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
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Asset Transfers Medicaid and Asset Transfers Medicaid and Asset Transfers
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Asset Transfers Medicaid and Asset Transfers Medicaid and Asset Transfers
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Asset Transfers Medicaid and Asset Transfers Medicaid and Asset Transfers
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Asset Transfers Medicaid and Asset Transfers Medicaid and Asset Transfers
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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

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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. ***