Medicaid: Divestiture of Assets to Qualify for Long-Term Care Services

Published by the Government Accountability Office on 1997-07-28.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

       United States
3AO    General Accounting   Office
       Washington, D.C. 20643

       Eealth, Education and Human Services Division

      July 28,1997
      The Honorable John McCain
      United States Senate

      Subject: Medicaid: Divestiture of Assets to Oualifv for Long-Term Care Services
      Dear Senator McCainz
       Medicaid-the $160 billion federal and state program that pays for health
       servicesfor low-income people-pays for nearly half of nursing home care costs
      ‘in the United States. To qualify for Medicaid benefits, an individual’s income
       and assetsmust fiiil below established standards.’ With private nursing home
       costs averagingmore than $3,000per month, the elderly who pay for an
       extended nursing home stay can quickly deplete their entire life savings. By
       divesting themselves of their assetsand income to qualify for Medicaid benefits,
      the elderly can protect their assetsfrom being depleted by long-term care ’
       expenditures and preserve them for the benefit of their families and heirs. Over
      the past 2 decades,the Congressand the states ha. become increasingly
       c&cerned that elderly Americans with substantial fInaxial means are divesting
      themselves of their assets to qualify for Medicaid benefits, particularly those for
      nursing home care. The Congresshas acted to limit such activities, primarily
      through amending title XIX of the Social Security Act and imposing civil
      penalties on persons who improperly transfer assets. Last year, as part of the
      Health Insurance Portability and Accountability Act (HIPAA) (P-L. 104491), the
      Congressmade such activities subject to cxim.i& penalties.

      In a congressional hearing, however, the Administrator of the Health Care
      l?inancingAdministration, the agencythat overseesthe Medicaid program,
      teaed that the magnitude of the problem with divesting of assetsto gain
      Medicaid coverage may be exaggerated. Moreover, a representative of the
      ConsumersUnion testified that the criminal provision of the law has resulted in
      considerable alarm among seniors who, as a result, may not seek the care that
      they need. In light of these events, you asked us to assessthe prevalence of

      lIn most states, Medicaid’s asset standards are $2,000for an individuaI and
      $3,000for a couple.
                                GAOAEHS-9%186B         Medicaid   Divestiture   of Assets
                                                                                     - -j


asset transfers to qualify for Medicaid benefits. You also asked us to answer
some specific questions regarding the application of the new criminal provision.

As agreed to with your office, to respond to your concerns and questions, we
reviewed the recent literature on the subject, as well as our previous work, and
spoke with experts in the field We also conducted a legal analysis of the new
provision in HIP&I. We did our work in June and July 1997 in accordance with
generally accepted government auditing standards.

In brief, we found that it is diEcult to determine Tom available studies the
prevalence of divestitures that are made with the purpose of becoming eligible
for Medicaid. Several limited-scope studies, however, have shown that some
individuals do shelter their assets-through transfers, conversions, and other
divestitures-despite legislative efforts to discourage this iype of activity. For
example, studies based on case file reviews in two states showed that from 13
to 22 percent of people who applied for nursing home and other long-term care
benefits through Medicaid have transferred their assets. However, the studies
also found that divested assets often are not sufficient to pay for even 1 year of
nursing home coverage-in some cases, the assets that were transferred could
not pay for a single month of such care. We also found that the law’s           ’
implications for individuals who transfer assets with the purpose of becoming
eligible for Medicaid-the only type of divestiture that is subject to criminal
penalty-are not clear in several respects.


Under Medicaid law, it is possible for the elderly to divest of their assets by
transferring ownership of assets; converting countable assets, such as cash,
stocks, and bonds, to noncountable assets, such as burial arrangements and
automobiles; or increasing through an appeal the value of assets the spouse
living at home is allowed to keep.’ Since the rules for determining financial
eligibility are complex, many individuals who divest themselves of their assets
to become eligible for Medicaid seek the counsel of a financial planner or elder-
law attorney.

2When a spouse applies for Medicaid, a methodology is used to determjne how
the couple’s combined assets, including income, will be divided. These limits
can be appealed. We use the term “divestiture” primarily to refer to the transfer
and the conversion of assets.

