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Jane Graham, age 74, comes to your office seeking legal advice about planning for her future in the face of growing health care needs. Her husband ran a small business, but he died four years ago. She lives in the modest home they bought 40 years ago. Her daughter Sally lives with her. Besides her home, her financial resources consist of less than six figures in investments and bank accounts, and a modest income from a pension and Social Security. If Mrs. Graham’s health were to decline to the point that she needed nursing home care, her income and assets would not last long. Of equal importance is her desire to help her children. Sally has given up full-time work to care for her mother, and Mrs. Graham wants to pay her back in some way. Three other children are doing well financially, but a fourth cares for a developmentally disabled grandson whose needs have been a tremendous financial burden. Mrs. Graham would like to help if she can. This kind of factual situation is familiar to any elder law attorney. Sooner or later, Mrs. Graham will likely be forced to rely on Medicaid, the federal-state health insurance program that pays for care for the impoverished elderly, among others. But Mrs. Graham most desperately wants to know whether she can also provide for her children now or after she is gone. The answer is a qualified yes . . . if she plans now. Long-term care in the United States is provided overwhelmingly by unpaid caregivers; researchers estimate the value of this unpaid caregiving at well over $196 billion per year. Paid caregiving costs another $173 billion, more than a quarter of which is paid out-of-pocket by individuals and their families. Nursing home care averages more than $56,000 per year, with 36 percent paid out-of-pocket by individuals. It is in this daunting context that people who might need long-term care engage in financial planning to access Medicaid funding. Transferring certain assets, converting some assets from countable to exempt, preserving qualified assets for caretaker children, establishing trusts for disabled relatives, even tapping the equity in one’s home — all these options are available under federal law. But public understanding of such Medicaid planning is too often distorted by false perceptions of “greedy geezers” or their children milking Medicaid for their own gain. Let’s look at some of these myths in the light of reality. Myth 1: “Medicaid planning” is the fraudulent sheltering of assets to help people become eligible for Medicaid. Reality: The term “Medicaid planning” describes legal changes in one’s estate plan to obtain or preserve Medicaid coverage. It is neither fraudulent nor illegal, but indeed anticipated under federal law. Congress has exempted certain assets from being counted in determining Medicaid eligibility because they are considered essential to the well-being and dignity of individuals. According to a 1993 General Accounting Office study of practices in Massachusetts (which reputedly sees a high level of Medicaid planning), about 90 percent of such efforts consist merely of the conversion of assets from countable to exempt — typically, by setting aside money for burial arrangements, making home repairs, or purchasing a car. These reasonable steps trigger no penalty whatsoever. The transfer of the ownership of countable assets will sometimes trigger a penalty — in the form of a period of disqualification from Medicaid, during which time individuals are liable for all their long-term care costs. Penalties are imposed under federal law in other contexts, too. For example, federal tax law sets a penalty for early withdrawals from Individual Retirement Accounts or 401(k) plans. But the existence of such a penalty does not make the transaction illegal. Myth 2: Gaming the system to get Medicaid coverage is widespread. Reality: Medicaid planning is neither “gaming the system” nor terribly widespread. The activity that is truly widespread is unpaid family caregiving. Families are the bedrock of the long-term care system: 83 percent of people with long-term care needs live at home, and 75 percent receive their care solely from unpaid caregivers (i.e., family and friends). Most families seek Medicaid only after they have been worn out. And even after Medicaid starts helping to pay costs, spouses and adult children continue to provide unpaid care. Moreover, planning for asset transfers that could result in a penalty is done for half or fewer of the clients of attorneys responding to a 2003 poll by the National Academy of Elder Law Attorneys. Indeed, 60 percent of the lawyers responding to that survey reported that such transfers were used in a quarter or fewer of their cases. The 1993 GAO study found that about 10 percent of cases reviewed involved asset transfers, typically to family members. Myth 3: Elder law attorneys help rich people get Medicaid. Reality: The rich engage in tax planning; they have no need to rely on Medicaid, nor would they want to. Medicaid is a valuable program, but there are many disadvantages to relying on it — such as limitations in access to health care providers, limitations in coverage, exposure to recovery against one’s estate after death, and state-by-state variations in eligibility and coverage. Middle-class seniors engage in Medicaid planning mainly because they find themselves in a lose-lose situation. First, they lose their health and need long-term care. Second, they learn that they will have to lose virtually their entire