Medicaid Long-Term Care: Few Transferred Assets before Applying  
for Nursing Home Coverage; Impact of Deficit Reduction Act on	 
Eligibility Is Uncertain (26-MAR-07, GAO-07-280).		 
                                                                 
The Medicaid program paid for nearly one-half of the nation's	 
total long-term care expenditures in 2004. To be eligible for	 
Medicaid long-term care, individuals may transfer assets (income 
and resources) to others to ensure that their assets fall below  
certain limits. Individuals who make transfers for less than fair
market value (FMV) can be subject to a penalty that may delay	 
Medicaid coverage. The Deficit Reduction Act of 2005 (DRA)	 
changed the calculation and timing of the penalty period and set 
requirements for the treatment of certain types of assets. GAO	 
was asked to provide data on the extent to which asset transfers 
for less than FMV occur. GAO examined (1) the financial 	 
characteristics of elderly nursing home residents nationwide, (2)
the demographic and financial characteristics of a sample of	 
Medicaid nursing home applicants, (3) the extent to which these  
applicants transferred assets for less than FMV, and (4) the	 
potential effects of the DRA provisions related to Medicaid	 
eligibility for long-term care. GAO analyzed data from the Health
and Retirement Study (HRS), a national panel survey, and from 540
randomly selected Medicaid nursing home application files from 3 
counties in each of 3 states (Maryland, Pennsylvania, and South  
Carolina). State and county selections were based on the	 
prevalence of several factors, including population, income, and 
demographics.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-280 					        
    ACCNO:   A67244						        
  TITLE:     Medicaid Long-Term Care: Few Transferred Assets before   
Applying for Nursing Home Coverage; Impact of Deficit Reduction  
Act on Eligibility Is Uncertain 				 
     DATE:   03/26/2007 
  SUBJECT:   Assets						 
	     Elder care 					 
	     Eligibility criteria				 
	     Eligibility determinations 			 
	     Fair market value					 
	     Federal law					 
	     Federal social security programs			 
	     Federal/state relations				 
	     Health care cost control				 
	     Health care programs				 
	     Income statistics					 
	     Long-term care					 
	     Medicaid						 
	     Nursing homes					 
	     Program evaluation 				 
	     Transfer payments					 

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GAO-07-280

   

     * [1]Results in Brief
     * [2]Background

          * [3]Financial Eligibility for Medicaid Coverage for Long-Term Ca
          * [4]Spousal Impoverishment Protections
          * [5]Transfers of Assets
          * [6]The DRA

     * [7]Nationwide, Most Nursing Home Residents' Nonhousing Resource

          * [8]Medicaid-Covered Nursing Home Residents Generally Had Fewer
          * [9]Nationwide, Fewer Medicaid-Covered Nursing Home Residents Re

     * [10]Majority of Medicaid Applicants in Selected Counties in Thre

          * [11]Majority of Medicaid Applicants Reviewed Were Single, Female
          * [12]Most Medicaid Applicants Reviewed Were Approved upon Initial
          * [13]Majority of Medicaid Applicants Reviewed Who Were Initially

     * [14]Few Transfers below FMV Identified for Applications Reviewed

          * [15]Approximately 10 Percent of Approved Applicants Transferred
          * [16]Transfers for Less than FMV Rarely Delayed Medicaid Eligibil
          * [17]Amounts of Assets Transferred for Less than FMV Varied

     * [18]Extent to Which Some DRA Long-Term Care Provisions May Affec

          * [19]DRA Provisions Related to Penalty Periods Could Delay Eligib
          * [20]Other DRA Provisions May Have Limited Effects on Eligibility

     * [21]Agency and State Comments and Our Evaluation
     * [22]Appendix I: Scope and Methodology
     * [23]Appendix II: Comments from the Centers for Medicare & Medica
     * [24]Appendix III: Comments from the State of South Carolina Depa
     * [25]Appendix IV: GAO Contact and Staff Acknowledgments

          * [26]GAO Contact
          * [27]Acknowledgments

               * [28]Order by Mail or Phone

Report to Congressional Requesters

United States Government Accountability Office

GAO

March 2007

MEDICAID LONG-TERM CARE

Few Transferred Assets before Applying for Nursing Home Coverage; Impact
of Deficit Reduction Act on Eligibility Is Uncertain

GAO-07-280

Contents

Letter 1

Results in Brief 6
Background 8
Nationwide, Most Nursing Home Residents' Nonhousing Resources Were Lower
than Annual Nursing Home Costs 17
Majority of Medicaid Applicants in Selected Counties in Three States Had
Few Nonhousing Resources and Were Approved upon Initial Application 21
Few Transfers below FMV Identified for Applications Reviewed and Penalties
Rarely Delayed Eligibility 28
Extent to Which Some DRA Long-Term Care Provisions May Affect Eligibility
Is Uncertain 35
Agency and State Comments and Our Evaluation 41
Appendix I Scope and Methodology 43
Appendix II Comments from the Centers for Medicare & Medicaid Services 50
Appendix III Comments from the State of South Carolina Department of
Health and Human Services 53
Appendix IV GAO Contact and Staff Acknowledgments 55

Tables

Table 1: Types of Assets and Examples 10
Table 2: Income and Resource Standards for Selected Ways of Becoming
Eligible for Medicaid, as of 2005 11
Table 3: DRA Changes to Provisions Related to Transfers of Assets 15
Table 4: New Provisions Introduced by the DRA Related to Medicaid
Eligibility for Long-Term Care and Asset Transfers 16
Table 5: Amounts of Cash Transferred at Entry and Prior to Entry into the
Nursing Home Reported by Elderly Nursing Home Residents, by Payer Source,
1992-2004 20
Table 6: Percentage of Approved Applicants Whose Files Indicated They Had
Transferred Assets for Less than FMV, by State and Selected County 29
Table 7: Percentage of Assets Transferred for Less than FMV by Type of
Asset for 47 Approved Applicants in Selected Counties in Three States 35
Table 8: Clusters Used for State Sample Selection 45
Table 9: Selected States and Counties, by County-Level Median Household
Income Group 47
Table 10: Number of Files Reviewed, by Selected State and County 47

Figures

Figure 1: Distribution of Nonhousing Resources as Reported by Elderly
Nursing Home Residents at the Time They Entered the Nursing Home,
1992-2004 18
Figure 2: Distribution of Annual Income as Reported by Elderly Nursing
Home Residents at the Time They Entered the Nursing Home, 1992-2004 19
Figure 3: Distribution of Nonhousing Resources of Medicaid Applicants in
Selected Counties in Three States 22
Figure 4: Distribution of Annual Income of Medicaid Applicants in Selected
Counties in Three States 23
Figure 5: Percentage of All Applicants in Selected Counties in Three
States, by Application Status (n=540) 25
Figure 6: Percentage of Initially Denied Applicants in Selected Counties
in Three States, by Reasons for Denial (n=122) 26
Figure 7: Median Nonhousing Resources and Median Annual Income of Reviewed
Applicants in Selected Counties in Three States Who Were Initially Denied
Only for Financial Reasons and Subsequently Approved, at Time of Initial
Application and Subsequent Application (n=41) 27
Figure 8: Percentage of Approved Applicants and Approved Applicants Who
Transferred Assets for Less than FMV, by Gender and Marital Status 30
Figure 9: Median Nonhousing Resources and Income for Approved Applicants
and Approved Applicants Who Transferred Assets for Less than FMV 31
Figure 10: Distribution of 47 Approved Applicants Who Transferred Assets
for Less than FMV, by Length of Assessed Penalty Periods, in Months 32
Figure 11: Distribution of 47 Approved Applicants Who Transferred Assets
for Less than FMV, by Amount Transferred 33
Figure 12: Distribution of 47 Approved Applicants Who Transferred Assets
for Less than FMV, by Number of Transfers 34
Figure 13: Example of How the DRA Penalty Period Provisions Could Delay
Medicaid Eligibility for Applicants Who Transfer Assets for Less than FMV
37

Abbreviations

ADL activities of daily living
CMS Centers for Medicare & Medicaid Services
CPI Consumer Price Index
DRA Deficit Reduction Act of 2005
FMV fair market value
HHS Department of Health and Human Services
HRS Health and Retirement Study
IADL instrumental activities of daily living
SSI Supplemental Security Income

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United States Government Accountability Office

Washington, DC 20548

March 26, 2007

The Honorable John D. Dingell
Chairman
Committee on Energy and Commerce
House of Representatives

The Honorable Henry A. Waxman
Chairman
Committee on Oversight and Government Reform
House of Representatives

The Honorable Frank J. Pallone, Jr.
Chairman
Subcommittee on Health
Committee on Energy and Commerce
House of Representatives

The Honorable Sherrod Brown
United States Senate

Long-term care is costly--particularly nursing home care, which is
estimated to average more than $70,000 a year for a private-pay patient.1
Medicaid, the joint federal-state health care financing program that
covers certain categories of low-income individuals, paid for nearly
one-half of the nation's total long-term care expenditures of about $193
billion in 2004. As such, long-term care expenditures were a significant
portion of total Medicaid expenditures in 2004, comprising 32 percent of
the total $296 billion spent. As the nation's population ages and more
individuals are likely to need long-term care services, federal Medicaid
spending is expected to nearly double in size during the next 10 years.2
In light of the associated increased demand and burden that these trends
place on federal and state budgets,3 it is important to ensure that
Medicaid coverage for long-term care is limited to those who are truly
eligible.

1Congressional Budget Office, The Cost 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 Metlife
Mature Market Institute, The MetLife Market Survey of Nursing Home & Home
Care Costs (Westport, Conn.: September 2006).

2Congressional Budget Office, Medicaid Spending Growth and Options for
Controlling Costs, July 13, 2006, Statement before the Special Committee
on Aging, U.S. Senate.

Individuals applying for Medicaid coverage for long-term care must meet
certain financial and functional eligibility criteria.4 To meet the
financial eligibility criteria, individuals must have assets--both income
and resources--that fall below established standards, which vary by state
but are within standards set by the federal government.5 Not all assets
are counted in determining financial eligibility for Medicaid. For
example, states generally exclude--within specified limits--the value of
an individual's home, car, and prepaid burial arrangements. Additionally,
federal law includes provisions to discourage individuals from
artificially impoverishing themselves--for example, by transferring their
assets to certain family members--in order to establish financial
eligibility. Specifically, the law states that those who transfer assets
for less than fair market value (FMV) during a specified "look-back"
period--a period of time before application for Medicaid in which an
individual's or couple's assets are reviewed--may be deemed ineligible for
Medicaid coverage for long-term care for a period of time, called the
penalty period.

3GAO, 21st Century Challenges: Transforming Government to Meet Current and
Emerging Challenges, [29]GAO-05-830T (Washington, D.C.: July 13, 2005);
GAO, Long-Term Care Financing: Growing Demand and Cost of Services Are
Straining Federal and State Budgets, [30]GAO-05-564T (Washington, D.C.:
Apr. 27, 2005); and Long-Term Care: Aging Baby Boom Generation Will
Increase Demand and Burden on Federal and State Budgets, [31]GAO-02-544T
(Washington, D.C.: Mar. 21, 2002).

4For this report, we focus on financial eligibility--specifically
financial eligibility for Medicaid coverage for long-term care. However,
individuals applying for Medicaid coverage for long-term care must also
meet functional eligibility criteria that are established by each state
and generally involve a degree of impairment measured by limitations in an
individual's ability to carry out activities of daily living
(ADL)--eating, bathing, dressing, using the toilet, getting in and out of
bed, and getting around the house--and instrumental activities of daily
living (IADL), such as preparing meals, shopping for groceries, and
getting around outside.

