Overview of Medicaid

Overview of Medicaid

time icon 19 min read update icon Oct. 22, 2019


  • 1. Community Medicaid vs. Long-Term Care
  • 2. Financial Eligibility
  • 3. Penalties
    •     a) Medicaid Planning
    •     b) Penalties for Married Persons
  • 4. Look-Back Periods
  • 5. A Note About Obtaining Medicaid Advice
  • 6. Medical Eligibility
  • 7. Other Restrictions and Requirements
  • 8. Applying for Medicaid
    •     a) Application for Nursing Home Benefits
    •     b) OBRA-93
  • 9. Estate Recovery


Medicaid is a medical assistance program for those who have no other means to pay for necessary medical care. Unlike Medicare, Medicaid does not require any specific contribution before one is entitled to benefits. Entitlement is based upon need alone.

The administrative structure of Medicaid is also different from Medicare. Whereas Medicare is operated exclusively by the federal government, Medicaid is operated primarily by the states. The federal government, however, reimburses 50-80% of the funds paid out by a state for Medicaid, as long as the state complies with requirements in the federal Medicaid statute regarding services, eligibility, estate recovery and other matters.

The discussion below addresses only federal requirements. If you need more detailed information about your particular states’ laws, find contact information for your state on the State Medicaid Toll-Free Lines page of the Health Care Financing Administration website.

1. Community Medicaid vs. Long-Term Care

Many people think of Medicaid only in connection with nursing home care. Most Medicaid recipients, however, are not the elderly, but rather younger disabled persons and families receiving public assistance. These persons all receive what is called "community" Medicaid benefits.

Medicaid for persons in nursing homes is called "institutionalized" or "long-term care" Medicaid. There are important differences between community Medicaid rules and long-term care Medicaid rules. For example, in all states, the Medicaid program must try to recover what it spends on long-term care benefits from the estate of a recipient after he or she dies. In most states, however, there is no estate recovery for expenditures for community Medicaid.

The rise of home care as an alternative to institutionalization has created an overlap of community and long-term care benefits. Some states now have special programs that allow increased benefits to go to elders in their homes in order to avoid the added cost of nursing home care.

To learn more about what your state may offer for long-term care in the home, contact your local agency. If you don’t already have contact information, find it on the State Medicaid Toll-Free Lines page of the Health Care Financing Administration website.

2. Financial Eligibility

In order to receive Medicaid, an individual must prove financial need. This can be done in a couple of different ways.

Disabled persons who receive Supplemental Security Income ("SSI") and financially needy persons who receive Aid to Families with Dependent Children ("AFDC") automatically receive community Medicaid. In both cases, qualification is based upon the fact that the individual already has proven financial need by qualifying for either SSI or AFDC. They are considered "categorically needy."

Those who are not categorically needy must satisfy Medicaid’s separate criteria for poverty. These consist of both income and asset standards.

a) Income

Income standards for Medicaid are based upon the Federal Poverty Level. In cases where medical expenses are very high, however (such as nursing home care), even individuals whose income exceeds the income standard can qualify for benefits. Financial need exists in these cases because income is inadequate when compared to the cost of necessary medical care. Such persons are considered "medically needy."

Individuals who qualify for Medicaid as medically needy must pay a certain amount of their monthly income toward medical costs before Medicaid becomes available. This is called a "spend-down" or "deductible." In community cases (i.e., cases other than nursing home care), the amount of the spend-down or deductible is the difference between the individual’s monthly income and 133% of the AFDC income limit for the state in which he or she lives.

In Massachusetts, for example, the income limit for AFDC eligibility is approximately $392.50. 133% of this is $522. The deductible for community Medicaid in Massachusetts, therefore, is the excess of the applicant’s monthly income over $522.

In many states (including Massachusetts), the Medicaid deductible is assessed on the basis of a six-month eligibility period. This requires the individual to pay six months’ worth of deductible amounts before receiving any Medicaid benefits. Once that amount has been paid, the individual then receives Medicaid without any further deductible for the rest of the six-month period. At the end of the six-month period, a new deductible must be met, and so on at six-month intervals.

The deductible for long-term care benefits is calculated somewhat differently. Instead of using the AFDC standard, the state uses a much lower figure, called a "personal needs allowance," or "PNA." This ranges from $30 to $75, depending upon what state you live in. (Check out the chart provided by Bet Tzedek Legal Services to see what your state’s figure is.) Under a special federal law, individuals who receive a service-connected Veterans Administration benefits must keep at least $90 per month as a PNA, but this provision does not affect other applicants.

