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Questions and Answers on Medicaid Estate Recovery for Long-Term Care Under OBRA '93

Introduction

After almost two months in the hospital during the summer of 1996, Mr. Clark entered a nursing home. His wife was surprised that Medicare would not pay for any of his nursing home expenses. While she was relieved to learn that Medicaid would cover the cost, she has heard that there is a federal law that requires state Medicaid agencies to engage in "estate recovery." Mrs. Clark does not understand what this means or how it will affect her family.

The Clarks' situation is not unique. In 1993 Medicaid paid for about 1.6 million beneficiaries in nursing homes. Under certain circumstances, when an individual needs skilled nursing care, Medicare will pay for nursing home care for a limited time. However, most people pay for their nursing home care out of pocket until they have exhausted their savings, and then they rely on Medicaid to pay for their care.

In the face of a growing older population and rising nursing home costs, it has become very expensive for the government to pay for nursing home care for all the people who cannot afford to pay for their own care. Since passage of the Omnibus Budget Reconciliation Act of 1993 (OBRA '93), Congress has required states to try to recover the cost of Medicaid benefits from the estates of certain nursing home residents and older persons receiving home- and community-based services. This law applies to individuals who were age 55 or older when they received Medicaid. As this is a new and complex law, nursing home residents, families, and advocates for older people often have questions about the effect of estate recovery. The following are answers to some of the most frequently asked questions about estate recovery. This publication is for information purposes only, and does not indicate any position of AARP with respect to Medicaid estate recovery.

Background

What is Medicaid?

Medicaid is a joint federal/state program that pays for medical care for individuals who cannot pay their own medical bills. To qualify for Medicaid, an individual must have limited income and resources. Medicaid eligibility rules are complicated, and different states apply different rules. Each state operates its own Medicaid program, consistent with federal law.

Why are we hearing so much about Medicaid these days?

Congress has become very concerned with limiting the growth in Medicaid spending. Between 1988 and 1993 Medicaid spending grew from $26 billion to an estimated $139.8 billion. Between 1995 and 2002, Medicaid spending is projected to grow by $150.8 billion; this translates into an average annual growth rate of 10.1 percent. In order to reduce government spending, the federal government is now requiring states to try to recover some of the money they spend on Medicaid beneficiaries.

I thought Medicaid only paid for health care for people who are uninsured and who have very low incomes. Does Medicaid ever pay for medical care for people who are not living in poverty?

Yes, Medicaid often pays a portion of the bill for nursing home residents who have spent almost all their savings and whose monthly income does not cover the cost of care. Medicaid pays the dif-ference between an individual's income and the cost of nursing home care. Some states have an income cap on gross income, and special income trusts must be set up to establish eligibility in those states. Right now Medicaid is the only national program available to help pay for long-term care; Medicaid is the main source of payment for nursing homes.

Example: Before Mrs. Bertagnolli entered a nursing home, she lived by herself in an apartment. Her monthly income was $1,600 per month, and she had no savings. The cost of her nursing home care is $3,000 per month. Mrs. Bertagnolli gives the nursing home $1,560, all but $40 of her monthly income (the amount her state allows her to keep as a personal needs allowance), and Medicaid pays the balance of $1,440 per month.

Estate Recovery

What is estate recovery?

OBRA '93 requires each state to recover the costs of nursing facility and other long-term care services from the estates of Medicaid beneficiaries. This means that states must try to get reimbursed for money they spend through their Medicaid programs. At a minimum, states are required to file claims in probate court against the estates of certain deceased Medicaid beneficiaries.

What exactly is an estate?

Under probate laws, an estate is usually defined as all real estate and personal property that passes from a deceased person to an heir through a will or by rules of intestate succession. Property that passes directly to joint owners or to beneficiaries under a trust is normally not considered part of the probate estate. However, OBRA '93 gives states the option to expand the definition of estate to include these types of interests and any other property that the individual has any title or interest in at the time of death.

What is a claim against an estate?

A claim against an estate is a demand for payment from a creditor who believes the deceased person owes the creditor money. In estate recovery under OBRA '93, the request comes from the state Medicaid agency, and the amount owed is all or some of the amount of Medicaid payments spent on behalf of the deceased Medicaid beneficiary.

Example: Mr. Robles was in a nursing home for nine months before he died. He had enough savings to pay for his first six months of care. During the last three months of his life, Medicaid paid a total of $6,000 for his care. After his death, the state will file a claim against his estate in the probate court for $6,000, the total amount spent on his behalf.

Do states have to recover money from the estates of everyone who receives Medicaid?

