The manner in which the State calculates penalty periods for institutional level Medicaid care services has recently changed.  Medicaid is a health payment plan for needy individuals.  If an individual qualifies for Medicaid, the program will pay for most of the costs associated with her care.  Unlike Medicare and private health insurance, Medicaid will pay for long-term custodial care services, such as care in a nursing home or an assisted living residence or a home health aide in the home.  These type of services are known in Medicaid parlance as “institutional level care services.”

In order to qualify for Medicaid, the beneficiary must have a limited amount of assets—less than $2,000, not counting non-countable assets, such as a car—and must have insufficient income with which to pay for her care.  If an individual gives away (that is, gifts) assets within five years of applying for Medicaid benefits, then the individual will be rendered ineligible for Medicaid benefits for a period of time.

This five-year period that Medicaid is examining is called the “five-year lookback.”  The five-year lookback looks at the period of time from the date of application for Medicaid benefits to a point in time that is five years prior to the date of application.  Calling it a lookback is somewhat deceiving though, because Medicaid continues to look at the Medicaid beneficiary’s finances for the remainder of her life.  For instance, if the beneficiary received an inheritance after she had been deemed eligible for Medicaid benefits and gave the inheritance away, that gift would subject her to issue for her continuing eligibility for Medicaid benefits.  So, while most people are concentrated on the five years prior to eligibility, the examining of a Medicaid beneficiary’s finances continues until she no longer requires Medicaid benefits.

For now, though, let’s concentrate on the five years prior to applying for Medicaid.  Let’s assume that Mrs. Smith applies for Medicaid benefits because she is residing in a nursing facility and has depleted her assets paying for her care.  She now has $1,000 in a checking account and $1,500 a month in Social Security income.  The nursing home costs $13,000 a month.  Clearly, Mrs. Smith is asset-eligible for Medicaid (she has less than $2,000 in assets), and clearly, her income ($1,500 per month) is insufficient to pay the cost of the nursing home ($13,000 per month).  For all intents and purposes, Mrs. Smith is eligible for Medicaid benefits.

But let’s further assume that within the five-year period of time leading up to Mrs. Smith becoming a nursing home resident, she paid $10,000 of a grandchild’s college tuition, helped her daughter out by paying $20,000 towards her mortgage, and gave a wedding gift of $10,000.  In sum, Mrs. Smith gave away $40,000 in assets during the five-year lookback period.

The purpose of the lookback period is essentially to say that if a Medicaid beneficiary gave away assets during that period of time, then the government, through Medicaid, should not pay for that person’s care for as long as the assets given away would have paid for the person’s care.  In other words, the government is saying: Why should the government pay for your care so that you gift money to your family?  That premise makes sense.

When an applicant for Medicaid gives away assets during the lookback period, she is ineligible for Medicaid benefits for a period of time equivalent to the period of time for which the assets given away would have paid for her care in a nursing home.  This period of ineligibility for Medicaid benefits is called a “penalty period.”  Recently, the State revised the figure used to calculate penalty periods to more accurate reflect the cost of nursing home care in the state.  The figure used is an average cost of care.  The State now says that the daily cost of a nursing home in the state is $351.84.  So, for every $351.84 that an individual gives away during the lookback period, she will be ineligible for Medicaid for one day.

If Mrs. Smith gave away $40,000 during the lookback period, she will be ineligible for Medicaid for approximately four months.  During those four months, Medicaid will not pay for her care, and since she has no money, she cannot pay for her care.  Theoretically, the nursing home could discharge her if her family did not pay for her care.

Medicaid transfer penalties are intended to prevent applicants from giving away assets shortly before requesting long-term care benefits. Understanding how the five-year lookback and penalty period are calculated can help families avoid unexpected delays in Medicaid eligibility and better prepare for the cost of long-term care.