Once the PNA is established, the monthly deductible for the individual is equal to all income except the PNA. This amount is referred to as the "patient paid amount," or "PPA." Medicaid pays the institution only the difference between the monthly cost of care and the individual’s PPA.

The PPA may be reduced or eliminated if the recipient is married and the spouse has low income. This is an important rule that is explained in the discussion of Long-Term Care Eligibility for Married Persons.

Unlike community Medicaid, states are not allowed to use deductible periods longer than one month in nursing home cases. The individual will remain eligible for Medicaid in each month that he or she pays the PPA to the nursing home.

b) Assets

Asset standards for both community Medicaid and long-term care benefits in most states are $2,000 for an individual and $3,000 for a couple. (A few states have different standards. Check out the chart provided by Bet Tzedek Legal Services to see whether your state is one of the exceptions.)

Asset limits for couples are very different in nursing home cases and, in some states, in long-term home-care cases. The spouse of the recipient is allowed to keep part of the couple’s assets for his or her financial security, up to a maximum of $79,020, or even higher in cases of low income. To learn more about how assets are counted for married couples, go to our page for Long-Term Care Eligibility for Married Persons.

There also are rules that determine whether particular assets are countable or not. A home, for example, is not countable for purposes of Medicaid eligibility. The same property would be countable if it were an investment property instead of a personal residence. For more information about countability, go to our Countable and Non-Countable Assets page.

3. Penalties

Depending upon local state rules and the kind of care that is needed, an individual may be disqualified from receiving Medicaid benefits for a period of time if he or she gave property away to anyone other than a spouse in order to meet the Medicaid asset limits. This period of ineligibility is referred to as a "transfer penalty," or simply a "penalty." It means that even if the individual meets all of the eligibility criteria, he or she cannot receive Medicaid benefits until the penalty is over.

Asset transfers to qualify for nursing home benefits are subject to penalty in all states. Transfers to qualify for community Medicaid (including assisted living, home care and other long-term options outside of a nursing home) may or may not be subject to penalty, depending upon the local state rules. Regardless of the kind of benefits requested, each state has its own unique regulations for determining how long the penalty lasts and exactly what kinds of transfers of assets incur a penalty.

The principal behind Medicaid penalties is to deny benefits in proportion to the amount of time in a nursing home that would have been paid for by the gift. This is done by coming up with an average daily cost of care in a nursing home and dividing the gift by that figure:

In Massachusetts, the "average daily cost of care" has been set by the state at $150 per day. If someone gives away $150,000 in Massachusetts, he or she therefore will be denied Medicaid nursing home benefits for 1,000 days: $150,000 ÷ $150 = 1,000 days.

After the penalty is over — in the above example, after 1,000 days — the individual will not be denied Medicaid anymore, even though they gave away property.

Penalties start when the person transfers the property, not when he or she enters the nursing home. Thus, if the person in the example above does not enter a nursing home for 1,000 days after making the gift, he or she would not be denied Medicaid benefits on account of the transfer.

Until recently, there was a 30-month "cap" on Medicaid penalties, meaning that a penalty could not exceed 30 months, regardless of the amount transferred. The cap was removed in 1993. Thus, the length of the penalty now depends solely upon the amount transferred.

While the cap on penalties is gone, there is still a limit on the "look-back" period for asset transfers. As explained below, the look-back period can function as a limit on the length of a Medicaid penalty. Unlike the old penalty cap, however, relying upon the look-back period to limit a Medicaid penalty requires sure knowledge of the new rules, and mistakes can be very costly.

a) Medicaid Planning

The ability to wait out Medicaid penalties has given rise to a law specialty known as "Medicaid planning." Medicaid planning is a form of asset preservation that seeks to avoid the loss of homes and estates to pay for nursing home care, by transferring such property to heirs without losing future Medicaid eligibility. Such planning has come under increasing political attack in recent years, despite the continuing need to protect middle-class estates from being destroyed by medical costs associated with long-term care.

Unease with Medicaid planning has caused numerous changes in law that have toughened penalties and increased the financial risks to those who do not know the Medicaid laws extremely well. Ironically, while lawyers who practice Medicaid planning are a chief target of the political attacks upon such activities, the effect of tougher laws has been to reinforce the need for Medicaid lawyers by increasing the financial dangers of estate planning without competent Medicaid advice.

As a result of the above facts, ElderNet takes the position that competent legal counsel is extremely important for any individual who is contemplating any transfer of assets with the expectation of later qualifying for Medicaid. This is so, whether or not Medicaid nursing home benefits are the primary reason for the transfer of assets.

b) Penalties for Married Persons

Transfers of property by married persons affect both the donor and his or her spouse. If the husband gives away his separate property, and the wife needs nursing home care during the penalty period, she will be denied Medicaid benefits, and vice versa. The couple is treated as a single financial unit when either of them applies.

