Advising clients on Medicare and Medicaid planning and eligibility has become increasingly complicated. Elder law practitioners must struggle to keep up with the ever-changing health care “wild west” and consider the impact of new laws on both the federal and state levels, as well as the effect of recent court rulings on program eligibility. And advisors must take into account the possibility that their state may withdraw from the Medicaid program as costs to participate increase.

Health Care Reform

Unless you've been living under rock, you know that in 2010, Congress passed and the president signed into law the Patient Protection and Affordable Care Act (the Act). The Act contains numerous provisions that affect, or will affect, seniors in our country. The Act is expected to cost approximately $940 billion over the next decade. To help offset the cost of health care reform, the Act imposes higher taxes, fees and reduced payments to Medicare providers. According to the Congressional Budget Office, the Act is projected to reduce the federal deficit by about $143 billion over 10 years.

The changes to the Tax Code include restrictions on the use of flexible spending accounts, limitations on the deductibility of medical expenses, increases in the Medicare tax on wages and a new tax on unearned income for certain taxpayers. In addition to these increased taxes for individuals, there will also be new assessments on insurance and pharmaceutical companies.

Generally speaking, the Act requires most U.S. citizens and legal residents to have qualifying health insurance. Those without coverage will pay a penalty, which will be phased in over a few years. Exemptions will be granted from the penalty for financial hardship and religious reasons, among others.

So, what does this all mean for our senior clients and those with special needs?

Improved prescription drug benefit

The passage of the Act improved Medicare prescription drug benefits. Seniors who enter the “donut hole” in 2010 receive a $250 rebate. The donut hole, which first took effect a few years ago, is a coverage gap in Medicare Part D. Basically it means that once your client and his prescription drug plan have spent a certain amount of money for covered drugs, your client has to pay all costs out-of-pocket up to a certain limit. The Act plans to gradually eliminate the donut hole by 2020, when it's expected to be fully closed. In addition, the Act provides that in 2011, pharmaceutical manufacturers whose drugs are covered by Part D must provide a 50 percent discount for brand-name drugs for those in the donut hole. Moreover, federal subsidies are provided for generic drugs.

Payments to Medicare Advantage plans (Part C), the private-plan part of Medicare, will be reduced to make them on par with payments made through traditional Medicare. The excess payments to Part C plans have allowed these privately run plans to offer more benefits than traditional Medicare. So, if your clients participate in one of these plans, don't be surprised if some of their optional benefits such as vision or dental are reduced. It's hoped that these reductions will extend the life of the Medicare Trust Fund, which according to some estimates is expected to go broke in 2017.

Free preventive care services

The Act provides for free preventive care services such as mammograms, colon and breast cancer screenings and an annual physical exam starting in 2011 for Medicare beneficiaries. As a result, there will be no co-payment or deductible for an annual wellness visit, which includes the creation of a personalized prevention assessment plan. This shift in focus from treatment to prevention attempts to reduce Medicare costs in the long term. Prevention services include referrals to education and preventive counseling or community-based interventions to address risk factors.

New advisory board

The Act creates an Independent Medicare Advisory Board (the Board) that will have authority to make legislative proposals with recommendations to reduce the cost of Medicare. While there are restrictions on what the Board can propose, its recommendations will take effect if Congress doesn't enact an alternative proposal that achieves the same cost savings. Congress is required to re-examine the Board in 2017 and has the power to terminate it.

Higher premiums for some

The Act ties Medicare Part D premiums to income and moves more Part D and Part B beneficiaries into higher income categories, although the majority of Medicare beneficiaries aren't affected. Thus, those affected will pay higher premiums due to a freeze on income thresholds. For example, the Medicare Modernization Act of 2003 changed how Medicare Part B premiums are calculated for some higher income beneficiaries. This law, which took effect in 2007, requires higher income beneficiaries to pay a higher Part B premium based on income they report to the Internal Revenue Service. The income thresholds have historically gone up based on an inflation index. The Act freezes the Medicare Part B premium threshold from 2011 through 2019, which means that more people will be paying higher Part B premiums. Traditionally, Medicare hasn't been a means-tested program, although that appears to be changing.

More community-based delivery systems

The Act makes some changes to the way long-term care will be delivered in the United States. The Act attempts to shift our health care delivery system away from the current institutional bias to a more community-based system. Under current law, many seniors are forced into nursing homes because they don't have the resources to stay at home and aren't eligible for long-term care insurance due to a pre-existing condition. The Act establishes the Community First Choice Option, whereby states are given more federal money if they set up community services for residents who would otherwise be in nursing homes. States will be able to provide community-based services to seniors and other individuals with disabilities who are Medicaid-eligible and who require an institutional level of care. This program ends in 2016, five years after it starts in 2011.