5Assets include income, which is anything received during a calendar month
that is used or could be used to meet food or shelter needs, and
resources, which are anything owned, such as savings accounts, stocks, or
property, that can be converted to cash. This terminology is based on
definitions provided in The State Medicaid Manual issued by the Centers
for Medicare & Medicaid Services, which specifies that assets include both
income and resources.

Evidence on the extent to which individuals transfer assets for less than
FMV to become financially eligible for Medicaid coverage for long-term
care is generally limited and often based on anecdote. In September 2005,
we reported that none of the nine states we contacted systematically
tracked or analyzed data that would have provided information on the
incidence of asset transfers made for less than FMV and the extent to
which penalties were applied in their states.6 We also reported that other
methods of reducing assets to qualify for Medicaid--such as using assets
to reduce debt or make home modifications--did not always result in a
penalty period. You asked us to expand on this work to provide more
information on the extent to which asset transfers for less than FMV
occur.

Subsequent to your request, in February 2006, the Deficit Reduction Act of
2005 (DRA), which amended certain existing provisions regarding asset
transfers for less than FMV and introduced new requirements related to
financial eligibility for Medicaid coverage for long-term care, was
enacted.7 For example, the DRA extended the look-back period from 36
months to 60 months for transfers occurring on or after its enactment,
changed the calculation and timing of the penalty period for those
transfers, and introduced new federal requirements regarding certain types
of assets, including an individual's home.

Given your request and the passage of the DRA, for this report we (1)
examined the financial characteristics of elderly nursing home residents
nationwide, including the extent to which they transferred cash; (2) for
selected states, reviewed the demographic and financial characteristics of
elderly individuals who applied for Medicaid coverage for nursing home
care and if they applied more than once; (3) determined the extent to
which elderly Medicaid nursing home applicants in selected states
transferred assets for less than FMV and were subject to penalty periods;
and (4) assessed the potential effects of the DRA provisions related to
eligibility for Medicaid coverage for long-term care.

To examine the financial characteristics of elderly nursing home residents
nationwide, including the extent to which they transferred cash, we
analyzed data from the 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. We used HRS data
from 1992 through 2004 to estimate the (1) level of assets (nonhousing
resources and income) held by elderly nursing home residents8 and (2) the
percentage of residents who transferred cash or the deed to their home and
the amount of the transfer.9 We further analyzed the above based on the
reported source of payment to the nursing home--Medicaid or non-Medicaid
(self-pay, Medicare, or other third-party insurance)--and assessed
nonhousing resources relative to the average cost of a year of private-pay
nursing home care. Because HRS only addressed cash and home deed transfers
made to relatives, our analysis understates the percentage of residents
who transfer and the amount of transfers by excluding transfers of other
types of assets or transfers made to other individuals.10 Because HRS did
not inquire about the reason for the transfers, no conclusions can be
drawn regarding whether the survey respondents made these transfers for
purposes of establishing eligibility for Medicaid coverage for nursing
home care. To examine the characteristics of elderly individuals who
applied for Medicaid coverage for nursing home care and the extent to
which they transferred assets for less than FMV, we reviewed 540 randomly
selected Medicaid nursing home application files from three selected
counties in 3 selected states (180 files from each of the selected
states).11 To select states, we assessed the prevalence of five factors in
each of the 50 states and the District of Columbia;12 on the basis of this
assessment, we ranked the states into three clusters (low, medium, and
high) based on the prevalence of the five factors and judgmentally
selected one state from each cluster.13 The 3 selected states were South
Carolina (low), Maryland (medium), and Pennsylvania (high). We then
judgmentally selected three counties in each state based on the prevalence
of four factors.14 From the 540 Medicaid nursing home application files,
we collected and analyzed data on the applicants' demographic
characteristics, income, nonhousing resources, and home value. We also
collected and analyzed data on the number of applicants who transferred
assets for less than FMV and the amount they transferred. Because of the
parameters set in our methodology, the data from the 540 Medicaid nursing
home application files can be generalized to the county level but cannot
be generalized to the state or national level.15 To assess the potential
effects of the DRA, we relied on data from HRS and the 540 Medicaid
nursing home application files, as well as interviewing officials from the
3 selected states regarding Medicaid eligibility determination practices,
including the process for identifying whether applicants had transferred
assets.16 We reviewed applicable federal law related to Medicaid and asset
transfers, as well as related guidance from the Centers for Medicare &
Medicaid Services (CMS). We also spoke with researchers and CMS officials.
We considered the HRS data as well as data from the Medicaid application
files to be sufficiently reliable for our purposes. (See app. I for more
information about our scope and methodology.) We performed our work from
October 2005 through January 2007 in accordance with generally accepted
government auditing standards.

6GAO, Medicaid: Transfers of Assets by Elderly Individuals to Obtain
Long-Term Care Coverage, [32]GAO-05-968 (Washington, D.C.: Sept. 2, 2005).

7See Pub. L. No. 109-171, SS 6011-6016, 120 Stat. 4, 61-67.

8For the purpose of our analysis, we defined elderly nursing home
residents as individuals aged 65 or older who have been surveyed prior to
the survey period in which they entered into a nursing home and who said
they (1) lived permanently in a nursing home, (2) spent at least 360
nights in a nursing home, or (3) spent 180 to 360 days in a nursing home
and died in a later survey period; had at least 3 ADLs, cancer, or lung
disease; or had heart disease and reported some difficulty with mobility.
For those respondents who were couples, defined as both married couples
and a small percentage of nonmarried individuals living together, we
required that at least one person in the household meet the above
criteria.

9Since the data for this analysis are from multiple years, we converted
all dollar figures into 2004 dollars, using the current methods series of
the Consumer Price Index (CPI) for all urban consumers.

10HRS asked respondents whether they had transferred cash to a
child/grandchild during the survey period prior to the interview.
Additionally, HRS asked respondents whether they had transferred the deed
to their home to a child/grandchild. The data we report here, therefore,
refer only to these transfers.

11The dates of the applications we analyzed ranged from March 1989 to
April 2006. Ninety-eight percent of the applications we analyzed were from
2005 or before. As a result, information regarding Medicaid eligibility
levels is provided for 2005, with notes added to explain the 2007 levels
when they differ.

12Throughout this report, the term state refers to the 50 states and the
District of Columbia.

13The five factors were (1) percentage of the population aged 65 and over,
(2) cost of a nursing home stay for a private room for a private-pay
patient, (3) proportion of elderly (aged 65 and over) with incomes at or
above 250 percent of the U.S. poverty level ($23,925 for a single-person
household in 2005), (4) reported Medicaid nursing home expenditures, and
(5) availability of legal services specifically to meet the needs of the
elderly and disabled.

14The four factors were (1) number of Medicaid applicants or enrollments
for nursing home coverage from individuals aged 65 and over, (2) number of
licensed nursing home beds, (3) population aged 65 and over, and (4)
median household income.

15We included the following counties in our sample: South
Carolina--Orangeburg (Low), Charleston (Medium), and Greenville (High);
Maryland--Baltimore City (Low), Baltimore (Medium), and Montgomery (High);
and Pennsylvania--Philadelphia (Low), Allegheny (Medium), and Montgomery
(High).

16The effects of the DRA provisions are not incorporated into our other
analyses because (1) the HRS data we used are from years prior to the
DRA's enactment, and (2) the data from the application file reviews are
from prior to the three states' implementation of the DRA.

Results in Brief

Nationwide, at the time most elderly individuals entered a nursing home,
they had nonhousing resources of $70,000 or less--which is less than the
average cost for a year of private-pay nursing home care. According to
data from HRS, median nonhousing resources for Medicaid-covered elderly
nursing home residents ($48) were lower than for the non-Medicaid-covered
elderly nursing home residents ($36,123). Regarding income, approximately
90 percent of elderly nursing home residents had annual incomes of $20,000
or less. Median annual income for Medicaid-covered elderly nursing home
residents ($9,719) was about half that for non-Medicaid-covered residents
($18,600). Similarly, the percentage of Medicaid-covered elderly nursing
home residents who reported transferring cash (9.2 percent) was less than
half that for non-Medicaid covered residents (23.2 percent) at time of
entry into the nursing home. However, the median amount of cash
transferred as reported by Medicaid-covered residents and
non-Medicaid-covered residents did not vary greatly.

Similar to the nationwide results, our review of 540 Medicaid nursing home
application files in selected counties in three states showed that about
90 percent of the applicants had total nonhousing resources of $30,000 or
less and 85 percent had annual incomes of $20,000 or less. Over 80 percent
of applicants had been living in long-term care facilities for an average
of a little over 4 months at the time of their Medicaid application. The
majority of the applicants were single females, and 25 percent of the
applicants (137 applicants) owned homes. For the 112 applicants for whom
we were able to determine a value for their homes, the median value was
$52,954. Overall, 408 applicants (76 percent) were approved for Medicaid
coverage for nursing home services the first time they applied, and 465
applicants (86 percent) were eventually approved. Of the 122 applicants
who were denied eligibility, 56 were denied due to having income or
resources that exceeded the standards, 41 of whom submitted subsequent
applications and were eventually approved, primarily by decreasing the
value of their nonhousing resources. Specifically, their median nonhousing
resources decreased from $22,380 to $10,463, with a maximum decrease of
$283,075. For about one-third of these applicants, at least part of the
decrease in nonhousing resources could be attributed to spending on
medical or nursing home care.

Approximately 10 percent of the approved applicants (47 of 465) whose
files we reviewed had transferred assets for less than FMV during the
36-month look-back period; however, these applicants rarely experienced a
delay in Medicaid eligibility as a result of the transfers because many
applicants' assessed penalties had expired by the time they applied for
coverage. The proportion of approved applicants found to have transferred
assets for less than FMV varied, ranging from a high of approximately 24
percent of approved applicants in a South Carolina county to a low of
approximately 4 percent in a Pennsylvania county. Among the 47 approved
applicants who transferred assets for less than FMV, the average length of
the penalty period assessed was about 6 months. However, only 2 of the
applicants experienced a delay in their eligibility for Medicaid coverage
for nursing home services as a result of transferring assets. The other
applicants were either not assessed a penalty, because the penalty would
have been for less than 1 month of coverage (9 applicants), or the penalty
they were assessed had expired by the time they submitted their Medicaid
application (36 applicants). The median amount of all assets transferred
for less than FMV was $15,152, and ranged from $1,000 to $201,516. Most of
the asset transfers involved the transferring of financial holdings, such
as gifts of cash or stocks, and applicants' children or grandchildren were
the most common recipients of the transfers.

The extent to which new long-term care provisions in the DRA may affect
applicants' eligibility for Medicaid coverage for long-term care is
uncertain. Primarily because the DRA changed the beginning date of the
penalty period, there is an increased likelihood that applicants who
transfer assets for less than FMV will experience delays in Medicaid
eligibility. For example, if the DRA penalty period provisions had been in
effect for the sample of applications we reviewed, all 47 of the approved
applicants who transferred assets for less than FMV would have experienced
a delay in eligibility for Medicaid coverage for nursing home care, with a
median delay of about 3 months. Since the new provisions were not yet in
effect, however, only 2 applicants actually experienced delays obtaining
Medicaid coverage because many applicants' penalty periods had expired by
the time they applied for coverage. While the new provisions in the DRA
have the potential to delay eligibility for those who transfer assets for
less than FMV during the look-back period, changes in individuals'
financial decision making--specifically decisions regarding whether to
transfer assets below FMV--could affect the extent to which such delays
actually occur. Additionally, individuals can request that the state waive
their penalty periods because the application of the penalty would result
in an undue hardship--that is, it would deprive the individual of
critically needed medical care, food, clothing, shelter, or other
necessities of life. Given the increases in the incidence or length of
penalty periods as a result of the DRA, more applicants may request that
the state waive their penalty periods. The effects of other DRA provisions
on individuals' eligibility for Medicaid may be limited. For example, few
applicants whose files we reviewed appeared to have home equity of
sufficient value to be affected by the DRA provisions.