Transfers between spouses, however, do not incur a penalty. The reason for this rule is that the assets of both spouses will be counted for purposes of any future Medicaid application by either of them. Thus, the gift to a spouse does not remove the asset from being counted, and there is no reason for a penalty.

4. Look-Back Periods

In addition to transfer penalties, there is something called a "look-back period." A look-back period is very different from a penalty. Rather than punishing the donor, it represents a statute of limitations. It provides that, after a certain amount of time has passed, the program does not ask anymore whether the individual gave away property, or how much. "Forgiveness" is too strong a word for the policy behind look-back periods, the but idea is that the risk of punishment ends.

Unlike penalties, look-back periods are always the same length of time, regardless of how much property was transferred. Their term depends only upon who or what the property was transferred to. The look-back period for ordinary transfers (for example, an outright gift to a child) is three years, no matter how much was transferred. The look-back period for transfers into trust is five years, unless the trust is revocable or countable for other reasons.

Since the 30-month cap on penalty periods was removed in 1993, the risk of long penalty periods has been increased. For example, the gift of a home worth $300,000 in Massachusetts would result in a penalty of 2,000 days, or nearly six years. Because of this change, look-back periods have taken on new importance as a way of limiting such long waiting periods.

In the example above, if the individual who made the transfer waits until the look-back period for that transfer is over before applying for Medicaid, he or she will be eligible on the date of that application, despite the transfer. The penalty technically would continue to run, but the entire transaction is ignored if it no longer falls within the look-back period. Thus, the six-year wait is reduced to three years by the look-back period (assuming the transfer was not into a trust).

Despite the resemblance between look-back periods and the penalty cap under prior law, relying upon look-back periods under the new law is far more treacherous. If a transfer is made, with the expectation of waiting for Medicaid until the date of the transfer is beyond the look-back period, an error calculating that date can be disastrous. If in fact the transfer is not outside the look-back period on the date of the Medicaid application, the entire penalty will be imposed. (Remember that the penalty cap was removed in 1993.)

In the example above, an individual who mistakenly applied for Medicaid less than three years after gifting the house would have to wait out the full 2,000-day penalty. This is so, even if the application was filed just one day too soon.

Even worse, if the application is filed too soon, the individual cannot get a new application date by reapplying. A "baseline application date" is assigned on the date of the first Medicaid application for each continuous period of institutionalization. If the person reapplies later, the look-back period for considering asset transfers will start from the baseline application date, not the new application date.

The only way to overcome the use of a baseline application date is to remove the individual from the nursing home for at least 30 days, readmit them and then reapply for Medicaid. During that 30-day period, the individual could not go to another facility. He or she would have to be outside of any institution, i.e., literally back at home. Trying to correct a baseline application date problem thus is almost impossibly difficult. This is intentionally so under the law, in order to discourage asset transfers as means of qualifying for Medicaid.

Because of the complications and dangers of miscalculation described above, ElderNet recommends that you obtain qualified Medicaid counsel before you consider any lifetime gifts of large amounts of property. Since the reasons for transfers are almost irrelevant under Medicaid rules (there is, as a practical matter, no such thing as "innocent intent" ), Medicaid advice is important even for estate planning steps that have little or nothing to do with future Medicaid eligibility. If you would like tips on how to select a lawyer for this purpose, check out ElderNet's links for Choosing a Lawyer.

5. A Note on Obtaining Medicaid Advice

You may find it difficult to obtain legal advice about Medicaid consequences for transfers of assets at the present time. Reckless elements in Congress have succeeded in imposing a "gag law" that makes it a federal crime for a lawyer to give you advice for a fee about how to transfer assets for purposes of Medicaid eligibility. This law obviously flouts a number of important personal rights and drags our national discourse about health care policy to a new rhetorical low. ElderNet believes that such flaws will result in removal of the gag law in the near future. But in the meantime, some lawyers will be reluctant to advise you about Medicaid financial eligibility rules, as was intended by the drafters of the gag law.

6. Medical Eligibility

In addition to financial eligibility requirements, penalties and look-back periods, the Medicaid program has a system of medical screening to make certain that only "necessary and reasonable" medical care is paid for. Some aspects of this system operate similar to the limits imposed by Medicare and private insurance, consisting of detailed lists of covered and non-covered medical treatments.

