Quarterly Newsletters

September 2007: Medicaid: A Program in Chaos

The other week, I wrote a column about the practice of our state's Medicaid officials to hold private meetings during which policies and procedures are discussed that are tantamount to rulemaking.

On February 8, 2006, President Bush signed in to law the Deficit Reduction Act of 2005 (the "DRA"). This act with a fancy name is the 2006 federal budget.

In part, the DRA implemented sweeping changes to the Medicaid program. For purposes of this column, I will be focusing on the changes that the DRA made to the transfer of asset rules governing the Medicaid program.

As I have mentioned before, Medicaid is a welfare program. In order to qualify for Medicaid, an applicant must be poor. In order to minimize the effects on the Medicaid system of applicants attempting to artificially impoverish themselves, the Medicaid Act contains rules that govern the uncompensated transfer of assets.

In short, if you give your assets away - to family members or friends - the Medicaid office will make you ineligible for Medicaid benefits for a period of time. Being ineligible, you will have to pay for your own care in the nursing home, at home, or in an assisted living residence. Since long-term care costs anywhere from $3,000 to $9,000 a month, the longer you are ineligible for benefits, the more of your money you will spend.

The most significant changes that the DRA made to the Medicaid Act's transfer of asset rules are the lengthening of the look back period and the change in the start date of the penalty. Prior to the DRA, the look back period - the period of time that Medicaid looked at to see if you made any uncompensated transfers - was three years. After the DRA, the look back period is five years.

Prior to the DRA, if you transferred $5,000 in March 2005, you were ineligible for benefits for March 2005, the month in which you made the transfer. After the DRA, if you transferred $5,000 in March 2007, your period of ineligibility as a result of that transfer will not begin until you "otherwise would be receiving an institutional level of services" based upon an approved application for Medicaid benefits but for the imposition of the penalty period. In short, the penalty will not begin until you have less than $2,000 and apply for benefits.

An "institutional level of care" is defined in a section of the Medicaid Act that immediately proceeds the section from which I quoted the above language as care in a nursing home, care equivalent to nursing home care, or care provided pursuant to a Medicaid waiver program. Medicaid waiver programs are programs that provide long-term care benefits (home health aides, for instance) in settings other than nursing homes. For instance, in New Jersey, we have a Medicaid program that will cover the cost of an assisted living residence or that will provide a home health aide for several hours per day. These are "waiver programs."

Now, back to these meetings.

At a recent meeting, I thought our Medicaid office came up with the brilliant (insert sarcastic inflection here) idea that if an applicant transferred money, let's say $5,000, and if the applicant were applying for a waiver Medicaid program (let's say, he resides in an assisted living residence), the applicant would be ineligible for Medicaid benefits because of the gift but the penalty would not even begin to run until such time as the applicant entered a nursing home. In other words, if the applicant weren't in a nursing home, the penalty period, or period of ineligibility for Medicaid, would be never-ending.

I've come to discover that this brilliant idea is the creation of a federal bureaucrat, not our state's bureaucrats. This rule, which is tantamount to a law, will not only affect New Jersey, but the fifty states. This rule wasn't promulgated in a law book but in a PowerPoint presentation.

Next week, I'm going to discuss how this new rule, which will result in litigation in all fifty states, is wholly wrong.

MEDICAID: CHAOS CONTINUED

Last week, I wrote the first part of a two-part series. In this column, I want to discuss an interpretation of the new Medicaid law, commonly known as the Deficit Reduction Act or DRA, that came to my attention about two weeks ago.

Medicaid is a welfare program. Medicaid is also a health insurance program, but unlike most health insurance programs, Medicaid will pay for long-term care, such as care in a nursing home.

Medicaid is a joint federal and state program. The federal law is paramount to any state law; however, the states are given latitude to implement the federal law.

In order to expand Medicaid coverage for people who require long-term care, the various states are permitted to submit proposed Medicaid programs to the federal government to cover individuals who do not reside in a nursing home but are at risk of residing in a nursing home. For instance, a Medicaid program that will provide home health aide services to an indigent, elderly person who would be forced to reside in a nursing home if she did not receive the services of a home health aide.

