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Best Practice

Vol. 7, Nos. 3 & 4

On Delivery of Legal Assistance to Older Persons

September 1996

Alert! Criminalization of Asset Transfers to Qualify for Medicaid

Elder law attorneys, state and area agencies on aging, older persons, and the many others who assist older persons with planning and meeting their needs for long term care should be made aware of the following recent change affecting Medicaid asset transfer law. The change is the result of a provision that was buried in the recently passed Kassebaum-Kennedy health reform bill (H.R. 3103). This Health Insurance Portability and Accountability Act of 1996 ("Health Reform Act") was signed by President Clinton on August 21, 1996 (Pub. L. No. 104-191). The Medicaid transfer provision, which was scarcely noticed until after the bill had been passed, has very serious implications for older persons seeking Medicaid assistance for long-term care. The provision is poorly drafted so that its precise meaning is unclear, but essentially it will make it a federal crime to transfer certain assets to qualify for Medicaid for nursing home or other long-term care.

A. Background

Although Medicare is the principal health care insurance for almost all individuals 65 years or older, it provides very limited coverage for long-term care, such as the cost of a nursing facility; and only about five percent of nursing home residents have long-term care insurance.1 As a result, many older individuals in need of long-term care deplete their savings paying for it privately, then turn to Medicaid for assistance. Medicaid is a needs-based program. To receive Medicaid benefits, an applicant's income and assets may not exceed certain state-specific limits. The purpose of Medicaid is, of course, to provide medical assistance to needy individuals. In an effort to qualify for Medicaid benefits, some individuals may attempt to divest themselves of their assets, by transferring them to family members or friends or setting up trusts.

B. Existing Law & Penalties

Congress has previously addressed the issue of improper transfers and established civil, not criminal, penalties. The purpose of the law is to discourage individuals from transferring their assets to family, friends, or others in order to qualify for Medicaid nursing facility or other long-term care benefits, while preserving their assets. This is a complex area of law which involves questions of intent, exempts certain types of asset transfers from penalty, etc.; and readers should not look to this article for an explanation of existing law. The brief information provided here is merely to place the recent changes in context.

Generally, under Medicaid law, there is a set period of time (the "look-back" period) during which the uncompensated transfer of assets by a Medicaid applicant or his/her spouse results in a period of ineligibility for Medicaid payment of nursing home care or care under a home and community based waiver, at state option, or other long-term care.2 For most transfers, the "look back" period is the thirty-six months prior to application; in the case of certain trusts, it is sixty months prior to application.3 In other words, such things as making gifts or selling property without receiving fair market value during the three years before applying for Medicaid, makes the applicant ineligible for Medicaid benefits for a certain amount of time. The period of ineligibility is equal to the value of all uncompensated asset transfers during the "look-back" period, divided by the monthly cost of nursing facility services in the given state.4 There is no set limit on the resulting period of ineligibility.5 An individual may attempt to prevent the penalty by demonstrating that the assets were transferred for a purpose other than to qualify for Medicaid.

C. Unexpected Move

On January 1, 1997, a major change will take effect. As a result of the Medicaid from Civil to asset transfer provision in the "Health Reform Act" mentioned above, "knowingly Criminal Penalties and willfully" transferring assets to qualify for Medicaid nursing home or long-term care benefits will not only make an applicant ineligible for benefits for a period of time, it will make him or her a criminal and is punishable by fine and/or prison.

The primary focus and purpose of the "Health Reform Act" was not to address Medicaid issues; it was to address issues of coverage and portability of health insurance, e.g. to limit insurance companies' ability to restrict coverage of children and adults with health problems and to require insurers to offer individual coverage to people who lose group coverage. These are the issues that were discussed and debated, that received media coverage, and on which hearings were held. Thus, in spite of its serious consequences, the Medicaid asset transfer provision received almost no public scrutiny and there is no meaningful legislative history describing the problem it was meant to address or why existing law and penalties were not considered adequate to address the problem.

The asset transfer law that we must now grapple with is extremely problematic in a number of ways, with a major problem being that it is very poorly drafted. It is impossible to know, for example, whether the crime is a misdemeanor or felony, exactly what the criminal activity is, or who the criminal is. The new provision was added to existing Medicare/Medicaid fraud law and reads as follows. (New language is in bold.) ("Title XIX" is the Medicaid Title in the Social Security Act.)

(a) Making or causing to be made false statements or representations
Whoever --
(1) - (5)
(6) knowingly and willfully disposes of assets (including by any transfer in trust) in order for an individual to become eligible for medical assistance under a State plan under title XIX, if disposing of the assets results in the imposition of a period of ineligibility for such assistance under section 1917(c), (To be codified as 42 U.S.C. 1320a-7b(a)(6))

shall (i) in the case of such a statement, representation, concealment, failure, or conversion by any person in connection with the furnishing (by that person) of items or services for which payment is or may be made under the program, be guilty of a felony and upon conviction thereof fined not more than $25,000 or imprisoned for not more than five years or both, or

(ii) in the case of such a statement, representation, concealment, failure, or conversion by any other person, be guilty of a misdemeanor and upon conviction thereof fined not more than $10,000 or imprisoned for not more than one year, or both.