Spousal impoverishment protections

The Act also mandates that states include spousal impoverishment protections, such as the community spouse resource allowance, in their home-based waivered Medicaid programs. Since the late 1980s, spouses of nursing home residents have been entitled to enhanced protections under law. Although the protections vary by state, the spouse of a nursing home resident generally is entitled to keep more assets and income than a spouse of someone who is receiving care at home paid for by Medicaid. This new program will apply to Medicaid waiver programs and will also end after five years. A Medicaid waiver program allows states to provide certain services to their residents, yet still receive federal matching funds.

CLASS program

The Act establishes the Community Living Assistance Services and Supports program (CLASS). CLASS is akin to a national long-term care insurance plan in many respects. This was the brainchild of the late Sen. Edward M. Kennedy (D-Mass.) and had been in the works for several years. CLASS is intended to allow seniors and those with disabilities to maintain their independence and alleviate the burden on caregivers, while reducing the institutional bias in our health care system. Another goal is to ease the strain on the Medicaid program by attempting to get more Americans to recognize the need to plan for long-term care at an earlier age and to contribute towards the cost of that care. CLASS is set to take effect in 2011, although it's unlikely to be fully implemented until the Secretary of Health and Human Services (HHS) has issued regulations, since many of its provisions are subject to interpretation, such as setting the premium and benefit levels and the disability triggers for receiving benefits. HHS isn't expected to issue regulations until 2012; therefore, the CLASS program might not take effect until 2013.

Under the program, employees may make voluntary payroll deductions as determined by HHS, in exchange for the right to receive cash payments if they're unable to perform daily living activities (that is, toileting, dressing, transferring, eating and bathing) or suffer from cognitive impairment. The cash benefits are to be used for the purchase of community living assistance services and supports such as a home health aide, transportation, wheelchair, lift, adult day care and respite care or to pay for care in an assisted living facility or a nursing home. Only working individuals are eligible. Retired individuals (unless they work part-time), non-working spouses and unemployed individuals aren't eligible to participate. The premiums and benefits will be determined by age, with younger people paying less than older individuals. Participants will be required to pay premiums for five years (the so-called “vesting period”) before they can receive any cash benefits. The daily benefit hasn't been set but won't be less than $50, with no lifetime limit. The Congressional Budget Office assumed a daily cash benefit of $75 and a monthly premium of $123 in one of its cost estimates. The premiums are expected to remain constant, unless an increase is needed to maintain the solvency of the program. There are no underwriting requirements and those with pre-existing conditions are accepted.

One of the biggest questions regarding the implementation of CLASS is, “Who will participate?” According to some estimates, only about 5 percent of eligible employees choose to participate in employers' private long-term care insurance benefit programs, and only about 7 million Americans own private long-term care policies. Initially, the long-term care insurance industry lobbied against CLASS, fearing that it would reduce people's incentives to purchase private long-term care insurance. Others argue that it will heighten people's awareness about the need to plan for long-term care and actually increase sales of long-term care insurance since the CLASS daily cash benefit may be in the $50-to-$75 range. The average cost of long-term care in the United States is significantly higher than that. In fact, in some major metropolitan areas, the cost can exceed $200,000 per year. Perhaps long-term care insurance can be used to fill in some of the gaps in the CLASS program similar to the way Medigap policies fill in the gaps in Medicare.

Under the Act, CLASS is supposed to pay for itself through premiums; the government can't subsidize it. During the first five years CLASS is in effect, this shouldn't be a problem since no participants will be entitled to cash benefits during this time. However, after the first five years, the long-term viability of CLASS will depend upon whether enough people participate. Will enough young, healthy people contribute so the system isn't financially strained by significant payments to people who need the benefits? We won't know the answer to this question until CLASS develops a track record. According to one government estimate, only 5 percent to 6 percent of those eligible to participate would actually sign up for the CLASS program. Other estimates predict even lower participation. To attract healthy employees, the government is hopeful that the CLASS regulations will provide for a streamlined sign-up process and make it easy to have the premiums deducted from employees' paychecks. One way of doing this is to offer employees the opportunity to pay their premiums through payroll deductions. In that case, all employees must be automatically enrolled in the program unless they opt out, similar to the way some firms administer their 401(k) plans. It's hoped that automatic enrollment will increase participation by employees, which in turn, would strengthen the financial condition of the CLASS program.