We received comments on a draft of this report from CMS and state
officials from Maryland and South Carolina. In commenting, CMS, Maryland,
and South Carolina generally agreed with our findings. Technical comments
from CMS were incorporated as appropriate.

Background

To qualify for Medicaid coverage for long-term care, individuals must be
within certain eligibility categories, such as children or those who are
aged or disabled, and meet functional and financial eligibility criteria.
Within broad federal standards, states determine if an individual meets
the functional criteria by assessing limitations in an individual's
ability to carry out activities of daily living (ADL) and instrumental
activities of daily living (IADL). The financial eligibility criteria are
based on individuals' assets--income and resources together. The Medicaid
statute requires states to use specific income and resource standards in
determining eligibility; these standards differ based on whether an
individual is married or single. If a state determines that an individual
has transferred assets for less than FMV, the individual may be ineligible
for Medicaid coverage for long-term care for a period of time.

Financial Eligibility for Medicaid Coverage for Long-Term Care

Most individuals requiring Medicaid coverage for long-term care services
become financially eligible for Medicaid in one of three ways:

           1. Individuals who participate in the Supplemental Security Income
           (SSI) program, which provides cash assistance to aged, blind, or
           disabled individuals with limited income and resources, generally
           are eligible for Medicaid.17 
           2. Individuals who incur high medical costs may "spend down" into
           Medicaid eligibility because these expenses are deducted from
           their 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.
           3. 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 eligible for Medicaid.18 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.19 The
           National Association of State Medicaid Directors reported that, as
           of 2003, at least 38 states had elected this option.20

Medicaid policy bases its characterization of assets--income and
resources--on SSI policy. 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 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.) In establishing policy for determining financial
eligibility for Medicaid coverage for long-term care, 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.21

17Not all SSI recipients automatically qualify for Medicaid. Under Section
1902(f) of the Social Security Act, states may use more restrictive
Medicaid eligibility standards than 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
S209(b) of the Social Security Amendments of 1972, Pub. L. No. 92-603, 86
Stat. 1329, 1381.

18For 2007, 300 percent of the SSI benefit was $1,869 per month.

19A personal needs allowance is an amount, subject to a federal minimum
($30 a month), excluded from an institutionalized individual's income to
pay for the individual's clothing and other personal needs.

20See National Association of State Medicaid Directors, Aged, Blind and
Disabled Eligibility Survey (Washington, D.C.: American Public Human
Services Association, 2002), http://www.nasmd.org/eligibility/default.asp
(downloaded July 31, 2005).

Table 1: Types of Assets and Examples

Type of asset Examples                                                     
Income           o Money earned from work                                  
                    o Money generated from resources, such as interest,       
                    dividends, and annuity paymentsa                          
                    o Money received from other sources, such as Social       
                    Security, worker's compensation, and unemployment         
                    benefits                                                  
Resources        o Cash                                                    
                    o Bank accounts                                           
                    o Stocks                                                  
                    o Bonds                                                   
                    o Trustsb                                                 
                    o Annuities                                               
                    o Real estate                                             
                    o Vehicles (such as automobiles and boats)                
                    o Life insurance                                          

Source: GAO analysis of SSI requirements.

aSome resources produce income. For example, an annuity is a financial
instrument that provides income over a defined period of time for an
initial payment of principal. The principal of an annuity may be
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 coverage for
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 depending on the way an individual becomes
eligible for Medicaid (see table 2).

21Although noncountable resources vary by state, for purposes of
determining Medicaid eligibility for long-term care, they generally
include an individual's home (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.

Table 2: Income and Resource Standards for Selected Ways of Becoming
Eligible for Medicaid, as of 2005

Ways of becoming                                                           
eligible for Medicaid  Income standard          Resource standard          
Mandatory coverage                                                         
SSIa                   Less than $579 per month Countable resources of     
                          for an individual and    less than $2,000 for an    
                          less than $869 per month individual, and less than  
                          for a coupleb            $3,000 for a couple        
State-elected coverage                                                     
(optional)                                                                 
Medically needy        State-set income         State-set resource         
                          standard; individuals    standard no lower than     
                          may "spend down" to      countable resources of     
                          eligibility by deducting less than $2,000 for an    
                          incurred medical         individual or $3,000 for a 
                          expenses from income     couple                     
Special income level   State-set income         Same as SSI                
for residents of a     standard no higher than                             
nursing facility or    300 percent of the SSI                              
institution            standard ($1,737 per                                
                          month) for an                                       
                          individualc                                         

Sources: 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), 30.

aNot all SSI recipients automatically qualify for Medicaid. Under Section
1902(f) of the Social Security Act, states may use more restrictive
Medicaid eligibility standards than 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 S209(b) of the Social Security Amendments of
1972, Pub. L. No. 92-603, 86 Stat. 1329, 1381.

bIn 2007, the standard was less than $623 per month for an individual and
less than $934 per month for a couple.

cIn 2007, the standard was no higher than $1869 per month.

Spousal Impoverishment Protections

The Medicaid statute requires states to use specific minimum and maximum
resource and income 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 eligible for Medicaid while leaving the
community spouse with sufficient assets to avoid impoverishment.

           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.22 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.23 The amount that
           the community spouse is allowed to retain is generally referred to
           as the community spouse resource allowance.24

           o Income. The community spouse is allowed to retain all of his or
           her own income. States establish a minimum amount of income--a
           minimum needs allowance25--that a community spouse is entitled to
           retain.26 Prior to the DRA, if the community spouse's income was
           less than the minimum needs allowance, then states could allow the
           difference to be made up in one of two ways: by requiring the
           transfer of 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 resources could be used to generate more income
           (the resource-first approach).27 Under the DRA, states must apply
           the income-first method.28
		   
		   Transfers of Assets

           Federal law limits Medicaid payments for long-term care services
           for persons who transfer assets for less than FMV within a
           specified time period. 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 individual (or his or her
           spouse, if married) transferred assets to another person or party
           and, if so, whether the transfer was for less than FMV.29 If a
           transfer of assets for less than FMV is detected, the individual
           is ineligible for Medicaid coverage for long-term care 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 $10,000 in assets, and
           private facility costs averaged $5,000 per month in the state, the
           penalty period would be 2 months.

           Federal law exempts certain transfers for less than FMV from the
           penalty provisions even if they are made within the look-back
           period. Exemptions include transfers of assets to the individual's
           spouse, another individual for the spouse's sole benefit, or a
           child who is considered to be disabled under federal law.
           Additional exemptions from the penalty provisions include the
           transfer of a home to an individual's spouse, or minor or disabled
           child who meets certain criteria; an adult child residing in the
           home who has been caring for the individual for a specified time
           period; or a sibling residing in the home who meets certain
           conditions.30 Transfers do not result in a penalty if the
           individual can demonstrate to the state that the transfer was made
           exclusively for purposes other than qualifying for Medicaid.31
           Additionally, a penalty would not be applied if the state
           determined that application of the penalty 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.

           Prior to the DRA, the look-back period for asset transfers was
           generally 36 months.32 If the state identified transfers for less
           than FMV during this period, then the state was required to impose
           a penalty period that began at approximately the date of the asset
           transfer.33 As a result, some individuals' penalty periods had
           already expired by the time they applied for Medicaid coverage for
           long-term care and therefore they were eligible when they applied.
		   
		   The DRA

           The DRA modified some of the eligibility requirements for Medicaid
           coverage for long-term care, including provisions related to asset
           transfers, and introduced new requirements. Most, but not all, of
           these DRA provisions became applicable on the date the law was
           enacted, February 8, 2006. In general, these DRA provisions do not
           apply to transfers that occurred prior to the law's enactment.

           The DRA extended the look-back period, changed the beginning date
           of the penalty period, and provided additional conditions on the
           application process for undue hardship waivers. (See table 3.)

22States' maximum resource levels cannot exceed the maximum federal
standard. As of January 1, 2005, the federal maximum was $95,100; for
2007, it was $101,640.

23States' minimum resource levels cannot be less than the federal minimum
standard. As of January 1, 2005, the federal minimum was $19,020; it was
$20,328 in 2007.

24Technically, 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 also
Wisconsin Department of Health and Family Services v. Blumer, 534 U.S.
473, 482-83 (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).

25The Social Security Act terms this the minimum monthly maintenance needs
allowance. Throughout this report, we refer to this as the minimum needs
allowance.

26As 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; in 2007, the minimum needs allowance could range from $1,650 to
$2,541 per month.

27If the shortfall in income could not be made up completely using one of
the approaches, then a combination of both approaches could be used.

28Prior to the DRA, approximately half of states required the use of the
income-first method.

29Federal law requires states to apply the transfer of asset provisions to
institutionalized individuals, who are defined in the Social Security Act
as individuals who are inpatients in a nursing facility or a similar
institution or certain recipients of home and community-based services.
See Social Security Act S 1917(e)(3). States have the option to apply such
provisions to noninstitutionalized individuals.

30For 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.

31According to CMS's State Medicaid Manual, an individual must provide
"convincing evidence" as to the specific purpose for which the asset was
transferred. Verbal assurances are not sufficient.

32For individuals in institutions, the look-back period was 36 months (or
60 months for certain types of trusts) from the date the individual was
institutionalized and applied for Medicaid.

33States had the option to begin the penalty period on either the first
day of the month in which the asset was transferred for less than FMV or
the first day of the month following the month of transfer.

Table 3: DRA Changes to Provisions Related to Transfers of Assets

Topic          Provisions prior to the DRA DRA provisions                  
Look-back      36 months for most assets,  60 months for all assets, from  
period         60 months for transfers     the date the individual was     
                  involving certain types of  institutionalized and applied   
                  trusts, from the date the   for Medicaida                   
                  individual was                                              
                  institutionalized and                                       
                  applied for Medicaid                                        
Beginning date Approximately the date of   Generally, the later of (1) the 
of penalty     the asset transferb         first day of a month during or  
period                                     after an individual transfers   
                                              assets for less than FMV or (2) 
                                              the date on which the           
                                              individual is eligible for      
                                              Medicaid and would otherwise be 
                                              receiving coverage for          
                                              long-term care services, were   
                                              it not for ineligibility due to 
                                              the imposition of the penalty   
                                              period                          
Undue hardship Penalty period for asset       o Undue hardship exists if   
                  transfers would not be         application of the penalty   
                  applied if the state           period would deprive an      
                  determines that the denial     individual of (1) medical    
                  of eligibility would create    care such that the           
                  an undue hardship as           individual's health or life  
                  determined on the basis of     would be endangered or (2)   
                  criteria established by the    food, clothing, shelter, or  
                  Secretary of Health and        other necessities of lifec   
                  Human Services (HHS)           o Allows the long-term care  
                                                 facility to apply for an     
                                                 undue hardship provision on  
                                                 behalf of a resident, with   
                                                 that resident's consent      

Source: GAO analysis of the Social Security Act before and after the DRA.

aThe DRA provides that only transfers of assets made on or after February
8, 2006, are subject to the 60-month look-back period. Thus, transfers
made prior to February 8, 2006, could result in a penalty period only if
they occur within 36 months from the date an institutionalized person
submitted an application. In contrast, transfers made on or after February
8, 2006, could result in a penalty period if they occur within 60 months
of the date of application. Given this, as a practical matter, the
look-back period will gradually increase from 36 to 60 months and will
reach the full 60 months on February 8, 2011.

bStates had the option to begin the penalty period on either the first day
of the month in which the asset was transferred for less than FMV or the
first day of the month following the month of transfer.

cThe criteria for determining undue hardship are the same as those that
had previously been established by the Secretary of HHS in Medicaid
guidance, namely The State Medicaid Manual.

