibling to be exempt from transfer
penalty provisions, the sibling must have an equity interest in the home
and must have resided in the individual's home for at least 1 year
immediately prior to the date the individual became institutionalized.
Asset Levels and Extent of Cash Transfers Varied Depending on Demographic
Factors
Greatest Proportion of Elderly Had Incomes of $50,000 or Less and Nonhousing
Resources below $100,000
25We analyzed HRS data at the "household" level. Household refers to
either a single individual living alone or more than one individual living
together. Elderly households are those in which at least one member is
aged 65 or over.
26For the purpose of our analysis, we defined disabled elderly households
as those in which the HRS respondent was both elderly and had at least one
limitation in ADLs.
27For the purpose of our analysis, we defined couples as both married
couples and a small percentage of nonmarried individuals living together.
28For the purpose of our analysis, we defined severely disabled elderly
households as those in which the survey respondent was both elderly and
had at least three limitations in ADLs.
29A household can have resources valued at less than zero if its debt is
greater than the value of its resources.
Elderly Households' Level of Assets Varied Depending on Level of Disability,
Marital Status, and Gender
30A similar relationship existed between limitations in IADLs and
household assets. As the number of limitations in IADLs increased, the
household's income and resources decreased.
Likelihood of Cash Transfers and Amount Transferred Varied by Level of Assets
31Furthermore, as limitations in IADLs increased, the likelihood that a
household transferred cash decreased.
Table 3: Cash Transferred in the Previous 2 Years as Reported by Elderly
Households, by ADL Limitation, Marital Status, and Gender, 2002
Source: GAO analysis of data from the 2002 Health and Retirement Study.
aMean amounts of cash transferred have been rounded to the nearest $10.
Transfers of cash were also more likely to occur in households with higher
income and resource levels. Elderly households with both income and
resources above the median-approximately 37 percent of all elderly
households-were the most likely to transfer cash. In contrast, elderly
households with both income and resources at or below the median were the
least likely to transfer cash. With regard to amounts of cash transferred,
the median amounts transferred for elderly households with both income and
resources above the median were twice as high ($4,000) as those for
elderly households with both income and resources at or below the median
($2,000). (Table 4 shows the cash transferred by elderly households in
relation to the median income and resource levels.)
32Elderly households that transferred cash had median total resources of
$255,000, ranging from less than zero to $21,101,000, and a primary
residence with a median net value of $100,000, ranging from less than zero
to $20,000,000.
Table 4: Cash Transferred in the Previous 2 Years as Reported by Elderly
Households with Varying Levels of Income and Nonhousing Resources, 2002
Source: GAO analysis of data from the 2002 Health and Retirement Study.
aThe annual median income for all elderly households was $24,200.
bThe median nonhousing resources for all elderly households were $51,500.
cMean amounts of cash transferred have been rounded to the nearest $10.
dNinety-nine percent of households in this group reported transfers of
cash of $30,000 or below.
eNinety-nine percent of households in this group reported transfers of
cash of $120,000 or below.
fNinety-nine percent of households in this group reported transfers of
cash of $25,000 or below.
gNinety-nine percent of households in this group reported transfers of
cash of $141,000 or below.
Methods of Reducing Assets May Not Result in a Penalty Period
Methods elderly individuals use to reduce their countable assets do not
always result in a penalty period. Reducing debt and making purchases,
such as for home modifications, for example, do not result in a penalty
period and thus would not lead to delays in Medicaid eligibility for
long-term care coverage. Other methods, however, could result in a penalty
period, depending on the specific arrangements made and the policies of
the individual state. For example, giving away assets as a gift generally
results in the imposition of a penalty period, but giving away assets
valued at less than the average monthly private-pay rate for nursing home
care may not, depending, in part, on whether the state imposes
partial-month penalties.
Some Asset Reduction Methods Do Not Delay Medicaid Eligibility
Some methods individuals use to reduce their countable assets do not
result in a penalty period and thus would not lead to delays in
eligibility for Medicaid long-term care coverage. According to several
elder law attorneys and some state officials we contacted, one of the
first methods Medicaid applicants use to reduce assets is to spend their
money, often by paying off existing debt, such as a mortgage or credit
card bills, or by making purchases. When such purchases and payments
convert a countable resource, such as money in the bank, to noncountable
resources, such as household goods, they effectively reduce the assets
that are counted when determining Medicaid eligibility. Common purchases
mentioned included renovating a home to make it more accessible for
persons with disabilities, repairing or replacing items such as a roof or
carpeting, prepaying burial arrangements, buying a home, or having dental
work done. Elder law attorneys explained that once individuals are
Medicaid-eligible, they and their families will have limited means.
Therefore, they advise these individuals to update, renovate, repair, or
replace old or deteriorating items such as homes and cars to reduce the
need for maintenance and repairs in the future. No penalty is associated
with paying a debt or making a purchase as long as the individual receives
something of roughly the same value in return.
Another method married individuals use that does not result in a penalty
period is seeking to raise the community spouse's resource allowance above
a state's maximum level, which reduces the amount of income or resources
considered available to the spouse applying for Medicaid coverage.33
States establish, under federal guidelines, a maximum amount of resources
that a community spouse is allowed to retain. In general, the remaining
resources are deemed available to be used to pay for the institutionalized
spouse's long-term care needs. In addition, if the community spouse's
income is less than the state's minimum needs allowance, the state can
choose to make up the shortfall by (1) transferring income from the
institutionalized spouse or (2) allowing the community spouse to keep
resources above the resource allowance so that the additional funds can be
invested to generate more income.34 Under the latter approach, the
community spouse may be able to retain a significant amount of resources
in order to yield the allowable amount of income. For example, a community
spouse might ask to retain a savings account with $300,000 and an annual
interest rate of 2 percent that would yield an additional $500 in income
per month.