Other provisions

While there are many other provisions in the voluminous Act, including insurance reforms, nursing home staffing, quality of care provisions and elder abuse protections, the foregoing is a summary of some of the more salient provisions affecting seniors and those with disabilities. Of course, with the mid-term elections now behind us, it's possible that some of the provisions of the Act could be modified or even eliminated. Only time will tell.

State Application of DRA

The Deficit Reduction Act of 2005 (DRA) was signed into law on Feb. 8, 2006. It substantially changed and restricted planning steps that can be taken to protect assets and achieve Medicaid eligibility for skilled nursing facility services, in particular. These changes affected the treatment of annuities, residences, the lookback period, periods of ineligibility flowing from gifts and contracts with continuing care retirement communities.1 While the DRA's provisions are relatively clear, implementation at the state level has been sporadic and inconsistent. Some states implemented the DRA immediately after it became law. California, the lone holdout, still hasn't implemented it. Some states made its new terms effective as of the date specified in implementing state legislation or regulations. Other states, such as Illinois, have applied DRA restrictions and policies retroactive to Feb. 8, 2006, which is the earliest possible retroactive implementation date. There are significant variations in how provisions relating to the exempt residence are incorporated at the state level.

Here's the most important lesson: Don't assume that just because you understand the DRA's provisions, you also understand how your jurisdiction implements the DRA. You must be familiar with how your jurisdiction interprets and applies the DRA, be it by legislation, regulation or other state (or District of Columbia) Medicaid program process.

Withdrawal From Medicaid

Medicaid is a program funded in part by the federal government and in part by state governments. The cost of the Medicaid program at the state level has increased consistently to the point where it consumes enormous portions of state budgets. In Texas, for example, Medicaid consumes 20 percent of the annual budget. This percentage is even higher in other states. Nationally, the federal government covers only 57 percent of the program's cost.

Many state governors have begun expressing concern about mandates contained in the Act for Medicaid expansion, slated for 2014. States will then be required to expand Medicaid to cover all non-elderly who have family incomes below 136 percent of the federal poverty level. For three years, the federal government will subsidize the cost of expansion. In 2017, states will be required to contribute additional dollars to cover the cost. Importantly, the federal government won't subsidize the cost of administering an expanded Medicaid program at the state level.

As a result, many states (with both Republican and Democratic governors) are considering withdrawal from the Medicaid program. Withdrawal is most seriously being considered in Nevada, South Carolina, Texas, Washington and Wyoming. The stated goal is to consider replacing Medicaid and its many mandates with state programs that are more flexible and presumably employ stricter eligibility criteria.

Since Medicaid is the primary source of payment for nursing home care, these developments are a source of worry for millions of Americans. Should Medicaid become unavailable or subject to restrictions in your state, planning will be compromised and more challenging.

Keep a careful eye on these developments, particularly if you practice in one of the identified states. Most observers agree: Something has to give.

A Step in the Right Direction

On Aug. 15, 2010, New York Governor David Paterson signed into law the Palliative Care Information Act. This “right to know” legislation requires that physicians and nurse practitioners provide terminally ill patients with information and counseling regarding palliative care and end-of-life options appropriate to the patient. The information may be provided verbally or in writing. If a patient lacks capacity to make informed choices relating to palliative care, the information will be provided to the person with health care decision-making authority.

The bill was modeled after similar legislation in California. It's hoped that the legislation will result in a higher quality of life for patients and increase the patients' ability to forego aggressive but unnecessary interventions, as well as result in substantial cost savings.

End-of-life discussions with physicians can be very powerful and influential. Research published in the Oct. 8, 2008 issue of JAMA, the Journal of the American Medical Association, showed that terminally ill patients who discuss end-of-life care with their physicians are more likely to sign a do-not-resuscitate order and receive hospice care. The study also found that the discussion doesn't make patients more anxious or fearful.2

Powers of Attorney

In Matter of Phillips,3 an Indiana appeals court affirmed the validity of a joint trust that was based on a durable power of attorney in arguably questionable circumstances. The lessons: draft powers of attorney with care and respect for their potential power; less explicitly, include specific powers with purpose and avoid simple forms.

