How a Medicaid Penalty Period Works
Understanding How A Medicaid Penalty Works
Before we get started with an in depth explanation of a Medicaid penalty, it is important to understand what a Medicaid penalty is. In short, a Medicaid penalty is a period of time that Medicaid will not cover the expenses of long term care, even if the applicant is clinically, and financially eligible. The causes of Medicaid penalties and steps to take in order to avoid them will be discussed below.
The 5 Year Lookback
In most states, when an individual applies for long term Medicaid, the Medicaid agency in that state is going to execute a 5 year look back from when the application was submitted on all of the applicants and spouses’ accounts in order to ensure that no assets were given away (gifted) or sold for below market value. There are a few exceptions in which Medicaid will allow a transfer of assets, such as from a Medicaid applicant to a healthy spouse, but in most cases a transfer of assets for below market value within the 5 year lookback period will result in a Medicaid penalty.
How a Penalty is Calculated
The Medicaid agency uses a penalty divisor in order to determine the length of the penalty. The penalty divisor is the average cost for private pay care in that state. Some states use a monthly divisor, some states will use a daily divisor, and some states use both. In our example we are going to use the penalty divisor in New Jersey which is $357.67 per day.
So for example, Mike Smith submitted a Medicaid application on Jan/13/202. Mike had under $2,000 on Jan/1 so he was financially eligible for January pickup. Medicaid asked Mike to provide them with 5 years of statements on all of his accounts. These include bank accounts, investment accounts, 401k’s IRA’s, and annuities. Medicaid then did a thorough review on these statements. During the review, Medicaid saw that on Apr/23/2019, Mike wrote a check for $22,000. After Mike provided a copy of the check, it was determined that the check was written to a university in order to help pay for a grandson’s college tuition. This resulted in a penalty period of 61.5 days, because the gifted amount of $22,000 divided by the penalty divisor of $357.67 = 61.5 days. Mike received an approval letter from Medicaid stating that he has been approved for Jan/1 pickup but because of the penalty Medicaid would only start to pay for his care after the 61 day penalty period was completed. During this period, unfortunately it is the patient’s responsibility to cover the cost of care. Very often the facility will work out a payment plan to help the applicant through this time. They may ask that the applicant turn over their income to the facility in order to cover some of the balance.
Avoiding Medicaid Penalties
It goes without saying that the best way to avoid a penalty period is to make sure not to make any disqualifying transfers during the 5 year lookback. This can be quite difficult, because nobody can foresee when they may need long term care, thus, it’s difficult to know when the 5 year lookback will start. That being said, it is of utmost importance that people be proactive about Medicaid planning well before long term care seems to be on the immediate horizon. Talk to an Elder Attorney or a Medicaid specialist, to discuss Medicaid planning strategies and to ensure that you won’t be engaging in any transactions that would result in a penalty period.
Another important point is that it’s imperative that one keeps meticulous records of large transactions. Even if the transaction is allowed by Medicaid, such as paying off debt, or home improvements, if what the money was used for can’t be proven, Medicaid will consider it a disqualifying transaction which will result in a penalty period.
If one is in a situation where they made disqualifying transactions within the 5 year lookback, it may be in their best interest to wait until the 5 years are up before submitting an application (this would depend on the expected penalty period, and the amount of time left to complete 5 years). Once an application is submitted, Medicaid will execute their lookback from the date of the first application for all future applications well. This is something to keep in mind if you are considering waiting out the 5 years.
If the transferred funds can be returned to the Medicaid applicant, the gifting penalty can be removed. However, some states will only allow this if the entire amount is recovered, while other states will accept even a partial return of the assets.