33Couples also may seek to increase the minimum needs allowance, the
state-established minimum amount of income that the community spouse is
permitted to retain. Generally, this would only be allowed if the couple
could prove that the state-established needs allowance is too low to cover
the community spouse's living expenses. As with increases in the resource
allowance, increasing the minimum needs allowance would require approval
from a court or fair hearings process but would not result in a penalty
period.
34A combination of these approaches may be used if the shortfall in income
cannot be made up completely using only one of the approaches.
Other Methods to Reduce Assets Could Delay Medicaid Coverage for Long-Term Care
Services
Some of the other methods elderly individuals use to reduce their
countable assets could result in a penalty period and thus could delay
Medicaid coverage for long-term care services, according to the elder law
attorneys and state and federal officials we contacted. Whether or not an
asset reduction method results in a penalty period depends on the specific
arrangements made and the policies of the state. Therefore, the extent to
which each of the following methods is used is likely to vary by state.
o Gifts. Under this method, an individual gives some or all
assets to another individual as a gift, for example, by giving his
or her children a cash gift. Although this is probably the
simplest method to reduce assets, some elder law attorneys told us
that this method would be one of the last things a person would
want to do. Not only would the individual lose control of his or
her assets, but giving a gift would likely be a transfer for less
than fair market value and therefore result in a penalty period.
As with other asset transfers, if individuals can prove that they
gave away their assets exclusively for a purpose other than
qualifying for Medicaid long-term care coverage, or if the
transfer is to a spouse or a disabled child, then there would be
no penalty.35 Additionally, if a state treats each transfer as a
separate event and does not impose penalty periods for time
periods shorter than 1 month, then transfers for amounts less than
the average monthly private-pay rate for nursing home care in that
state do not result in a penalty period.36 Because the penalty
period begins at approximately the date of asset transfer,
individuals that meet Medicaid income eligibility requirements can
give away about half of their resources and use their remaining
resources to pay privately for long-term care during which time
any penalty period would expire.37 This is often referred to as
the "half a loaf" strategy because it preserves at least half of
the individual's resources.
o Financial Instruments. Some financial instruments, namely
annuities and trusts, have been used to reduce countable assets to
enable individuals to qualify for Medicaid. Annuities, which pay a
regular income stream over a defined period of time in return for
an initial payment of principal, may be purchased to provide a
source of income for retirement. According to a survey of state
Medicaid offices,38 annuities have become a common method for
individuals to reduce countable resources for the purpose of
becoming eligible for Medicaid because they are used to convert
countable resources, such as money in the bank, to a resource that
is not counted, and a stream of income.39 If converting the
resource to an annuity results in individuals' having countable
resources below the state's financial eligibility requirements,
then these individuals can become eligible for Medicaid if their
income, including the income stream from the annuity, is within
the Medicaid income requirements for the state in which they
live.40 Married individuals can use their joint resources to
purchase an annuity for the sole benefit of the community spouse.
Since a community spouse's income is not counted in a Medicaid
eligibility determination, an annuity effectively reduces the
countable assets of the applicant. Annuities must be actuarially
sound-that is, the expected return on the annuity must be
commensurate with the reasonable life expectancy of the
beneficiary-or they are considered a transfer of assets for less
than fair market value and result in a penalty.41 Trusts are
arrangements in which a grantor transfers property to a trustee
with the intention that it be held, managed, or administered by
the trustee for the benefit of the grantor or certain designated
individuals. The use of trusts as a method of gaining Medicaid
eligibility for long-term care services was addressed in 1993
legislation.42 The law and associated CMS guidance indicate how
assets held in a trust, as well as the income generated by a
trust, are to be counted in the Medicaid eligibility process.43
According to CMS, since this legislation was enacted, the use of
trusts as a Medicaid asset reduction method has declined.
o Transfer of Property Ownership. Medicaid allows individuals to
transfer ownership of their home, without penalty, to certain
relatives, including a spouse or a minor child (under age 21).44
Other transfers of a home or other property within the look-back
period may result in a penalty period if they were for less than
fair market value. For example, individuals might transfer
ownership of their home while retaining a "life estate," which
would give them the right to possess and use the property for the
duration of their lives. According to the CMS State Medicaid
Manual, this would be a transfer for less than fair market value
and thus would result in a penalty period.45
o Personal Services Contract or Care Agreement. Personal services
contracts or care agreements are arrangements in which an
individual pays another person, often an adult child, to provide
certain services. Based on CMS guidance, relatives can be
legitimately paid for care they provide, but there is a
presumption that services provided without charge at the time they
were rendered were intended to be provided without compensation.
Under this presumption, payments provided for services in the past
would result in a penalty period.
o "Just Say No" Method. Under this method, the institutionalized
spouse transfers all assets to the community spouse, which is
permitted under the law. The community spouse then refuses to make
any assets available to support the institutionalized spouse and
retains all of the couple's assets. In turn, the institutionalized
spouse may seek Medicaid coverage for long-term care.46 Whether
this method results in a delay in Medicaid coverage for long-term
care services depends on the policies of the individual state.
o Promissory Notes. A promissory note is a written, unconditional
agreement, usually given in return for goods, money loaned, or
services rendered, whereby one party promises to pay a certain sum
of money at a specified time (or on demand) to another party.
