The Deficit Reduction Act of 2005

Asset preservation planning is performed to avoid impoverishment caused by the escalating cost of nursing home and long term care services and to provide a means to seniors and persons with disabilities to provide a legacy to their families.

A new federal law designed to shift more of the burden of nursing home and other long-term care costs onto seniors and people with disabilities has been enacted. President Bush signed the Deficit Reduction Act of 2005 (DRA) on February 8, 2006 and states throughout the country are in the process of implementing the DRA at the state level. Florida implemented the provision of the DRA on November 1, 2007.

The DRA’s cuts are wide-ranging and affect both old and young. It cuts $39 billion in Federal funding for the poor, the elderly and disabled, students and children.

Seniors will have to cope with provisions that attempt to shift more of the financial burden of nursing home care onto families and nursing facilities. Few seniors have insurance that covers long term care and most nursing home residents rely on Medicaid to cover part of the cost of their care. The new law will make it more difficult for these residents to obtain this financial aid.

The most troublesome provision of the new nursing home rules is the treatment of gifts. Under the DRA, a senior who makes a relatively small gift to a family member may be unable to pay if nursing home care is needed three, four or even five years later.

Under prior law, an individual making a gift could be ineligible for Medicaid nursing home care for up to three years from the date of making the gift. The DRA changes the start of the penalty period for transferred assets from the date of the transfer to the date of filing of a Medicaid application. This means that the penalty period will not start to run until the individual is receiving institutional level of care, which includes residing in a nursing home among other levels of care, and is out of other funds to pay for care. The law also extends the look-back period to five years.

The grandparent who helped pay for a grandchild’s education, the parent who helps a child with medical bills, and even the family farmer who passes on the farm will all be caught by this law if they get sick within five years of making the gift.

Because the Medicaid ineligibility period will no longer begin when the nursing home resident is out of funds, there will be a period of time during which neither the nursing home resident nor Medicaid can pay for needed care. The Congressional Budget Office estimates that this change will affect about 15% of individuals who are admitted to nursing homes each year.

Nursing homes will apparently be required to provide uncompensated care to many of these residents. For this reason, the nursing home industry strongly opposed the change in the penalty start date. The American Health Care Association, a group representing nearly 11,000 long-term care providers, said the change “leaves the nursing facility (not the state) to collect from individuals who have no funds to pay privately and are not Medicaid eligible during their penalty phase.” As a result, some are referring to the start date change as the “The Nursing Home Bankruptcy Act of 2005.”

The Deficit Reduction Act contains many other changes that impact the families of nursing home residents. Some are reasonable approaches to addressing rising long-term care costs under the Medicaid program while others are complicated and ambiguous rule changes that are likely to engender confusion and litigation. All are intended to ensure that persons who are unfortunate enough to encounter a long-term illness spend more of their income and assets to pay for the cost of their care.