What You Need to Know About Medicaid Eligibility in Colorado – How Medicaid Works, Who is Eligible, and How to Qualify while Protecting Your Assets

Introduction

From this article, you will learn the basics of Medicaid long term care eligibility and planning in Colorado under federal and state law.  If you have planned for Medicaid previous to 2006, please be aware that changes to federal and state law since then have changed the requirements for eligibility.

Medicaid Basics

Medicaid is a needs-based medical assistance program funded and managed jointly by the federal and state governments.  Since both the federal and state laws govern Medicaid eligibility, criteria to qualify vary somewhat from state to state.

Medicaid is different than Medicare in that its coverage is far more comprehensive.  Medicaid does not require beneficiaries to pay deductible or co-pay amounts.  The scope of medical services covered by Medicaid is similarly more comprehensive.  For example, Medicaid will cover expenses for unskilled, nonmedical personnel both in the home and in a long term care facility.

Medical Qualifications

To be eligible for Medicaid, a beneficiary must first be over 65, blind or disabled as defined by the Social Security Act, and must require a nursing home level of care.  Whether the beneficiary requires a nursing home level of care is determined according to that person’s ability to perform the following “activities of daily living,” which we will call ADLs:

Mobility                                 Using the toilet

Bathing                                  Transferring

Dressing                                 Need for supervision

Eating

Generally, if the person requires significant assistance with any two ADLs, or if the person has a very significant need for supervision, he or she will be considered in need of a nursing home level of care.  The Medicaid office contracts a local agency to send a representative to perform what is called a functional needs assessment.  That assessment rates the applicant’s medical status based on the above ADLs.

Financial Qualifications

There are a few terms which are familiar but have specific nuances to them in the Medicaid world.  Medicaid looks at your assets as a function of your income and your resources.  What they consider income is fairly straightforward: what you bring in for the month as counted during the month.  Anything that the applicant nets after expenses counts as a resource.  Different types of income and resources are counted differently for the purposes of your qualification for benefits.  Generally, all available income and resources are considered countable for that purpose, but there are legal categories that would make those resources exempt.

To qualify for Medicaid, an applicant is permitted just over $2,000 per month in income.  If the applicant’s spouse is not applying for Medicaid, that spouse’s income does not count as income for the applicant.  The state can still provide access to benefits if the applicant’s income exceeds the approximately $2,000 cap.  If that income is still less than what the state has determined to be the applicable average monthly cost of nursing home care, a specific kind of trust can be established for the income in excess.  That trust then pays nursing home bills directly.

As to total resources, the general rule is that a Medicaid applicant cannot have what Medicaid calls “countable resources” of more than $2,000.  The following are examples of resources that are not countable under certain circumstances: primary residence, vehicles, life insurance, burial insurance, retirement accounts, and annuities.  A more detailed explanation of how these resources are considered is contained in the Appendix.

Spousal Impoverishment Protections

As might begin to become clear, to qualify for Medicaid under many circumstances, some rearrangement of one’s assets and income must occur.  For married couples, if one spouse requires Medicaid, there are protections in place to try to ensure the status quo for the non-applying spouse.  Medicaid calls the applying spouse the “institutionalized spouse,” and the spouse not receiving benefits the “community spouse.”

Resource protection

The community spouse can retain certain amounts of countable resources without affecting the eligibility of the institutionalized spouse.  The amount is set forth by law and is in addition to the exempt resources already discussed and the $2,000 allowed for the institutionalized spouse.  It is referred to as the Community Spouse Resource Allowance (CSRA), and for 2009 it was $109,560.  It generally is adjusted every year.

Income protection

There is an income allowance for the community spouse to be able to pay for basic needs and maintain some semblance of status quo as the institutionalized spouse seeks to qualify for benefits.  It is a limit set by Medicaid, changes every year, and is referred to as the Minimum Monthly Maintenance Needs Allowance (MMMNA).