2                         GAOADIS-9?-185R       Medicaid   Divestiture   of Assets
    Throughout the 198Os,the Congress passed a number of amendments to
    discourage such actions. In general, individuals are ineligible for Medicaid
    long-term care benefits if they or their spouses transfer assets for less than fair
    market value. The law creates a presumption that individuals who transfer
    their assets within a specified time period before applying for Medicaid benefits
    do so for the purpose of meeting Medicaid eligibility criteria If an individual is
    found to have improperly transferred assets, a penalty period is imposed, during
    which the individual is ineligible for Medicaid long-term care benefits. The
    length of the period of meligibility is calculated with a formula that divides the
    value of the assets transferred by the average monthly cost of private nursing
    home care in the state. For example, if the assets transferred were $30,000 and
    the average monthly cost of private nursing home care was $3,000, the penalty
    period would be 10 months. However, the penalty period starts when the
    assets are transferred, not when the application for Medicaid benefits is made.
    Therefore, if the application is made 12 months after what would have been a
    N-month ineligibility period, no penalty would be imposed.
.   The Congress enacted several provisions in the Omnibus Budget Reconciliation
    Act of 1993 COBRA 1993) to further Emit the transfer of assets for the purpose
    of becoming eligible for Medicaid and to enhance the monitoring and
    enforcement of the statute.3 For example, the ‘1look-backf’4period was extended
    from 30 months to 36 months, and multiple transfers over a period of time were
    considered as a single transfer, with the penalty period determined by the total
    amount transferred. In addition, the transfer of jointly held assets, whether the
    transfer was made by the applicant or a nonapplicant, was prohibited, and the
    circumstances under which income and assets placed in trusts are considered
    countable resources were clarified. HPAA added a provision, Section 217, that
    imposes criminal penalties in certain circumstances for a person who transfers
    assets to become eligible for Medicaid.5

    30BRA 1993 also contained a provision requiring states to establish estate
    recovery programs to recover costs of nursing facility and other long-term care
    services from the estates of Medicaid beneficiaries.

    4The look-back period dejines the amount of time before Medicaid application
    in which asset transfers may be reviewed and subject to a penalty period.
    ‘Section 132Oa-7%of title 42 of the U.S. Code.
                             GAO/HEHS-97-185R        Medicaid   Divestiture   of Assets


The methods by which individuals divest their assets to become eligible for
Medicaid benefits often are not reported or tracked. Therefore, discussions of
the prevalence of such activities tend to be based not on broad-based empirical
evidence but on small-scale studies conducted in a few states. On the basis of
this limited information, it appears that some individuals do divest themselves
of their assets to become Medicaid eligible.

In 1993, we reviewed a sample of October 1992 case files of Massachusetts
residents who had applied for Medicaid nursing facility benefits in the state.6
We found that of the 403 applicants, 54 percent had converted some of their
countable assets to noncountable assets-usually just before they were approved
for Medicaid. The average amount converted was $5,618 and, in almost all
cases, this was used to pay for burial arrangements. Another 13 percent
transferred assets averaging $45,912, but about a third of these individuals
transferred less than $10,000. Transfer amounts greater than $100,000 occurred
in six cases, or 1.5 percent of the sample.7 Single transfers of cash represented
the most common form of asset transfer.

Since our review and the changes made by OBRA 1993, there have been at least
three studies on the prevalence of asset divestiture among the elderly Medicaid
population. The Minnesota Department of Human Services looked at a sample
of eligibility cases in which beneficiaries’ assets were close to the maximum
allowable limit of $3,000: The state found that of the 445 oases it reviewed, 98,
or 22 percent, involved transfers of assets-most of which were improper. The
average number of transfers was 3 per case (297 in 98 cases), and the majority

‘See Medicaid Estate Planning (GAOKIRD-9329R, July 20, 1993). Cur review
did not account for applicants who transferred assets prior to the required look-
back period, nor did it account for those individuals who had transferred assets
but had not yet applied for Medicaid.

7More than half of the cases that transferred assets were denied Medicaid
eligibility or withdrew the application, including five of the six cases that
transferred $100,000 or more.
8Minnesota Department of Human Services, Medical Assistance Bualitv Controls
Long-Term Care Client Asset Review (St. Paul, Mum: Minnesota Department of
Human Services, Feb. 1996).