estate to pay for long-term care. That is, they will have to pay 100 percent out-of-pocket until they reach Medicaid’s definition of impoverishment. Congress created a partial remedy to this harsh result by allowing people to protect part of their estate if they pay the penalty of non-eligibility for a period of time. The 1993 GAO study found not only that a mere 10 percent of cases involved asset transfers, but also that those transfers averaged $46,000, with one of every three for less than $10,000. These are not the stratagems of millionaires. Whether the purpose is to leave a legacy to family members or to help loved ones meet expenses for housing, education, or other needs, these are reasonable transactions affecting modest, middle-class families. Myth 4: Asset transfers result in huge additional costs to the Medicaid program. Reality: No reliable data exist assessing the actual effect of asset transfers on Medicaid expenditures. However, a few studies provide informative insight. In a 1995 study, Korbin Liu and Marilyn Moon of the Urban Institute estimated that if literally every elder with a significant incentive to divest countable assets in order to become Medicaid-eligible actually did divest every penny, the amount transferred would equal about 4 percent of Medicaid nursing home expenditures. The fact is that people receiving Medicaid — even those who engaged in Medicaid planning — must pay all but a small portion of their income each month for their care. Only then does Medicaid step in to pay the difference between that amount and the government rate for those services. It is also essential to understand that the cost of administrative errors and fraud by health care providers far outweighs the dollars involved in Medicaid planning. While no reliable nationwide estimates exist of the extent of fraudulent payments, three states have measured their administrative accuracy, and they have reported payment error rates involving 24 percent of Medicaid payments in Kansas, 7.2 percent in Texas, and 4.7 percent in Illinois. Myth 5: Private long-term care insurance will solve this problem. Reality: Long-term care insurance products provide an important planning option for some seniors. But a 2003 in-depth analysis by the Kaiser Family Foundation concluded that long-term care insurance has emerged mainly in response to the demands of a small, relatively affluent market, and that most policies are not affordable for most people. As a result, only about 4 million Americans had private long-term care insurance in the year 2000. As for the rest, few retirees are able to afford comprehensive long-term care protection, especially since the cost of policies rises dramatically with age. Nor would many qualify even if they could afford the cost: More than one out of five persons age 60 to 64 would fail to pass the required health screening. Unlike Medicare and Medicaid, private long-term care insurers do not have an open enrollment period when applicants are accepted regardless of medical condition. Myth 6: Making the penalties for asset transfers more severe will prevent cheaters from taking advantage of Medicaid. Reality: Medicaid planning is not cheating. Current rules, enacted by Congress over a period of years, reflect a considered public policy to balance the needs of individuals and families with the demands of fiscal responsibility. Making asset transfer penalties more punitive would mainly hurt seniors who act in good faith and then fall innocently into the cross hairs of state budget-cutting guns. One proposal, for instance, calls for changing the start of the penalty period from the date of the asset transfer to the date when the individual applies for Medicaid. This would have the practical effect of extending the penalty period for years beyond what it is now. A few of the likely victims: the devoted church supporter who donates personal assets to the church; the widow who lacks records of her now-deceased husband’s spending; the caring sister who pays to help a needy brother remain in his home; and Mrs. Graham, introduced at the beginning of this article, if she were to give money to support her disabled grandchild. Under state proposals to close asset transfer “loopholes,” those individuals would be cut off from Medicaid much longer if they subsequently fell ill. Harsher-penalty proposals would also force many “well spouses” to choose between poverty with their mate, or divorce to save themselves. Indeed, much Medicaid planning is aimed at ensuring that well spouses have sufficient assets and income to maintain their independence without sacrificing their marriage. Planning to pay for long-term care is a rational process engaged in by loving families facing the potentially prohibitive cost of nursing homes. The short-term solution to concerns about Medicaid planning is not punitive measures that target the victims of serious chronic illness, but federally supported fiscal relief for states’ burgeoning Medicaid budgets. The long-range solution is the creation of a system that builds on the Medicare model — a widely supported, universal program that helps seniors pay for hospital and outpatient services — to guarantee long-term care coverage for all Americans. Charles P. Sabatino is assistant director of the American Bar Association’s Commission on Law and Aging in Washington, D.C., and chair of the Public Policy Committee for the National Academy of Elder Law Attorneys. He can be reached at [email protected].

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