President George W. Bush signed the Deficit Reduction Act of 2005 into law on February 8, 2006. Pub. L. No. 109-171, 120 Stat. 4. This article will deal with the changes made by the Deficit Reduction Act (DRA) of 2005 to the Medicaid eligibility rules for individuals in long-term care facilities as set forth in chapter 2, subchapter A, Reform of Asset Transfer Rules (§§ 6011-6016, 120 Stat. 61-67). For a discussion of other Medicare and Medicaid changes relevant to health care providers, see Bill Mathias' article, "DRA Efforts to Combat Medicaid Fraud," on page 4 of this issue.

One of the DRA changes that has received the most press coverage in LTC circles is the lengthening of the look-back period for Medicaid eligibility. Under the old law, state Medicaid agencies were required to look back three years when an individual made application for Medicaid long-term care benefits in order to determine whether any inappropriate transfers of assets were made within that period. Under the DRA, the statute now requires that states implement a five-year look-back period.

This change effectively will be phased in, since it applies only to transfers made on or after February 8, 2006. Consequently, in three years' time it will become a rolling look-back period, starting in February 2009. To illustrate, in March 2009, if an individual submits a Medicaid application for long-term care services, the look-back period at that point will be three years and one month. If an application for Medicaid is made in April 2009, the look-back period for that individual will be three years and two months. This rolling look-back would continue in this fashion until February 2011, when the full look-back period of five years would be fully operational.

The extension of the look-back period will have a significant impact on many long-term care providers that depend on Medicaid eligibility for many of their residents. The additional two years' worth of bank statements, brokerage statements, and financial information that individuals will have to provide greatly increases the Medicaid application burden on residents and their families. Not only will it take families and residents additional time to request and gather documents, the additional information will necessarily require longer review periods by the local Medicaid agencies. Consequently, eligibility decisions will likely be delayed even further as a result of more information that needs to be reviewed, considered, and acted upon. In addition, the increased volume of information provided will raise more questions from reviewers on transfers of assets that may or may not be problematic. Communications back and forth in clarifying these points will certainly delay eligibility determinations further.

A related DRA change in the eligibility rules that has not seemed to have received as much attention, but is potentially more significant, is the change in the start date of the penalty period. When a transfer of less than fair market value is identified on a review of a Medicaid application, a period of Medicaid ineligibility is calculated based on the average cost of nursing home care within the state. The amount of the transfer is divided by the average cost of nursing home care to arrive at the number of months the individual will be ineligible for Medicaid. Prior to the enactment of the DRA, the start date of that penalty period was the date of transfer. Consequently, by way of example, a relatively small transfer that occurred a year prior to the month an individual applied for Medicaid may not have caused a period of ineligibility because any penalty period that was required would likely have expired before the month of application.

Under the DRA changes, the penalty period will now begin on the date that the individual would otherwise be eligible for Medicaid, i.e., typically the month of application. This means that a transfer for less than fair market value that may have occurred two years prior to the date of application, even a transfer of a few thousand dollars, will result in a penalty period beginning the month that the person applies for Medicaid coverage. Consequently, that individual will not be eligible for Medicaid until the penalty period expires.

An example that illustrates this situation is a transfer of $12,000 an individual makes as a gift to her grandchild. Two years later, that individual needs nursing home care, applies for Medicaid, and is otherwise eligible, meaning she has less than the state resource limit. The $12,000 transfer made two years prior is identified as a transfer for less than fair market value by the Medicaid agency. Assuming the average cost of nursing home care in the state is $4,000, the agency will assess a threemonth penalty period for the $12,000 transfer. Prior to the DRA, that penalty period would still have been assessed, but it would have expired prior to the month of application and the individual would have received Medicaid coverage effective the month of application. Under the DRA, however, this individual will not be eligible for Medicaid until three months after the date she applied for Medicaid. Consequently, either the grandchild will have to return the $12,000 to the grandmother to use for her care, or someone else in the family will have to pay for her care until Medicaid coverage begins. In many cases however, there will be no source of funds and the nursing home will have to make a decision whether it will wait for Medicaid coverage to begin or attempt to discharge the resident for nonpayment of fees. The options are not attractive under any of these scenarios. The effective date of this provision applies to transfers made on or after February 8, 2006.

The DRA provisions also include requirements that states have hardship waivers for situations in which the transfer provisions would deprive an individual of medical care, such that her health or life would be endangered, or would deprive the individual of food, clothing, shelter, or other necessities. The process must provide a notice to recipients that a hardship waiver process exists, timely procedures for determining whether the waiver will be granted, and a process for appealing adverse determinations. Facilities will be permitted to file hardship waivers on behalf of an individual, with the individual's consent. In addition, states are permitted to provide a payment to nursing facilities for up to 30 days in order to hold the bed during the hardship waiver determination process. Most states however, have not implemented these provisions and are waiting for further instruction from CMS.