According to CMS and state officials, some individuals have given
assets to their children in return for a promissory note as a
means to reduce their countable assets.47 For example, we were
told of a case in which a mother gave her daughter money in return
for a promissory note with a schedule for repayments. Although the
note was scheduled to be repaid during the mother's expected
lifetime, the payment arrangements called for the child to repay
only the interest until the final payment, when the entire
principal was due. Additionally, each month the mother forgave a
portion of the note that equaled slightly less than the average
monthly nursing home cost.48 Whether promissory notes result in a
delay in Medicaid coverage for long-term care would depend on the
specific details of the note and the policies of the state.
None of the nine states we reviewed systematically tracked or
analyzed data that would provide information on the incidence of
asset transfers and the extent to which penalties were applied in
their states. Nationwide, all states requested information about
applicants' assets, including transfers of assets, through
Medicaid application forms, interviews to determine Medicaid
eligibility, or both. The nine states we reviewed generally relied
on applicants' self-reporting of financial information and varied
in the amount of documentation they required and in the extent to
which they verified the assets reported. According to officials in
these states, transfers that were not reported by applicants were
difficult to identify.
Although officials from the nine states reviewed reported that
some individuals transferred assets for purposes of qualifying for
Medicaid, these states did not systematically track and analyze
data on the incidence of asset transfers or associated penalties.
As a result, the states could not quantify the number of people
who transferred assets, the assets transferred, or the penalties
applied as a result of transfers for less than fair market value.
Officials in four of the nine states informed us that they had
computer-based systems for recording applicant information,
including data on penalties that resulted in a delay in Medicaid
eligibility but they did not regularly analyze these data and thus
did not have information available on the number of applicants who
transferred assets. One of these states-Hawaii-was able to
determine that there were no individuals serving a penalty at the
time of our interview. However, because the state's system only
kept data on applicants currently serving a penalty, the state
could not provide us with data on the number of people who had
served penalties in the past. One state-Montana-that did not
report having a computer-based application system, did report
collecting several months of data on asset transfers from its
counties in the fall of 2004, but a state official told us that as
of mid-July 2005, the data had not been analyzed.
Although states could not systematically track and analyze asset
transfers, state officials were familiar with and had observed
different methods that elderly individuals used to transfer assets
in their states. For example, state officials frequently
identified cash gifts as the most common method used to reduce the
amount of countable assets. Some states had taken steps to try to
deter the use of financial instruments, such as annuities. For
example, two states reporting changing their laws to expand the
circumstances under which annuities are counted as available
resources for purposes of determining Medicaid eligibility for
long-term care. Similarly, some states have tried to deter the use
of the "Just Say No" method by pursuing financial support from the
community spouse or by requiring the institutionalized spouse to
take the community spouse to court to recover his or her share of
the assets.
Some officials commented that as states took actions to identify
and prevent methods used to make transfers in order to become
eligible for Medicaid long-term care coverage, new ways emerged to
make transfers for this purpose that are permitted under the law.
For example, one state took action to try to deter multiple small
transfers by adding the amount of the transfers together, under
certain circumstances, for purposes of calculating the penalty
period.49 According to this state's officials, however, some
attorneys had advised their clients to transfer very small amounts
of money in consecutive months and make one final transfer of a
significant amount before applying for Medicaid. Under the state's
policy, these transfers are added together and the penalty period
begins at the month of the first transfer, as opposed to the month
of the final transfer. As a result, some or all of the penalty
period may have expired by the time the applicant applies for
Medicaid long-term care coverage.
Nationwide, states used the application process-application forms,
interviews, or both-to determine the level of assets held by
Medicaid applicants and whether applicants transferred assets.50
Applications in 38 states requested comprehensive information
about assets-for example, by requiring applicants to respond to
questions regarding whether they had certain types of assets, such
as checking accounts or real estate. Another 7 states'
applications requested general information about applicants'
assets, and the remaining 6 states reported relying on the
interview process to collect information on assets.51 Thirty
states required in-person or telephone interviews with either the
applicant or an applicant's appointed representative.52 Table 5
summarizes states' application processes. (See app. III for more
details on the application processes in each state.)
Table 5: Information Required during States' Application Processes
for Medicaid Eligibility
Source: GAO analysis of state and county information, June and
July 2005.
Note: In June and July 2005, we asked state officials to provide
their current applications for Medicaid long-term care coverage.
Where states asked for clarification or had multiple applications
for Medicaid long-term care coverage, we asked for applications
appropriate for nursing home coverage. Some states referred us to
a county eligibility office for information about the Medicaid
application process. As such, the information on the interview
requirement in these states is based on the response of the
official from the county eligibility office.
aOf the six states that did not ask about assets, two states had
applicants complete their application during the interview process
with eligibility case workers and four states had brief
applications. All six states required interviews in which
officials collected information on applicants' assets.