The DRA also introduced several new provisions, which are summarized in
table 4.

Table 4: New Provisions Introduced by the DRA Related to Medicaid
Eligibility for Long-Term Care and Asset Transfers

DRA provision              Description                                     
Asset review and                                                           
verification                                                               
Annuities                     o States are required to treat the purchase  
                                 of an annuity as a transfer for less than    
                                 FMV unless the annuity names the state as    
                                 either (1) the remainder beneficiary in the  
                                 first position for at least the total amount 
                                 of Medicaid expenditures paid on behalf of   
                                 the annuitant or (2) a remainder beneficiary 
                                 in the second position after the community   
                                 spouse or minor or disabled child.           
                                 o Annuities purchased by or on the behalf of 
                                 an individual who applied for Medicaid       
                                 coverage for long-term care shall be treated 
                                 as a transfer of assets for less than FMV    
                                 unless the annuity is irrevocable,           
                                 nonassignable, actuarially sound, and        
                                 provides for payments in equal amounts       
                                 during the term of the annuity, with no      
                                 deferral and no balloon payments.            
                                 o Annuities purchased by or on the behalf of 
                                 an individual who applied for Medicaid       
                                 coverage for long-term care services that    
                                 are considered as individual retirement      
                                 accounts or purchased with the proceeds of   
                                 certain retirement accounts and meet certain 
                                 federal tax code requirements are not        
                                 considered transfers for less than FMV.      
Continuing care retirement States are required to consider certain         
communities                entrance fees for continuing care retirement    
                              communities or life care communities as         
                              countable resources.                            
Home equity                An individual with an equity interest in        
                              his/her home of more than $500,000 is excluded  
                              from eligibility for Medicaid payment for       
                              long-term care. (A state can elect to increase  
                              this value up to $750,000.) However, an         
                              individual would not be excluded from           
                              eligibility if his/her spouse, child under age  
                              21, or child who is considered blind or         
                              disabled lives in the home.                     
Income-first rule          When calculating the community spouse's minimum 
                              needs allowance, states are required to         
                              allocate the available income of the            
                              institutionalized spouse before allocating any  
                              available resources to the community spouse.    
Life estates               A purchase of a life estate interest in another 
                              person's home is treated as a transfer of       
                              assets for less than FMV unless the purchaser   
                              lived in the home for at least 1 year after the 
                              date of purchase.a                              
Notes and loans            States are required to consider funds used to   
                              purchase a promissory note, loan, or mortgage   
                              as a transfer of assets for less than FMV       
                              unless the repayment terms are actuarially      
                              sound, provide for payments to be made in equal 
                              amounts during the term of the loan with no     
                              deferral or balloon payments, and prohibit the  
                              cancellation of the balance upon the death of   
                              the lender.                                     
Imposition of penalty                                                      
period                                                                     
Imposition of partial      A state cannot "round down" or disregard any    
months of ineligibility    fractional period of ineligibility when         
                              determining the penalty period.                 
Treatment of multiple      For an individual or an individual's spouse who 
transfers                  makes multiple fractional transfers of assets   
                              (i.e., transfers for less than FMV that are     
                              worth less than 1 month of nursing home cost of 
                              care) during the look-back period, states may   
                              determine the penalty period by treating the    
                              total, cumulative uncompensated value of all    
                              the assets transferred as one transfer.         

Source: GAO analysis of the DRA.

aA life interest, or life estate, is an interest in real property that
gives the owner of the interest the right to use and possess the property
only for the duration of the life of a person, usually the person who
occupies the premises.

Nationwide, Most Nursing Home Residents' Nonhousing Resources Were Lower than
Annual Nursing Home Costs

Nationwide, most elderly individuals had nonhousing resources valued under
$70,000 at the time they entered the nursing home; nursing home care is
estimated to cost over $70,000 a year for a private-pay patient.34 In
general, Medicaid-covered elderly nursing home residents had lower
nonhousing resources and income at the time of entry than
non-Medicaid-covered residents. The percentage of Medicaid-covered elderly
nursing home residents who reported transferring cash was lower and the
median amounts they reported transferring were similar to those for
non-Medicaid-covered residents.

Medicaid-Covered Nursing Home Residents Generally Had Fewer Assets than Those
Not Covered by Medicaid

According to data from the HRS, nursing home residents covered by Medicaid
had fewer assets than residents not covered by Medicaid. Over 70 percent
of all elderly nursing home residents had nonhousing resources of $70,000
or less at the time they entered the nursing home, which is less than the
estimated average annual cost for nursing home care.35 Median nonhousing
resources for all elderly nursing home residents were $5,794 at the time
they entered the nursing home.36 (See fig. 1.) Sixty-two percent of all
elderly nursing home residents had nonhousing resources of $25,000 or less
while 11 percent had nonhousing resources of $300,000 or above. Median
nonhousing resources for Medicaid-covered elderly nursing home residents
($48) were lower than for non-Medicaid-covered residents ($36,123).
Approximately 92 percent of Medicaid-covered residents had nonhousing
resources of $25,000 or less compared to 46 percent of
non-Medicaid-covered residents.

34For the purpose of our analysis, "nonhousing resources" refers to the
net value of stocks, checking accounts, CDs, bonds, individual retirement
accounts/Keogh plans, other real estate, vehicles, business, and other
resources, excluding the home as well as mortgages and loans on the home.
Since the data for this analysis are from multiple years, we converted all
dollar figures into 2004 dollars, using the current methods series of the
CPI for all urban consumers.

35For couples, nonhousing resources are assessed at the household level.

36Mean (average) nonhousing resources were $121,201 and ranged from less
than zero to $6,625,498. Ninety-five percent of all elderly nursing home
residents had nonhousing resources of $622,506 or below. An individual or
household can have resources valued at less than zero if debt is greater
than the value of resources.

Figure 1: Distribution of Nonhousing Resources as Reported by Elderly
Nursing Home Residents at the Time They Entered the Nursing Home,
1992-2004

Note: The data for this analysis are from multiple years; therefore, we
converted all dollar figures into 2004 dollars, using the current methods
series of the Consumer Price Index (CPI) for all urban consumers.

Approximately 92 percent of all elderly nursing home residents had an
annual income of $50,000 or less at the time they entered the nursing
home; about 65 percent of elderly nursing home residents had incomes of
$20,000 or less. Median annual income for elderly nursing home residents
was $14,480 at the time of entry.37 (See fig. 2.) Median annual income of
Medicaid-covered elderly nursing home residents ($9,719) was about half
that of non-Medicaid-covered residents ($18,600). Approximately 90 percent
of Medicaid-covered elderly nursing home residents had annual incomes of
$20,000 or less compared to approximately 53 percent of
non-Medicaid-covered residents.

37Mean (average) annual income for all elderly nursing home residents was
$22,182 and it ranged from zero to $556,357 at the time they entered the
nursing home. Ninety-five percent of all elderly nursing home residents
had annual income of $58,773 or below.

Figure 2: Distribution of Annual Income as Reported by Elderly Nursing
Home Residents at the Time They Entered the Nursing Home, 1992-2004

Note: The data from this analysis are from multiple years; therefore, we
converted all dollar figures into 2004 dollars, using the current methods
series of the CPI for all urban consumers.

Nationwide, Fewer Medicaid-Covered Nursing Home Residents Reported Transferring
Cash Compared with Non-Medicaid-Covered Residents

Nationwide, the percentage of Medicaid-covered elderly nursing home
residents who reported transferring cash was about half that of
non-Medicaid-covered residents at the time they entered the nursing home
and during the 4 years prior to entry. For example, at the time they
entered the nursing home, 9.2 percent of Medicaid-covered residents
reported transferring cash, compared with 23.2 percent of
non-Medicaid-covered residents. However, the median amount of cash
transferred as reported by Medicaid-covered residents and
non-Medicaid-covered residents did not vary greatly.38 (See table 5.)

Table 5: Amounts of Cash Transferred at Entry and Prior to Entry into the
Nursing Home Reported by Elderly Nursing Home Residents, by Payer Source,
1992-2004

                                   Amount of cash transferred (in 2004 dollars)
Time in                Percentage                                                 
relation                       of                                                 
to entry                residents                                                 
into the                      who                                                 
nursing               transferred             Median      Mean       95th         
home     Payer source        cash Minimum (midpoint) (average) percentile Maximum 
At entry Medicaid             9.2      $1     $2,194    $5,439    $23,174 $23,174 
         Non-Medicaid        23.2      12      2,194     9,328     30,986 383,928 
2 years  Medicaid            12.4       6      2,194     4,655     14,873  43,380 
prior to                                                                          
entry                                                                             
         Non-Medicaid        23.8     116      2,194     5,935     23,174  74,366 
4 years  Medicaid            12.0      46      1,239     2,278      9,915  15,493 
prior to                                                                          
entry                                                                             
         Non-Medicaid        25.1     110      1,859     6,119     19,614 301,266 

Source: GAO analysis of data from the Health and Retirement Study,
1992-2004.

Note: The data from this analysis are from multiple years; therefore, we
converted all dollar figures into 2004 dollars, using the current methods
series of the CPI for all urban consumers.

38Very few elderly nursing home residents (approximately 5 percent or
less) reported transferring the deeds to their homes to their children or
grandchildren.

Majority of Medicaid Applicants in Selected Counties in Three States Had Few
Nonhousing Resources and Were Approved upon Initial Application

Similar to the nationwide results, the majority of the 540 applicants
whose Medicaid nursing home application files we reviewed in selected
counties in three states (Maryland, Pennsylvania, and South Carolina) had
few nonhousing resources.39 The majority of applicants (approximately 65
percent) were single females. About 76 percent of all applicants were
approved the first time they applied, while the remaining applicants (23
percent) were initially denied, often for financial reasons--having income
or resources that exceeded the states' financial eligibility standards.
About three-quarters of the applicants initially denied only for financial
reasons were subsequently approved, primarily after the value of their
nonhousing resources decreased. For the applicants who were initially
denied for financial reasons, the time span between their initial and
subsequent applications averaged a little over 5 months. During this time,
their median nonhousing resources decreased from $22,380 to $10,463, with
a maximum decrease of $283,075. For about one-third of these applicants
who were initially denied for financial reasons and were subsequently
approved, at least part of the decrease in their nonhousing resources
could be attributed to spending on medical or nursing home care.

Majority of Medicaid Applicants Reviewed Were Single, Female, and Had Nonhousing
Resources of Less than $30,000

Of the 540 Medicaid nursing home application files we reviewed in selected
counties in three states, about 75 percent of the applicants were female,
most of whom were single. Over 80 percent of the applicants were already
living in a long-term care facility. These individuals had been living in
facilities for an average of a little over 4 months at the time of
application. About 90 percent--488 applicants--had total nonhousing
resources of $30,000 or less. (See fig. 3.) Eleven percent--59
applicants--did not have any nonhousing resources, while about 5 percent
had total nonhousing resources of $60,000 or more. For all applicants
whose files we reviewed, median nonhousing resources were $3,365.40
Married applicants, who made up about 21 percent of the applicants, had
higher median nonhousing resources ($8,407) than single applicants.41 Of
the single applicants, females, who made up approximately 65 percent of
all applicants, had higher median nonhousing resources ($3,109) than males
($1,628), who made up about 14 percent of all applicants.

39We were unable to obtain home values for about 18 percent of applicants
(25 applicants) who reported owning homes. Therefore, for this analysis,
we focused on total nonhousing resources--which include all resources
except for the value of an applicant's home--instead of total
resources--which includes the home value. Total nonhousing resources
include nonhousing resources that are counted and those that are generally
not counted toward determining financial eligibility for Medicaid.