The MMMNA consists of a basic allowance ($1,750 as of January 1, 2009), plus an allowance for housing payments and maintenance, insurance, taxes, utilities, etc., plus a family allowance.  Taken together, the amount could not exceed $2,739 in 2009.

If the community spouse income is less than the MMMNA, a certain amount of the institutionalized spouse’s income can be contributed.  This is referred to as the Monthly Income Allowance (MIA).  If the MIA is not sufficient to raise the community spouse’s income to MMMNA levels, the community spouse can compensate by requesting an increase in his or her CSRA.

To calculate how much the CSRA can be increased, Medicaid uses and estimate of the cost of a commercial, irrevocable, immediate annuity that will make monthly payments equal to the amount by which the community spouse’s monthly income, after inclusion of the MIA, falls short of the MMMNA.  There is no requirement to actually purchase such an annuity, but it is used as the basis of this calculation.

Transfers of Assets

A major factor in determining whether an applicant qualifies immediately for Medicaid is whether there has been any gifting of assets (or, in Medicaid, parlance, any income or resources).  Medicaid imposes an ineligibility period for an applicant if either the applicant or the spouse gifts any assets at any time during a sixty-month (five year) “look-back” period.  This applies to any asset transferred to another for less than fair consideration (fair value) and can include certain transfers into or out of a trust.

Upon application, Medicaid will review whether an applicant made any such transfers within the five year period prior to applying.  If any have been made, Medicaid will calculate what period of ineligibility is appropriate before benefits can be received.  The period is determined by taking the amount of the transfer and dividing it by the average cost of nursing home care in Colorado ($6,267 in 2010).

The ineligibility period begins either on the first day of the month in which the transfer was made or the first day the applicant is receiving services that require Medicaid and in which the applicant would be eligible but for the transfer.  That eligibility is determined by a submitted application that has been preliminarily approved.  This means that before the penalty period begins to be counted, the applicant must already meet the financial qualifications discussed above.

The key, then, is to apply early and retain sufficient private assets to pay for care while the penalty is running its course.  Legal strategies exist that can ensure that transfers of assets can occur, private funding can pick up the slack, and Medicaid benefits can be received as soon as possible.

For example, certain types of transfers are considered exempt from triggering the ineligibility period.  These include: transfers between spouses; transfers of the home to disabled children or caregiving children under certain circumstances; transfers to certain kinds of trusts; and any transfer that can be justifiably shown to be purely for the purposes of disposal and not for the purposes of Medicaid qualification.

Medicaid also allows three additional kinds of transfers to be exempt.  These include: transfers to purchase certain types of annuities; transfers as loans under certain circumstances; and transfers to purchase a life estate in another person’s home if the purchaser actually lives in the home for one year after the purchase.

Spending Down

Having analyzed the effect of transfers on the timing of Medicaid eligibility, one way to minimize the ineligibility period is to use some strategy to reduce the amount of countable assets.  Generally, this “spending down” strategy involves some combination of the following strategies: 1) convert non-exempt resources into exempt resources, 2) convert non-exempt resources into exempt income, or 3) transferring non-exempt resources for valuable consideration that would not be considered a resource or income.

Under the first strategy, for example, a Medicaid applicant might use excess cash to make home improvements and repairs, purchase a new vehicle, purchase new furniture or appliances, purchase an irrevocable burial plan or fund a Medicaid-exempt trust.  These are all prudent activities for someone facing the prospect of long-term care and will help qualify for Medicaid all the sooner.

Under the second strategy, the applicant could use excess resources to purchase a long-term care insurance policy or a certain type of annuity that is exempt from Medicaid.  Under the third strategy, an individual may use excess resources to pay debts such as mortgages, pay for travel, hire a care manager, pay professional fees for Medicaid planning, disability planning, or estate-planning.

If there is excess after reasonable expenses have been incurred under the above strategies, most Medicaid applicants will need to proceed with some gifting as part of their estate plan to achieve eligibility and still have sufficient funds to leave some form of legacy.