4                        GAO/BEE@-97-185R        Medicaid   Divestiture   of Assets

were made after the beneficiaries had entered a musing home. Approtiately
two-thirds of the transfers (180 of 297) were for less than $2,700, the average
monthly payment for nursing home care in the state, the other third (96 of 297)
involved transfers of higher amounts9 The report noted that the method,
timing, and amounts of the transfers may indicate that the beneficiaries had
received advice on how to legally divest themselves of their assets and become
eligible for Medicaid.

A second study, conducted by the MEDSTAT Group, looked at divestiture
activity in four states-California, Florida, Massachusetts, and New York.
Through interviews with eligibility workers and their supervisors, the study
concluded that while the level of activity aered across these four states, the
majority of individuals who applied for Medicaid long-term care benefits did not
divest themselves of or shelter their assets for the purpose of being eligible
before applying for Medicaid.l’ For unmarried applicants, most eligibility
workers estimated that the percentage who divested themselves of or sheltered
their assets before applying for Medicaid ranged from 5 to 10 percent.
Eligibility workers consistently estimated a higher rate of activity for cases
involving married applicants, with most estimates f-g       in the 20- to 25percent

A third study, conducted by a group of Connecticut researchers, revealed
similar findings. To estimate the prevalence of asset divestiture in the state,
the researchers interviewed state eligibility workers and a sample of elder-law
attorneys and &ran&l planners.‘1 A majority of state eligibility workers
estimated that fewer than half of the applicants transferred assets during the
look-back period. Over half of the state eligibility workers indicated that the
average value of a transferred asset was under $50,000-which, in Connecticut,
covers less than a year of nursing home care. Although a majority of financial
planners and elder-law attorneys interviewed agreed that there was an overall

‘Only one in three of the improper transfers actually resulted in a penalty
period because the penalty period was for less than 1 month; that is, the
amount involved was less than a month’s payment for nursing home care.
“Brian Burwell and William H. Crown, Medicaid Estate Planning in the
Aftermath of OBRA 1993 (Cambridge, Mass.: The MEDSTAT Group, Aug. 1995).
‘“Leslie Walker, Cynthia Gruman, and Julie Robison, Medicaid Estate Planning
for Nursing Home Care in Connecticut: Policies. Practices and Percentions,
(Draft manuscript being prepared for publication, Hartford, Corm.: Braceland
Center for Mental Health and Aging, Aug. 1, 1996).

5                       GAOIHEHS-97-185R        Medicaid   Divestiture   of Assets

increase in the number of clients who transferred their assets in order to
qualify for Medicaid, most of the financial planners believed that fewer than 25
percent of their clients transferred assets with this purpose, while elder-law
attorneys tended to believe that almost half of their clients who transferred
assets ultimately did so for the purpose of qual.iQing for Medicaid.


In 1996, as part of HIPAA, a provision was added to the Social Security Act that
imposes criminal penalties for certain transfers of assets for the purpose of
becoming eligible for Medicaid. Section 217 added paragraph (6) to 42 USC.

       (a) Whoever . . .

           (6) knowingly and wiUfuIly disposes of assets (inchding by any
           transfer in trust) in order for an individual   to become eligible for
           medical assistance under a State plan under subchapter XIX of
           this chapter, if disposing of the assets results in the imposition of
           a period of ineligibiliW  for such assistance under section 1396pCc)
           of this title,

       shall 0) in the case of such a statement, representation, concealmen< failure or
       conversion by any person in connection with the furnishing (by that person) of
       items or services for which payment is or may be made under the program, be guilty
       of a felony and upon conviction thereof fined not more than $25,000or imprisoned
       for not more than five years or both, or (ii) in the cze of such a statement,
       representation, concealment, failure, or conversion by any other person, be guilty of
       a misdemeanor and upon conviction thereof Cued not more than $10,000or
       imprisoned for not more than one year, or both __ . _

The law also provides for an additional administrative penalty: Those convicted
of violatig this provision can have their eligibility for federal health care
programs limited, restricted, or suspended for up to a year. However, concerns
regarding the application of this provision and its impact on elderly citizens
have been raised, prompting a number of questions-l2

12Atthis writing, there are no court decisions or agency regulations on this law.
Until a court decides an issue, answers to questions about the interpretation of
a crimimil statute are speculative. Only one prosecution, Peebler and Nav v.
Reno (ID- Or. Civ. No. 97-256-H@, has been brought under this statute. The
case was dismissed on the basis that the court lacked jurisdiction.

