Financing long-term care in Missouri: limits and changes in the wake of the Deficit Reduction Act of 2005.

• Author: Hargraves, Julia M.

1. INTRODUCTION

   The expense of long-term care, intensified by an aging population, has contributed to a nationwide financial strain on the Medicaid program, complicating the already difficult tasks of medical and fiscal planning for the elderly. Missouri's elderly population is substantial, the state having ranked 14th in the country for the number of residents over age 65 in 2000. (1) These senior citizens face the prospect of paying for long-term care, and many of them will rely on Medicaid for all or part of the cost. Medicaid is the primary taxpayer-funded program that finances long-term care. Current projections suggest that the cost of Medicaid "will continue to increase exponentially." (2) As a result of this projected increase, both the federal government and the state of Missouri have enacted legislation restricting the availability of Medicaid benefits for long-term care--limits that affect the financial planning of the baby boom generation, especially those in the middle-class.

   Title XIX of the Social Security Act establishes the Medicaid program and provides federal funding to help states pay for medical assistance to individuals who cannot otherwise afford it. (3) States also provide funding for the program and must implement it within federal guidelines. (4) Since its creation in 1965, Medicaid has been modified several times by Congress, most recently with the Deficit Reduction Act of 2005 (DRA). (5) The Congressional Budget Office estimates that reductions in Medicaid outlays under the DRA would, while increasing direct spending by $2.2 billion in 2006, ultimately diminish direct spending by $4.7 billion from 2006-2010. (6) Many of the cutbacks in spending will impact elderly people seeking Medicaid coverage for long-term care. The cutbacks result from provisions that discourage asset transfers, limit the usefulness of annuities in sheltering assets, and include home equity as a countable asset when determining Medicaid eligibility. (7)

   In response to changes in federal law, Missouri immediately implemented the DRA as set forth in Section 208.010.7 of the Missouri Revised Statutes (8) and enacted the Missouri Continuing Health Improvement Act of 2007 (MCHIA). (9) Both Acts limit access to "Vendor Medicaid," (10) while ostensibly providing for alternative payment options, thwarting previous methods used by some middle-class Missourians to shelter their assets from long-term care costs. This summary examines provisions of the DRA and MCHIA that will most strongly impact elderly Missourians and addresses the considerations necessary for attorneys as they help clients plan for long-term care.

2. LEGAL BACKGROUND

   1. Federal Medicaid under the Social Security Act

      Title XIX gives states with approved Medicaid plans a right to "federal matching funds at a specified rate for all allowable expenditures." (11) Predictably, the incentives provided by federal funding influence state Medicaid programs and the Medicaid planning options available under them. Of these combined state and federal Medicaid funds, a large portion is spent on long-term care for the elderly. Long-term care includes medical and personal assistance provided to individuals with chronic illnesses or disabilities, among them residents of long-term care facilities. (12) In 2005, 34% of Medicaid spending was on long-term care services, (13) due in part to the opportunities for Medicaid planning available under existing laws. Planning tactics relating to asset transfers, look-back periods, and other methods such as annuities permitted the elderly to shelter assets from Medicaid eligibility requirements.

      Prior to the enactment of the DRA on February 8, 2006, restrictions on asset transfers were relatively broad. These restrictions allowed for reasonably straightforward Medicaid planning, mainly because the date that the penalty period began to run was the date of asset transfer. (14) The penalty period was the number of months an institutionalized individual was ineligible for Medicaid payments, calculated by taking the total value of gifts made on or after the look-back date, which was thirty-six months prior to application for Medicaid, and dividing by the average monthly cost of nursing home care in the state. (15) The resulting number indicated the number of months of ineligibility for Medicaid funding. (16) Because the penalty period prior to February 8, 2006 began running on the date of an asset transfer, individuals were able to engage in "half-a-loaf" planning, calculating how long they would be ineligible for Medicaid benefits after a transfer and reserving enough personal assets to pay for their care until the penalty period had run. (17)

