The Journal of The DuPage County Bar Association

Back Issues > Vol. 18 (2005-06)

Feds Bite U.S. Seniors: Innocent Seniors Take Medicaid Hit
By Ben A. Neiburger, Rick L. Law and James Haertel

This article discusses some of the changes that the Deficit Reduction Act of 2005 (the DRA) made to current Medicaid law, how the authors anticipate that DRA will be implemented in Illinois, and how the DRA’s changes affect certain Medicaid techniques.

Feds Bite U.S. Seniors: Innocent 
Seniors Take Medicaid Hit

Medicaid is our government’s 40-year-old program that provides medical benefits to the elderly, poor, and disabled. Medicaid is the program that pays for approximately 48% of skilled nursing home care in the United States. Since nursing home costs in northern Illinois now average $72,000 per year or more, many lower- and middle-class families must rely on this program to finance some of their long-term care needs. As a result, Medicaid has become the long-term care safety net for seniors who, before retirement, were hard-working middle-income citizens who worked their whole lives to have a small retirement nest egg.

In response to tightening federal budgets and a promise by Congress last year to slash $10 billion from the federal Medicaid budget, the Republican-controlled Congress made good on its promise when the President signed the Deficit Reduction Act of 2005 (the "DRA") into law on February 8, 2006. The DRA drastically increases the complexity and unfairness of Medicaid eligibility rules.

The Only Certainties Are Death, Taxes, and Change

This chart sets out DRA’s major changes to current Medicaid-related law:

View chart as pdf file

What Happens Now?

The effective date for most DRA provisions is the date of enactment—February 8, 2006—so the DRA provisions apply to transactions that occur on or after that date. DRA’s changes do not apply to transactions that occur before February 8, 2006. Illinois must adopt and implement all of the new DRA requirements no later than July 1, 2007. Of course, Illinois can certainly implement the changes prior to July 1, 2007.

Based on Illinois’ past practice, as evidenced by its implementation of prior major Medicaid changes, Medicaid applicants’ eligibility will continue to be determined under the old set of policy rules (that is, the pre-DRA rules) until the date the Illinois Department Healthcare and Family Services (HFS) provides a new set of policy rules to the local Illinois Department of Human Services (DHS) offices. DHS is the Illinois agency that determines whether someone is eligible for Medicaid. Policy changes are usually effective with applications filed on or after this date. For a Medicaid applicant to achieve eligibility under the current set of policy rules, DHS will need to process and approve that application prior to the effective date of the new set of policy rules.

Before HFS can implement the new policy, it must submit proposed rule amendments to the Joint Committee on Administrative Rules (JCAR), a service agency of the Illinois General Assembly. Amendments are valid and enforceable only after they have been adopted, which can take up to a year.

Upon submission to JCAR, proposed rule amendments are published in the Illinois Register, which may be accessed at The new policy will be under "Proposed Rules" at 89 Ill. Adm. Code 120. Along with other changes incorporated from the DRA, any proposed amendments will provide a good indication of how Illinois plans to treat transfers made during the time period between enactment date of the federal law (that is, February 8, 2006) and when Illinois subsequently complies and implements the law.

There will be time provided to voice any specific concerns prior to adoption of the proposed rule amendments. This means that various interest groups and politicians will have an opportunity to affect the eventual outcome of the implementation of this Federal law into Illinois policy and practice. Written comments are essential, as it is through these comments that JCAR is made aware of the effect of the changes. The Illinois Register lists the HFS contact person, mailing address, and deadline for written comments. HFS may modify the proposed amendments based on the comments received and political pressure generated by senior citizen advocacy groups.

Once the rule amendments are adopted, HFS notifies the DHS local offices of the revised policy and effective date. It is important to note that the implementation by DHS local offices will be very dependent upon modifications in the computer system software that the DHS local offices use to determine Medicaid eligibility. Unless and until changes to the computer system are finalized, the reality will be that the revised policy will not actually be applied or implemented. The result may be a dangerous system in which the new rules are not applied in a uniform manner across the state. In other words, one DHS local office may determine a Medicaid applicant’s eligibility under the new law—but a neighboring DHS local office may be processing the same facts under the old law, merely because the computer system has not yet been upgraded.

DRA’s Effect on Medicaid Planning

Recent Medicaid asset protection plans have depended in large part on a strategy commonly called "half-a-loaf gifting." The half-a-loaf gifting strategy depended on the now passé legal privilege that when a person made a transfer of assets for any reason, the hypothetical "penalty for ineligibility for Medicaid benefits" was initiated in the same month that the gift transfer was made. In the past, most persons who gifted assets never experienced the ill effect of the period of ineligibility for Medicaid benefits, because that penalty period usually expired without creating a problem. Imagine that a senior couple, Harry and Maud, made an "innocent transfer" of $50,000 of assets to others for any of the following legitimate reasons:

• College tuition for grandchildren; or

• A systematic estate-motivated gifting program to children/grandchildren; or

• Payment for medical expenses for children/grandchildren; or

• Vacation expenses related to children/grandchildren; or

• Charitable contribution to a church building program; or

• A grandparent caregiver who provides full support to grandchildren; or

• Payments from the seniors to other family members due to a family emergency; or

• Other legitimate family transfers to assist needy siblings and/or others.

In these examples, the authors assume that an "innocent transfer" is a gift-related transfer that was not motivated by the expectation that Harry and/or Maud were trying to impoverish themselves to qualify for Medicaid benefits. Although technically a penalty period is not to be imposed for "innocent transfers," the burden of proof that a transfer was "not to qualify for Medicaid" is on the Medicaid applicant. In many cases this proof will be difficult or impossible to obtain, due to the mental condition of the Medicaid applicant and/or the lack of receipts and other records. This change in the law may require that many families will be required to hire an attorney in situations that created no obstacles to a senior’s ability to be approved for Medicaid under the old law.

