Approximately 50 percent of nursing home residents have their costs paid by Medicaid. As noted in my previous article, Medicaid is a program designed to provide medical care for the poor. It is therefore a "means tested" benefit, unlike Medicare which is an entitlement program based upon age. However, it is obvious that 50 percent of Americans cannot be considered poor. How, then, does Medicaid end up paying for the nursing home costs of roughly one half of Americans requiring nursing home care? The simple answer is that middle class Americans become eligible for Medicaid by spending or giving away their assets until they are able to meet the poverty level criteria for Medicaid. The history of how this "spend down" process has evolved is not so simple, and neither are the present rules which govern Medicaid eligibility.

Prior to several legislative enactments by the United State Congress, the "spend down" process was quite straightforward. Elderly persons in declining health would simply transfer their assets to relatives or friends. In some cases, these transfers took place in name only, and the elderly Medicaid recipient would have "off the record" access to the cash or other assets transferred. In other cases, the transfers were genuine, in which case the elderly person disposed of wealth which might normally be disposed of by Will upon death. By transferring the assets while still alive, the elderly person became eligible for Medicaid while preserving the family wealth for the next generation.

Eventually Congress caught on to what was clearly an abusive practice designed to essentially manufacture a condition of poverty where no true poverty existed. Therefore, the law of Medicaid was changed to disqualify applicants for Medicaid nursing home assistance if those applicants gave away significant assets in the recent past. The time frame, originally three years but later changed to five years, became known as the "look back" period. In other words, Medicaid applicants are now required to disclose significant transfers of assets made during the previous five years. The applicant will then be disqualified from receiving Medicaid funding for nursing home care for a specified period of time based upon a formula utilizing the value of the funds transferred and the average cost of nursing home care in the state of residence.

But what if this person leaves behind a spouse when entering the nursing home. Must the spouse also be impoverished to quality for Medicaid? To address this problem Congressional legislation permits the remaining spouse to retain a certain amount of assets and a certain level of monthly income without disqualifying the spouse who is entering the nursing home. Moreover, careful advanced planning can enable retired persons to optimize asset preservation by taking advantage of the complex rules associated with Medicaid funding for nursing homes. Some of these planning tools will be the subject of future columns in this series.

James Bendell practices law at the Grupp Law Firm in Coeur d'Alene and is a member of the National Academy of Elder Law Attorneys.