If you have an elderly parent destined for a nursing home, but who lacks the money to pay for it, you may do what many people do – help your parent apply for Medicaid, a joint federal-state program that covers medical bills for low-income seniors. But frequently an individual will only qualify for Medicaid if he or she first does a Medicaid "spend down."
That's a financial strategy used when the individual's income is a little too high to qualify for Medicaid. To be accepted into the program, some of your parent’s income must be spent down to ensure his or her income is low enough to qualify for Medicaid. For instance, let's say your mother brings in $600 a month with a Social Security check, and the Medicaid income limit in her state is $750. Then you'll have to do a $150 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 $150 every month to the hospital until that debt disappears, and that would be part of the spend down. Or if she has monthly medications, her medical spend down could go toward paying those monthly medications as well as chipping away at that hospital bill or perhaps routine monthly doctor visits.
But spend downs, which each state regulates differently, 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. So if you suspect a spend down is in your parent’s future, and you're panicking, here are two do’s and one big don’t.
Do: Think ahead about how your parent might pay for a nursing home. If your mother suddenly needs a nursing home, you're going to be managing strong emotions while looking for a good place to take care of her. So, if you can, think about how your parent might pay for a nursing home before he or she needs one, especially if mom or dad has significant assets, such as an expensive car or a paid-off house.
Why? Because some states have made it known that after your parent passes on, his or her estate (namely, the house) may end up being sold, with the money going to the nursing home, to reimburse the state for your parent's outstanding health care costs. (If your other parent or stepparent is still living in the house, then, no, it wouldn't be sold.)
John Bowblis, of Oxford, Ohio, began preparing for a possible Medicaid spend down for his mother when she was 59 and in perfectly good health – and not even eligible for Medicaid for another six years. His father had just passed away.
If you didn’t start preparing this early, don't sweat. Bowblis is an economics professor at Ohio’s Miami University and is a research fellow at the university's Scripps Gerontology Center, which specializes in studying aging. So Bowblis, 34, thinks about retirement and aging day and night.
As he saw it, someday his mother might need to do a Medicaid spend down, and he wanted to be as prepared as possible.
"My mother is not rich, but she has assets," he says. "She owns a home that is paid off, she has a pension – she worked in a school district her whole life – and she has a house across the street that is a rental property."
So Bowblis began talking to his mom, suggesting that they set up an irrevocable trust. It took three years, but she finally agreed. She would put her money and property into the trust, which would mean she wouldn't actually have that money or own her property any longer. The trust would. Meanwhile, she still lives in her house – she just doesn't own it.
"She can still use the assets in some way, but she has no control over them any longer," Bowblis says.
The reason they did this is because of the Deficit Reduction Act of 2005. Back then, Congress determined there should be a look-back period of five years to examine an individual's assets to determine Medicaid eligibility. (Before the act, the look-back period was three years.) The act was designed to prevent fraud. Medicaid is, after all, designed to help people who genuinely need assistance paying for their health care. It isn't supposed to be a way for millionaires to transfer all of their assets to their kids and then get free health care, although anecdotal evidence suggests that does happen.
The downside of doing what Bowblis' mother did is that you no longer own your assets. In theory, Bowblis could take his mother's money and put her on the streets right now, if he had any desire to win an award for worst son ever. You have to trust whomever runs your trust.
Another planning tip: Encourage your parents to save bank statements. You will likely need five years' worth of them to show your Medicaid caseworker, to prove that your mother or father isn't a secret millionaire. Banks often charge a fee for old bank statements, and it won't be fun if you discover that you need to shell out $5 to $10 per bank statement for the last five years. If your parent has a bank and a credit union, it gets even more expensive.
Do: Find a lawyer. If your parent has some assets you're hoping to preserve or you simply need help with the Medicaid spend down, Bowblis recommends hiring an elder law attorney.
And for good reason, since Medicaid rules are a complicated maze of state and federal laws, says Marielle Hazen, owner of a Pennsylvania-based law firm that specializes in elder law and estate planning.
"Because the rules are so difficult to navigate," she says, "families are often given inaccurate information about how much needs to be spent in order to qualify for benefits, and as a result, they spend down more resources than needed."
Hazen suggests finding an attorney through the National Elder Law Foundation (www.nelf.org). She particularly encourages people to hire an attorney if one parent is entering a nursing home while the other parent remains at home. If there's still a healthy spouse – called a “community spouse” in Medicaid lingo – it's especially important for the Medicaid spend down to be done correctly.
"In most cases, the spouse of a nursing home resident can spend excess resources on things like a new car, home repairs or improvements, medical expenses, credit card bills, loan or mortgage payments and funeral or burial prepayment," Hazen says, but she stresses that timing is key. "Spending down resources too early could result in a reduced amount of protected resources for the community spouse."
On your own, you could make some other colossal blunders, so that you end up owing the nursing home money. Instead of a spend down, you may have to spend up.
For instance, according to Bowblis, if your dad or mom cuts you a deal and sells you the house for $10,000, when fair market value says it was really worth $100,000, you could be on the hook for $90,000 of the nursing home bill once Medicaid learns what transpired (and it will).
"It depends on the state you live. Not every state holds the child responsible," Bowblis says. But, he adds, 29 states have filial responsibility laws that could, in theory, land you in legal hot water.
Your parent also could be put in a bad spot if Medicaid thinks you or your parent tried to rig the system. He or she could be banned from the program for up to five years.
Don't: Panic. A primary reason to plan early is if your parent has some property or money he or she really wanted to pass on to the family – a house or car, for example. If nobody really wants that little house or clunker, and there isn't all that much money to pass on, you have less to be stressed about, preparation-wise.
If you did like the house, and you hate to see the state take it, that would be yet another reason to consult an elder law attorney and see what your options are. But never lose sight of the fact that your main concern is to get your parent's health care needs met. The other stuff is just other stuff.
Corrected on April 15, 2015: A previous version of this story misstated the Web address for www.nelf.org.