Under the old law, if a senior transferred $50,000 in any of the above situations, it was as if he had triggered a "hypothetical penalty period" of Medicaid ineligibility of approximately 10 months. In other words, if Harry and/or Maud had applied for Medicaid during the 10 months following the $50,000 gift transfer, the eligibility would have been postponed for 10 months on the assumption that they could have used their own assets to pay the average nursing home cost. The good news for Harry and Maud was that if they did not need Medicaid assistance during the 10 months following the transfer, the "hypothetical" penalty would have expired without causing a problem.

The situation will be different and harsher under the DRA changes. First, Harry and Maud will need to provide five years of financial information for the period immediately prior to the application for Medicaid assistance. Second, the caseworker at DHS will comb through the prior five years’ financial records and aggregate all transfers that appear to be ‘not for value’ or gift transfers. Once the caseworker has totaled the gift transfers, the caseworker will compute and impose the penalty period. The caseworker is to eliminate transfers in which fair value was received in exchange, and to disregard any transfers that were for less than fair market value but which were not done with the intention of qualifying for Medicaid. This is a subjective determination that may require the weighing of evidence; therefore many more Medicaid applications may be delayed by being required to go to Fair Hearing for determination.

Any penalty that is imposed will be more harsh than in the past, as the date of the beginning of the penalty period is not when the gift was given, but when the need for Medicaid is most urgent—that is, when a senior is receiving long term nursing home care and applies for Medicaid benefits and is "otherwise eligible for Medicaid, but for the imposition of any penalty period of ineligibility." Seniors may find that they are ineligible for Medicaid assistance even though they may have spent down substantial assets on private-pay long term care expenses.

Unfortunately for America’s Harrys and Mauds, the result imposed by DRA will penalize many innocent seniors who generously used their assets for any of the socially worthy reasons noted previously. They may now face the judgment of a DHS caseworker who imposes a multi-month period of ineligibility for long-forgotten and possibly worthy transfers that were done with no intention of qualifying for Medicaid. This will cause untold grief to many families who unselfishly contributed to the quality of life of their extended families and/or churches and charities.

For seniors caught in the trap of a penalty period, the "expanded hardship exception" may be the only route available to obtain Medicaid qualification. In the past, it has been almost impossible to qualify for Medicaid under the hardship exception, as it is triggered only if the Medicaid applicant is in danger of loss of health, life, or other life necessities. Federal law states that the nursing home cannot legally evict a non-paying resident unless there is another institution that will take them. The government may decide that a person who is currently residing in a nursing home and who then applies for Medicaid is not sufficiently ‘endangered’ to trigger qualification for the hardship exception. Some commentators worry that the DRA may become known as the "Nursing Home Bankruptcy Act" due to its shift of this burden of uncompensated care from the government to the nursing home industry.

The big question is this: What, if any, strategies are left to assist Medicaid applicant clients and their families after the implementation of DRA? Bluntly, every family should seek legal counsel prior to signing a Medicaid application. Prudent advance planning will yield the most benefit. Traditional estate planners will need to take into account the possibility that long-term disability is the biggest risk to a client’s goals of transferring assets to loved ones. Appropriate transfers to irrevocable trusts can be used to provide income for life and the asset protection of principal that the client desires.

Anyone providing caretaking services to a senior adult family member should seek counsel as to how that care arrangement should be structured for financial asset transfers and protection. Prudent counsel may advise a transfer of interests in residential real estate based on the limited exceptions that still exist under DRA. If a family member is providing care in a senior’s home, it is imperative to seek legal counsel in order to understand the vast potential consequences. Children of seniors who are classified as "disabled," as that term is defined by the Social Security Act, retain a privileged status for the receipt of assets from a senior who needs Medicaid assistance.

The little known "d(4)(c) Special Needs Trust" created under a 1993 law can be used by seniors to qualify themselves for Medicaid while transferring assets to provide themselves substantial supplemental care expenses. This is referred to as a "pay-back trust," and it allows a senior to self-fund a much higher quality of life and care than could be provided by Medicaid alone. A "d(4)(c) trust" can be used to pay for a variety of therapies, mobility devices, hair care, dental care, pedicures, massages, and a host of personal expenses.

It remains to be seen how Illinois will choose to implement the various provisions of DRA. Almost every state in the union has implemented past federal Medicaid laws by adding their own state-specific twists. The elder law bar is deeply invested in working to provide their clients with honest ways to protect their homes, loved ones, and independence. This is a time of clash between rising senior citizen needs and limited taxpayer resources. The most recent law is only one of numerous instances in which the government is cutting back on its past promises of benefits and privileges. The first baby boomer will become a senior citizen on January 1, 2011.

Ben A. Neiburger, JD, CPA is the principal of Neiburger Law Ltd. (www.ElderLaw, an Elmhurst, Illinois-based estate planning and elder law practice. He is a frequent lecturer and author on legal topics affecting families and the elderly. He most recently authored a handbook chapter entitled "Tax Planning for the Elderly," published in Advising Elderly Clients and Their Families (IICLE, 2006). Mr. Neiburger can be reached at 630-782-1766 or

Rick L. Law, JD lectures extensively regarding estate planning and public benefits. He has a passion for the issues that confront the elderly, the adult family caregiver, and those with long-term disabilities. He is the principal of a great team at Law Elder Law, based in Aurora, Illinois and serving the entire Chicago metro region. The firm’s website is Mr. Law can be reached at 630-585-5200 or

James Haertel is a Medicaid planning consultant serving elder law attorneys and recently retired from the Department of Healthcare and Family Services. He has over 18 years’ experience in Medicaid policy analysis and program development. Mr. Haertel can be reached at 217-632-4399 or

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