If you have an elderly parent who requires long-term nursing home or assisted living care, but who lacks the money to pay for it, you may consider helping your parent apply for Medicaid, the joint federal-state program that offers health coverage to eligible low-income seniors. But frequently an individual will only qualify for Medicaid if he or she first does a Medicaid “spend down.” While a Medicaid spend down can be a savvy strategy, the rules, restrictions and requirements can be complex and confusing.
“A Medicaid spend down is going to mean something different in every state, because the income guidelines are different,” says Anastasia Iliou, the senior content manager for Medicare Plan Finder, an insurance agency with locations in in Nashville, Tennessee and Tucson, Arizona.
Read on to brush up on the basics, and determine whether a Medicaid spend down is the right choice for your loved one.
What Is a Medicaid Spend Down?
A Medicaid spend down is a financial strategy used when an individual’s income is too high to qualify for Medicaid. To be accepted into the program, some of the individual’s income must be spent down to ensure his or her income is low enough to qualify for Medicaid. You can apply for Medicaid through your state Medicaid agency, or you can fill out an application through the Health Insurance Marketplace. For more information, visit Medicaid.gov.
However, keep in mind, each state regulates Medicaid spend-down eligibility differently and the process can be overwhelming and stressful, since Medicaid won’t pay for medical or nursing care until you’ve submitted the medical bills that will make up the spend down amount.
If you suspect your parent or loved one will need to meet spend-down requirements in the future, you’ll first need to understand the eligibility rules and limitations.
What Are the Rules, Exemptions and Limits of a Medicaid Spend Down?
To qualify for Medicaid, often individuals must first complete an income or asset spend down. That means some of the individual’s income or assets must be spent — generally on health care and medical-related costs. But you could also spend money on accrued debt, such as a mortgage, a vehicle or credit card balances.
Some examples of health care costs that you might put toward a Medicaid spend down include:
— Medical bills, past and current.
— Transportation services to get medical care.
— Home improvements to help with medical care, like a chair-lift.
— Medical expenses, such as eyeglasses or a hearing aid.
Here are the key differences between an income spend down and an asset spend down, and tips for spending down strategically.
How an Income Spend Down Works
Let’s say your mother brings in $800 a month with a Social Security check, and the Medicaid income limit in her state is $600. Then, you’ll have to complete a $200 spend down before Medicaid will pay those nursing costs. That can be tricky, or easy to do, depending on your mother’s medical expenses. If your mother owes the hospital thousands of dollars you thought would never be paid off, she could pay $200 every month to the hospital until that debt disappears, and that would be part of the spend down. Or, if she has monthly medications and routine doctor visits, her medical spend down could go toward her regular medical care.
How an Asset Spend Down Works
Every state has a different asset limit required for an individual to obtain Medicaid benefits. The individual would spend down all eligible assets needed to be eligible to receive benefits, according to the threshold designated by the state. Fortunately, that doesn’t mean anybody has to give up a house or a car. Those are generally considered non-countable assets, though sometimes if an individual lives in a very expensive home (say, one that’s worth more than $1 million), there may be home equity that will be required to be used in a Medicaid spend down. Personal belongings also generally do not count toward a Medicaid spend down. These are also non-countable assets.
So what would be considered a countable asset? If an individual has money in a savings account, that would likely fall into the countable asset category. If he or she owns a second home, perhaps one that they’ve been renting out, that would be a countable asset and will need to be sold, with the money going toward health care expenses. Often, IRAs and 401(k)s are considered countable assets, unless they are currently paying out. Investments, like mutual funds and stocks and bonds, are also considered countable assets.
How to Calculate the Spend Down Amount
Every person’s financial situation is different and with its own quirks, which is why the best way to calculate it is to work with a professional Medicaid planner. Some are free, and some charge a fee — typically $300 to $600 an hour — according to the American Council on Aging. Insurance agents do this sort of planning for free, as well as counselors at your local State Health Insurance Assistance Program. Consult the American Council on Aging’s website to find a reputable professional Medicaid planner.
Other Factors to Consider
Another argument for working with a professional is that how a spend down can work hinges on a variety of factors. “The spend down depends on several things,” says Katya Sverdlov, an estate planning attorney in New York City. She says it depends on whether the Medicaid recipient is living at home or in a nursing home, whether the recipient is also receiving Social Security income or only Medicaid and whether he or she is married or single. “If the Medicaid recipient is not receiving Social Security income and not in a nursing home, then the money can be transferred — either to an irrevocable trust or to a family member,” she explains.
If the Medicaid recipient is receiving Social Security income, then this option is not available because having Social Security income will impose a three year penalty period for any uncompensated transfers, she says. “If the (medicaid recipient) is married, and the spouse is not receiving Medicaid, then some of the money can be transferred to the spouse. In New York, there is no penalty for transferring money to spouses, in unlimited amounts,” Sverdlov says.
“The best tip I can give anyone who is trying to qualify for Medicaid is to come up with a good system for yourself to track every dollar you spend on health care,” Iliou says. Whether it’s buying cold medicine at your local pharmacy or staying at a hospital for a week, “track every last penny.” she says. “Save receipts and confirmations and ask for copies at your doctor’s office if they do not usually provide them. It all adds up and one missing receipt from a doctor’s appointment can mean the difference between you qualifying for Medicaid and not,” she adds.
And what happens if an individual doesn’t qualify? He or she may get a penalty, rather than financial assistance, since the goal of a Medicaid spend down is to reduce income. Instead, the individual would incur a time penalty that’s calculated in months, rather than in dollars. For instance, if the individual is penalized by five months, he or she could have to pay out of pocket for their own health care, such as a nursing home, for that time period. In short: You will have to prove your need for financial assistance to be eligible, so make sure to keep all copies of receipts and paperwork from your doctor.
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Update 05/17/19: This story was previously published on April 14, 2015, and has been updated with new information.