In 1992, Donna and Ollie Phillips executed reciprocal wills that provided their entire estate would pass first to the surviving spouse and the remainder to the Riley Hospital for Children. The Phillips had no children. They also set up durable powers of attorney naming each other as attorney-in-fact. In 2003, the couple befriended Elizabeth Shoemaker, who helped manage their household affairs. Donna was diagnosed with Alzheimer's disease in mid-2006, and by late 2007, her condition had deteriorated to the point that her physician deemed her no longer able to manage her own affairs.

The couple contacted their long-time attorney in late 2007 and stated that they “wanted everything to go to [Shoemaker] after their deaths,” because “she's like a daughter to us.” Given Donna's incapacity to make a new will, the attorney drafted a joint trust, naming Ollie and Donna as grantors and initial primary beneficiaries, Ollie as initial trustee and Shoemaker as successor trustee and remainder beneficiary. The attorney reviewed the trust with Ollie and Donna several times over a four-month period before the trust was executed. On Feb. 11, 2008, Ollie executed the joint trust, signing his name and Donna's name by his power of attorney.

Ollie died on Dec. 26, 2008. A family friend was appointed to serve as the guardian of Donna's person and estate. The guardian filed a petition to revoke the joint trust. The trial court denied the guardian's petition, holding that Ollie's creation of the joint trust was consistent with Donna's intentions and its revocation wouldn't be in Donna's best interests. The guardian appealed and the Court of Appeals affirmed the trial court's ruling.

Despite some indications of incapacity, further estate planning could still take place in certain circumstances through the use of a durable power of attorney. In situations in which an attorney is able to establish and document an elder's wishes, it may be possible for the attorney-in-fact to carry out those wishes.

Annuities and “Income First”

Much is said and written about the DRA because of its limiting impact on asset protection planning for individuals facing the cost of long-term care. Johnson v. Lodge4 is interesting because it employs a strategy of Medicaid planning to increase the amount of money the “community spouse” may retain that's not affected by the DRA. The result, however, is disappointing.

Benjamin and Wilma Johnson applied for, and were denied, Tennessee Medicaid benefits while Benjamin was a nursing home resident. The Johnsons had combined non-exempt assets of $164,694, twice the amount of Wilma's $82,347 community spouse resource allowance (CSRA). The CSRA is the amount the community spouse may retain while the institutionalized spouse achieves Medicaid eligibility.

The Johnsons' combined monthly income was about $1,358, which fell short of the minimum monthly maintenance needs allowance (MMMNA) by $432 per month. (The MMMNA is the minimum income the community spouse is able to retain after the institutionalized spouse becomes Medicaid-eligible.) The Johnsons appealed the denial, arguing that Wilma's CSRA should be raised to account for the MMMNA income shortfall, pursuant to 42 U.S.C. 1396r-5(e)(2)(C). They claimed that a CSRA of $172,800 would provide Wilma with income of $432 per month at a 3 percent interest rate.

The district court rejected their argument. The court held that the couple could cover the income shortfall of the community spouse by liquidating the current CSRA and purchasing a single premium immediate annuity. That way, an increase in the CSRA wouldn't be necessary.

This holding doesn't bode well for asset preservation for community spouses. As the court acknowledged, when the person covered by the annuity dies, the insurance company typically keeps the remaining principal, if any. The remaining principal is thus lost to future generations.

Implications of “Self-funding”

Concerning Medicaid eligibility, will a transfer penalty be imposed on beneficiaries over age 65 who join a pooled trust? In Wisconsin, an 86-year old beneficiary transferred about $5,000 into a pooled self-funded special needs trust while applying for Medicaid. She was receiving Social Security retirement benefits, but had never received a disability determination from any government program. The local agency denied her Medicaid benefits, holding that the transfer of funds by a non-disabled person was a divestiture. The beneficiary's agent appealed on her behalf.

Several authorities provide that a finding of disability is necessary for beneficiaries of any age who transfer funds into Medicaid pooled trusts. Program Operations Manual System, Supplemental Security Income 01120.203.B.2.b provides that individuals who use Medicaid pooled trusts, including those who qualify for supplemental security income on the basis of age, must “meet the definition of disabled.” The State Medicaid Manual states that, if an individual isn't receiving disability benefits, a determination must be made concerning the individual's disability.5

Considering these authorities, the Wisconsin Division of Hearings and Appeals ultimately ruled that transfers to the pooled trust by disabled persons age 65-and-over aren't divestments.6 Applicants age 65-and-older must arrange a disability determination process with the Wisconsin Disability Determination Bureau to determine whether Social Security disability standards are met. If so, the elder's transfer to the pooled trust isn't a divestment.