Medicaid application forms in 44 states asked applicants to report
whether they had transferred assets. Eleven of the 44 states'
applications asked whether applicants had transferred assets in
the past 36 months, the required look-back period for most assets;
13 asked applicants whether they had transferred assets in the
past 60 months, the required look-back period for trusts; and 17
did both.53 Of the applications in the remaining 3 states, 1 asked
about assets ever transferred; 1 asked applicants to report any
transfers, including the date of the transfer, on a separate form;
and 1 asked about transfers in the prior 30 months.54 (See app. IV
for details on the characteristics of Medicaid application
questions related to transfers of assets in each state.) Although
the 7 remaining states did not have a question about transfers on
their applications, they all required interviews as part of the
application process.
The nine states we reviewed generally relied on the information
applicants reported during the application process-the
application, supporting documentation, and interviews-to identify
transfers of assets. The states generally required applicants to
submit documentation of their assets as part of the application
process (see table 6). The type of documentation required varied
by type of asset. For example, for trusts, annuities, and life
insurance, states generally required a copy of the agreement or
policy; for real estate, states generally required a copy of the
deed or documentation of the value from a tax assessment or
broker. For more liquid assets, such as checking and savings
accounts, four of the nine states contacted reported requiring a
copy of 1 month's statements. However, the remaining five states
reported requiring or collecting documentation for longer periods
of time ranging from 3 months to 3 years. For example, Florida
generally collected at least 3 months of bank statements from
individuals seeking nursing home coverage, South Carolina required
applicants to submit a total of 14 months of statements covering
points in time over a 3-year period, and Montana generally
collected bank statements dating back 3 years.
Table 6: Nine States' Requirements for Documentation of Assets
Source: GAO analysis of state information, July 2005.
To verify applicants' assets, the nine states used other
information sources, to varying degrees, in addition to the
documentation provided by applicants. Generally, states were more
likely to verify information related to possible income sources
for applicants, such as the Social Security Administration and
unemployment offices, than for data sources on possible resources,
such as motor vehicle departments and county assessor offices. For
example, seven of the nine states reported using information from
an Income and Eligibility Verification System (IEVS), a system
that matches applicant-reported income information with data from
the Internal Revenue Service, the Social Security Administration,
and state wage reports and unemployment benefits, for all or
almost all of their applicants. In contrast, five of the nine
states used information from county assessor offices that provide
information on property taxes and thus property ownership, and
four of these states used this source to verify resources for half
of their Medicaid applicants or less. (See table 7 for the
proportion of applicants for which the nine states used specific
sources to verify applicants' assets.)
35CMS guidance included in the State Medicaid Manual indicates that states
must determine what constitutes sufficient proof that an asset was
transferred exclusively for a purpose other than to qualify for Medicaid.
However, the manual states that verbal assurances are not sufficient and
that there must be convincing evidence about the purpose for the asset
transfer. According to officials from some of the nine states we
contacted, individuals who gave gifts before they could know of a need for
long-term care must prove that the transfer was for a purpose other than
qualifying for Medicaid. For example, if an individual gave his or her
child a down payment on a house or grandchild money for school and later
had a stroke that led to the individual's need for long-term care, the
individual may be able to prove that the gift was not made in order to
qualify for Medicaid long-term care coverage.
36Under the Medicaid statute, the penalty period is calculated by dividing
the dollar amount of the assets transferred by the average monthly
private-pay rate for nursing home care in the state (or the community, at
the option of the state). Thus, a transfer for less than the average
monthly nursing home private-pay rate would result in a penalty period of
less than 1 month. None of our nine sample states imposed penalties for
less than 1 month.
37For example, a single elderly male with $50,000 in resources gives
one-half of his resources away, leaving him with $25,000. He uses the
remaining $25,000 in resources to pay privately for his long-term care
costs. Assuming that the average private payment for a nursing home is
$5,000 per month, his $25,000 in resources would cover 5 months of
care-which is equal to the same amount of time as any penalty period that
would be calculated and imposed by the state. He would then become
eligible for Medicaid long-term care coverage, assuming his need for
nursing home care continued.
38See National Association of State Medicaid Directors, The Role of
Annuities in Medicaid Financia Planning: A Survey o State Medicaid
Agencies (Washington, D.C.: American Public Human Services Association,
October 2003).
39Although CMS acknowledged that annuities are used in this manner in some
states, CMS officials told us that an annuity should be considered a
countable resource if it can be converted to cash, for example, by being
sold for a lump sum.
40Individuals living in states with a medically needy program may be
eligible for Medicaid if their income is less than their monthly long-term
care costs.
41To determine whether an annuity is actuarially sound, states are to use
the life expectancy tables included in the State Medicaid Manual, which
are based on information published by the Office of the Actuary of the
Social Security Administration.
42Omnibus Budget Reconciliation Act of 1993, Pub. L. No. 103-66, S:13611,
107 Stat. 312, 622-27.
43The treatment of trusts is detailed in the Medicaid statute and the
State Medicaid Manual issued by CMS. Generally, to the extent that assets
in a trust are available to an individual, they are counted in determining
Medicaid eligibility. Assets in a trust that are not available to the
individual generally are considered to be transferred for less than fair
market value and thus could be subject to the transfer of asset penalties.
Certain types of trusts, such as certain trusts established for the
benefit of a disabled child or individual or certain trusts in which the
state is the remainder beneficiary, are exempt from transfer of asset
penalties.
44Individuals also are allowed to transfer ownership of their home without
penalty to (1) a child of any age who is disabled, (2) a sibling with an
equity interest in the home who resided in the home for at least 1 year
before the individual's institutionalization, and (3) an adult child who
resided in the home for at least 2 years immediately prior to the
individual's institutionalization and provided care to the individual that
allowed him or her to reside in the home.
