Medicaid and Nursing Homes: A Quick Guide to the Rules

Medicaid may cover nursing home care and expenses, but it will depend on the situation. In order to qualify for Medicaid, you must meet income requirements. And Medicaid may not kick in to pay for your nursing home until after you pay for what you can out of pocket.

“Most people pay out of their own pockets for long-term care until they become eligible for Medicaid," said Laura M. Krohn, a Rhode Island-based elder law attorney. "Though Medicare is an entitlement program, Medicaid is a form of welfare—or at least that’s how it began. So to be eligible, you must become ‘impoverished’ under the program’s guidelines."

Medicare vs. Medicaid Roles in Nursing Home Care

Medicaid was created in 1965 as a social health care program to help people with low incomes pay for medical attention. Many older adults rely on Medicaid to pay for long-term nursing home care.

Medicare does cover nursing home care—up to a point. If you are sent to a skilled nursing facility for care after a three-day inpatient hospital stay, Medicare will pay the full cost for the first 20 days. For the next 100 days, Medicare covers most of the charges, but patients must pay a certain amount per day, unless they have a supplemental insurance policy. For day 101 and beyond, the patient pays all costs.

These rules apply to traditional Medicare. People on Medicare Advantage plans likely have different benefits

Medicaid provides nursing facilities for rehabilitation, long-term care, and skilled nursing medical services. Some nursing homes may not accept Meciaid though, so if you were to be in a nursing home and then become eligible for Medicaid, you may have to transfer to a facility that does accept Medicaid.

Qualifying for Medicaid

In all states, Medicaid is available to individuals and families, pregnant women, people with disabilities, and aging adults who meet the requirements. Medicaid programs vary from state to state, and the Affordable Care Act (ACA) allows states to provide Medicaid to adults (under the age of 65) without minor children or a disability.

Income standards are usually based on the federal poverty level. Each state has its own guidelines and eligibility requirements. For example, in New Jersey, there is an income limit of $1,562 monthly for individuals and $2,106 for a couple. In Oregon, the limit is $1,507 for individuals and $2,030 for couples. Separate limits apply with regard to the number of financial resources (such as bank accounts, cash, real property, etc.) someone can have to be Medicaid-eligible.

How Your Assets Impact Eligibility

Besides income, your assets will be counted toward meeting eligibility requirements. Countable assets include checking and savings account balances, CDs, stocks, and bonds.

In most states, you can retain up to $2,000 as an individual and $3,000 for a married couple outside of your countable assets. However, these amounts may vary depending on the state in which you live.

Your home, your car, personal belongings, or your savings for funeral expenses remain outside of countable assets. If you can prove other assets are not accessible (because they are in an irrevocable trust, for example), they too are exempt. A house must be a principal residence and does not count as long as the nursing home resident or their spouse lives there or intends to return there.

Upon becoming eligible for Medicaid, all of the applicant's income must be used to pay for the nursing home where the applicant resides. However, you may be allowed to keep a monthly "allowance" and a deduction for medical needs, such as private health insurance. The amount of the allowance varies depending on your living arrangements, type of nursing facility, and state rules. If you are married, an allowance may be made for the spouse still living in the home.

Medicaid Eligibility and Asset Transfer Rules

In the past, to avoid exceeding Medicaid's income limits, some families would transfer a patient's assets into the names of other relatives, such as the children. The Deficit Reduction Act of 2005 made such maneuvers much harder to manage. Now, when you apply for Medicaid, there is a five-year “lookback” at all asset transfers. If Medicaid finds money was transferred within the past five years, a penalty period is imposed, delaying the onset of Medicaid coverage. 

Medicaid calculates the penalty by dividing the amount transferred by what Medicaid determines is the average price of nursing home care in your state.

For example, suppose Medicaid determines your state's average nursing home costs $6,000 per month, and you had transferred assets worth $120,000. You will not be eligible for Medicaid assistance until you pay the cost of the nursing home for 20 months ($120,000 / $6,000 = 20). There is no limit to the number of months for which someone can be declared ineligible. The penalty period begins on the day the patient enters a nursing home. 

Not all transfers are counted in the lookback period. Arrangements that are allowed include transfers to:

• Spouse of the applicant
• A child under the age of 21
• A child who is permanently disabled or blind
• An adult child who has been living in the home and provided care to the patient for at least two years prior to the application for Medicaid
• A sibling with an equity interest in the house who also has been living there for at least one year before the patient applied for Medicaid

States May Try to Recoup Medicaid Benefits

After the Medicaid recipient dies, the state can try to recoup whatever benefits it has paid out. The home is usually the only major claimable asset. Currently, the state can only put a lien on it (or any other asset) if it is part of the deceased's probate estate. If the asset is jointly owned by a spouse or in a life estate or trust, then it can escape recovery.

In most states, the government can place a lien on the home after the death of both spouses, unless a dependent child resides on the property.

The Bottom Line

Medicaid may be an option when looking to pay for nursing home expenses and care, but it depends on your eligibility. Medicaid has income limits that you must meet and these are different from state to state. Additionally, if you have a large estate, you may not qualify. You may be able to spend down your estate before seeing if you can qualify for Medicaid, but it's not guaranteed to work.

If you anticipate needing Medicaid in the future, review your financial situation as soon as possible and have an attorney set up your affairs in a way that will give you the money you need for now while rendering your assets ineligible to count against you in the future.

Don't forget that asset transfers must be in place at least five years prior to your application to avoid Medicaid's lookback period. Even so, plan to have enough assets to pay a facility privately or through private long-term care insurance, at least for the initial six months to a year.

Investopedia does not provide tax, investment, or financial services and advice. The information is presented without consideration of the financial circumstances of any specific individual. Interested readers should consider consulting with a financial or legal professional that specializes in the areas related to this article.