New MassHealth Regulations Implement the Deficit Reduction Act of 2005
[July 5, 2006]
Susan H. Levin

On February 8, 2006, as a part of the Deficit Reduction Act of 2005, the federal government made significant changes in the requirements the states must enforce for Medicaid eligibility. Massachusetts has just amended its state MassHealth regulations effective July 1, 2006. Highlights of the major changes to MassHealth law in Massachusetts follow.

1. CHANGE IN THE "LOOK-BACK"

Prior to the enactment of DRA ’05, most gifts and transfers for less than fair market value made within three years of applying for MassHealth for nursing home services potentially affected eligibility; except that a five-year rule applied to transfers to or distributions from certain types of trusts.

With DRA ’05, the so-called “look-back period” is extended to five years for all gifts and transfers that do not qualify under a special exception.

The new five-year rule applies to transfers on or after February 8, 2006. The prior rule remains in effect for transfers prior to February 8. If an individual transferred assets (other than to or from a trust) prior to February 8, 2006, MassHealth eligibility will still be reviewed based on the three-year lookback.

The general significance of the change, as plainly intended, will be to increase the financial risk of most transfers as a strategy to protect assets for five years prior to application. The changes will place a premium on advance planning, and on the need for “stand-by” planning to ensure appropriate care on a private basis in the event of an unexpectedly early need for special care.

Special Planning Notes: The transfer penalty (and thus the look-back) applies only to nursing home services and to home- and community-based services provided under the so-called spousal waiver. Medicaid coverage for services at home or in assisted living, including personal care services and group adult foster care, will continue to be available without regard to transfers. Also, special exceptions, such as transfers to certain care-providing children and disabled persons, are unchanged by DRA ‘05.

2. CHANGE IN THE TRANSFER PENALTY "BEGIN-DATE"

The period of ineligibility continues to be computed by dividing the value of the transferred asset by the average daily cost of private nursing home care as determined by the state ($246 for transfers reported on MassHealth applications filed on or after February 1, 2006).

However, DRA ’05 makes a very important change in when the period of ineligibility BEGINS. Prior to the enactment of DRA ’05, the period of ineligibility ordinarily began on the first day of the month in which the transfer was made. In many cases, the period of ineligibility might have begun and ended even before nursing home placement.

For transfers on or after February 8, 2006, the period of ineligibility will begin on “the first day of the month in which resources were transferred for less than fair market value or the date on which the individual is otherwise eligible for MassHealth payment of long-term-care services, whichever is later.”

The date on which the individual is “otherwise eligible for MassHealth payment of long-term-care services” will be the date when two requirements are met:
(1) the individual’s resources are below $2,000, (or for a couple, below the community spouse resource allowance plus $2,000); and
(2) the individual is in need of long term care services.

The community spouse resource allowance (CSRA) is determined by first totaling all countable resources in the name of either spouse as of the date of institutionalization. The CSRA is one-half of this total, but no more than $99,540 (this figure is adjusted annually.)

The significance of the change is that even small transfers within the five-year look-back period may interfere with MassHealth eligibility. In addition, it is critical that you consult a knowledgeable elder law attorney to determine the effect of any transfers on eligibility for MassHealth, as well as any subsequent steps that should be taken to establish eligibility at the earliest possible date.

3. CHANGES IN THE TREATMENT OF ANNUITIES

Under DRA ’05, an annuity purchased by the institutionalized spouse on or after February 8, 2006 must ordinarily name the State as the “remainder beneficiary” (to receive any benefits due after death) up to the amount of Medicaid benefits paid. Some exceptions apply, for example, where there is a community spouse or minor or disabled child.

The MassHealth regulations appear to require that the State be named as the “remainder beneficiary” of annuities purchased by the community spouse as well. However, the State may only recover for the “total amount of medical assistance paid on behalf of the annuitant.” In most cases where the community spouse purchases the annuity, the community spouse is the annuitant. Therefore, on the death of the community spouse, the State should not be able to recover for medical assistance furnished to the institutionalized spouse because the institutionalized spouse is not the annuitant. If the community spouse also applies for medical assistance, then on the death of the community spouse, the State will be able to recover the amount of MassHealth benefits paid.