These programs that provide long-term care outside the nursing home are called "waiver programs," because the state is asking the federal government to allow the state to use Medicaid dollars to pay for long-term care outside a nursing home setting. These applications for waiver programs are frequently granted. New Jersey has several waiver programs.

The DRA contains rules that punish an applicant for Medicaid benefits who has given assets away within a certain period of time prior to making application. Currently, that period of time, called the "look back period," is five years. The interpretation of the Medicaid Act that I am focusing on in this column is the point in time at which the Medicaid office will begin to punish an applicant for transferring assets.

When the Medicaid office will begin to punish a person for transferring assets is important, because the sooner the government begins to punish you for having given something away, the sooner you will be eligible for benefits. The Medicaid Act, as amended by the DRA, provides that the penalty begins to run on the date the applicant is eligible for assistance under the State's Medicaid plan and would "otherwise be receiving an institutional level of care" as described in the Medicaid Act but for the imposition of a period of ineligibility.

The Medicaid Act, in the paragraph of the Act that immediately proceeds the paragraph in which this language is contained, describes the phrase "an institutional level of care" as including nursing home care and care provided under a waiver program.

Here's the rub: An individual who works for the federal government has given a PowerPoint presentation to officials from the various states indicating that pursuant to his interpretation of the DRA, if an applicant transfers an asset and is applying for a waiver program, the applicant is ineligible for benefits; however, the penalty for the transfer does not begin to run until the applicant resides in a nursing home.

This is what I call the Never-Ending Penalty. The applicant is ineligible but because the penalty doesn't begin to run, she will never be eligible for benefits.

The federal official indicates in his PowerPoint presentation that his interpretation is supportable because the type of services that an applicant receives under a waiver program, for instance, home health aide services, are clearly delineated in the Medicaid Act. So, according to him, the applicant must be actually receiving waiver services before the penalty can begin to run but because the applicant transferred assets he is ineligible for benefits and the penalty can never begin to run. What!

No, seriously, that's what he says in his PowerPoint presentation. Of course, he's ignoring the fact that an applicant for benefits could never be receiving benefits under the program for which she is applying, otherwise, she wouldn't be an applicant for benefits but a recipient of benefits and if she were a recipient of benefits, she wouldn't be applying for benefits, because she'd already be receiving benefits.

This official's interpretation of the law is absolute nonsense. The new law itself in describing when a penalty starts uses the phrase "would otherwise be receiving an institutional level of services." Would otherwise. Not is already.

The problems here are multi-fold. A law, let alone a complex law, should not be governed by bureaucrats. A law should not be made up in secret. If these things do happen, what you get is utter nonsense that wastes people's time and money and denies people necessary services. It is wrong. So, wrong, I think it may be criminal, literally.

UNINTENDED CONSEQUENCES

Probate. Probate is word that causes people great concern. People tend to believe that the probate process involves a tremendous amount of government interference in their affairs after their death and that the process is associated with taxes and expenses.

In some states, such as Florida and California, probate is quite expensive. In Florida, for instance, the cost of probate is a percentage of the value of the estate. But rest assured, because New Jersey is not Florida.

In New Jersey, the cost of probate is nominal. In most cases, the cost of submitting a Will to probate is under $200. The fee is based upon the number of pages of the decedent's Will - the more pages, the higher the cost of probate.

The cost has nothing to do with the value of the decedent's estate. A person could die with a $10,000,000 estate and a two page Will and his executor would pay less money to probate his Will than would an executor of an estate worth $100,000 in which the decedent had a ten page Will.

But no matter how many times I write about how inexpensive probate in New Jersey is, people will still go out of their way to attempt to avoid probate. The problem I find is, avoiding probate can have unintended, negative consequences.

For instance, let's assume that Mr. Smith owns a bank worth $20,000 and $980,000 in a brokerage account. The bank account is solely in his name. The brokerage account names his four children as beneficiaries. Mr. Smith has a Will that leaves everything to his four sons equally and names one of his son's as the executor of his Will.