45An example provided in CMS guidance assumes that the individual
transferring the home does not receive any compensation for the difference
between the life estate and the value of the home. The value of the life
estate is determined using a table indexed for age provided by CMS.
46In such cases, eligibility of the institutionalized spouse will not be
denied provided the state has a legal right to obtain support from the
community spouse for the care provided to the institutionalized spouse.
47According to CMS officials, under SSI policy, which serves as the basis
for Medicaid policy on the treatment of assets, promissory notes are a
countable resource. These officials said, however, that some states are
treating promissory notes in a way similar to how they treat annuities,
that is, they are not treating the value of the note as a countable
resource. As issues arise, CMS is telling states that they can count a
promissory note as a countable resource.
48As with the small monthly transfers, forgiving a loan for an amount less
than the average monthly nursing home private-pay rate would result in a
penalty period of less than 1 month, which some states do not impose.
States Could Not Identify the Extent to Which Individuals Transferred Assets
States Reviewed Did Not Systematically Track and Analyze Applicants' Transfers
of Assets
Nationwide, States Request Information on Assets and Transfers of Assets as Part
of the Medicaid Application Process
49The amount of assets transferred are added together if (1) transfers
occurred in the same month, (2) transfers occurred in consecutive months,
(3) the penalty periods for the transfers would overlap, or (4) a penalty
period ended in the month immediately prior to the transfer.
50In June and July 2005, we asked state officials to provide their current
applications for Medicaid long-term care coverage. Where states asked for
clarification or had multiple applications for Medicaid long-term care
coverage, we asked for applications appropriate for nursing home coverage.
51These six states either had applicants complete their application during
the interview process with eligibility case workers or had brief
applications that did not ask about assets.
52Some states referred us to a county eligibility office for information
about the Medicaid application process. As such, the information about the
interview requirement in these states is based on the response of the
official from the county eligibility office.
53Several states that did not ask about transfers in the past 60 months
had a specific question on their application form about trusts that could
be used as an indication for whether further review is necessary.
54Prior to the Omnibus Budget Reconciliation Act of 1993, the federally
mandated look-back period for transfers of assets was 30 months.
Nine States' Identification of Asset Transfers Predominately Relied on Applicant
Reporting
Table 7: Proportion of Applicants for Which Nine Sample States Used
Specific Asset Verification Sources
Source: GAO analysis of state information, July 2005.
aIEVS matches applicant-reported income information with data from the
Internal Revenue Service, the Social Security Administration, and state
wage reports and unemployment benefits.
bOne state did not obtain data from county assessor offices because the
state can access a statewide assessor system.
Regarding transfers of assets, the nine states asked on their Medicaid
application forms, in interviews, or both, whether applicants had
transferred assets. Officials from the nine states indicated that
transfers that are not reported by applicants or a third party are
generally difficult to identify. Three of the nine states did not have a
process to identify unreported transfers. The remaining six states
generally relied on certain indicators from applicants' asset
documentation, the states' asset verification data, case worker
interviews, or a combination of these factors to try to identify
unreported transfers. Following are two examples of how states used these
indicators:
o South Carolina asked for the previous 12 months of bank
statements and also asked for statements from the 24th and 36th
month preceding the application. South Carolina officials reviewed
these bank statements to ascertain whether there had been large
reductions in the amount of money in the account over the past 3
years. If a large reduction was detected, the state would ask the
applicant for information regarding the use of the money.
o Ohio officials told us that the state generally relied on case
workers' experience to decide whether additional review was
necessary, noting that there are certain indications that a
transfer might have occurred, which would prompt additional review
of the application. Examples include the opening of a new bank
account, an applicant who is living beyond his or her means, and
an applicant who recently sold his or her house but reports having
no resources.
To help states comply with requirements related to asset transfers
and Medicaid, CMS has issued guidance primarily through the State
Medicaid Manual. The agency has also provided technical
assistance, through its regional offices, to individual states in
response to their questions; communicated to states through
conferences; and funded a special study on the use of annuities to
shelter assets. Officials from the majority of CMS regional
offices and the nine states we contacted indicated that some
additional guidance, such as on the use of financial instruments,
would be helpful. CMS officials, however, noted that it would be
difficult to issue guidance that would be applicable in all
situations given the constantly changing methods used to transfer
assets.
In response to provisions in the Omnibus Budget Reconciliation Act
of 1993, CMS updated the State Medicaid Manual in 1994 to include
provisions relating to transfers of assets, including the
treatment of trusts. The portion of the manual relating to asset
transfers and trusts generally includes definitions of relevant
terms, such as assets, income, and resources; information on
look-back periods; penalty periods and penalties for transfers of
less than fair market value; exceptions to the application of such
penalties; and spousal impoverishment provisions. The portion of
the manual regarding trusts includes other definitions relating
specifically to trusts, provisions on the treatment of the
different types of trusts (such as revocable and irrevocable),55
and exceptions to the specified treatment of trusts. CMS is in the
process of revising certain policies in the manual related to
funeral and burial arrangements.56 CMS officials were not able to
provide a date for when revisions to the manual would be completed
and stated that they did not anticipate any major revisions to the
asset transfer provisions in the Medicaid manual.