While MassHealth regulations require that most annuities purchased on or after February 8, 2006 be irrevocable and nonassignable, certain retirement annuities are exempted from this requirement. MassHealth regulations require such retirement annuities to also name the State as a remainder beneficiary, although the federal DRA is not clear about this requirement.

While we are evaluating the extent to which these changes will impact Medicaid planning, we remain convinced that annuities continue to present a viable planning option for married couples.


4. CHANGES IN THE TREATMENT OF LOANS

DRA ’05 clarifies how the state will determine whether a loan made by a Medicaid applicant may be considered a gift or transfer affecting eligibility. First, the promissory note’s repayment terms must be “actuarially sound.” This means that the note must require re-payment to the lender within the lender’s life expectancy (as determined under certain life expectancy tables). Second, the loan must provide for payments in equal amounts, with no deferral or balloon provisions. And lastly, the note must not provide for cancellation of the balance due upon the lender’s death.

While the making of a loan meeting these requirements may not constitute a transfer, consider other potential MassHealth problems arising out of a MassHealth recipient owning a note. First, the note must be properly drafted and payments must be regularly paid to avoid having the note itself considered to be a countable asset. Second, payments to the lender/MassHealth recipient will be treated as income, and may, depending on the circumstances, affect his eligibility for community-based services and his patient-pay amount for nursing home services. And third, the note may be an asset of the lender’s estate on death, and therefore subject to Medicaid claims. Using a loan as a component of a plan for Medicaid eligibility must deal effectively with these considerations.

5. CHANGES IN THE TREATMENT OF THE PURCHASE OF A LIFE ESTATE

The purchase of a life estate in another individual’s home unless the purchaser resides in the home for at least one year after the date of purchase shall be a disqualifying transfer.

6. CHANGES IN THE PRINCIPAL RESIDENCE EXEMPTION

Prior to DRA ’05, the principal residence was not counted as an available resource for MassHealth eligibility purposes, regardless of value, assuming the application was completed correctly. Now, the state may count the equity interest of the principal residence as a countable asset if it exceeds $750,000. The equity interest is defined as the assessed value (as determined by the city or town for real estate tax purposes), less any outstanding mortgages or home equity loans. These values should be further adjusted in case the house is held jointly with someone other than the spouse, or is in a life estate.

The new limits are expected to apply to applications filed on or after January 1, 2007, and in those cases, to subsequent eligibility re-determinations by the state, but with two very important exceptions. The new limits will not apply if and so long as there is a spouse or minor, disabled or blind child residing in the house. Also, the law requires that the home not be counted even if the equity interest exceeds $750,000 “in the case of a demonstrated hardship.” Undue hardship, however, will be difficult to prove in most cases.

Individuals owning an equity interest in their homes that is worth more than $750,000 would be advised to consult a qualified elder law attorney about planning options.


7. CHANGES IN THE TREATMENT OF ENTRANCE FEES AT CONTINUING CARE AND RETIREMENT COMMUNITIES (CCRCs) AND LIFE CARE COMMUNITIES

As a requirement for admission to certain CCRCs and Life Care Communities, the resident must pay an entrance fee. The entrance fee is usually at least partially reimbursable if the individual leaves the facility or dies while a resident. Under some CCRC contracts, the facility may be permitted or required to use a portion of the entrance fee toward monthly resident charges if the resident exhausts his resources and becomes otherwise unable to pay.

Pursuant to DRA ’05, the entrance fee shall be considered a countable resource to the extent that: (1) the individual has the ability to use the entrance fee or the contract provides that the entrance fee may be used to pay for care should other resources or income of the individual be insufficient to pay for such care; (2) the individual is eligible for a refund of any remaining entrance fee when the individual dies or terminates the CCRC or life care contract and leaves the community; and (3) the entrance fee does not confer an ownership interest in the CCRC or life care community.

Furthermore, CCRCs may now require residents to spend on their care resources “declared for the purposes of admission” before applying for medical assistance.

This provision was clearly requested by CCRCs to deter residents from transferring assets and applying for MassHealth. CCRC residents or prospective residents would be advised to review their Resident Care Agreement carefully, especially when considering any Medicaid related estate planning.

The following is a link to the text of the regulations as proposed: http://www.mass.gov/Eeohhs2/docs/masshealth/publicnotice/ph-515_520.pdf

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