40Mean (average) nonhousing resources were $13,440, and ranged from $0 to
$355,387.

Figure 3: Distribution of Nonhousing Resources of Medicaid Applicants in
Selected Counties in Three States

Note: For purposes of determining eligibility for Medicaid coverage for
nursing home care, an applicant's resources are considered to be both
those of the applicant and those of the spouse.

41For purposes of determining Medicaid eligibility, an applicant's
resources are considered to be both those of the applicant and those of
the spouse.

Eighty-five percent of the Medicaid applicants whose files we reviewed
(459 applicants) had annual incomes of $20,000 or less. The median annual
income of all applicants was $11,382.42 (See fig. 4.) Single male
applicants generally had higher annual incomes than single females.

Figure 4: Distribution of Annual Income of Medicaid Applicants in Selected
Counties in Three States

Note: For purposes of determining eligibility for Medicaid coverage for
nursing home care, only the income of an applicant is considered,
regardless of the applicant's marital status.

42Mean (average) annual income was $13,083 and ranged from $0 to $47,316.
All three states in which we reviewed applications have provisions that
allow certain applicants to obtain Medicaid coverage for nursing home care
even if their income exceeds the standards. For example, South Carolina
requires such applicants to place excess income in an income trust, which
is used to pay for the applicant's care. In addition, based on federal
law, a portion of a married applicant's income may be contributed to the
community spouse's minimum needs allowance, thereby decreasing the
applicant's income stream.

Applicants had several different types of nonhousing resources, some of
which were not counted toward determining eligibility for Medicaid
coverage for nursing home care. For example, a little over half (53
percent) of all applicants whose files we reviewed had prepaid burial or
funeral arrangements, with a median value of $2,614. Additionally, about
38 percent of the applicants had life insurance. Whether the burial
arrangements or life insurance policies counted toward determining
Medicaid eligibility depended on their type and value as well as the state
in which the applicant applied.43

Of the 540 applicants whose files we reviewed, 137 applicants (25 percent)
owned homes and 83 of the home owners (about 61 percent) were single.
Based on the applications we reviewed, home ownership varied by state,
with 32 percent of the applicants we reviewed in selected counties in
South Carolina owning homes, compared with 28 percent and 16 percent in
Pennsylvania and Maryland, respectively. For the 112 applicants in all
selected counties for whom we were able to determine a value for their
homes, the median value was $52,954.44

Most Medicaid Applicants Reviewed Were Approved upon Initial Application

About 76 percent of the Medicaid applicants whose files we reviewed were
approved upon initial application (408 applicants), while 23 percent (122
applicants) were denied.45 The majority of the approved applicants were
single and female. Of the 122 applicants who were initially denied, 57
were approved upon submitting a subsequent application.46 Therefore, 465
applicants, or 86 percent of all applicants whose files we reviewed, were
eventually approved.47 Figure 5 provides a breakdown of applicants by
application status.

43For example, with regard to life insurance policies, Maryland and
Pennsylvania do not count an applicant's life insurance policies if they
have a combined face value of $1,500 or less. If the policies have a
combined face value of more than $1,500, then Maryland counts the total
cash value of the policies, while Pennsylvania counts the total cash value
of the policies less $1,000. South Carolina counts the total cash value of
an applicant's life insurance policies if those policies have a combined
face value of more than $5,000.

44Mean home value was $70,668 and ranged from less than zero to $535,500.
One applicant had a home valued at $535,500 while the rest of the
applicants had homes with values of $358,600 or below. An applicant can
have a home valued at less than zero if his or her debt is greater than
the value of the home.

45Two percent of the applicants withdrew their applications before
receiving an eligibility determination. These percentages do not add to
100 because of rounding.

46At the time of our application file reviews, 65 of the applicants whose
initial applications were denied did not have a subsequent approved
application in their files. We do not know if they submitted applications
after the time of our review and were subsequently approved.

Figure 5: Percentage of All Applicants in Selected Counties in Three
States, by Application Status (n=540)

Note: Percentages do not add to 100 due to rounding.

aAt the time of our application file reviews, 65 of the applicants whose
initial applications were denied did not have a subsequent approved
application in their files. We do not know if they submitted applications
after the time of our review and were subsequently approved.

Almost half of the denied applicants (56 of 122) were denied only for
financial reasons--having income or resources that exceeded the standards,
most having to do with resources exceeding the standards. For those
applicants who were denied for having excess resources, their resources
exceeded the standards by an average of $25,116; the median amount of
excess resources was $13,260.48 Other reasons for denial included failing
to provide the requested documentation, not being in a nursing home or
meeting functional eligibility criteria, or a combination of two or more
of these reasons. (See fig. 6.)

47The number of approved applicants varied by state. Specifically, of the
files we reviewed, approximately 75 percent of applicants in South
Carolina were approved, compared to 91 percent and 93 percent in Maryland
and Pennsylvania, respectively.

48The amount of these applicants' excess resources ranged from $75 to
$205,440.

Figure 6: Percentage of Initially Denied Applicants in Selected Counties
in Three States, by Reasons for Denial (n=122)

Majority of Medicaid Applicants Reviewed Who Were Initially Denied Only for
Financial Reasons Were Eventually Approved

Of the 56 applicants who were initially denied only for financial reasons,
41 (73 percent) reapplied and were later approved. The time span between
their initial and subsequent applications averaged a little over 5 months
and ranged from less than 1 month to 31 months.

Of the 41 applicants who were initially denied only for financial reasons
and were subsequently approved, their nonhousing resources generally
decreased between the initial and subsequent applications, while their
annual incomes stayed about the same. (See fig. 7.) Between the two
applications, median nonhousing resources decreased from $22,380 to
$10,463, with a maximum decrease of $283,075. For most of these
applicants, the overall decrease in nonhousing resources was specifically
due to a decrease in financial holdings such as checking or savings
accounts, stocks, and mutual funds.49 For example, a married applicant
initially applied and was denied for having countable resources that
exceeded the state standards by $51,213. The applicant applied again just
over 9 months later and had resources within the state standards.
Therefore, the applicant was approved.

49Additionally, 9 of the 41 applicants owned homes at the time of their
initial application; 2 of these applicants sold them prior to applying
again.

Figure 7: Median Nonhousing Resources and Median Annual Income of Reviewed
Applicants in Selected Counties in Three States Who Were Initially Denied
Only for Financial Reasons and Subsequently Approved, at Time of Initial
Application and Subsequent Application (n=41)

Some of the files of applicants who were initially denied for financial
reasons and were subsequently approved indicated that the applicants spent
at least some of their resources on medical expenses or nursing home care,
although this was not the case for all of them. In the files we reviewed
for 13 of these applicants (32 percent), there were indications that the
applicant had spent at least some of his or her resources on medical
expenses, nursing home care, or both. For example, one applicant sold
stock and received cash in exchange for a life insurance policy, spending
about $12,150 for 3 more months of nursing home care before being approved
for Medicaid. In the remaining 28 applicants' files (68 percent), there
was no indication that their resources were used for medical or nursing
home care. For example, one married applicant was initially denied for
having resources of $205,440 above the state's standard. The file
indicated that when the applicant reapplied and was approved about 6
months later, $140,000 of the applicant's resources was used to purchase
an annuity to create an income stream for the community spouse, which was
not counted toward the applicant's eligibility.50

Few Transfers below FMV Identified for Applications Reviewed and Penalties
Rarely Delayed Eligibility

Few of the approved applicants whose files we reviewed in selected
counties in three states were found to have transferred assets for less
than FMV during the 36-month look-back period,51 and those who did
transfer assets for less than FMV rarely experienced a delay in
eligibility for Medicaid coverage for nursing home care as a result.52 The
proportion of approved applicants found to have transferred assets for
less than FMV varied both within and among the three states, and the
variation may be due, in part, to counties' or states' Medicaid
application review procedures. At the time these applicants applied for
Medicaid--state fiscal year 2005 or earlier--none of the three states
reviewed imposed penalties for partial months, and the penalty period
began at the time of the asset transfer; under these circumstances, only
two of the applicants received a penalty that delayed their eligibility
for Medicaid coverage for nursing home care as a result of transferring
assets for less than FMV. The other applicants were either not assessed a
penalty, because the penalty would have been for less than 1 month of
coverage, or the penalty they were assessed had expired by the time they
submitted their Medicaid application. Thus, these applicants did not
experience a delay in their Medicaid coverage as a result of transferring
assets for less than FMV. The total amount of assets transferred for less
than FMV varied by applicant, as did the number of transfers each
applicant made. In terms of the kinds of assets transferred for less than
FMV, applicants most commonly transferred financial holdings such as cash
or stocks, and their children or grandchildren were the most common
recipients of the transfer.

50The file did not indicate how the applicant spent the remaining $65,440.

51Prior to the DRA, the look-back period for asset transfers was generally
36 months.

52When discussing asset transfers for less than FMV, we are referring to
transfers that the state determined would be subject to the penalty
provisions. We are not referring to transfers that, under federal law, are
exempt from the penalty provisions. Such exemptions include transfers of
assets to the individual's spouse, transfers to another individual for the
spouse's sole benefit, or transfers to a disabled child. Additionally,
transfers do not result in a penalty period if the individual can show
that the transfer was made exclusively for purposes other than qualifying
for Medicaid.

Approximately 10 Percent of Approved Applicants Transferred Assets for Less than
FMV

Of the 465 approved applicants whose files we reviewed from selected
counties in three states, the files for 47 applicants (10 percent)
indicated that the applicants had transferred assets for less than FMV
during the 36-month look-back period.53 The proportion of approved
applicants found to have transferred assets for less than FMV varied both
within and among the states reviewed, ranging from a high of approximately
24 percent of approved applicants in Orangeburg County, South Carolina, to
a low of approximately 4 percent in Allegheny County, Pennsylvania (see
table 6).

Table 6: Percentage of Approved Applicants Whose Files Indicated They Had
Transferred Assets for Less than FMV, by State and Selected County

                                             Approved applicants
                                         Number who            Percentage who 
                                 transferred assets        transferred assets 
State          County          for less than FMV Total   for less than FMV 
Maryland       Baltimore                      11    57               19.3% 
                  Baltimore City                  3    48                 6.3 
                  Montgomery                      3    58                 5.2 
                  Subtotal                       17   163                10.4 
Pennsylvania   Allegheny                       3    72                 4.2 
                  Montgomery                      3    30                10.0 
                  Philadelphia                    3    65                 4.6 
                  Subtotal                        9   167                 5.4 
South Carolina Charleston                      9    46                19.6 
                  Greenville                      8    72                11.1 
                  Orangeburg                      4    17                23.5 
                  Subtotal                       21   135                15.6 
Total                                         47   465               10.1% 

Source: GAO analysis of Medicaid nursing home application data from nine
counties as of July 2006.

The variation in the proportion of applicants who were identified as
having transferred assets for less than FMV may be due, in part, to
states' ability to identify transfers not reported by the applicant. About
half of the assets transferred for less than FMV by applicants in South
Carolina were identified by the eligibility workers as opposed to being
reported by an applicant. Eligibility workers in Maryland and Pennsylvania
identified 9 percent and 4 percent of transfers, respectively.

53Our analysis of asset transfers focused on applicants who were approved
for Medicaid coverage, because if an applicant appears likely to be denied
Medicaid coverage, states might not conduct a complete review to determine
if an applicant transferred assets for less than FMV.

