Medicaid Changes in the Deficit Reduction Act of 2005

On February 8, 2006, President Bush signed the Deficit Reduction Act of 2005 into law. The Act restrains spending on entitlement programs, including Medicaid.

Increase in Look-Back Period

One of the most important changes to Medicaid coverage is the lengthening of the look-back period for transfers of assets. The look-back period begins with the date of application for benefits and extends back in time. Financial transactions that take place during the look-back period will be examined to determine whether they are a basis for Medicaid disqualification. Transactions that occur prior to the look-back period are not considered, making timing a critical element in Medicaid planning.

Under prior law, the look-back period was generally thirty-six (36) months for outright transfers and sixty (60) months for transfers to a trust. Under the new Act, there is a uniform look-back period of sixty (60) months for all transfers made after the effective date of the Act.

Substantial Home Equity Rule

Under prior law, all homestead property of the applicant was exempt, regardless of value, as long as the applicant resided in or intended to return to it if the applicant resided in a nursing home. Under the new Act, the applicant must have no more than $500,000.00 in equity in the property for it to qualify as exempt. If the applicant's spouse, minor child or disabled child resides in the home, it continues to be exempt under the Act, regardless of the equity value.

States have the option to increase the limit to no more than $750,000.00, and the $500,000.00 limit will be increased annually for inflation starting in 2011. The new rule will apply to individuals who submit an application on or after January 1, 2006, but there will be limited exceptions for those who can demonstrate hardship.

Ineligibility Periods

Transfers made for less than fair market value and within the look-back period can result in penalty periods during which the applicant will be ineligible for Medicaid benefits. Under the new Act, States are no longer able to drop partial months of ineligibility and have discretion to treat multiple fractional transfers in successive months as a single lump transfer.

Under prior law, the period of ineligibility began on the first day of the month during or after which the transfer was made and which does not occur during any other period of ineligibility. For transfers made after adoption of the new Act, the beginning date will be the later of: 1) the first day of the month during or after which the transfer is made; or 2) the date on which the individual is eligible for medical assistance under the State plan and would otherwise be receiving institutional level care but for the application of the penalty period; and 3) which does not occur during any other period of ineligibility.

Constitutionality of the Act

Some Democrats have asserted that the version of the new Act signed by the President may be unconstitutional, as a clerk incorrectly transcribed a number after the Bill cleared the Senate. As a result, the President signed a different version of the Bill than that actually passed by the Senate. This discrepancy leaves open the possibility of the Act being ruled invalid if a challenge is brought in court.

The above is only a brief overview of some of the changes brought about by the Deficit Reduction Act of 2005. Please make an appointment to discuss the facts of your particular case.