Given the fact that his estate is worth $1,000,000, Mr. Smith's estate will be subject to New Jersey estate tax. The estate tax will be approximately $32,000.

After paying for his funeral and for other estate expenses, the executor depletes the bank account, so no money is left in the estate. The bank account that was solely in Mr. Smith's name was the only "probate asset," and the executor is only in control of probate assets.

Mr. Smith was a big believer in the concept that the probate process is a bad thing, so he placed most of his money in his brokerage account, naming his four children as beneficiaries. Mr. Smith knew that by doing this most his estate would avoid the probate process, which it did; however, Mr. Smith's actions also left the executor with no money to pay the estate tax.

The estate tax is calculated on the total value of the estate, not just assets passing through probate, so the brokerage account is fully included in Mr. Smith's estate for purposes of calculating the tax. Under New Jersey tax law, the executor is responsible for paying the estate tax, but in this case, the executor has insufficient assets with which to pay the tax.

While there is a statute that apportions the tax amongst the recipient's of Mr. Smith's property in proportion to the amount of money the recipients received from the estate (which in Mr. Smith's case mean that each of his sons have to contribute equally towards the payment of the tax), the situation that Mr. Smith created leaves his son whom he named as the executor of his estate in a position where he has to request contribution from his siblings.

This isn't fair to the son who was named as the executor; moreover, while the executor-son is responsible, and liable, for the payment of the tax, he will not be receiving an executor's commission worth speaking of because the commission is based only on probate assets, in this case, $20,000. So, the commission would be $1,000. All that work, all that liability, and $1,000 in the form of payment.

My point is, probate is simple and trying to avoid probate can actually cause far more trouble than simply letting your assets pass through probate.

TEMPORARY INCAPACITY

When speaking with clients who are married, it frequently comes as a surprise to them that one spouse could not make financial decisions for the other spouse if the other spouse were to become disabled. In other words, if the husband suffered a stroke and was incapable of making decisions for himself, his wife would not be permitted to make decisions for him simply because she is his wife.

When I say this to clients, my clients will almost universally say to me, "When my husband was in the hospital, the doctor did what I said."

Now, that's probably true. If there is no conflict between family members as to the proper course of treatment, medical professionals will, in all likelihood, honor the requests of immediate family, such as spouses or children; however, that statement begs the question, What would happen if there is a conflict between family members? If the spouse says, "my husband would not like to live like this" and the children say, "dad would want you to do everything that you can."

More to the point, what would happen if the spouse were mentally incapacitated and the wife had to access an asset that was just in his name, such as a bank account or stock account, or sell or mortgage an asset that is held jointly, such as the house they live in? The bank is not, under any circumstance, going to give the well-spouse access to the ill-spouse's bank account or stock account. No one is going to buy a house from only one owner; both owners must join in the sale of the house.

I've written about this topic before, and for those of you who read my column on a regular basis, you know that I strongly recommend you have general powers of attorney and living wills. These documents will permit others to make decisions for you if you are incapable of making decisions for yourself. Furthermore, since you are appointing one person - your spouse, your child - to make decisions for you, you avoid the possibility of there being a conflict between family members. At least a conflict that matters to third-parties since you have named one person to make decisions for you and that person's decisions must be honored.

For those who fail to put powers of attorney and living wills in place, there are guardianship proceedings. Guardianship proceedings are court proceedings in which a person who is incapable of handling his affairs is declared mentally incapacitated and has another person, the guardian, appointed for him by the court to make his decisions.

Appointing a guardian for a person is typically a perfunctory matter. Most guardianships are filed when the person, called the "ward," is clearly mentally incapacitated, for instance, they have suffered a massive stroke or have suffered from Alzheimer's disease for years. In most instances, these people are never going to regain a mental state from which they could govern their own affairs, so declaring them mentally incapacitated is a relatively simple task for the court.