Post-Medicaid Eligibility

Generally speaking, asset transfers from one spouse to another don't create problems with Medicaid eligibility when one spouse is institutionalized. This continues to be the case when transfers are made before Medicaid eligibility is established, since all assets held by a non-institutionalized spouse are counted in determining eligibility. If eligibility has already been established, however, transfers from the institutionalized spouse to the community spouse can result in ineligibility. This happened in two recent cases — one in Ohio and the other in Oklahoma.

In Burkholder v. Lumpkin,7 Rex Burkholder became eligible for Medicaid in October 2007. One year later, Rex inherited from his mother's trust a deed to real property, as well as $17,810 in the form of an annuity payment. During that same month, Rex transferred the real property to his wife, Linda, in the form of a quitclaim deed and transferred the annuity payment to Linda's bank account. At the time of transfer, Rex was living in a nursing home, the cost of which was being paid for by Medicaid. In February 2009, Linda sold the real property and used the money to pay off her home and her car and to remodel her home.

In April 2009, the Ohio Medicaid agency mailed Rex a notice of restricted coverage, indicating its intent to stop paying for the nursing home from May 1, 2009 to April 30, 2011. Rex asked the court to enjoin the agency from continuing its suspension of Medicaid payments to the nursing home. The court granted the agency's motion to dismiss.

The court held that, for post-eligibility transfers, 42 U.S.C. 1396r-5(a)(1) only permits transfers for less than fair market value from the institutionalized spouse to the community spouse up to the CSRA amount. The court rejected Rex's argument that 42 U.S.C. 1396p(c)(2)(B)(i) allows post-eligibility transfers between spouses in excess of the CSRA.

In Morris v. Oklahoma Department of Human Services,8 Glenda Morris applied for Medicaid benefits for in-home care. As of the application date, Glenda and her husband Morris' assets equaled about $108,000. To spend down Glenda's $57,000 spousal share of the assets to $2,000, Leroy used about $18,000 of Glenda's assets to purchase an irrevocable annuity, which provided an income stream for Leroy alone. The Oklahoma Department of Human Services (DHS) denied Glenda's claim for Medicaid, finding that the annuity exceeded Leroy's CSRA, that the purchase of the annuity resulted in a transfer penalty and that the annuity's income stream could be sold in a secondary market, making it a countable asset. Glenda appealed the decision.

The Oklahoma federal court upheld the DHS' decision. The court held that assets attributed to the institutionalized spouse couldn't be transferred, after an initial determination of eligibility, to the community spouse. Citing Burkholder, the court stated, “If an institutionalized spouse can ‘spend down’ that spouse's share by transmogrifying spousal share resources into community-spouse income, the provisions dividing and limiting the spousal resources are superfluous.”9

A lesson, therefore, is the usual: “Timing is everything.”


  1. For a discussion of the Deficit Reduction Act of 2005's specific provisions, see Michael Gilfix and Bernard A. Krooks, “Throw Momma from the Train,” Trusts & Estates (March 2006) at p. 36.
  2. Alexi A. Wright, M.D. et. al., “Associations Between End-of-Life Discussions, Patient Mental Health, Medical Care Near Death, and Caregiver Bereavement Adjustment,” JAMA (Oct. 8, 2008), available at
  3. Matter of Phillips, 926 N.E.2d 1103, 1108 (Ind. App. 2010).
  4. Johnson v. Lodge, 673 F. Supp.2d 613 (M.D. Tenn. 2009).
  5. See State Medicaid Manual 3259.7.B.
  6. DHA Case No. MDV 38/87937 (Wis. Div. Hearings & Appeals June 9, 2008).
  7. Burkholder v. Lumpkin, 2010 WL 522843 (N.D. Ohio Feb. 9, 2010).
  8. Morris v. Oklahoma Department of Human Services, 2010 WL 3790596 (W.D. Okla. Sept. 24, 2010).
  9. Ibid. at *4.

Bernard A. Krooks, far left, is a partner in the New York City, White Plains and Fishkill, N.Y. firm of Littman Krooks LLP. Michael Gilfix is a partner in the Palo Alto, Calif. firm of Gilfix & La Poll Associates LLP


All Together, Now!

This Polish version of the “Zolta Lodz Podwodna”(“Yellow Submarine”) (81 cm. by 58.5 cm.) movie poster was sold at Christie's Vintage Film Posters Auction in London on Dec. 1, 2010 for $1,264. The real Beatles participated only in the closing scene of the film; other actors voiced the rest of their lines.