      Also prior to the DRA, Title XIX imposed a thirty-six month look-back period for asset transfers when property was disposed of for less than fair market value. (18) That is, in determining the penalty period, the government would look back at gifts given or assets transferred for less than fair market value for thirty-six months on or before the date that an individual became institutionalized and applied for state medical assistance. (19) Applying the penalty period equation to transfers in these thirty-six months, fractional penalty periods would often result. Because Title XIX was silent on the treatment of fractional periods, states had the discretion to round down to the nearest whole month of ineligibility. (20) The consequence of rounding down was that individuals could "stagger transfers" (21) by giving away more than the monthly cost of care (22) but less than the amount that would trigger two months of ineligibility. Thus the amount transferred resulting in the fractional period of ineligibility was, in effect, not a countable asset. (23)

      Similar to calculated asset transfers, annuities were another method through which individuals could disqualify assets from consideration in determining Medicaid eligibility because annuities were assessed only under the test of actuarial soundness. (24) Title XIX treated annuities as countable assets when determining Medicaid eligibility "to such extent and in such manner as the Secretary [of Health and Human Services] specifie[d]." (25) The Secretary interpreted this provision to mean that an annuity is actuarially sound if the life expectancy of the individual is commensurate with the life of the annuity. 26 Thus, people could shelter assets by purchasing annuities that met the Secretary's definition.

      Like annuities, other exempt assets provided investment options through which long-term care applicants could shelter funds, thereby making it easier to qualify for Medicaid benefits. Among these, investing in homes was an option, as home equity was not included in assets when determining Medicaid eligibility. (27) Similarly, money used to purchase life estates was not considered a countable asset because the purchase of life estates was not mentioned in Title XIX prior to the DRA. (28)

   2. Missouri Medicaid

      Pursuant to Missouri Revised Statute Section 208.010.7, through which Missouri automatically implements all federal changes to Medicaid law, Missouri Medicaid has followed federal guidelines as provided in Title XIX. (29) As a joint federal and state program, however, Medicaid is open to narrow state interpretation. Missouri has exercised its discretion in implementing optional Medicaid provisions, generally maintaining the most stringent requirements available. (30) This exacting approach is based in part on the disbursement of nearly a quarter of the state's Medicaid assets to the elderly, even though they comprise only 8.2% of the state's Medicaid-eligible population. (31)

      Historically, Missouri has been one of the strictest states in providing access to state and federal Medicaid funds to the elderly. (32) One way Missouri restricted Medicaid access was by implementing the lowest countable resource allowance, the amount to which an individual must spend down his or her assets to qualify for Medicaid coverage. (33) While most states use Social Security Income rules to determine eligibility, setting their resource allowance at $2,000, Missouri has set the personal allowance at $999.99. (34)

      Reflecting the narrowness of Medicaid accessibility in Missouri relative to other states, (35) Missouri tightened Medicaid availability with the passage of Senate Bill 539 (36) in 2005. The bill anticipated changes that would later be adopted by Congress with the DRA. Moreover, it further limited financial planning options previously available to the elderly by shifting from a resource-first to an income-first rule (37) and strengthening limitations on transfers of assets through annuity purchases. (38)

      The income-first and resource-first methods of asset allocation are relevant when a married individual enters a long-term care facility and his or her spouse remains at home. The income-first method is less forgiving than the resource-first approach. (39) Under the income-first method, as the name suggests, income from the institutional spouse is used first to generate enough money for the non-institutionalized, or community, spouse to live, (40) known as the "monthly maintenance needs allowance" (MMNA). (41) Under the resource-first method, the community spouse receives resources from the institutionalized spouse that can be used to generate income, (42) thereby providing the spouse's MMNA. (43) The practical effect of this difference is that the resource-first method allows the community spouse to live off income from investments even after the institutionalized spouse dies. Conversely, the income-first method requires the institutionalized spouse to spend down income-generating resources in order to qualify for Medicaid, thereby leaving his or her spouse with few or no income-generating assets and threatening the financial security of the surviving spouse. (44)

      Like asset allocation, annuities were also treated more harshly under Senate Bill 539...