But what about people who are temporarily mentally incapacitated? For instance, some people are mentally incapacitated because they drink or use drugs to excess or because they suffer trauma, perhaps in an auto accident. An alcoholic who goes on a binge could easily be mentally incapacitated, but what about when he sobers up?

These "moving target" mentally incapacitated people present a genuine problem for the courts, their family, and themselves. Going through a guardianship proceeding is costly. In order to obtain a guardianship over someone, you must have them declared mentally incapacitated by two medical doctors, a lawyer is appointed for them by the court, and the person seeking to be named the guardian typically hires an attorney. In all, the costs could easily exceed $4,000.

How would you feel if you spent $4,000 and the next month the person sobered up and no longer required a guardian? What if the person goes on a binge and becomes mentally incapacitated again a year later? Obviously, few people could afford to spend $4,000 every year on a guardianship.

These cases, for me, only serve to highlight a reason why everyone needs a power of attorney and living will. The persons you name in these documents can serve when you need them and cease to serve when you are capable of handling your own affairs. The cost, about $250, is minimal and the documents could last a lifetime. Of course, if you wanted to change the documents or revoke the documents entirely, you could do that to at any time you want.

TENANT'S RIGHT TO TERMINATE LEASE

There are a number of elder individuals who rent the place in which they live. If a senior who rents an apartment enters a nursing home or assisted living residence, family members may wonder if they need to continue paying the rent on the apartment until the end of the rental term.

For instance, assume that Mr. Smith rents an apartment for $1,200 a month. He has a yearly lease, which renews every January. Mr. Smith is ill, but he's hoping to continue living in his apartment - where he has lived for the past thirty years - for the remainder of his life.

Despite his wishes, in February of one year, Mr. Smith slips on some ice and breaks his hip. He ends up in the hospital, then a rehabilitation center. After a month of rehabilitation, it is determined that Mr. Smith cannot return to his apartment.

Not only is his hip not mending correctly, but the trauma of the event has worsened his mental deficits, and his doctors believe that he suffers from dementia. He is disoriented to person, place, and time.

Given his physical and mental condition, it would simply be unsafe for Mr. Smith to return to his apartment. His niece, who is his closest relative, must now bring herself up to speed with Mr. Smith's financial affairs. Mr. Smith named his niece as power of attorney several years prior to his accident but failed to share any significant information about his finances.

One issue that the niece must address is Mr. Smith's lease. He has ten months to go on the current lease, but she believes it is unfair for Mr. Smith to have to pay the entire lease term.

If you think the facts that I describe above are unrealistic, think again. Many relatives find themselves in the situation in which Mr. Smith's niece finds herself. Aside from the lease issue, it is important for seniors to have a power of attorney agent and to keep that person apprised of their affairs.

As for the lease issue, since Mr. Smith is over sixty-two and since he is entering a nursing home, the niece could terminate Mr. Smith's lease on fourteen days notice. The niece will have to provide the landlord with a letter informing the landlord that Mr. Smith is over sixty-two and has entered a nursing home. She will also have to inform the landlord that Mr. Smith intends to terminate the lease on fourteen days notice.

The niece will have to obtain a certification of a physician that Mr. Smith requires the type of care that he can only receive in a nursing home. Finally, the niece will have to provide the landlord with a statement from the nursing home that Mr. Smith is in fact residing in the nursing facility.

If the niece provides all of this information to the landlord, then the landlord must permit Mr. Smith to terminate the lease on fourteen days notice. These requirements and rights can be found at New Jersey Statute 46:8-9.2.

This law came in to being about one year ago. Before that, tenants in Mr. Smith's position were at the whim of the landlord in such situations.

As an elder law attorney, I obviously appreciate this law and see the need for it; however, I could see problems arising from the law. For instance, if I were a landlord and I had the opportunity to rent to a younger or older individual, I might choose the younger individual because of the potential for the older tenant to terminate the lease on short notice.

While such discrimination is legally prohibited, the fact of the matter is, such discrimination occurs in the real world and proving discrimination such as that is easier said than done.

In most cases, I would surmise that elderly renters have probably rented for years at the same place, so discrimination such as I described is unlikely for that reason.