No, but states must recover money spent on behalf of the following individuals

  • individuals who were age 55 or older when they received Medicaid. A state must recover payments made for nursing facility services, home- and community-based services provided under a Medicaid waiver, and related hospital and prescription drug services; and
  • individuals in nursing facilities, intermediate care facilities for the mentally retarded, or other medical institutions who pay a share of cost as a condition of receiving Medicaid and who cannot reasonably be expected to be discharged and return home. This provision requires that the state determine, after notice and an opportunity for a hearing, that the individual cannot reasonably be expected to return home.

Can states go beyond these requirements?

Yes, states have the option to recover payments for all other Medicaid services provided under their state Medicaid plan for individuals age 55 and old . These Jr may include services such as home- and community-based care for functionally disabled persons, community-supported living arrangements, optional personal care, and mandatory home health care.

Example: Mrs. Miller lives in a state that has decided to recover for all Medicaid services provided to individuals who are age 55 and older. Because of her heart condition, Mrs. Miller relies on the help of an aide for six hours every week. The aide does Mrs. Miller's laundry, prepares her meals, and helps her bathe. Medicaid pays for this service. When Mrs. Miller dies, her state Medicaid agency will file a claim against her estate for the cost of these services.

Are there any exceptions to estate recovery?

There are limits on a state's right to recover Medicaid benefits. Recovery cannot be made:

  • before the death of a surviving spouse;
  • if the individual has a surviving child who is under age 21 or who is blind or permanently disabled; and
  • against one's home on which the state placed a lien, unless additional protections for siblings and adult children are satisfied.

How does estate recovery work?

At the time of a Medicaid beneficiary's death, the state becomes a creditor in probate court. State laws govern the distribution of assets in estates, and this process is administered by the courts. In many states, the Medicaid agency is simply a creditor in these proceedings, and probate costs, the cost of last illness, reasonable funeral expenses, and taxes have priority over claims made by the Medicaid agency. In some states, the Medicaid agency can also file under "cost of last illness" and gain priority over other creditors. Under OBRA '93, states may amend their probate laws to make the Medicaid agency a priority creditor. Heirs receive their inheritance only after these priority claims are paid.

Example: Mr. Roberts left his only property, a house valued at $75,000, to his son. At the time of his death, the state Medicaid agency had paid $24,000 for his nursing home care. In addition to this claim, there was a total of $10,000 in funeral bills and costs for probating his estate. Mr. Robert's son received $41,000 after all the claims were paid.

Does this mean that if people can avoid probate, they will be able to avoid Medicaid estate recovery?

No, states can expand the definition of "estate" to include any property in which an individual had any legal title or interest at the time of death, including assets passed outside probate. A state can define this property to include joint bank accounts, bank accounts with a pay-on-death beneficiary designation, living trusts, life estates in real property, and real estate held in joint tenancy. This suggests that the state can recover from surviving joint tenants and transferees of property with a reserved life estate. This is a major change in the law because the definition includes property interests that are extinguished by the death of the owner, and are otherwise unavailable to creditors. You should check to see if your state uses the expanded definition.

Example: After their husbands died, Mrs. Pruitt and Mrs. Hawkin lived together in Mrs. Hawkin's house. Mrs. Hawkin wanted Mrs. Pruitt to be able to stay in the house, so ten years ago she added Mrs. Pruitt's name to the deed as a joint tenant. Their state has adopted a definition of "estate" that includes all property in which an individual had any legal interest at the time of death. After Mrs. Hawkin entered a nursing home, Mrs. Pruitt continued to live in the house. Under prior law, at the time of Mrs. Hawkin's death, Mrs. Pruitt would have become the sole owner of the house. Under OBRA '93, at the time of Mrs. Hawkin's death, the state Medicaid agency can attach the property and force Mrs. Pruitt to pay for Mrs. Hawkin's nursing home care out of what had been Mrs. Hawkin's share of the property.

What about the surviving spouse?

During a spouse's lifetime, the state Medicaid agency cannot require repayment of Medicaid expenses. However, after the spouse dies, the state may file a claim against the spouse's estate to recover money spent for nursing home care, to the extent of the deceased beneficiary's interest.

Example: Mr. Chang was married for 50 years. He entered a nursing home in November 1994. At the time of his death, Medicaid had paid $40,000 for his care. He is survived by his wife. If the state Medicaid agency filed a claim against Mr. Chang's estate, it would be denied because he was survived by a spouse. Instead, in many states, the state Medicaid agency will file a claim against Mrs. Chang's estate when she dies. At that time, the claim will be for the $40,000 paid for Mr. Chang's nursing home care.

Liens

If Medicaid pays for nursing home care, are there any circumstances when the state can take a home before a person's death?

