Deficit Reduction Act of 2005

The Deficit Reduction Act of 2005 (DRA) was signed by the President in February 2006. The Congressional Budget Office estimates that the Medicaid provisions alone of the DRA will reduce federal spending by $6.9 billion over the next five years. The Medicaid provisions of the DRA make significant changes in a number of areas.

Provisions Affecting Long-Term Care Medicaid

There are a number of issues that relate to Medicaid eligibility. The starting point for determiningMedicaid eligibility for nursing home care for an individual is whether the individual meets theincome and resource requirements for Medicaid. While there are numerous other eligibilityrequirements, these are the two requirements that raise the vast majority of issues encountered inMedicaid eligibility.

For 2006, the income limit for a nursing home and the elderly waiver is $1,809 monthly. Theresource limit remains at $2,000 for a single person and $3,000 for a couple when both need longterm care.

Financial eligibility for Medicaid is determined at the county Department of Human Services offices. However, the Deficit Reduction Act of 2005 increases the need for nursing facilities to payattention to the financial situation of its residents and potential residents.

Change to Transfer of Assets

Increases the look-back period to 60 months, for all transfers: The look-back period forassets transferred at less than fair market value is lengthened to five years.

-Currently when determining Medicaid eligibility the look-back is 60 months for transfers to atrust but only 36 months for any other transfer. Iowa also has a five year look back periodwhen referring the case to the Department of Inspections and Appeals to establish a debtagainst the person that received the transfer.

--The law in Iowa requires that all transfers by a person applying for Medicaidduring the five-year period prior to application for Medicaid, creates apresumption on the person who receives the asset that the intent was toenable the transferor to obtain Medicaid eligibility. Therefore, the person whoreceives the asset has to provide by “clear and convincing” evidence that thetransfer was not made to obtain Medicaid. (Iowa Code 249F.1)

Change in Beginning Date for Transfer of Assets Penalty:

-The penalty for these asset transfers, exclusion from Medicaid eligibility, will begin on thefirst day of the month when a person is receiving long-term care and would otherwise beeligible for Medicaid except for the asset transfer. In other words, the penalty period doesnot begin until the resident is out of funds – i.e. cannot afford to pay for the nursing homeservices.

-Previously, the penalty period would begin on the date on which an uncompensatedtransfer was made. Under that approach, many transfers made during the look back perioddid not actually give rise to assessment of a penalty.

-The intent of this change is to prevent people from making a transfer and then "waiting out" the penalty period before applying for Medicaid.

-As noted above, under the Deficit Reduction Act of 2005 the penalty period begins on thedate on which the individual has applied and is otherwise qualified for Medicaid. This is adramatic change.


-Under the new law individuals in need of long-term care will be penalized for any gifts theyhave made during the extended look back period, regardless of the purpose of the gift.

-It is immaterial that the gift, even a moderate amount was made exclusively for a purposeother than to receive Medicaid payments.

-However, Senator Charles Grassley wrote a letter to Michael Leavitt, the Secretary of theDepartment of Health and Human Services stating:

Congress made these changes in the law to prevent people from transferring assets toimproperly obtain Medicaid coverage not to prevent people from making legitimatedonations to charities or helping family members in need. CMS should be directed topromptly issue guidance and regulations to stipulate the types of transfers that should bepresumed to be for a legitimate purpose and therefore not subject to penalty unless thestate has cause to believe that the individual made the transfer with the specific intent tohide those assets and improperly qualify for Medicaid. Examples of the kinds of assettransfers that should be presumed to be legitimate ones would include regular donations tochurches and charities, or helping family members with such things as medical andeducational expenses.

-The asset transfer provisions would apply to transfers made after the date of enactment ofthis budget legislation. (February 8, 2006)

Undue Hardship Waiver:

-The law provides an “undue hardship” waiver of the penalty if the asset transfer penaltywould deprive an individual of medical care necessary to preserve health or life, or offood, clothing, shelter or other necessities.

-Nursing facilities could apply for a hardship waiver on behalf of a resident.

-While the application was pending, the facility could receive bed hold payments, but forno more than 30 days.

Partial Months of Ineligibility:

-The period of ineligibility imposed for asset transfers is calculated by dividing the amounttransferred by the statewide average cost of care to come up with the number of months thatan individual could have paid their own facility care, if they had not transferred assets. Currently, when doing this calculation, DHS rounds down or drops any partial month. TheDeficit Reduction Act requires DHS to apply additional days of ineligibility for the partial month.

Accumulate Multiple Transfers Into One Period of Ineligibility:

-The Deficit Reduction Act allows multiple transfers made within the look-back period to beadded together and treated as one large transfer. Currently DHS would only total alltransfers when the penalty period for one transfer overlaps the next transfer. This allowedDeficit Reduction Act of 2005, people to make multiple transfers of less than the statewide average and no penalty periodwas ever imposed.

