By David R. Okrent // Managing Attorney
and Claudia T. Salazar // Second-Year Associate

On July 20, New York’s Department of Health issued an Administrative Directive (the ADM) notifying social services districts of the eligibility changes under the Deficit Reduction Act of 2005 (the DRA). The DRA significantly changed Medicaid rules. These changes will have an unfortunate impact on individuals and families seeking to apply for Medicaid. This article will provide an overview of the major changes under the DRA and its effective dates. The authors also intend to warn practitioners of some pitfalls that may arise due to common recommendations that may now lead to Medicaid ineligibility under the DRA.

The following are the major changes and effective dates of enactment:

A longer "look-back" period. For individuals seeking to apply for nursing home coverage, the DRA increases the look-back period on transfers of assets to 60 months for all transfers. Prior to the DRA, the look- back period on outright transfers was 36 months and 60 months on trusts. The longer look-back period will be gradually phased in because this change only affects transfers on or after February 8, 2006. Beginning February 1, 2009, applicants will have to submit 37 months of financial records. Thereafter, the look-back will increase by one-month increments until February 2011 when the look-back period will be 60 months for all transfers of assets. Because it can be time consuming and expensive for clients to request voluminous records from financial institutions, attorneys should advise clients to keep all financial records. Medicaid may be denied without submitting these records.

Changes to the start date of the "penalty period." Previously, an individual was ineligible for Medicaid for a certain period of time (the “penalty period) if he or she transferred an uncompensated amount in assets. This penalty period would begin the month after the transfer took place. Under the DRA, for transfers on or after February 8, 2006, the penalty period will begin only when (1) the individual is otherwise eligible for Medicaid (meets the required resource level for Medicaid), (2) is “receiving nursing facility services,” and (3) when his or her application for Medicaid would have been approved but for the penalty period.

For example, an elderly woman gifts $20,000 for grandchild’s college education on February 9, 2006. She enters a nursing home in 2008 and does not have any resources. She seeks Medicaid to cover her nursing home costs, yet will be ineligible at that time for two months because of the $20,000 gift she made in 2006. (The total gift is divided by the divisor of $9,842 currently used in Suffolk County to calculate the penalty period). But if her granddaughter already spent the money on college and she has no other money, how is our grandmother to pay?

There is a hardship provision under the DRA. An undue hardship exists when “the individual applying for nursing facility services is otherwise eligible for Medicaid and despite his/her best efforts, as determined by the social services district the individual or the individual’s spouse is unable to have the transferred assets returned or to receive fair market value for the asset or to void the trust and either the individual is unable to obtain appropriate medical care such that the individual’s health or life would be endangered without the provision of Medicaid for nursing facility services or the transfer of assets penalty would deprive the individual of food, clothing, shelter, or other necessities of life.” Hardship provisions existed prior to the DRA but were difficult to obtain. The only change to the DRA’s definition of “undue hardship” is the last section regarding the deprivation of food, clothing, shelter and other necessities of life. It is still unclear how much easier it will be to prove undue hardship. It may be wise to advise clients to document attempts at having assets returned in order to show “best efforts.”

Practitioners should also note that the commonly referred to "half loaf" approach used in the past may no longer work due these changes as well as other crisis planning techniques. Future articles will discuss the alternatives.

Equity in home counted as resource. Previously, a home was an exempt resource regardless of its value as long as long as an individual was living in it. Under the DRA if a Medicaid applicant has equity in his or her home in excess of $750,000, such excess must be counted as a resource on an application for Medicaid. This rule does not apply when a spouse or minor, blind, or disabled child lives in the home. The effective date of this change is January 1, 2006 and applies to new Medicaid applications filed after this date.

Annuities. Under the DRA, annuities will not be counted as a resource if they are irrevocable and non-assignable; actuarially sound; and have equal payments with no deferral or balloon payments. Second, the State will have to be named as a remainder beneficiary. However, the State is secondary after a spouse, minor, or disabled child. This change is effective immediately for annuities purchased on or after February 8, 2006.

Life Estates. The DRA explains that if a Medicaid applicant or his/her spouse transfers assets to purchase a life estate in another person’s home, then it will be treated as a transfer of assets. However, if the purchaser resides in the home for at least a continuous period of one year after the date of purchase, then it will not be treated as a transfer. This change will apply to applications filed on or after August 1, 2006 for purchases on or after February 8, 2006. Practitioners should not advise elderly clients to purchase life estates in their children’s homes without first confirming their clients will live in those homes for at least a year after the purchase.

Due to the complexity of the DRA, it is important now more than ever that seniors and their families consult with elder law attorneys. These changes will have dramatic consequences for individuals without many assets who may want to preserve money to pay for long-term care services that are not covered by Medicaid. The DRA does set boundaries for annuities, loans, and transfers, which may be used in various ways depending on individual situations. There are still ways for individuals to protect assets and income. Most importantly, advice should be sought earlier under the DRA.