The Deficit Reduction Act of 2005 was the boldest move by the federal government to date in this ongoing battle to preserve Medicaid for the truly needy. In addition to reauthorizing the Long-Term Care Partnership Program, the Deficit Reduction Act made several changes to Medicaid eligibility:

The look-back period on a Medicaid application is now five years for everything. It used to be five years only for transfers involving trusts, and three years for all other transfers; now, Medicaid will be checking your client's finances a full five years from the date of application.
The penalty period assessed for individuals deemed ineligible for Medicaid benefits because of a transfer within the look-back period now begins with the date of Medicaid application. Previously, the ineligibility period started on the date of transfer. That's a significant difference. Now every financial transaction made in the previous five years is scrutinized and any penalties are assessed according to the date of application. This change dealt a substantial blow to some Medicaid planning strategies for those trying to qualify as "poor on paper."
A cap was placed on the amount of home equity allowed when determining Medicaid eligibility. The cap is currently $536,000, although states can opt for $802,000, providing they apply for permission from the Department of Health and Human Services. The majority of states have used the $500,000 limit (as indexed for inflation) as they do battle with their own Medicaid budgets. Some states (Idaho and Nebraska, to name two) have chosen the $750,000 limit (as indexed for inflation), probably in recognition of the number of farms in those states whose equity value can be calculated on the high side. This rule was enacted to counteract the Medicaid planning technique of putting the majority of assets into a protected asset — the home — from which money could be easily accessed via a home equity line of credit. This was a less risky move than transferring assets out of one's name.
Any annuity that has a deferred or balloon payment is counted as an asset. Or, if it has gone into an irrevocable payment mode, the annuity will be considered an asset transferred at less than fair market value and will be subject to a qualifying penalty period. Further, a Medicaid applicant must name the state as remainder beneficiary on all annuities or as second remainder beneficiary behind a spouse, disabled child, or minor child under the age of 21.

Note: Medicaid is called Medi-Cal in California and MassHealth in Massachusetts.

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4 things to know about Medicaid, long-term care

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