For the past several years, clients have been coming to me telling me that they heard the lookback period for Medicaid was seven years or that the lookback period for Medicaid was soon to be increasing from five to seven years.

For the first few years, I just dismissed these statements as a common misconception, one of many that clients have, but lately, after hearing these statements for so many years and from so many people, I’m beginning to think there is more to this misconception. I’m beginning to think that this may be one of the most pervasive misconceptions I have ever heard.

Medicaid is a government health insurance program for needy individuals. The federal government establishes the broad requirements for any state’s Medicaid program, and the various states are free to establish their own programs within the parameters of the federal rules.

Since Medicaid is for needy individuals, a Medicaid beneficiary must satisfy certain needs-based criteria. A Medicaid beneficiary must have very limited assets; in New Jersey, typically, less than $2,000 in assets. A Medicaid beneficiary must also have insufficient income to pay for his care. Finally, a Medicaid beneficiary must have a physical need for Medicaid benefits, for instance, the beneficiary must need the care provided in a nursing home.

Because Medicaid requires a Medicaid beneficiary to have limited assets before he can qualify for benefits, the Medicaid program also punishes individuals who give away their assets in order to obtain eligibility for Medicaid benefits. If Medicaid did not punish a person who gave away their assets, then most anyone could qualify for Medicaid benefits simply by giving away their assets one day and qualify for Medicaid benefits the next.

The lookback period is a key component to the Medicaid asset transfer rules. In simple terms, the lookback period is the period of time that the Medicaid program looks at to see if a person who is an applicant for Medicaid benefits gave away his assets.

If an applicant gives away assets prior to the lookback period, then the Medicaid program cannot see those transfers. If an applicant gives away assets during the lookback period, then Medicaid will make the individual ineligible for Medicaid for a period of time depending upon how much money the applicant gave away.

The more the applicant gave away, the longer the applicant is ineligible for benefits. The period of ineligibility is called a “penalty period.” A penalty period can be of unlimited duration. A penalty period is not limited to the length of the lookback period.

For obvious reasons, there are administrative constraints on how long a period of time Medicaid can look at. For instance, banks are only required to maintain their records for a certain period of time, typically, seven years. So, if the Medicaid program had a ten year lookback, an applicant for benefits would not be able to obtain the financial records he would need to apply for benefits from the bank.

The lookback period is currently five years. So, the lookback period begins five years prior to the date the individual applies for benefits and continues to run until such time as the individual ceases to receive Medicaid benefits either due to his death or his ceasing to receive Medicaid benefits. Any gifts made during the lookback period can result in a penalty period.

The lookback period has been five years since February 2006. Before February 2006, the lookback period was three years.

There are, and never have been, any plans to make the lookback period seven years. Quite frankly, from an administrative standpoint, I don’t think the lookback period could be seven years, because I don’t think records would be readily available to an applicant if the lookback period were that long.

The five-year lookback remains one of the most misunderstood parts of Medicaid planning. Understanding how the rule actually works can help families make informed decisions and avoid costly mistakes when planning for long-term care.