CMS has provided additional guidance to states about asset
transfers through conferences and one special study:
o Conferences. CMS officials reported providing states with
information on asset transfer issues at its annual Medicaid
eligibility conference. At this conference, issues regarding
transfers of assets have been discussed as a formal agenda item,
in panels on state experiences, or in question and answer
sessions.
o Special study. In 2005, the agency released a report that
examined the use of annuities as a means for individuals to
shelter assets to become Medicaid-eligible.57 While this study did
not identify a universal recommendation for the policy on annuity
use or determine the extent to which the use of annuities is
growing or declining, it suggested that annuities established for
the purpose of becoming Medicaid-eligible do lead to additional
costs for federal and state governments in that individuals may
shift assets from countable resources into a resource that is not
counted, and into a stream of income. In some cases, the use of
annuities results in individuals qualifying for Medicaid more
quickly. Using the estimated cost of annuities to Medicaid from a
sample of five states and an examination of policies regarding
annuities in all states, the study estimated that annuities cost
the Medicaid program almost $200 million annually.58
Officials from CMS's regional offices informed us that they
provided technical assistance on asset transfer issues to 29
states over the past year. The types of technical assistance
provided to these states ranged from confirming existing Medicaid
policy to advising them on ways to address specific asset transfer
methods. When asked for examples of the specific issues for which
states sought technical assistance, officials in seven regional
offices said they had responded to states' questions about
annuities. Other issues for which states requested technical
assistance included the treatment of trusts, the policy on spousal
impoverishment, and promissory notes.
Officials from the majority of CMS regional offices noted that the
states in their regions could benefit from additional guidance.
Additionally, the majority of states we contacted concurred that
guidance related to transfers of assets would be helpful. These
states and regional office officials indicated a need for more
guidance on topics such as annuities, trusts, and the relationship
between asset divestment and spousal impoverishment. CMS central
office officials said that the agency faces challenges in issuing
guidance that would be applicable to all situations given the
constantly changing methods individuals use to transfer assets in
a manner that avoids the imposition of a penalty period. CMS
officials said that states' efforts to identify and address asset
transfer issues are constantly changing, as methods for reducing
countable assets are identified, increase in use, and then
diminish. For example, CMS officials cited the use of personal
care agreements, where the individual applying for Medicaid
long-term care coverage hires a family member to perform services,
as a practice that at one time was frequently used to transfer
assets. In some cases, these agreements paid exorbitant fees for
the services provided, and CMS officials provided technical
assistance to states to help them limit the use of such
agreements, at which point the practice diminished in use. CMS
officials maintain that blanket guidance from the agency cannot
necessarily address all of the issues that states face.
We provided CMS and the nine states in our sample an opportunity
to comment on a draft of this report. We received written comments
from CMS (see app. V). We also received technical comments from
CMS and eight of the nine states, which we incorporated as
appropriate.
CMS noted that the Medicaid program will only be sustainable if
its resources are not drained to provide health care assistance to
those with substantial ability to contribute to the costs of their
own care. CMS acknowledged, however, the difficulty of gathering
data on the extent and cost of asset transfers to the Medicaid
program. In particular, CMS commented that the law is complex and
that the techniques individuals and attorneys devise to divest
assets are ever-changing. CMS reiterated the President's budget
proposal to tighten existing rules related to asset transfers, and
associated estimated savings, which we had noted in the draft
report. CMS further noted one limitation to our analysis that we
had disclosed in the draft report-that the HRS only addressed cash
transfers provided to relatives or other individuals. CMS
commented that it believes that substantial amounts of assets are
sheltered by individuals who transfer homes, stocks and bonds, and
other noncash property. We agree with CMS's view that information
on such noncash transfers would be valuable, but as we noted in
the draft report the HRS does not include such data.
As agreed with your offices, unless you publicly announce its
contents earlier, we plan no further distribution of this report
until 30 days after its issue date. At that time, we will send
copies of this report to the Administrator of the Centers for
Medicare & Medicaid Services. We will also make copies available
to others upon request. In addition, the report will be available
at no charge on the GAO Web site at http://www.gao.gov .
If you or your staffs have any questions about this report, please
contact me at (202) 512-7118 or [email protected] . Contact points
for our Offices of Congressional Relations and Public Affairs may
be found on the last page of this report. GAO staff who made major
contributions to this report are listed in appendix VI.
Kathryn G. Allen Director, Health Care
The Health and Retirement Study (HRS) is a longitudinal national
panel survey of individuals over age 50 sponsored by the National
Institute on Aging and conducted by the University of Michigan.
HRS includes individuals who were not institutionalized at the
time of the initial interview and tracks these individuals over
time, regardless of whether they enter an institution. Researchers
conducted the initial interviews in 1992 in respondents' homes and
conducted follow-up interviews over the telephone every second
year thereafter. HRS questions pertain to physical and mental
health status, insurance coverage, financial status, family
support systems, employment status, and retirement planning.
For this report, we used the most recent available HRS data
(2002), for which the data collection period was February 2002
through March 2003. These data include information for over 18,000
Americans over the age of 50. We limited our analysis to data for
households with at least one elderly individual, which we defined
as an individual aged 65 or older. Thus, the data we used were
from a sample of 10,942 individuals (8,379 households) that
represented a population of 28.1 million households.