In cases involving long-term institutionalized care, the medical screening process focuses on clinical thresholds to determine whether the individual really needs the high level of services that are provided in nursing homes. An individual who would benefit in some respects from nursing home placement, but who does not meet the threshold requirement for institutionalized care under Medicaid, will be denied benefits in such a facility. Thus, in order to obtain nursing home benefits from Medicaid, an individual must show that he or she is both financially and medically needy enough to require such assistance.

7. Other Restrictions and Requirements

In addition to the general requirements discussed here, there are many other specific rules and regulations that determine whether a particular individual is eligible for Medicaid. Some of these rules are set by federal law, and some of them are set by the state in which applicant lives. For more information about your state’s Medicaid eligibility rules, contact your local agency. If you don’t already have contact information, find it on the State Medicaid Toll-Free Lines page of the Health Care Financing Administration website.

8. The Medicaid Application

Because financial limitations are so important to Medicaid eligibility, applying can be complicated. The application process, which may take from weeks to months to complete, allows the state agency to scrutinize the potential recipient’s income and assets to see whether he or she is sufficiently needy to qualify for benefits. In long-term care cases, medical screening also is done at the application stage, and the individual is investigated for past transfers of assets.

The first step in any application is to be certain that the agency understands whether the applicant is for community Medicaid or long-term care benefits, as explained above. Some states use completely different forms for institutionalized and community-based applications. Others simply provide boxes to mark on a unified form. Check with your local Medicaid agency to find out the rule in your state.

a) Application for Nursing Home Benefits

An application for nursing home benefits may require extensive documentation of financial transactions for the 36 months (or in the case of trusts, 60 months) prior to the application date. The required documentation may include all bank account activities, investments, real estate purchases or sales, gifts of money or assets, retirement savings plans, insurance policy transactions or other financial activities of any kind during the prior period.

One thing that consumers can to do address the documentation problem is to begin keeping all financial records for at least five years. Having the necessary statements on hand at the time of a Medicaid application can be a huge relief, and can save weeks of time in the application process.

b) OBRA-93

Changes in federal law enacted in the Omnibus Budget Reconciliation Act of 1993 (OBRA-93) substantially increased the risk of disqualification to individuals who apply for Medicaid nursing home benefits without a detailed understanding of Medicaid law. One important amendment was the removal of the cap on Medicaid penalties. Another was to begin treating the filing date of the first application submitted by an individual as a "baseline application date".

The combined effect of the above changes was to expose unwary applicants to the risk of penalties much longer than the 36-month or 60-month wait that they might have expected. Under the new law, a trivial error in the timing of the original application — that is, filing it a single day too soon — now can result in years of additional disqualification from nursing home benefits, if the applicant or his or her spouse transferred large amounts of assets prior to the application date. There is no equality of treatment for similarly-situated individuals under this new law, and mistakes can be devastating.

To get a better idea of what it is like to apply for Medicaid benefits, contact your local Medicaid office and request an application form. There you will see exactly what is required of you, and you can get an idea of how difficult it may (or may not) be for you to complete an application. If you don’t have contact information for your state, find it at the State Medicaid Toll-Free Lines page of the Health Care Financing Administration website.

Most lawyers who specialize in Medicaid law are available to assist with Medicaid applications. If assets have been transferred in recent years, or if there are any unusual circumstances regarding assets or income, qualified counsel may be indispensable at the time of an application.

9. Estate Recovery

"Estate recovery" refers to state laws that allow the state Medicaid agency to file a claim against the estate of an individual who received benefits during his or her lifetime. The amount of such a claim is the amount spent on that individual’s care by the program.

In light of the extremely low asset limit for Medicaid eligibility, the only assets of value that a Medicaid recipient may have at death are those that were not counted for purposes of Medicaid eligibility. Of all such assets, a personal residence usually is the only one of significant value. Thus, as a practical matter estate recovery concerns the treatment of the personal residence after a death.

In order to assist with recovery against the personal residence, many states impose a lien on the property while the recipient is alive. Each state has its own procedure for liens. To learn more about whether your state has such a policy and what it may be, check with your local agency. If you don’t have contact information for your state, find it at the State Medicaid Toll-Free Lines page of the Health Care Financing Administration website.

Federal law requires states to pursue estate recovery in all institutionalized cases, and it allows estate recovery in community causes as well. OBRA-93 expanded the scope of estate recovery to include a non-probate property at the state’s option, such as life estates, jointly-held interests, and property in the trust. To date, however, only a handful of states have sought to expand estate recovery beyond the probate estate. Of these, only one or two have successfully done so. To find out the status of estate recovery in your state, check with your local agency. If you don’t have contact information for your state, find it at the State Medicaid Toll-Free Lines page of the Health Care Financing Administration website.

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