Medicaid was created in 1965 as a social healthcare program to help those of low income receive medical attention. Yet today, Medicaid pays for the majority of nursing home care in the U.S.—or all sorts of patients. In contrast, as of 2020, Medicare pays for approximately 13% of nursing home care; private insurance is used to cover even less. Medicaid programs are paid for out of both federal and state funds.
“Most people pay out of their own pockets for long-term care until they become eligible for Medicaid. While 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,” says Laura M. Krohn, a Rhode Island-based elder law attorney. (For an additional refresher, see What's The Difference Between Medicare And Medicaid?)
Let's look at how the economics work, and how Medicaid can be used to pay for a nursing home.
Medicare vs. Medicaid Roles in 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 in-patient 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 $176.00 per day (in 2020) unless they have a supplemental insurance policy. These rules apply to traditional Medicare. People on Medicare Advantage plans likely have different benefits (see Five Distinct Features of Medicare Advantage).
No matter what type of Medicare coverage you have, after day 100, you will pay for everything out-of-pocket unless you have a private long-term-care policy or you qualify for Medicaid.
Qualifying for Medicaid
In all states, Medicaid is available to low-income individuals and families, pregnant women, people with disabilities, and the elderly. 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. For more information about the medicare expansion coverage by state, visit here.
Income standards are usually based on the Federal Poverty Level. Each state has its own guidelines and eligibility requirements. For example In New York state, for individuals, there is an income limit of $15,450 (in 2019), but in Mississippi, the income limit is much lower—$4,000. Because these rules vary by state, it may be best to speak directly to a regional office to obtain the correct set of guidelines for your home state. You can find a link to connect you via the Medicaid website.
Countable Assets vs. Non-Countable Assets
Besides income, your assets will be counted towards 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 you reside in.
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; it does not count as long as the nursing home resident or his or her 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. However, the amount of allowance will vary depending on one's living arrangments, type of nursing facility, and of course, state rules. If the nursing home patient is married, an allowance may be made for the spouse still living in the home.
- For most seniors ages 65 and older (or people with a disability), Medicare is used as a primary medical coverage provider and does not have any income restrictions like Medicaid.
- Medicaid is for individuals and families living on a limited income but many seniors use it to pay for long-term care in nursing homes.
- In order to be eligible for Medicaid, you must meet specific income and asset requirements, so seniors may choose to "pay down" their assets in order to meet Medicaid guidelines in their state.
- The transfer of an applicant's assets must have occurred at least five years before applying to Medicaid, in order to cover the program's look-back period.
In the past, to avoid exceeding Medicaid's income limits, some families would transfer a patient's assets into the name of other relatives, such as the children. The Deficit Reduction Act of 2005 made such maneuvers much harder to do. Now, when one applies for Medicaid, there is a five-year “look-back” at all asset transfers. If Medicaid finds money transferred within the last 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 the patient had transferred assets worth $120,000. That patient will not be eligible for Medicaid assistance until he or she pays 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 look-back period. Arrangements that are allowed include transfers to:
- the 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
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 with 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
Depending on Medicaid as your long-term care insurance can be risky if you have a sizeable estate; even if you don't, it may not meet all your needs (see Medicaid Vs. Long-Term Care Insurance). But if you anticipate wanting to qualify, review your financial situation as soon as possible, and have an elder- or senior-care 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.
Transfers must be in place at least five years prior to your application to avoid Medicaid's look-back period, remember. For details on your options, see Top 5 Strategies To Pay For Elder Care.
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. Some nursing homes won’t accept Medicaid patients outright, but the law forbids them, throwing you out if you become dependent on Medicaid once you are in their care.