From these data we estimated the nationwide level of assets held
by households with at least one elderly individual, the extent to
which these households transferred cash, and the amounts
transferred. Our analysis underestimates the extent to which
elderly households transferred assets and the amounts of assets
transferred because the study data included only cash transfers,
not other types of transfers. HRS also did not assess whether the
transfers were related to individuals' attempts to qualify for
Medicaid coverage for long-term care services.
To assess the reliability of the HRS data, we reviewed related
documentation regarding the survey and its method of
administration, and we conducted electronic data tests to
determine whether there were missing data or obvious errors. On
this basis, we determined that the data were sufficiently reliable
for our purposes.
To select a sample of states to review in more detail regarding
their Medicaid eligibility determination practices, including the
process for identifying whether applicants had transferred assets,
we assessed the prevalence of five factors in each of the 51
states.
1. The percentage of the population aged 65 and over,
which we determined using 2000 census data from the
Census Bureau.
2. The cost of a nursing home stay for a private room
for a private-pay patient based on data from a 2004
survey conducted for the MetLife Company.
3. The proportion of elderly (aged 65 and over) with
incomes at or above 250 percent of the U.S. poverty
level, which was based on information from the Census
Bureau using the 2000 and 2002 Current Population
Surveys.
4. Medicaid nursing home expenditures as reported by
states to CMS.1
5. The availability of legal services specifically to
meet the needs of the elderly and disabled, based on
membership data from the National Academy of Elder
Law Attorneys.
For each factor, we ranked the states from low to high (1 to 51)
and then summed the five rankings for each state. On the basis of
these sums, we grouped the states into three clusters (low,
medium, and high) using natural breaks in the data as parameters
(see table 8). We then selected three states from each cluster
using randomly generated numbers, for a total sample of nine
states.
Table 8: Clusters Used for State Sample Selection
Source: GAO analysis of data from the Census Bureau, CMS, The
MetLife Market Survey of Nursing Home & Home Care Costs, and the
National Association of Elder Law Attorneys.
Note: States in bold are the states in our sample.
Source: GAO analysis of state and county information, June and
July 2005.
Note: In June and July 2005, we asked state officials to provide
their current applications for Medicaid long-term care coverage.
Where states asked for clarification or had multiple applications
for Medicaid long-term care coverage, we asked for applications
appropriate for nursing home coverage.
aApplications were considered to have asked for comprehensive
information on assets if they required applicants to respond to
questions regarding whether they had certain types of assets. For
example, applications required applicants to indicate whether they
had checking and savings accounts, stocks and bonds, retirement
accounts, burial insurance, real estate, and vehicles, along with
other assets.
bStates were asked whether they required an interview as part of
the application process. In our analysis, we considered an
interview as either a face-to-face meeting or a telephone
conversation with either the applicant or an appointed
representative. States that do not require an interview may allow
interviews at the discretion of the applicant or the Medicaid
eligibility case worker.
cIn this state, we were referred to a county eligibility office
for information about the interview; therefore, interview
requirements in this state are based on the response of the
official from the county eligibility office.
dThe state had a brief application that did not ask about assets.
eWhile the state asked applicants to respond to whether they had
certain types of assets, the application was limited with respect
to the types of assets applicants were required to address. For
example, the application may have only asked about cash, bank
accounts, life insurance, real property, and "other."
fThe state required interviews for applicants who the state deemed
to have complex assets, including those who reported transferring
assets.
gThe state had applicants complete their application during the
interview process with eligibility case workers.
Source: GAO analysis of state and county information.
Note: In June and July 2005, we asked state officials to provide
their current applications for Medicaid long-term care coverage.
Where states asked for clarification or had multiple applications
for Medicaid long-term care coverage, we asked for applications
appropriate for nursing home coverage.
aUnder federal law, states generally must withhold payments for
long-term care services for persons who dispose of assets for less
than fair market value within a specified time period to satisfy
financial eligibility requirements. As a result, states generally
conduct a review, or "look-back," to determine whether the
applicant (or his or her spouse, if married) transferred assets
and, if so, whether the transfer was made for less than fair
market value. Generally, the look-back period is 36 months, but
for certain trusts the look-back period is 60 months.
bThe state's application had a specific question about trusts that
could be used to indicate whether further review for a transfer of
assets was necessary.
cWhile the state's application did not include specific questions
regarding transfer of assets, it included a separate form for the
applicant to report any transfers of assets, including the date of
such transfers.
dThe state's application asked about transfers within 30 months.
Prior to the Omnibus Budget Reconciliation Act of 1993, the
federally mandated look-back period for transfers of assets was 30
months.
eThe state's application did not ask about transfers of assets.
fThe state had applicants complete their application during the
interview process with eligibility case workers.
gThe state's application asked if an applicant had ever
transferred assets.
Kathryn G. Allen (202) 512-7118 or [email protected]
In addition to the contact named above Carolyn Yocom, Assistant
Director; JoAnn Martinez-Shriver; Kaycee Misiewicz; Elizabeth T.
Morrison; Michelle Rosenberg; Sara Sills; LaShonda Wilson; and
Suzanne M. Worth made key contributions to this report.
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CMS Provides Guidance on Transfers of Assets through the State Medicaid Manual
and in Response to Specific Questions from States
55Revocable trusts are trusts that, under state law, can be revoked by the
individual creating the trust. In contrast, an irrevocable trust cannot be
revoked after its creation.
56The policy relating to funeral and burial arrangements had been
previously communicated to state Medicaid directors in a letter in 1996.