The approved applicants who transferred assets for less than FMV were
predominately single females. Although single females accounted for 65
percent of approved applicants, they accounted for over 78 percent of the
approved applicants who transferred assets for less than FMV. (See fig.
8.) Additionally, 89 percent of approved applicants who transferred assets
for less than FMV resided in a long-term care facility before applying for
Medicaid. These individuals were in the facility for an average of over 5
months before they applied for Medicaid coverage.

Figure 8: Percentage of Approved Applicants and Approved Applicants Who
Transferred Assets for Less than FMV, by Gender and Marital Status

Approved applicants who transferred assets for less than FMV were better
off financially (i.e., they had higher income and resources), even after
excluding the amount transferred, compared with the universe of approved
applicants. For example, approved applicants who transferred assets had
higher median nonhousing resources ($8,138) compared with all approved
applicants ($2,940). (See fig. 9.)

Figure 9: Median Nonhousing Resources and Income for Approved Applicants
and Approved Applicants Who Transferred Assets for Less than FMV

Note: The amount of nonhousing resources for the approved applicants who
transferred assets for less than FMV reflects the amount after excluding
the assets transferred.

Transfers for Less than FMV Rarely Delayed Medicaid Eligibility

Transfers for less than FMV rarely led to delays in eligibility for
Medicaid coverage for nursing home care, as most applicants' assessed
penalty periods expired before they applied for Medicaid. Among the 47
approved applicants who transferred assets for less than FMV, the length
of the penalty period assessed averaged about 6 months, with a median
penalty period of 2 months. (See fig. 10.) At the time these applicants
applied for Medicaid (state fiscal year 2005 or earlier), the three states
in which we reviewed applications did not assess penalties for partial
months; that is, the length of penalties assessed was rounded down to the
closest whole month.54 As a result, 9 of the 47 approved applicants who
transferred assets for less than FMV (about 19 percent) were not assessed
a penalty because they transferred assets valued at less than the cost of
a month of nursing home coverage for a private-pay patient in their
state.55 Furthermore, because penalty periods began at approximately the
date of the asset transfer, 36 applicants' penalty periods expired prior
to the submission of their application for Medicaid coverage for nursing
home care.56 Thus, only 2 applicants experienced delays in Medicaid
coverage resulting from their transfers of assets for less than FMV; the
delays were for 1 and 6 months, respectively.

54Pennsylvania began assessing partial-month penalties during its 2006
fiscal year, specifically in August 2005. With the passage of the DRA, all
states are required to assess partial-month penalties.

Figure 10: Distribution of 47 Approved Applicants Who Transferred Assets
for Less than FMV, by Length of Assessed Penalty Periods, in Months

55In state fiscal year 2005, the average monthly cost for a private-pay
patient in a nursing facility--the figure used for calculating the penalty
period--was $4,300.00 in Maryland, $5,787.38 in Pennsylvania, and
$4,234.00 in South Carolina.

56The DRA changed the timing of the penalty period. For transfers made on
or after February 8, 2006, the penalty period will begin on the later of
(1) the first day of the month during or after which an individual
transfers assets for less than FMV or (2) the date on which the individual
is eligible for Medicaid and would otherwise be receiving coverage for
long-term care services, were it not for ineligibility due to the
imposition of the penalty period.

Amounts of Assets Transferred for Less than FMV Varied

Among those who transferred assets for less than FMV, the total amount of
the assets transferred varied, with a median amount of $15,152.57 The
applicant with the lowest total transfer amount made a onetime cash gift
of $1,000 to her child, while the applicant with the highest total
transfer amount used funds from a trust established for her care to buy
and resell property. Since the trust fund should have only been used for
the applicant's care, the use of the funds to pay real estate fees, which
totaled $201,516, was considered a transfer of assets for less than FMV.
Figure 11 shows the distribution of the amounts of transfers for less than
FMV per approved applicant. Nearly half of the applicants who transferred
assets for less than FMV (22 of 47) transferred $10,000 or less; 10 of the
22 applicants transferred $5,000 or less. In contrast, 6 of the 47
applicants (about 13 percent) transferred more than $80,000 in assets.

Figure 11: Distribution of 47 Approved Applicants Who Transferred Assets
for Less than FMV, by Amount Transferred

57The mean amount of all assets transferred for less than FMV was $30,246
and ranged from $1,000 to $201,516.

The number of transfers for less than FMV made by applicants also varied,
averaging slightly over two transfers per applicant. Specifically, 23
applicants made a single transfer and 1 applicant made eight transfers
(see fig. 12). The eight transfers spanned a 1 1/2-year period and ranged
from an over $4,000 cash gift to a grandchild to a stock transaction in
which the applicant gave a relative over $33,000 of her stock.

Figure 12: Distribution of 47 Approved Applicants Who Transferred Assets
for Less than FMV, by Number of Transfers

The majority of asset transfers for less than FMV (approximately 84
percent) involved the transferring of financial holdings such as cash or
stocks. However, the types of assets transferred varied by state (see
table 7). This variation may be related, in part, to differences in
counties' or states' Medicaid application review procedures. Specifically,
based on our review of the files, county officials in South Carolina
conducted searches of real property tax databases, which likely allowed
South Carolina eligibility workers to identify property transfers that
were not reported by the applicant. For example, a South Carolina
applicant was penalized because the eligibility worker identified that the
applicant had transferred property for less than FMV--a house valued at
$84,700 to her son for $5. In contrast, although Maryland eligibility
workers could search the state's property tax records, state officials
told us that workers' searching abilities were limited because they needed
to know the county and street name of the property. As a result, it likely
would be difficult for Maryland eligibility workers to identify unreported
transfers of property.

Table 7: Percentage of Assets Transferred for Less than FMV by Type of
Asset for 47 Approved Applicants in Selected Counties in Three States

Asset type          Maryland Pennsylvania South Carolina Total 
Financial holdingsa    95.5%        82.6%          71.8% 84.0% 
Real property              0          4.4           25.6  10.4 
Automobile               2.3          8.7              0   2.8 
Otherb                   2.3          4.4            2.6   2.8 

Source: GAO analysis of Medicaid nursing home application data from nine
counties as of July 2006.

Note: Percentages may not add to 100 because of rounding.

aFinancial holdings includes items such as cash or stocks.

bIncludes instances where the type of asset transferred was unknown.

Applicants most frequently transferred assets to their children and
grandchildren. Approximately 47 percent of transferred assets were given
to children or grandchildren, 15 percent were given to other relatives,
and 38 percent were given to other individuals.58

Extent to Which Some DRA Long-Term Care Provisions May Affect Eligibility Is
Uncertain

The extent to which some DRA long-term care provisions may affect
applicants' eligibility for Medicaid coverage for long-term care is
uncertain. Our review of a sample of Medicaid applications indicated that
the DRA penalty period provisions could increase the likelihood that
individuals who transfer assets for less than FMV on or after the date of
enactment will experience a delay in eligibility for Medicaid coverage for
long-term care. However, the extent of the delay is uncertain. The effects
on eligibility of other DRA provisions--specifically those related to
annuities, home equity, the allocation of assets to community spouses, and
life estates--may be limited because they only apply to a few applicants,
affect applicants in some states but not in others, or both.

58"Other individuals" includes instances where the recipient of the
transfer was unknown.

DRA Provisions Related to Penalty Periods Could Delay Eligibility for Those Who
Transfer Assets for Less than FMV, but the Extent of the Delay Is Uncertain

The DRA requires states to change when a penalty period is applied and how
it is calculated.59 First, the DRA changes the beginning date of a penalty
period from approximately the date of the transfer--which could precede
the date of a Medicaid application by days, months, or years--to the later
of (1) generally the first day of a month during or after which an asset
has been transferred for less than FMV or (2) the date on which the
individual is eligible for Medicaid and would otherwise be receiving
coverage for long-term care services, were it not for ineligibility due to
the imposition of the penalty period. All applicants who transfer assets
for less than FMV during the look-back period on or after February 8, 2006
(the date the DRA was enacted) will experience a delay in eligibility for
Medicaid coverage for long-term care, whereas before that date, some
applicants' penalty periods expired before they applied for Medicaid
coverage.60 Second, regarding the calculation of the penalty period, the
DRA prohibits states from "rounding down" or disregarding fractional
periods of ineligibility when determining the penalty period. This
provision could result in longer penalty periods for some applicants. (See
fig. 13, which illustrates the potential effects of the DRA penalty period
provisions.)

59Additionally, the DRA gives states the option of treating an applicant's
total, cumulative value of all assets transferred for less than FMV as one
transfer when determining the applicant's penalty period.

60The DRA provides that only transfers of assets made on or after February
8, 2006, are subject to the 60-month look-back period. Thus, transfers
made prior to February 8, 2006, could result in a penalty period only if
they occur within 36 months from the date an institutionalized person
submitted an application. In contrast, transfers made on or after February
8, 2006, could result in a penalty period if they occur within 60 months
of the date of application. Given this, as a practical matter, the
look-back period will gradually increase from 36 to 60 months and will
reach the full 60 months on February 8, 2011.

Figure 13: Example of How the DRA Penalty Period Provisions Could Delay
Medicaid Eligibility for Applicants Who Transfer Assets for Less than FMV

aThe 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). In
this example, we assumed that the average monthly private-pay rate for
nursing home care was $5,000.

If these DRA penalty period provisions had been in effect for the
applicants whose files we reviewed, all 47 approved applicants who
transferred assets for less than FMV would have experienced a delay in
Medicaid coverage, compared with only 2 who actually experienced a delay.
Additionally, the penalty period would have been longer for 45 of the 47
approved applicants. The increase in the penalty period would have ranged
from less than 1 day to almost 6 months, with a median increase of about 2
1/2 weeks. As a result, the median delay in eligibility would have been
approximately 3 months and ranged from about 1 week to over 47 months.61

An increase in the number of applicants whose eligibility is delayed may
be mitigated by two factors. First, states may see an increase in the
number of approved applicants seeking to waive their penalty periods
because they would create an undue hardship--that is, the application of
the penalty would deprive the applicants of (1) medical care that would
endanger the applicants' health or life or (2) food, clothing, shelter, or
other necessities of life.62 Officials from the three states in which we
reviewed applications commented that they received few undue hardship
requests prior to the DRA but expected to see an increase in requests as
the DRA provisions are implemented. Second, the extent to which
individuals are subject to penalty periods may change as individuals may
make different decisions regarding the transferring of assets as a result
of the DRA.

