Let's assume that you have a perfect, carefully thought-out financial plan for your retirement -- one that takes into account routine expenses such as housing, food, and medical care, extras such as travel, and even a stay in a nursing home. You've made sure that the money you have in savings, your 401(k), other investments, and home equity will suffice to cover all these expenses through a long life.
Though you think you've covered all the bases, it may be time to redo the plan. The Deficit Reduction Act of 2006 signed by President Bush in February enacted new provisions that will make it more difficult for you, your spouse, your elderly parents, or your in-laws to qualify for Medicaid funding if any of you must go to a nursing home. When he signed the bill, the President said it "tightens the loopholes that allowed people to game the system by transferring assets to their children so they can qualify for Medicaid benefits."
Vincent Russo, a Westbury, N.Y., elder-law attorney, has a different take on the new law. He says the changes it contains "signal a curtailment of access to long-term care services under Medicaid." Both the President and Russo were referring to revisions in the rules on "Medicaid asset transfers," or strategies that families may use to reduce their assets in order to qualify for Medicaid nursing home care.
ASSET LIMITS. According to September, 2005, data from a Metlife Mature Market Institute survey, the average national cost of nursing home care runs more than $74,000 per year in a private room and more than $64,200 in a semi-private room. Medicaid pays nursing home bills for patients with resources below certain income and asset levels.
Within a federal framework, states set limits on the income and assets you're allowed to have and still qualify for Medicaid. In general, items that are not considered available to pay for nursing-home expenses include personal effects such as clothing and furniture, cars, small amounts of insurance, and prepaid funeral funds.
Until February, home equity of up to $500,000 had also been excluded. The new law allows states to raise the limit to $750,000, but Gene Coffey, an attorney at the National Senior Citizens Law Center in Washington, says, "there's no incentive for states to make the change," because it could result in higher Medicaid costs for the state.
GIFT PENALTY. However, Coffey points out that most of the other changes "are clearly more punitive" than previous policies and are intended to shift costs from Medicaid and onto long-term care insurance or whatever other resources families can find.
One important area where the policy has been tweaked relates to the "penalty" for giving away money or other assets purely for the purpose of being eligible for Medicaid. Coffey offered this example of the potential impact: Let's say your elderly father gave you a gift of $40,000 in 2000. In 2003, he had to go into a nursing home that cost an average of $5,000 per month. To decide if he was eligible for Medicaid, the Medicaid agency would divide the $40,000 gift by $5,000.
The resulting number -- eight -- would represent the months he would have to wait before Medicaid would start to pay his nursing-home bills. Under the old law, as long as the time elapsed was less than three years, he would have been eligible immediately in 2003. Under the new rule, the clock wouldn't start ticking toward his eligibility until the day he applies for Medicaid, instead of on the date that he made the gift. So the earliest that he might qualify is eight months after applying, which could be a serious problem if he has a medical crisis.
ANNUITY ASSETS. Another change is that in deciding whether your father is eligible, the state Medicaid agency could question any asset transfers he made in the last five years, not just the last three years. To avoid the eight-month delay in eligibility, he would have to show that his decision to give away the $40,000 had nothing to do with trying to qualify for Medicaid. For example, he would have to document that at the time of the gift, he was in excellent health and didn't expect to need a nursing home.
Another new rule defines how purchasing an annuity might affect your eligibility. An annuity is basically an insurance contract that pays you a certain regular income, usually on a monthly basis. Medicaid views your purchase of the annuity as a "transfer" of money and may consider the, say, $200,000 you paid for it as an asset you could use to pay for your private care.
According to Coffey, your annuity will now have to meet three tests in order for you to qualify for Medicaid. Previously, Coffey says, the only generally accepted criterion was actuarial soundness, meaning that the number of years you expect to receive money is less than your life expectancy.
COMPLEX PROVISIONS. Under the new law, there are two additional criteria. The annuity must be paid out to you in equal installments, so that you can't hoard a large balloon payment for your heirs. And it must be irrevocable, meaning you aren't allowed to take the money out. If the annuity you bought fails any of these tests, you won't qualify for Medicaid. And if it's revocable, you will have to cash out the annuity to pay for your nursing-home care.
You can read a more complete list of the Medicaid changes on the Web site of the Kaiser Family Foundation, a nonprofit policy-research group based in Washington, D.C. Bear in mind that the new law contains more provisions than recounted here. According to Russo, some of them are so complex that elder-law experts and state officials are still trying to assess their potential impact.
GOOD ADVICE. Anticipating and planning for long-term care needs is a challenge, and plotting a path through the Medicaid maze isn't easy for a non-expert. Ideally, we would all save enough to simply pay for any long-term expenses we or our family members might incur. But with costs so high and continuing to rise, that's increasingly difficult.
Russo suggests that you become "Medicaid-literate" and talk with an adviser who's knowledgeable about the program and about other long-term care options and costs. Such a person can walk you through your options and help update your personal retirement plan. It isn't possible to anticipate all changes in programs like Medicaid, but by staying abreast of them, you have a fighting chance to adapt your retirement planning.