57See Robert A. Levy et al., The CNA Corporation, under contract with CMS,
Analysis of the Use of Annuities to Shelter Asses in State Medicaid
Programs (Alexandria, Va.: January 2005). The study presents information
from analyses of (1) interviews conducted with Medicaid policy officials,
county eligibility workers, and consumer and industry representatives; (2)
focus groups with potential nursing home beneficiaries; and (3) the
modeling and simulation of actual Medicaid case files from 11 counties
within a total of five states.
58To estimate the proportion of the nonpoor (i.e., those above the federal
poverty level) Medicaid beneficiaries in nursing homes who had annuities
and the cost of annuities to the Medicaid program, Levy, et al. collected
Medicaid case files from a sample of five states. Using information from
these case files and various other factors, such as nursing home costs and
income and resource constraints on Medicaid eligibility, the researchers
developed a model to estimate the costs of annuities in the five states.
Using these estimates and an analysis of how restrictive states' policies
were regarding the use of annuities, the researchers estimated a national
cost of annuities to the Medicaid program. The study acknowledges that its
estimates of these costs are likely to be less than the costs perceived by
most Medicaid officials.
Agency and State Comments
Appendix I: Information about the Health and Retirement Study Appendix I:
Information about the Health and Retirement Study
Appendix II: Methodology for Selecting Sample States Appendix II:
Methodology for Selecting Sample States
1Each quarter, states submit Medicaid program expenditures to CMS using
the CMS-64 form. Our analysis used the fiscal year 2000 nursing home
expenditures as reported on the CMS-64.
Appendix III: Characteristics of Medicaid Long-Term Care Application
Processes, by State Appendix III: Characteristics of Medicaid Long-Term
Care Application Processes, by State
Appendix IV: Characteristics of Medicaid Long-Term Care Applications
Related to Transfers of Assets, by State Appendix IV: Characteristics of
Medicaid Long-Term Care Applications Related to Transfers of Assets, by
State
Appendix V: Comments from the Centers for Medicare & Medicaid Services
Appendix V: Comments from the Centers for Medicare & Medicaid Services
AAc Appendix VI: GAO Contact and Staff Acknowledgments
GAO Contact
Acknowledgments
(290455)
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Highlights of GAO-05-968 , a report to congressional requesters
September 2005
MEDICAID
Transfers of Assets by Elderly Individuals to Obtain Long-Term Care
Coverage
In fiscal year 2004, the Medicaid program financed about $93 billion for
long-term care services. To qualify for Medicaid, individuals' assets
(income and resources) must be below certain limits. Because long-term
care services can be costly, those who pay privately may quickly deplete
their assets and become eligible for Medicaid. In some cases, individuals
might transfer assets to spouses or other family members to become
financially eligible for Medicaid. Those who transfer assets for less than
fair market value may be subject to a penalty period that can delay their
eligibility for Medicaid.
GAO was asked to provide data on transfers of assets. GAO reviewed (1) the
level of assets held and transferred by the elderly, (2) methods used to
transfer assets that may result in penalties, (3) how states determined
financial eligibility for Medicaid long-term care, and (4) guidance the
Centers for Medicare & Medicaid Services (CMS) has provided states
regarding the treatment of asset transfers. GAO analyzed data on levels of
assets and cash transfers made by the elderly from the 2002 Health and
Retirement Study (HRS), a national panel survey; analyzed states' Medicaid
applications; and interviewed officials from nine states about their
eligibility determination processes.
In 2002, over 80 percent of the approximately 28 million elderly
households (those where at least one person was aged 65 or over) had
annual incomes of $50,000 or less, and about one-half had nonhousing
resources, which excluded the primary residence, of $50,000 or less. About
6 million elderly households (22 percent) reported transferring cash, with
amounts that varied depending on the households' income and resource
levels. In general, the higher the household's asset level, the more
likely it was to have transferred cash during the 2 years prior to the HRS
study. Overall, disabled elderly households-who are at higher risk of
needing long-term care-were less likely to transfer cash than nondisabled
elderly households.
Cash Transferred in the Previous 2 Years as Reported by Elderly Households
with Varying Levels of Income and Nonhousing Resources, 2002
Source: GAO analysis of data from the 2002 Health and Retirement Study.
Certain methods to reduce assets, such as spending money to pay off debt
or make home modifications, do not result in penalty periods. Other
methods, such as giving gifts, transferring property ownership, and using
certain financial instruments, could result in penalty periods, depending
on state policy and the specific arrangements made. None of the nine
states GAO contacted tracked or analyzed data on asset transfers or
penalties applied. These states required applicants to provide
documentation of assets but varied in the amount of documentation required
and the extent to which they verified the assets reported. These states
generally relied on applicants' self-reporting of transfers of assets, and
officials from these states informed GAO that transfers not reported were
difficult to identify.
To help states comply with requirements related to asset transfers, CMS
has issued guidance primarily through the State Medicaid Manual. CMS
released a special study in 2005 to help states address the issue of using
annuities as a means of sheltering assets. Additionally, CMS officials
provide ongoing technical assistance in response to state questions, but
noted the challenge of issuing guidance applicable to all situations given
the constantly changing methods used to transfer assets in an attempt to
avoid a penalty period.
In commenting on a draft of this report, CMS noted the complexity of the
current law and commented that data on the precise extent and cost of
asset transfers to the Medicaid program have been difficult to gather.
*** End of document. ***