Notes and Loans Considered an Asset Transfer:

-The Deficit Reduction Act adds additional restrictions to the use of funds for making a loan,or purchase of a mortgage or promissory note. Iowa’s current rules such as receiving fairmarket value still apply. In addition, loans, mortgages, and promissory notes will beconsidered a transfer for less than fair market value unless:

•Repayment terms are actuarially sound (the expected return on the annuity iscommensurate with the life expectancy of the beneficiary),

•They require equal payments with no deferral or balloon payment, and

•The loan, mortgage, or note can’t be canceled upon the lender’s death.

If the loan, mortgage, or promissory note does not meet these requirements, the outstandingbalance at the time of application for Medicaid is considered an asset transferred for lessthan fair market value.

Purchase of Life Estate Considered a Transfer of Assets:

-The Deficit Reduction Act adds additional restrictions to the use of funds for purchasing alife estate. Iowa’s current rules, such as the requirement to receive fair market value, stillapply. The purchase of a life estate may also be considered a transfer for less than fairmarket value unless the purchase of the life estate is made on a home where the personcontinued to live for one year after making the purchase.


-Old Law: A mother transfers $11,000 each to her sons on July 1, 2003. The motherapplies for Medicaid nursing home coverage on February 1, 2006, and is otherwise qualified for Medicaid coverage.

Assume that the average monthly cost of nursing home care in Iowa is $4,000. (Actual Average Monthly Statewide Cost of Nursing Facility Services for the Period July 1, 2006 – June 30, 2007 is $4,021.31.)

The transfer was uncompensated and occurred during the 36-month look back period. The penalty calculation is then used. Dividing the amount of the transfer by the averagemonthly cost of care ($22,000/$4,000 = 5.5) results in the number of month’s the mother'spenalty period would last.

However, DHS previously would drop the partial month to the penalty period. Therefore,the penalty period would be only five months. Also, under the old law, the mother’s penaltyperiod would begin on July 1, 2003 (the first day of the first month of transfer) and would runthrough November 1, 2003. (Five months).

Result: The mother’s penalty period has expired by the time of the application for Medicaid.The mother qualifies for Medicaid.

-New/Current law: Assume the same facts as above except that the mother applies forMedicaid coverage on March 1, 2009 and made the gifts to her children on July 1, 2006.The new law produces a different result. While the calculation of the penalty period remainsthe same, DHS will not round down or drop the partial month. Therefore, the 5.5 monthpenalty period does not begin running until March 1, 2009. As a result, the mother iseligible for Medicaid coverage as of March 1, 2009, she will be denied Medicaid coverageuntil mid-August of 2009.

How is the mother going to pay for the nursing home care?

1.The family can pay

2.Nursing Facility may attempt to discharge for failure to pay

3.Charity Care provided by the nursing facility

4.Undue Hardship Waiver

Changes in Relation to Purchase of Annuities:

-Individuals applying for Medicaid coverage of long-term care would have to disclose theirinterest in any annuities, whether or not the annuity was irrevocable. To be eligible forMedicaid, individuals would have to make the state a remainder beneficiary under the trustfor the amount of health care provided to the individual. States would have to take intoaccount the amounts of any withdrawals from the annuity account in determining theindividual’s eligibility for Medicaid coverage.

-Additional restrictions also apply to certain types of annuities. If the annuity does not meetthese criteria, it is considered a transfer for less than fair market value.

-Assets counting against eligibility for Medicaid would include balloon annuities and thepurchase of a life estate in another individual’s home.

“Income First” Rule for Community Spouse Support

-Iowa used to follow the “Resource First” rule for the community spouse. The resources forboth spouses are totaled and divided in half for the community spouse. Typically, this allowedthe applicants to request an appeal to an administrative law judge to request the inclusion ofonly the resources of the community spouse and not the spouse in the institution. In thepast, typically the wife was the community spouse and had little or no income orcompensation. This allowed for protection of the husband’s income or compensation.

-Now, lower amounts will be protected because during the appeal the income orcompensation of both spouses will be considered. Transfers from an institutionalizedspouse to meet the needs of a spouse living in the community would be made first from theinstitutionalized spouse’s income. The institutionalized spouse’s assets would only betapped if his/her income was not available.

-According to the Iowa Department of Human Services this will affect one-third (1/3) ofcouples with community spouses. This would require that the institutional spouse spenddown and be private pay for an average of 2 to 6 months longer.

Changes in Resource Exemptions:

Home equity:

-Individuals with more than $500,000 in home equity would not be eligible for Medicaidcoverage of long-term care. States could use higher home equity amounts in determiningMedicaid eligibility, but the absolute limit would be $750,000. The amounts would beindexed to inflation beginning in 2011.

-This prohibition would not apply to homes in which the individual’s spouse or minor orpermanently disabled child was living in the home.

-The prohibition would not apply to individuals who take out reverse mortgage or homeequity loans.

-Hardship waivers of the prohibition are authorized


-Admission contracts may require residents to spend on their own care the assets declaredas available in the application for admission before a resident applies for Medicaid coverage.

-Entrance fees are to be considered a resource available for the resident’s care if:

1.the contract allows for that use of the fee,

2.the fee is refundable, and

3.the entrance fee does not give the resident an ownership interest in the CCRC.