No, but under some circumstances the state may place a lien on the home. This can occur if the Medicaid beneficiary pays part of the cost of care as a condition of receiving Medicaid, and the state determines, after notice and an opportunity for a hearing, that the individual cannot reasonably be expected to be discharged and return home.

Example: Mrs. Horowitz entered a nursing home after her husband died. She is unable to return home and has a low income and no resources other than her home. After providing her with written notice and an opportunity for a hearing, the state may put a lien on her home. If Mrs. Horowitz sells the house or dies before it is sold, the state may collect on the lien.

What is a lien?

A lien is a claim against a specific piece of real estate. When the property is sold or title is transferred, the lien must be paid. For nursing home residents, the lien is the amount of Medicaid payments made on behalf of the persons receiving care. This amount builds up the longer a person receives care.

Example: Before Mr. Lang went into a nursing home, he lived alone. When it was determined that he could not return home, the state Medicaid agency put a lien on his house, and he put his house up for sale. Fourteen months later the house sold for $31,000. During this time, $35,000 in Medicaid payments were paid for Mr. Lang's care in the nursing home. At the time of the sale, the state can satisfy part of the lien of $35,000 out of the sale proceeds. Since the lien is for an amount greater than the proceeds from the sale, no money remained for Mr. Lang's use after sale of the property.

What is the effect of a lien?

If a lien exists, the property holder must first pay off the lien before title to the property can be sold or transferred. Often, when property is sold, a lien is paid off from the proceeds of the sale.

How does the state get the lien?

The state must file a claim with the county property office (often the Register of Deeds) in the county where the home is located.

Must states use liens?

No, OBRA '93 requires the use of estate recovery, but it does not require the use of liens. As of May 31, 1996, 23 states were planning to use liens.

I have heard the state can't put a lien on property if a relative-lives in the home. Is that true?

It is true under some circumstances while the Medicaid beneficiary is alive. A state Medicaid agency may not place a lien on a home for benefits paid if any of the following relatives live in the home:

  • a spouse;
  • a minor child;
  • a permanently disabled or blind adult child; or
  • a brother or sister who has been residing in the home for at least one year immediately before the Medicaid beneficiary entered the nursing home.

Example: Mr. Kalivas entered a nursing home on August 1,1996, and his wife continues to live in their home. A lien cannot be placed against their home because Mrs. Kalivas still lives in it. After Mr. Kalivas dies, the state Medicaid agency may turn its estate claim into a lien on the home, but it cannot enforce the lien while Mrs. Kalivas is alive.

Example: Mrs. Colbert and her brother Mr. Dade inherited their home from their mother. They have lived in it for the last 35 years. Poor health has forced Mr. Dade into a nursing home. Mrs. Colbert wants to stay in the house. As long as she remains in the property, it is not subject to a lien. If she moves out, the state Medicaid agency can put and enforce a lien on the property.

Can the Medicaid agency place a lien if an adult child, who is not disabled, lives at home?

Yes, it can place a lien on the property, but it cannot enforce the lien if the Medicaid beneficiary can prove that the live-in adult son or daughter provided care that allowed the beneficiary to stay out of a nursing home for at least two years immediately before entering a nursing home. Then, even after the beneficiary's death, the state cannot enforce the lien as long as the adult child lives in the home.

Example: Mrs. Klein entered a nursing home July 1, 1996, after a stroke. She is not expected to return home. Her adult daughter moved back home in March 1996, and is still living there. A lien may be placed on Mrs. Klein's home and the state Medicaid agency may enforce the lien, even though her daughter still lives in the home, because the daughter had not been providing care that kept her out of a nursing home.

Under what circumstances is a state not permitted to enforce a lien?

A lien may not be enforced, and the house may not be sold to pay for Medicaid benefits under the following circumstances:

  • there is a living spouse (no matter where he or she lives);
  • there is a child who is under age 21, or is blind or disabled (no matter where he or she lives);
  • there is a brother or sister with an equity interest who lived in the home for the year immediately prior to the nursing home admission (but only if the sibling has continuously lived in the home since that date);
  • there is a non-disabled adult child who had lived in the home at least two years immediately prior to a parent's admission to a nursing home, and was providing care that delayed admission (but only if the adult child has lived continuously in the home since that date).

Example: Mrs. Bingham lived in a house just two blocks from her daughter's home. For several years before Mrs. Bingham's nursing home admission, her daughter had been fixing all her meals, doing her shopping, and helping her dress and bathe. There is no doubt that without her daughter's help, Mrs. Bingham would have needed nursing home care at least two years earlier. Once it is determined that Mrs. Bingham cannot return home, the state Medicaid agency can put and enforce a lien on her home because the daughter did not live in the home with Mrs. Bingham.

If family members need to move, what happens?