Other DRA Provisions May Have Limited Effects on Eligibility

The effects on eligibility for Medicaid coverage for long-term care of
other DRA provisions may be limited. This is primarily because few
Medicaid applicants appear to have resources that are specifically
addressed by the DRA, namely annuities, home equity of more than $500,000,
or life estates. Additionally, the provision on allocating income and
resources to the community spouse will only affect married applicants in
certain states, thus limiting the effects that the DRA might have on
eligibility.

           o Annuities. The DRA added requirements for states regarding the
           treatment of annuities. A state must treat the purchase of an
           annuity as a transfer for less than FMV unless certain conditions,
           such as a requirement that the state be named as a remainder
           beneficiary, are met. However, the effect of this provision may be
           limited because few Medicaid applicants appear to have annuities.
           We found that 3 percent of the approved applicants (14 of 465)
           whose application files we reviewed owned an annuity.63 These 14
           applicants' annuities would have been considered transfers for
           less than FMV under the DRA because they did not name the state as
           a remainder beneficiary, had a balloon payment, or both. While the
           incidence of annuities among Medicaid beneficiaries is not
           nationally known, a January 2005 study undertaken at the request
           of CMS estimated that, among the five states examined, the
           percentage of Medicaid long-term care beneficiaries who had an
           annuity ranged from less than 1 percent in two states to more than
           3 percent in one state.64

           o Home Equity. Under the DRA, certain individuals with home equity
           greater than $500,000 are not eligible for Medicaid payment for
           long-term care, including nursing home care.65 The effect of this
           provision may be limited because it appears that few individuals
           who apply for Medicaid coverage for nursing home care have homes
           valued at more than $500,000. For example, 23 percent of the 465
           approved Medicaid nursing home applicants whose files we reviewed
           owned homes. Of the homes for which we could determine values, the
           median value was $57,600.66 Only one approved applicant owned a
           home valued at more than $500,000. Although we do not know this
           applicant's equity interest in the home, the applicant would not
           have been subject to the DRA home equity provision, since the
           applicant's spouse lived in the home. Additionally, our review of
           2004 HRS data indicated that no elderly nursing home residents
           owned a home valued at more than $500,000.

           o Life Estates. The DRA requires states to treat the purchase of
           certain life estates as a transfer of assets for less than FMV
           unless the purchaser (the applicant) lived in the house for at
           least 1 year after the date of purchase.67 The effect of this
           provision may be limited because we found that few approved
           Medicaid nursing home applicants whose files we reviewed had life
           estates. Specifically, the proportion of approved applicants who
           owned life estates ranged from zero in Pennsylvania to 2 percent
           in South Carolina.68

           o Income First. The DRA's income-first provision has the potential
           to affect married applicants in states that did not already use
           the income-first methodology. Under the income-first methodology
           the difference between a community spouse's income and his or her
           minimum needs allowance is made up by transferring income from the
           institutionalized spouse. According to CMS, approximately half of
           all states did not use the income-first methodology before the
           passage of the DRA.69 Of the three states we reviewed, only
           Pennsylvania will be affected by this provision.70 Among approved
           applicants in Pennsylvania, 6 of the 42 married applicants whose
           files we reviewed would have been affected by this change because
           these applicants had retained resources in excess of the standards
           to create income streams for their community spouses.
           Specifically, they created annuities for the community spouses
           with values ranging from $7,372 to $77,531, with a median value of
           $39,912. Pennsylvania officials told us that almost all
           institutionalized spouses in their state have enough income to
           supplement the income needs of their community spouses. As a
           result, under the DRA, applicants would not be allowed to retain
           resources in excess of the standards as they had previously
           through the creation of annuities. Rather, resources in excess of
           those allowed by the Medicaid program would need to be reduced in
           order for the institutionalized spouse to be eligible for
           Medicaid.
		   
61This analysis assumes the DRA penalty period provisions had been in
effect at the time the applicants made the transfers. However, if an
applicant transfers assets before the date of enactment, then the transfer
will be subject to the rules for transfers before the DRA was enacted. In
contrast, if an applicant transfers assets on or after the date of
enactment, then the transfer will be subject to the DRA rules. If an
applicant transfers assets both before and on or after the date of
enactment, then the pre-DRA rules apply to the earlier transfer and the
DRA rules apply to the latter.

62Under the DRA, states are required to establish procedures to allow
nursing homes (or other long-term care facilities) to file a request to
waive a resident's penalty period if it would create an undue hardship for
that resident.

63Among the approved applications we reviewed, there were eight applicants
with annuities in Maryland, three in Pennsylvania, and three in South
Carolina. We were unable to determine annuity values for one of the
approved applicants who owned annuities. Of the annuities for which we
could determine values, the median value was $18,000, the mean value was
$77,073, and the values ranged from $1,147 to $565,000.

64See R.A. Levy et al., Analysis of the Use of Annuities to Shelter Assets
in State Medicaid Programs (January 2005).

65An individual with equity in his or her home of greater than $500,000
may still be eligible for Medicaid payment for long-term care if the
individual has a spouse, child under age 21, or child who is considered
blind or disabled living in the home. States have the option to increase
the home equity limit up to $750,000. As of summer 2006, all three of the
states included in our review elected to keep the threshold at $500,000.

66We were unable to determine home values for approximately 18 percent (19
of 108) of all approved applicants who owned homes. Of the homes for which
we could determine values, the mean value was $77,276 and the values
ranged from $200 to $535,000. This analysis does not account for any debt
that applicants may have on their homes.

67A life estate is an interest in real property that gives the owner of
the interest the right to use and possess the property only for the
duration of the life of a person, usually the person who occupies the
premises.

68We were not able to assess whether the DRA provision on the treatment of
life estates would apply to the life estates that these approved
applicants had.

69These data are based on a telephone survey conducted by CMS in 2001.

70Before enactment of the DRA, Pennsylvania allowed married applicants to
allocate resources to the community spouse before allocating the
institutionalized spouse's income. The other two states, Maryland and
South Carolina, already used the income-first methodology.
		   
		   Agency and State Comments and Our Evaluation

           We provided copies of a draft of this report to CMS and the three
           states in which we reviewed Medicaid nursing home application
           files: Maryland, Pennsylvania and South Carolina. We received
           written comments from CMS (see app. II) and South Carolina (see
           app. III). Maryland provided comments via e-mail, while
           Pennsylvania did not comment on the draft report.

           In its written comments, CMS generally agreed with our findings,
           but noted the limited number of states in which we reviewed
           applications and that study was done before the effects of the DRA
           could be assessed. We agree that the actual effects of the DRA are
           not yet known. However, our findings based on applications
           submitted prior to the implementation of the DRA provide insight
           into what its effects may be. CMS also commented that the DRA will
           be working as Congress intended if applicants experience delays in
           Medicaid eligibility as a result of transferring assets for less
           than FMV.

           Maryland and South Carolina generally agreed with our findings. In
           addition, Maryland emphasized the difficulties faced by Maryland
           eligibility workers in identifying unreported transfers of assets
           due to their limited ability to search the state's property tax
           records. South Carolina highlighted our finding that 15.6 percent
           of the approved applicants whose files we reviewed in South
           Carolina were found to have transferred assets for less than FMV,
           as compared to 10.4 percent and 5.4 percent in the other two
           selected states. The state attributed this difference to the
           effectiveness of South Carolina's eligibility process and its
           training of eligibility workers to enable them to identify
           transfers of assets not reported by an applicant. In response to
           our finding that only 2 of the 47 approved applicants who
           transferred assets for less than FMV experienced a delay in
           Medicaid eligibility as a result of transferring assets, South
           Carolina recommended that we clarify that this occurred despite
           the fact that the states were adhering to federal requirements. We
           did not make a change, as we believe the report clearly states why
           the other applicants did not experience a delay in Medicaid
           eligibility.

           Technical comments from CMS were incorporated into the report as
           appropriate.

           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 provide copies 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 IV.

           Kathryn G. Allen
		   Director, Health Care
		   
		   Appendix I: Scope and Methodology

           To examine the financial characteristics of elderly nursing home
           residents nationwide, including the extent to which they
           transferred cash, we analyzed data from the Health and Retirement
           Survey (HRS). 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
           follow-up interviews over the telephone every second year
           thereafter.1 HRS questions pertain to physical and mental health
           status, insurance coverage, financial status, family support
           systems, employment status, and retirement planning.2

           For this analysis, we used HRS data from 1992 to 2004.3 We limited
           our analysis to elderly nursing home residents who had been
           surveyed at least once before they entered a nursing home. We
           defined an elderly individual as anyone 65 years of age or older.
           On the basis of individuals' answers on HRS, we defined a nursing
           home resident as anyone who met one of the following three
           criteria:

                        1. answered "yes" to permanently living in a nursing
                        home;
                        2. answered "no" to permanently living in a nursing
                        home but spent more than 360 nights in a nursing
                        home; or
                        3. answered "no" to permanently living in a nursing
                        home but spent 180 to 360 days in one and

                        a. died in a later survey period;

                        b. had three or more limitations in activities of
                        daily living (ADL); or

                        c. had cancer, lung disease, or heart disease and
                        some difficulty (rating of three or more) with
                        mobility.4

           We used the HRS data from the 1,296 individuals who met these
           criteria; this sample represented a population of 4,217,795
           individuals. From these data, we estimated the financial
           characteristics of elderly nursing home residents as well as the
           percentage of residents who transferred cash or deeds to their
           homes, the amount transferred, and whether it varied by how they
           paid for their care (i.e., Medicaid-covered or
           non-Medicaid-covered).5 This analysis underestimates the
           percentage of elderly households that transferred assets and the
           amount of assets transferred because HRS data included only
           transfers of cash and deeds to the home. Additionally, HRS does
           not assess whether the transfers relate to individuals' attempts
           to qualify for Medicaid coverage for nursing home services.

           In order to assess the reliability of the HRS data, we reviewed
           related documentation regarding the survey and its methods of
           administration. We also conducted electronic data tests to
           determine whether there were missing data or obvious errors. On
           the basis of this review, we determined that the data were
           sufficiently reliable for our purposes.

           To analyze the demographic and financial characteristics of
           elderly individuals who applied for Medicaid coverage for nursing
           homes and if they applied more than once, as well as the extent to
           which they transferred assets for less than fair market value
           (FMV) and were subject to penalty periods, we reviewed Medicaid
           eligibility determination practices and Medicaid nursing home
           application files in three states. To select states, we assessed
           the ranking of five factors for each of the 51 states.

                        1. The percentage of the population aged 65 and over,
                        which we determined using 2000 census data from the
                        U.S. 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 U.S.
                        Census Bureau using the 2000 and 2002 Current
                        Population Surveys.
						
1HRS defines each 2-year survey period as a wave. Each wave corresponds to
the second year of a survey period in which the survey was conducted (wave
one--1992--up to wave seven--2004).

2For more information about HRS, see http://hrsonline.isr.umich.edu/
(accessed on Dec. 8, 2006).

3Since the data from this analysis are from multiple years, we converted
all dollar figures into 2004 dollars, using the current methods series of
the Consumer Price Index (CPI) for all urban consumers.

4Mobility is a summary index using five limitations: walking one block,
walking several blocks, walking across a room, climbing one flight of
stairs, and climbing several flights of stairs. The mobility rating is on
a scale of zero (no difficulty or limitations with summary measurements)
to five (some difficulty or limitation in all five summary measurements).

5Payer source for non-Medicaid-covered residents could include self-pay,
Medicare, or other third-party insurance.
						
                        4. The extent of Medicaid nursing home expenditures
                        as reported by states to the Centers for Medicare &
                        Medicaid Services (CMS).6 
                        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).

           Table 8: Clusters Used for State Sample Selection
		   
Cluster States                                                             

Low     Arkansas, Georgia, Idaho, Louisiana, Mississippi, Montana, New     
           Mexico, South Carolina, South Dakota, Utah, Vermont, Wyoming       

Medium  Alabama, Alaska, Arizona, Colorado, Delaware, District of          
           Columbia, Hawaii, Illinois, Indiana, Iowa, Kansas, Kentucky,       
           Maine, Maryland, Michigan, Minnesota, Missouri, Nebraska, Nevada,  
           New Hampshire, North Carolina, North Dakota, Oklahoma, Oregon,     
           Rhode Island, Tennessee, Texas, Virginia, Washington, West         
           Virginia                                                           

High    California, Connecticut, Florida, Massachusetts, New Jersey, New   
           York, Ohio, Pennsylvania, Wisconsin                                

           Sources: GAO analysis of data from the U.S. Census Bureau, CMS,
           the MetLife Market Survey of Nursing Home & Home Care Costs, and
           the National Association of Elder Law Attorneys.

           We judgmentally selected one state from each cluster. In making
           this selection, we excluded some states, such as states that did
           not have the technical ability to generate the data needed to
           select Medicaid nursing home application files for review. The
           states we selected were South Carolina (low), Maryland (medium),
           and Pennsylvania (high).

           To choose counties in our selected states, we considered four
           factors.