Medicaid and Annuities

Medicaid defines an annuity as “…a contract between an individual and a commercial company, in which the individual invests funds and in return is guaranteed fixed substantially equal installments for life or a specified number of years.” (Colorado Department of Health Policy and Financing Medicaid Staff Manual).  Once an annuity has been annuitized and the annuitant is receiving regular distributions, the annuity is no longer considered an available resource for purposes of determining Medicaid eligibility.  Instead, the monthly distributions are considered income in the month received.

An annuity can be a useful Medicaid planning tool if it meets the following criteria:

  • The annuity must have been purchased from a life insurance company or other commercial company that sells annuities as part of its normal course of business;
  • The annuity must be annuitized to the Medicaid recipient;
  • The annuity must be “actuarially sound,” meaning it must be design to pay out completely during the Medicaid recipient’s remaining life expectancy.  This is determined by a life expectancy table that is part of the Medicaid regulations.

The annuity must make substantially equal payments over the entire period of the annuity; and

The annuity must name the state as death beneficiary, at least up to the amount of Medicaid benefits paid to the annuitant.  The state must be named as first death beneficiary unless the recipient has a spouse or a minor or disabled child, in which case that spouse or child may be named as first death beneficiary, with the state as second beneficiary if the spouse or child disposes of his or her remainder interest without fair consideration.

This type of annuity is not something that would normally be set up outside of planning for Medicaid purposes.  The annuity would be purchased with all of the Medicaid applicant’s excess resources after the “spending down” process and any other gifts.  The purpose is to provide funds, exempt from Medicaid’s financial qualification process, that can cover nursing home or in-home care expenses for the duration of the ineligibility period.

Properly structured, the annuity becomes annuitized when the recipient enters a nursing home or begins receiving long term care services at home.  At this point it is no longer counted as a resource for Medicaid purposes and would not, by itself, delay the start of the ineligibility period.  The annuity would last for the duration of that ineligibility period at which point Medicaid payments would begin.

Long Term Care Insurance

Long term care insurance is an excellent means to meet future nursing home costs during any period of ineligibility for Medicaid benefits.  Payments to the nursing home from a long term care insurance policy are not treated as income, nor is the policy itself counted as a resource for the purpose of Medicaid eligibility.

Purchasers of long term care insurance should ensure that the policy will provide sufficient payments to cover nursing home costs not covered by monthly income, cover the costs of an assisted living facility as well as in a nursing home, and continue long enough to cover the period during which Medicaid will not be available.

Reverse Mortgages

Payments from a reverse mortgage are not counted as income for the purposes of Medicaid eligibility.  Couples planning for Medicaid eligibility could use a reverse mortgage on the couple’s principal residence to pay for the institutionalized spouse’s care during any period of financial ineligibility/penalty period.  A reverse mortgage can also be used to allow the principal residence to qualify as an exempt resource by reducing the value of equity held in the residence when that equity would be greater than $500,000 without a reverse mortgage.

To qualify for a reverse mortgage, both spouses must be over age 62 and own their home.  At least one will be required to continue living in the home.  For Medicaid, individuals should choose a reverse mortgage that will provide the community spouse with a line of credit which he or she can draw upon each month to pay for the institutionalized spouse’s nursing home or other long-term care expenses during the ineligibility/penalty period.

The reverse mortgage will become due in full once both spouses move out of the residence.  So long as at least one spouse lives there, that mortgage does not need to be paid back.  Paying the mortgage may require that the home be sold and that any proceeds from the sale be used to pay the mortgage with anything remaining going to the couple.

Those proceeds would then be considered available resources for Medicaid planning purposes which could then disqualify both spouses.  If spousal poverty protections were in place, they will no longer apply once the community spouse dies or when both spouses are receiving long-term care.  If repayment of the reverse mortgage was due to the death of the community spouse or the community spouse entering a nursing home, the community spouse’s CSRA will become an available resource.

