At a time when Medicaid is draining state coffers, Michigan is ignoring a mechanism that not only could save taxpayers’ dollars, but is required by federal law.
By far, the largest component of the coming year’s $11 billion Michigan Department of Community Health budget is Medicaid, a state and federal medical assistance program for the poor. The state’s share of this budget is just over $4 billion, and the federal government picks up most of the balance.
Federal law requires all states to recoup some of these costs by implementing what is known as "estate recovery" programs. This primarily affects elderly people whose nursing home bills are paid by Medicaid.
Medicaid is intended for those with low incomes, though it does not exclude individuals who also have some assets. When such a person dies, federal law requires states to pursue a claim against his or her estate for the amount of past assistance. Michigan is the only state that has not implemented estate recovery in some form, despite the fact that the requirement has been on the books for more than 10 years.
Given the magnitude and explosive growth of Medicaid, this is unfair to taxpayers. From 1991 to 2001, the state’s Medicaid spending grew 10 percent annually. Moreover, Michigan ranks seventh among all states on Medicaid spending for nursing homes.
The trends are unsustainable. A June 2005 report issued by the Michigan Medicaid Long Term Care Task Force projected that the state’s senior population will increase by 50 percent in the next 15 years, and many of these will seek Medicaid assistance. While Michigan can dodge the federal estate recovery law, it can’t avoid the laws of economics.
Lansing recognizes the problem, but has not acted. Legislative packages have been introduced in both the House and Senate that would place estate recovery programs into statute. Another bill has been introduced to prohibit the growing problem of people trying to game the system with schemes to shelter assets, thus sloughing off their nursing home expenses onto taxpayers. But none of these bills have moved out of committee.
How much money is involved? According to a U.S. Department of Health and Human Services study, Medicaid nursing home spending nationwide exceeded $45.8 billion in 2004. Estate recovery collections brought in approximately $362 million, a comparatively small but not insignificant amount. Oregon had the second highest rate of collection at 5.8 percent, or $13 million of its $238 million Medicaid nursing home care bill. Given the $1.7 billion Michigan spent on Medicaid nursing home care, a 5 percent recovery rate would save taxpayers $85 million. Instead, the savings were $0.
The federal "Deficit Reduction Act of 2005" included several provisions to address asset hiding. One of these provisions imposes penalties on those who make gifts, or divestments, with the intention of lowering their assets and thereby qualifying for Medicaid.
States must now review an applicant’s divestments over the past five years, and recoup the cost of Medicaid assistance in direct proportion to the amount given away. Previously, the look-back period was just three years.
A growing scheme is to purchase an annuity in order to convert assets into an income stream without disqualifying the individual for Medicaid. The new federal law mandates that the state be named as the first beneficiary of an applicant’s annuity, and repaid up to the amount of assistance given to the recipient. (If the applicant is married, the spouse may be listed as the first beneficiary, with the state listed as the second or contingent beneficiary.)
Finally, the new law caps the value at which a Medicaid beneficiary’s home can be considered an exempt asset (assets beneficiaries are allowed to keep and still qualify for Medicaid). The cap on an applicant’s home equity is now $500,000, although states can increase that to $750,000.
The new federal Medicaid provisions are expected to save U.S. taxpayers $26.1 billion over the next 10 years. Given the program's skyrocketing costs, a growing senior population and increased pressure on states to lower Medicaid spending, Lansing should stop dithering and adopt an estate recovery program.
TaraLynn T. Velting is an estate attorney with Garan Lucow Miller in Grand Rapids and an adjunct scholar with the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted, provided that the author and the Center are properly cited.