Even if no one lives in the home, the state may not enforce the lien so long as the Medicaid beneficiary has a living spouse, a child under age 21, or an adult blind or disabled child. This means that as long as the spouse is alive, whether or not the spouse has moved to some other residence, the state may not enforce the lien. The spouse may sell the couple's home and use all the money from the sale of the house to purchase another home or pay rent on an apartment, without any lien being enforced.

Example: Mr. Jasinski has been in a nursing home for two years. His wife is preparing to sell the couple's home and move to a small apartment. No lien could have been placed on the home because his wife lived in it. No lien could be enforced because Mr. Jasinski has a living spouse, regardless of where she lives. If Mr. Jasinski dies before his wife sells the home, a lien could be placed on the home, but it could not be enforced regardless of where Mrs. Jasinski lives.

Does the state ever have to release a lien?

Yes, if the Medicaid beneficiary leaves the nursing home and returns home, the state must file a release of lien.

Example: Mrs. Washington entered a nursing home in October 1995. She had a chronic heart condition and severe memory problems that made it impossi-ble for her to take care of herself at home. In May 1996, the state Medicaid agency determined that she was not likely to return home and put a lien on her house. In July 1996, her son learned that she was eligible to participate in a new adult day care program in her city, and he decided that with the help of other family members he could take care of her at home. As a result, Mrs. Washington was able to return home, and the lien was removed from her house.

Other Issues

Are there any allowances for people who would be seriously hurt if the state recovered from an estate?

Yes, states are required to establish procedures for waiver of recovery in cases where undue hardship would result. Congress was particularly concerned about situations where the property subject to recovery is the sole income-producing asset of the survivors, such as a family farm or family business, or a homestead of "modest value," or where other compelling circumstances exist.

What can be done if there is reason to believe the state has made a mistake?

An individual can request a hearing. States must have an appeals process. Also, states must let people know before any property can be taken and before a lien can be placed on a home.

Example: Mr. Gomez was sent to a nursing home to have rehabilitation for a broken hip. He received a notice that the state had determined that he could not "reasonably be expected to be discharged from the institution and return home," and that the state intended to put a lien on his home. He has a right to request the state to conduct a hearing.

When was this law passed?

OBRA '93 was on passed August 1993, but it became effective on 10, October 1, 1993 (states were given additional time to pass legislation to implement the new law). States are not required to make their legislation retroactive, but states that want to enact statutes retroactive to October 1, 1993, may do so.

Does that mean that a state cannot recover for Medicaid services provided before October 1, 1993?

No, if a state had an estate recovery program approved under the state plan and in operation before October 1, 1993, the state may recover for services provided before that date under the state's rules effective at that time. New or expanded recovery rules may be retroactive only to October 1, 1993.

Are there any exceptions to the requirement that states recover money spent on behalf of Medicaid beneficiaries who are over 55 and live in nursing homes?

There is an exception for individuals who were residents of California, New York, Iowa, Indiana, and Connecticut and received Medicaid by having additional resources disregarded in connection with receiving benefits under a long-term care insurance policy. These states are allowed, but not required to seek recovery from the individual's estate for Medicaid costs for nursing facility and other Medicaid long-term care expenses. These state programs are known as Robert Wood Johnson Partnerships.

My state legislature is considering some bills on estate recovery. What are some things to watch for?

While federal law requires states to have an estate recovery program, it is up to each state to decide how the program will work and who will be affected. Here are some questions to ask:

  • What definition of estate will be used? Will the state expand its probate law's definition of estate? Will it include life estates, joint bank accounts, joint tenancies, or insurance policies? Will an expanded definition of estate make it difficult to transfer title because of "hidden" claims against property?
  • Will the state use liens?
  • Will the state recover for Medicaid paid for home care provided as an optional service?
  • For which services beyond those required by OBRA '93 will the state seek recovery?
  • What notice, hearing, and appeals procedures will be used?
  • What will be the standard for granting a hardship waiver?
  • Will the state waive recovery when it is not cost effective? Is so, what method will be used?
  • Will the Medicaid agency be granted special standing as a creditor?
  • How will beneficiaries be notified of the estate recovery program?
  • How will assets be identified and tracked?
  • What collection procedures will be used?
  • Will the state use its own staff to conduct estate recovery, or will it hire private contractors?
  • What process will be used to track the deaths of beneficiaries and their spouses?
  • What process will the state use to determine whether an individual is permanently institutionalized for purposes of estate recovery?
  • Will the state monitor who is most affected by estate recovery?

Written by Faith Mullen, AARP Public Policy Institute
September 1996
©1996 AARP
May be copied only for noncommercial purposes and with attribution; permission required for all other purposes.
Public Policy Institute, AARP, 601 E Street, NW, Washington, DC 20049

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