Medicaid Estate Recovery

The State of Colorado can seek recovery for the amount of medical assistance provided to an individual over age 55.  After the individual dies, the state must be notified of the death and be given notice of the individual’s estate proceedings.  Because of the aid rendered, the state becomes an interested party to those proceedings.  At that point, the state will then try to assert a lien against the individual’s estate to recover the assistance provided through equity in the individual’s home or any other assets.

The State can only recover to the limit of the individual’s equity interest in the home and cannot pursue recovery against any other owners of the property, including certain kinds of trusts.  Life estate and joint tenancy interests owned by the individual cease at the moment of death and are not considered part of the estate, so those interests likewise cannot be pursued.

Conclusion

Having read this far, the one thing that is clear is that eligibility for Medicaid is a complicated process.  There are two options: 1) losing all assets and resources as well as any chance at leaving a legacy behind, or 2) a fairly complex restructuring of an applicant’s assets, resources, and income so as to protect as many of those assets as possible.  Any gift made within as many as five years of needing Medicaid can be disastrous for one’s eligibility and ability to survive financially.

A sound strategy is necessary is necessary to allow the penalty period to start running as soon as the applicant enters the nursing home while at the same time providing the means to pay privately for that care while the penalty period runs its course.  Several potential elements of that strategy—annuities, reverse mortgages, etc.—have been discussed above, but no one set of solutions will work in every instance.  An applicant needs a personalized plan followed to the letter.

Given the current complexity of Medicaid law, do-it-yourself planning is nearly impossible.  The service of a competent elder law attorney with particular expertise in Medicaid planning is essential.  There are plenty of elder law attorneys who may be fully competent in other aspects of the field but only occasionally participate in Medicaid planning.  Expertise requires a full-time commitment.

Appendix

Treatment of Resources NOT Countable

  • Primary Residence.  The Medicaid recipient’s equity in his or her home is considered an exempt resource if that equity is valued at less than $500,000 or the recipient’s spouse or minor, blind, or disabled child continues to live there; and if the home was the Medicaid recipient’s principal residence; and (a) the recipient (or spouse) actually lived in the home immediately prior to being institutionalized and a spouse or dependent relative continues to live there; or (b) the recipient (or spouse) left the home before being institutionalized, but the recipient intends to return home.
  • Vehicles.  The Medicaid recipient is entitled to a vehicle, regardless of its value.
  • Personal Property.  Personal property is exempt, regardless of its value, so long as it is not property held for investment purposes.
  • Life Insurance.  If the total face value of all life insurance policies the Medicaid recipient owns does not exceed $1,500, then the polices are exempt regardless of their cash surrender value.  If the face value of all policies exceeds $1,500, then the total amount of the cash surrender value is countable toward the $2,000 resource limit.  Term life insurance policies are always exempt, regardless of face value.
  • Burial Insurance.  Irrevocable burial insurance is exempt regardless of its dollar value.  Revocable burial insurance is exempt to a maximum of $1,500, but this exemption is reduced on a dollar for dollar basis to the extent that the person has life insurance, other than term life insurance, that was exempt under the rule described above.  Also, the value of burial spaces and grave markers for the applicant and immediate family are exempt.
  • Retirement Accounts.  Self-funded retirement accounts of the Medicaid recipient and the recipient’s spouse are countable, but may be reduced for taxes that will be charged upon withdrawing the funds.
  • Annuities.  A commercial, irrevocable and non-assignable, actuarially sound annuity that pays substantially equal payments of the annuitant’s lifetime (i.e., an immediate annuity) is considered an available resource until it is annuitized.  Once annuitized, payments from the annuity are considered income in the month received.  The use of a “Medicaid friendly” annuity is an important technique to convert an “available resource” to an income stream that can protect a large amount of cash through an asset transferring plan.  Colorado’s state regulations provide that such an annuity may be considered a transfer without fair consideration under circumstances when the annuitant is the community spouse.