Medicaid and long‐term care: The effects of penalizing strategic asset transfers

• Date: 01 March 2021
• DOI: http://doi.org/10.1111/jori.12307
• Author: Anita Mukherjee,Junhao Liu
• Published date: 01 March 2021

J Risk Insur. 2021;88:53–77. wileyonlinelibrary.com/journal/JORI

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DOI: 10.1111/jori.12307

ORIGINAL ARTICLE

Medicaid and long‐term care: The effects

of penalizing strategic asset transfers

Junhao Liu

1

|Anita Mukherjee

2

1

Discipline of Finance, The University of

Sydney Business School, The University

of Sydney, NSW, Australia

2

Department of Risk and Insurance,

Wisconsin School of Business, University

of Wisconsin‐Madison, WI, USA

Abstract

Medicaid provides a critical source of insurance for long‐

term care, and individuals may strategically offload as-

sets (typically to children) to meet the means‐tested

eligibility requirement. In this article, we quantify the

extent of such behavior using variation in the penalty for

improper parent‐to‐child transfers induced by the Deficit

Reduction Act of 2005. We estimate difference‐in‐

differences models based on the hypothesis that only

individuals with high levels of nursing home risk (high

risk) will alter transfers because of the Act. We find that

over a 2‐year horizon, high‐risk individuals reduced

transferstochildrenontheextensivemarginby

11 percent and that the average total amount of transfers

decreased by $4,860. The results hold only for

coupled respondents. We also conduct a triple‐

differences analysis to examine heterogeneity with fi-

nancial literacy and find that even those with a low level

of financial literacy responded to the penalty.

KEYWORDS

Financial literacy, intergenerational transfers, long‐term care,

medicaid, social insurance

1|INTRODUCTION

Medicaid is the largest means‐tested health insurance program in the United States and pro-

vides a key source of nursing home coverage for older Americans. Current program

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© 2020 American Risk and Insurance Association

expenditures are about $500 billion each year, of which 30 percent goes to nursing home and

other long‐term care services (CMS, 2017).

As with any means‐tested program, there is a concern about “Medicaid planning,”that

individuals strategically adjust their asset holdings to meet eligibility requirements. Since many

types of asset transfers are not easily detectable, understanding the extent of such strategic

behavior is crucial for policy making, especially in an era of Medicaid reform and rising costs of

the program (Harrington, 2010). While there has been evidence of such behavior in other social

insurance programs, the evidence on Medicaid has been “limited and often based on anecdotes”

(GAO, 2005).

Yet, it is difficult to ignore the prevalence of “Medicaid planning.”There is an industry of

elder law experts dedicated to providing such counsel, and the topic has received attention in

the news (New York Times,2017) and in bookstands: for example, Heiser (2006) writes about

Medicaid “secrets”to avoid nursing home care costs. It seems clear that at least some portion of

the population engages in Medicaid planning, but the extent to which such behaviors inflate

Medicaid costs is unknown. For context, recent research estimates that over half of people aged

57–61 will require nursing home care in their lifetimes, though only about one‐third will pay for

it out‐of‐pocket (Hurd, Michaud, and Rohwedder, 2017).

In this article, we offer new evidence on whether individuals strategically offload assets to become

Medicaid eligible. We do this by leveraging variation in penalties associated with such behaviors

brought about by the Deficit Reduction Act (DRA) of 2005. Signed into law in February 2006 by

President George W. Bush, the DRA attempted to reduce “improper”financial transfers with two new

rules. First, the look‐back period on asset transfers increased from 3 to 5 years, meaning that transfers

made over a longer period of time were counted towards one's countable holdings. Second, the DRA

shifted the starting point of the penalty period from the time of improper transfer to the time of

Medicaid application, generating a greater disincentive to engage in such transfers. Together, these

penalties made it more difficult for individuals to “spend down”for Medicaid eligibility.

The empirical challenge in assessing the DRA's impact is that since it was enacted na-

tionwide in February 2006, at first glance the policy only enables a before‐and‐after analysis.

Such analysis can be difficult to interpret due to the confounding effect of general time trends in

asset holding behaviors. As such, we adopt a difference‐in‐differences (DD) technique lever-

aging variation from survey data: we use the respondent's self‐assessed likelihood of requiring

nursing home care as a proxy for treatment. Specifically, we hypothesize that individuals with

high nursing home risk would alter their asset holdings in response to the DRA, while people

with zero or low nursing home risk should form a useful control group by remaining un-

affected. Directionally, if the DRA is effective at limiting strategic asset transfers, we expect that

individuals facing high nursing home risk will reduce transfer activities.

We examine parent‐to‐child financial transfers as our key outcome. These transfers are

easily made and difficult to detect, making them an ideal way to reduce or shield assets if that is

one's goal. Using our DD framework, we find that the DRA caused individuals with high levels

of anticipated nursing home risk to reduce financial transfers to children on both the extensive

and intensive margins. These effects are statistically significant and economically meaningful:

we estimate a 4 percent decrease in the probability of making any transfer and a $4,860 total

decrease in the average amount of transfers (though most of this is explained by the extensive

margin response). These results correspond to effect sizes of 11 and 90 percent, respectively.

Our findings thus show that the DRA served to reduce strategic transfers from parents to

children, as intended. The results hold only for coupled (married) respondents, potentially due

to their greater incentive to preserve assets for the spouse not seeking Medicaid coverage.

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