 6                           GAOBEHS-97-185R              Medicaid     Divestiture     of Assets

One concern is that individuals who transfer assets without the intent to quali@
for Medicaid will be found in violation of the law. To violate the‘law, a person
must have “lmowingly and willfully” disposed of assets for less than fair market
value in order to become eligible for a Medicaid program. We believe that
“knowingly and willfuhy” means with specnic intent. Therefore, a person who
transfers assets without intending to qualify for Medicaid is not in violation of
the criminal provision. However, such a transfer may result in the person
becoming ineligible for Medicaid assistance for a period prescribed in the look-
back provision (42 USC. 1396p(c)), in which intent is not a factor.

There also is concern that dispositions of assets made before the effective date
of the statute may be subject to the criminal penalties. We believe that
dispositions before the effective date of the law should not be subject to the
criminal penalties because, in general, it is unconstitutional to later criminabze
conduct that was legal at the tie it took place. However, the prior
dispositions could result in a loss of eligibility under the look-back provision.

Questions regarding the criminal liability of individuals other than the owner of
the assets also have been raised. Section 217 applies to those who dispose ,of
assets for less than fair market value to quali@ for Medicaid; it does not
expressly apply to others who may participate in the disposition. However,
under the general conspiracy statute (18 USC. 371), anyone who conspires in
the commission of an offense can be prosecuted for conspiracy and can be
fined, imprisoned for up to 5 years, or both. In addition, anyone who “aids,
abets, counsels, commands, induces or procures” the commission of an offense
by someone else is punishable to the same extent as the person who commits
the offense (18 U.S.C. 2), and anyone who lnzows of the commission of a felony
and does not report it to law enforcement authorities is subject to prosecution
(18 U.S.C. 4).

There are additional questions concerning the penalty clause of the law, as
amended by section 217 of HlPAA These questions arise because the language
added by HIPS to section 132Oa-7bof title 42, U.S. Code, is not well-integrated
with the rest of the law. Section 132OaJb(a)-in an unchanged portion that
follows paragraph 6-lists criminal penalties for the activities listed prior to the
amendment. Specifically, the law provides that whoever makes certain false
statements or representations, conceals or fails to disclose certain information,
or converts another’s benefits to his own use, %hall . . . in the case of such a
statement, representation, concealment, failure or conversion” be ,tity of a
crime. However, when section 217 of HIPAA added a new class of criminal
conduct to section 132Oa-7b(a),consisting of Yiisposing of assets” under certain
conditions, it failed to add “disposition” to the .penahy clause. In other words,

7                        GAO/HEHS-97-185R       Medicaid   Divestiture   of Assets

the penaky clause should have been amended to read “shah . . . in the case of
such a statement, representation, concealment, failure, conversion, or
disposition . . . .‘I It is reasonable to assume that the drafters intended that
the same penalties apply to al3 the activities listed in the section, but that is not
clear horn a literal reading of the law because of the failure to add the conduct
prohibited by section 217 to the list of the kinds of conduct subject to

Even if one concluded that the penalty clause applies to those disposing of
assets to become eligible for Medicaid, a question would remain whether that
conduct is a feIony or a misdemeanor. Under the law, activities committed by
someone “in connection with the furnishing of items or services for which
payment is or may be made under the program”-such as hospitals, physicians,
and other providers-are felonies; those committed by anyone else are
misdemeanors. Because individuals disposing of assets in order to apply for
benefits are not providers, they are presumably subject only to the
misdemeanor per&ties. However, it is not clear whether this is what the
Congress intended.

As arranged with your office, we will make copies of this letter available to
others upon request.

Please call Richard Jensen at (202) 512-7146or me at (202) 512-7114 if you or
your staff have any questions about the information in this letter. Other
contributors were Stefknie Weldon and Karen Sloan.

Sincerely yours,

Wihiarn J. ScanIon
Director, Health Financing and
 Systems Issues


8                          GAOIHEHS-97-185R       Medicaid   Divestiture   of Assets
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