Documentation of Citizenship:

The Deficit Reduction Act of 2005 requires Medicaid applicants and recipients to furnishdocumentation proving they are U.S. citizens or nationals as of July 1, 2006.

Acceptable documentation for "national" status is documents issued by the U.S. Citizenship andImmigration Services. Acceptable documentation for U.S. citizenship is:

-a U.S. passport or,

-most commonly, a birth certificate in combination with some other identification, such as a driver's license.

Under the legislation, a driver's license alone is not sufficient identification unless the state thatissued the license has verified the person's citizenship before issuing the license. An Iowadriver's license does not meet this standard.

-In rare instances where the state is unable to obtain the preferred documents as proof ofcitizenship, CMS is allowing the use of written affidavit signed by two US citizens who havepersonal knowledge of the beneficiary’s citizenship status.

-In addition, CMS guidance directs the state to give the beneficiary “reasonable opportunity” to present the required documents at time of application or redetermination.

A Medicaid application will not be approved after July 1, 2006 unless the applicant hasfurnished the required verification. The requirement will be imposed on people receivingMedicaid benefits at the time of their next eligibility review. If acceptable verification is notfurnished at that time, the person's Medicaid eligibility will end. Iowa DHS did not however,that DHS has one year to get acceptable verification for current Medicaid recipients.

Medicaid Integrity Program:

The DRA created the Medicaid Integrity Program (MIP) which dramatically increases both CMS’obligations and resources to combat fraud and abuse.

-$5 Million in FY 2006;

-An additional $50 Million in each of FY 07 & 08; and

-$75 Million annually in FY 09 and each year after.

-CMS to hire 100 new full time employees “whose duties consist solely of protectingthe integrity of the Medicaid program.”

Legislative Requirements:

-CMS to contract with an entity to conduct Medicaid oversight through reviews, audits,identification of overpayments and education.

-The entity is to develop a comprehensive 5 year Medicaid integrity plan.

-Annual reports to be provided to Congress

-Provides additional funding to the Office on the Inspector General of the Department of Health and Human Services for Medicaid fraud and abuse control activities.

“Rebalancing Efforts”

Expand Access to HCBS Services:

-The DRA establishes an opportunity for the state to provide home and community-basedservices as an optional Medicaid benefit that would not require a waiver and that meets certain other requirements for individuals whose income does not exceed 150 percent ofthe federal poverty level.

-The state is also required to submit to the Secretary a projection of the number ofindividuals to be served under the option, and may limit the number of individuals who areeligible for such services.

Level of Care:

-The state may provide this option to individuals without determining that but for the provisionof such services; the person would require the level of care provided in a hospital, nursinghome, or ICF-MR.

-States are required to establish a needs-based level of care criteria for determining anindividual's eligibility for the HCBS option established by this provision, and the specificHCBS the individual will receive.

More Stringent Level of Care:

-The State must also establish a needs-based level of care criteria for determining whetheran individual requires the level of care provided in a hospital, nursing home, ICF-MR, orunder a waiver of the state plan, that is more stringent than the needs-based criteria forthe HCBS option established by this provision.

-Federal Medicaid funding will continue to be available for individuals who are receivingMedicaid in an institution or home and community-based setting (under a HCBS waiverprogram or Section 1115 demonstration) as of the effective date of the Medicaid state planamendment, without regard to whether the individuals satisfy the more stringent eligibilitycriteria established under that paragraph until the individual is discharged from the institutionor waiver program, or no longer requires such level of care.

Independent Evaluation:

-The state is required to use an independent evaluation for determining an individual'seligibility for HCBS. The independent evaluation must include an assessment of the needsof the individual to:

(1) determine a necessary level of services and supports consistent with theindividual's physical and mental capacity;

(2) prevent unnecessary or inappropriate care, and (3) establish an individualized careplan for the individual.

The assessment must include:

(1)an objective evaluation of an individual's inability or need for significant assistanceto perform two or more activities of daily living as defined in the Internal Revenue Service code;

(2)a face-to-face evaluation of the individual by an individual trained in the assessmentand evaluation of individuals whose physical or mental conditions trigger a potentialneed for HCBS;

(3)where appropriate, consultation with the individual's family, spouse, guardian, orother responsible individual;

(4)consultation with all treating and consulting health and support professionals caringfor the individual;

(5)an examination of the individual's relevant history and medical records, and careand support needs guided by best practices and research on effective strategiesthat result in improved health and quality of life outcomes.

-Self Direction: The assessment must also evaluate the ability of the individual orindividual's representative to self-direct the purchase and control of HCBS if he/she electsthis option, and if such an option is covered by the state.

-Quality Assurance: The state must ensure that the provision of home and community-basedservices meets federal and state guidelines for quality assurance. The state mustestablish standards for the conduct of the independent evaluation to prevent conflicts ofinterest, and must allow for at least annual redetermination of eligibility and appeals usingthe process for appeals under the State Plan.