Annuities are now treated differently under the DRA. Applicants for Medicaid will be required to disclose all annuities on their applications, regardless of whether the annuities are irrevocable or whether they are considered an asset. In addition, the Medicaid application itself must include a provision that the state becomes a remainder beneficiary on an annuity by virtue of the provision of Medicaid. This provision means that if there are any funds left over in an annuity when an individual dies, the state would be the first to receive those funds, up to the amount of Medicaid paid on the individual's behalf.

States will be required to notify the issuer of the annuity of the state's right to the remainder interest for the amount of Medicaid benefits furnished to the individual. The issuer is then permitted to notify other persons with remainder interests of the state's priority. The state may also require the issuer of an annuity to notify the state when the amount of income being withdrawn or principal amount changes during the course of the annuity. The state must then take such changes into account in determining the individual's continuing Medicaid eligibility and/or the individual's contribution to the cost of care. Additionally, if the state cannot be named as the remainder beneficiary in the annuity, or named in the second position after a spouse, or minor or disabled child, the purchase of the annuity will be considered a disposal of an asset for less then fair market value and a penalty period will be assessed accordingly. Any purchase of an annuity will be considered a transfer of an asset for less then fair market value if the annuity itself either does not meet IRS standards or if the annuity is not irrevocable and non-assignable, is not actuarially sound, and/or does not provide payment in equal amounts during its term, with no deferred or balloon payments. The effective date of these provisions is February 8, 2006.

Under the DRA, the concept of "income first" has been codified into law. States are now required to allocate and permit a transfer of income from an institutionalized spouse to a community spouse before any resource transfer is permitted in order to supplement the community spouse's income. This provision is a result of various court challenges to some states' "income first" requirements. Consequently, Congress has now determined that "income first" is the rule. The effective date of this provision is February 8, 2006.

The DRA makes a significant change to the way an individual's equity in home property is evaluated. Under the DRA, an individual is not eligible for Medicaid long-term care benefits if the equity interest in the individual's home exceeds $500,000. States, however, may elect to increase the equity up to $750,000, but need to do so either through statute or regulation, depending on the state's required process. Beginning in 2011, the dollar amounts increase yearly based on the percentage increase in the consumer price index, rounded to the nearest $1,000. However, individuals may use a reverse mortgage to reduce the equity value of the home. Further, the Secretary of HHS is required to establish a waiver process for demonstrated hardship. It is significant to note that the effective date for the application of these home equity provisions is January 1, 2006, for all applications filed after that date.

With respect to nursing home residents in continuing care retirement communities, for individuals applying for Medicaid, the CCRC entrance fees will be considered a resource to the individual if the individual has the ability use the fee, or the CCRC contract provides that the fee may be used for care should other resources or income be insufficient. Additionally, the fee can only be considered a resource if the individual is eligible for a refund of any remaining fee when he or she dies or terminates the CCRC contract and leaves the community and if the entrance fee does not confer an ownership interest in the CCRC.

Finally, the DRA includes significant changes to the transfer-of-assets provisions. States now are prohibited from rounding down any fractional period of ineligibility based on a disposal of assets. This means that, if a penalty period results in a fractional period of ineligibility, such as 2.3 months, the ineligibility period will have to last for 2 months plus a third of the next month. In addition, states are permitted to accumulate multiple, fractional transfers for less than fair market value made in more than one month. States are now permitted to determine the penalty period by adding up those fractional transfers and treating it as one transfer for which a penalty period will be calculated starting from the date of application for Medicaid. The definition of assets, under the new rules, now includes promissory notes, loans, and mortgages, unless they are actuarially sound, payments are made in equal amounts with no balloon payments, and the loans, promissory notes, or mortgages are not cancelled on the death of the lender. These changes presumably are designed to prohibit non-recourse loans to children that are never repaid or are cancelled on death. If a promissory note, loan, or mortgage is determined to be an asset, the value of the asset is the outstanding balance on the note or mortgage on the date of the application for Medicaid.

The definition of assets also now includes the purchase of a life estate in another individual's home, unless the purchaser lived in that home for at least one year after purchase. Presumably this provision is designed to prohibit "sham" purchases of life estate interests in relatives' homes as a method for sheltering resources. These transfer-of-asset rules apply to assets disposed of on or after February 8, 2006. Nursing homes and other long-term care facilities that accept Medicaid payments for long-term care benefits are well advised to become familiar with these eligibility changes. Facilities should be careful in counseling residents on upcoming Medicaid applications, as the effect of transfers and various other provisions have significantly changed and will arguably affect a decision on eligibility. Nursing homes also may need to scrutinize potential residents' finances more closely for transfers of assets that may trigger longer and harsher penalties than ever before. To the extent that the Medicaid agencies will be looking at five years' worth of financial transactions, nursing homes may likewise need to look at that same information when an individual applies for admission. Nursing homes may also need to consider and have some type of contingency plan when the facility finds out that a resident has been determined ineligible for Medicaid based on a transfer that occurred years prior and for which there may be no current ability to recover those funds.