                        1. Number of individuals aged 65 and over who applied
                        for, or were enrolled in, Medicaid coverage for
                        nursing home services.7 
                        2. Number of licensed nursing home beds.8 
                        3. Population aged 65 and over.9 
                        4. Median and range of household income.10

           For the first three factors, we ranked the counties within each
           selected state from high to low. Separately, we ranked the
           counties by median household income and split them into low,
           medium, and high groups, using natural breaks in the data as
           parameters. Of the counties that appeared in the top 10 ranking of
           each of the first three factors, we matched them with their
           respective median household income groups. Based on this
           assessment, we chose a county from each median household income
           group for each of the three states (see table 9).

6Each quarter, states submit Medicaid program expenditures to CMS using
the CMS-64 form. Our analysis used fiscal year 2000 nursing home
expenditures as reported on the CMS-64.

7To select counties, we used information sent from state officials in the
three states. For Maryland and Pennsylvania, we used data on the number of
applicants, while for South Carolina we used data on the number of
enrollees.

8We used information from the Medicare Nursing Home Compare Web site,
http://www.medicare.gov/NHCompare/Include/DataSection/Questions/SearchCriteria.asp
, for Pennsylvania (accessed on Apr. 24, 2006) and South Carolina
(accessed on Apr. 24, 2006), and the "Long Term Care in Maryland: A Pocket
Chartbook, 2005" (Baltimore, Md.: Maryland Health Care Commission, June
2005), http://mhcc.maryland.gov/longtermcare/_longtermcare.htm
(accessed on Mar. 10, 2006) for Maryland.

9We used information from J. Billings and R.M. Weinick, Monitoring the
Health Care Safety Net--Book II (Rockville, Md.: Agency for Healthcare
Research and Quality, 2003), 334-336 for Pennsylvania; Billings and
Weinick, Monitoring the Health Care Safety Net--Book II, 320-321, and the
Maryland Association of Counties Web site,
www.mdcounties.org/counties/demographics.cfm (accessed on Mar. 22,
2006) for Maryland; and Billings and Weinick, Monitoring the Health Care
Safety Net--Book II, 336-337, and the U.S. Census Bureau (2004 estimates)
for South Carolina.

10We used Billings and Weinick, Monitoring the Health Care Safety
Net--Book II, 532-534 for Pennsylvania, 518-519 for Maryland, and 534-535
for South Carolina.

           Table 9: Selected States and Counties, by County-Level Median
           Household Income Group

                                          Selected states and counties
County-level median household                                              
income group                    South Carolina Maryland       Pennsylvania 
Low                             Orangeburg     Baltimore City Philadelphia 
Medium                          Charleston     Baltimore      Allegheny    
High                            Greenville     Montgomery     Montgomery   

           Source: GAO.

           We reviewed a total of 180 nursing home application files in each
           selected state, for a total of 540 files. Within each selected
           state, we based the number of application files reviewed in each
           county on the proportion of the county's population of individuals
           aged 65 and over. (See table 10.)

           Table 10: Number of Files Reviewed, by Selected State and County
		   
Selected state  Selected county    Number of files reviewed 

South Carolina Orangeburg                            22 
                  Charleston                            72 
                  Greenville                            86 
                  Total                                180 

Maryland       Baltimore City                        51 
                  Baltimore                             68 
                  Montgomery                            61 
                  Total                                180 

Pennsylvania   Philadelphia                          70 
                  Allegheny                             74 
                  Montgomery                            36 
                  Total                                180 
Total                                               540 

           Source: GAO.

           Each selected state sent us a list of individuals aged 65 or over
           who submitted an application for Medicaid coverage for nursing
           home care during state fiscal year 2005. These lists also included
           individuals who applied in previous years but whose files had
           activity during fiscal year 2005.11 For example, an individual may
           have applied in state fiscal year 2004, but had his or her
           application approved in state fiscal year 2005. From the lists
           provided by the states, we randomly selected application files by
           unique identifying numbers. In order to compensate for application
           files that would need to be skipped because they did not meet our
           criteria or lacked adequate information, we requested additional
           files (10 to 15 percent) in each county. Therefore, when we
           determined that an application file was unusable, we included the
           next application file on our randomly generated list.

           We established a file review protocol whereby we reviewed and
           recorded the earliest Medicaid application for nursing home
           services in each file regardless of the date of the application.
           If the earliest application was denied, then we recorded data from
           that application as well as data from the earliest subsequently
           approved application, if there was one. From each application, we
           collected and analyzed data on the applicants' demographic
           characteristics, income, nonhousing resources, and home value. We
           also collected and analyzed data on the number of applicants who
           transferred assets for less than FMV and the amount they
           transferred.

           Since the selected counties used the information in these
           application files to determine eligibility for Medicaid coverage
           for nursing home services, we did not independently verify the
           accuracy of the information contained in the files. However, to
           ensure that the information we entered into our data collection
           instrument was consistent with the information found in the
           application files, we conducted independent file verifications,
           which resulted in a total verification of at least 20 percent of
           entries. Additionally, we conducted electronic tests of the data
           collected to determine whether there were missing data or obvious
           errors. In some cases, we combined variables to create new ones.
           For example, we collected and identified several types of
           applicant resources but ultimately combined them into two
           categories--housing and nonhousing resources. Based on these
           procedures, we determined that the data were sufficiently
           reliable. Moreover, these data can be generalized to the
           individual county level but cannot be generalized to the state or
           national level.

           To assess the potential effect of provisions of the DRA, we used
           (1) HRS data and (2) data from our application file reviews.
           Specifically, we used 2004 HRS data to identify the number of
           elderly individuals in nursing homes who had houses in excess of
           $500,000 and could be affected by the DRA home equity provision.12
           Additionally, we used the data from our review of Medicaid
           application files in three counties in each of the three states to
           analyze the potential effects of the DRA provisions pertaining to
           penalty periods, annuities, home equity, and income-first.

           We performed our work from October 2005 through January 2007 in
           accordance with generally accepted government auditing standards.
		   
11Therefore, the actual dates of the applications we analyzed ranged from
March 1989 to April 2006. Ninety-nine percent of the applications we
analyzed were from 2000 or later.

12The data collection period for the 2004 HRS data was March 2004 to
February 2005. The data we used were from a sample of 11,114 individuals
that represented a population of 20,179,826 individuals.
		   
		   Appendix II: Comments from the Centers for Medicare & Medicaid
		   Services

Now footnotes 22 and 23.

Now on p. 12.

Now on p. 11.

Now footnote 19.

Now footnote 17 on p. 9.

Now footnote 27 on p. 12 and footnote 29 on p. 13.

Now footnote 26.
		   
		   Appendix III: Comments from the State of South Carolina Department
		   of Health and Human Services
		   
		   Appendix IV: GAO Contact and Staff Acknowledgments
		   
		   GAO Contact

           Kathryn G. Allen (202) 512-7118 or [email protected]
		   
		   Acknowledgments

           In addition to the contact named above Carolyn Yocom, Assistant
           Director; Kaycee Misiewicz Glavich; Grace Materon; Kevin Milne;
           Elizabeth T. Morrison; Daniel Ries; Michelle Rosenberg; Laurie
           Fletcher Thurber; and Suzanne M. Worth made key contributions to
           this report.
		   
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(290502)

www.gao.gov/cgi-bin/getrpt?GAO-07-280 .

To view the full product, including the scope
and methodology, click on the link above.

For more information, contact Kathryn G. Allen at (202) 512-7118 or
[email protected].

Highlights of [44]GAO-07-280 , a report to congressional requesters

March 2007

MEDICAID LONG-TERM CARE

Few Transferred Assets before Applying for Nursing Home Coverage; Impact
of Deficit Reduction Act on Eligibility Is Uncertain

The Medicaid program paid for nearly one-half of the nation's total
long-term care expenditures in 2004. To be eligible for Medicaid long-term
care, individuals may transfer assets (income and resources) to others to
ensure that their assets fall below certain limits. Individuals who make
transfers for less than fair market value (FMV) can be subject to a
penalty that may delay Medicaid coverage. The Deficit Reduction Act of
2005 (DRA) changed the calculation and timing of the penalty period and
set requirements for the treatment of certain types of assets. GAO was
asked to provide data on the extent to which asset transfers for less than
FMV occur.

GAO examined (1) the financial characteristics of elderly nursing home
residents nationwide, (2) the demographic and financial characteristics of
a sample of Medicaid nursing home applicants, (3) the extent to which
these applicants transferred assets for less than FMV, and (4) the
potential effects of the DRA provisions related to Medicaid eligibility
for long-term care. GAO analyzed data from the Health and Retirement Study
(HRS), a national panel survey, and from 540 randomly selected Medicaid
nursing home application files from 3 counties in each of 3 states
(Maryland, Pennsylvania, and South Carolina). State and county selections
were based on the prevalence of several factors, including population,
income, and demographics.

Nationwide, HRS data showed that, at the time most elderly individuals
entered a nursing home, they had nonhousing resources of $70,000 or
less--less than the average cost for a year of private-pay nursing home
care. Overall, nursing home residents covered by Medicaid had fewer
nonhousing resources and lower annual incomes, and were less likely to
have reported transferring cash than non-Medicaid-covered nursing home
residents.

Similar to the nationwide results, GAO's review of 540 Medicaid nursing
home applications in three states showed that over 90 percent of the
applicants had nonhousing resources of $30,000 or less and 85 percent had
annual incomes of $20,000 or less. One-fourth of applicants owned homes,
with a median home value of $52,954. Over 80 percent of applicants had
been living in long-term care facilities for an average of a little over 4
months at the time of their application. Of the 540 applicants, 408 were
approved for Medicaid coverage for nursing home services the first time
they applied and 122 were denied. Of the denied applicants, 56 were denied
for having income or resources that exceeded the standards, 41 of whom
submitted subsequent applications and were eventually approved, primarily
by decreasing the value of their nonhousing resources. For about one-third
of these applicants, at least part of the decrease in nonhousing resources
could be attributed to spending on medical or nursing home care.

Approximately 10 percent of approved applicants in the three states (47 of
465) transferred assets for less than FMV, with a median amount of
$15,152. The average length of the penalty period assessed for the 47
applicants was about 6 months. However, only 2 of these applicants
experienced a delay in Medicaid eligibility as a result of the transfers
because many applicants' assessed penalties had expired by the time they
applied for coverage.

The extent to which DRA long-term care provisions will affect applicants'
eligibility for Medicaid is uncertain. DRA provisions regarding changes to
penalty periods could increase the likelihood that applicants who transfer
assets for less than FMV will experience a delay in Medicaid eligibility,
but the extent of the delay is uncertain. Several factors could affect the
extent to which DRA penalty period provisions actually delay eligibility
for Medicaid. These factors include whether an applicant transferred
assets for less than FMV before or after the DRA was enacted and a
potential increase in requests for waived penalty periods due to undue
hardship--circumstances under which individuals are deprived of medical
care, food, clothing, shelter, or other necessities of life. Other DRA
provisions may have limited effects on eligibility. For example,
provisions pertaining to home equity may have limited impact because few
applicants whose files GAO reviewed had home equity of sufficient value to
be affected.

CMS, Maryland, and South Carolina generally agreed with the report's
findings; Pennsylvania did not provide comments.

References

Visible links
  29. http://www.gao.gov/cgi-bin/getrpt?GAO-05-830T
  30. http://www.gao.gov/cgi-bin/getrpt?GAO-05-564T
  31. http://www.gao.gov/cgi-bin/getrpt?GAO-02-544T
  32. http://www.gao.gov/cgi-bin/getrpt?GAO-05-968
  44. http://www.gao.gov/cgi-bin/getrpt?GAO-07-280
*** End of document. ***