In addition, in any case where an individual who is otherwise eligible for assistance . . . is convicted of an offense under the preceding provisions of this subsection, the State may at its option . . . limit, restrict, or suspend the eligibility of that individual for such period (not exceeding one year) as it deems appropriate; but the imposition of a limitation, restriction, or suspension with respect to the eligibility of any individual under this sentence shall not affect the eligibility of any other person for assistance under the plan, regardless of the relationship between that individual and such other person.

D. Questions/Problems

Clearly this language raises many questions and the new provision presents serious Analysis by problems and dilemmas for those in need of Medicaid long-term care benefits. Patricia Nemore, Patricia Nemore of the National Senior Citizens Law Center (NSCLC) has prepared J.D., NSCLC an excellent analysis of these questions and problems and, rather than re-inventing the wheel, we are reprinting Ms. Nemore's Analysis in its entirety below. Those who wish further information can contact Ms. Nemore at NSCLC directly.6


Is the crime a misdemeanor or a felony?

A casual reading of this entire provision (if such a reading were actually possible) suggests that the crime intended by the provision is a misdemeanor, punishable by up to $10,000 in fines or up to one year in prison, or both. That is, the felony portion of the law appears to apply to providers of services to Medicare or Medicaid recipients and not to beneficiaries or their agents or family members. However, the conference report on the bill raises ambiguity as to the intent of the provision's sponsors. In describing current law, the conference report refers to program-related felonies and states that the new provision would add "a new crime to the list of prohibited activities. . ." Conf. Rept. 104-736; 104 Cong. Rec. H9536 (July 31, 1996).

Is there any penalty at all for the prohibited act?

It is difficult to read the provision so that it makes any sense at all within the context of existing law, since the penalties are imposed for certain "statements," "representations," "concealments," "failures" and "conversions" but not explicitly for "disposing of assets." Assuming this ambiguity would pass Constitutional scrutiny, which it may not, questions remain as to what exactly the criminal act is and who the possible criminals are.

Transfers that cannot be criminal under this provision

Since only transfers that result "in the imposition of a period of ineligibility for such assistance under section 1917(c)" are made criminal, clearly those protected from penalty are not. Thus, the following transfers are not implicated:

a. transfers of the homestead to a spouse, dependent or disabled child, certain siblings and certain caretaker children;

b. transfers of any other asset to a spouse or dependent or disabled child or to another for their sole benefit;

c. transfers to a trust for the benefit of a disabled individual under 65;

d. transfers intended to be disposed of for fair market value, transfers exclusively for a purpose other than to qualify for Medicaid and transfers where the asset was returned to the individual; and

e. transfers where applying a penalty would work undue hardship.

It also appears likely that transfers made outside the look-back period cannot be criminal, since they do not result in any period of ineligibility. Thus, transfers (other than those to or from a trust) more than 36 months before application are not implicated. Transfers to an irrevocable trust, to the extent the assets are not for the benefit of the applicant, and transfers from a revocable trust to someone other than the applicant or protected family members made more than 60 months before application are also not affected.

Individuals applying for Medicaid services other than nursing facility services or care provided under a home and community-based care waiver are not subject to the criminal provisions, unless a state has chosen the option to broaden the scope of existing transfers of assets penalties to other long-term care services.

What activity is criminal?

Since the knowing and willful disposition of assets only becomes criminal if it results in the imposition of a period of ineligibility, it appears that what triggers the possibility of application of the provision is applying for Medicaid within the lookback period. It seems relatively clear that, if one applied within the time that a period of ineligibility would be running, one could be criminally liable if the "knowing and willful disposition" "in order to become eligible" requirements could be proved. Example: I give away $10,000 in January 1997 and apply for Medicaid in February 1997. Assuming a $5,000/month cost, my penalty would run through February, so I am still in the penalty period when I apply. If the government could demonstrate the criminal intent, I would be liable.

Less clear is the effect of the law on transfers made for which any possible period of ineligibility would have run out by the time of application. Examples Same as above, but I apply for Medicaid for nursing facility services in July 1977. Although I have to report the transfer made in January, because it is within the lookback period, no period of ineligibility is imposed because any penalty that might have applied ran out in February. This latter example is the more likely scenario for many individuals (it could apply to many people who transfer assets relying on the so-called rule of halves); arguably, the criminal penalties could not apply in this situation. Advocates who have considered application of the criminal provision differ in their view of its reach to situations where the penalty period has expired.

Who is the criminal?

"Whoever. . . knowingly and willfully disposes of assets. . . in order for an individual to become eligible for medical assistance," if other factors are present, has committed a crime. Thus, the target of the law is the person who disposes of the assets. Since usually only the owner of the asset or his/her agent can dispose of it, the criminal, apparently, is the individual applying for Medicaid, an attorney-in-fact for that person, a conservator for that person or possibly a joint tenant of joint-held property. Some have suggested that an attorney advising a client to transfer assets might be liable under conspiracy statutes. If the attorney assists in the transfer, by preparing papers in addition to providing the advice and counsel, is she or he also liable for aiding and abetting in the perpetration of a crime? The provision demands further analysis by those familiar with criminal law.

Additional Penalties

The fraud provision to which this amendment is added allows states to impose yet further penalties, in addition to the fines and imprisonment authorized in the first part of the law. For anyone convicted of an offense under this law, a state may also "limit, restrict or suspend" the individual's eligibility for up to one year. This period of ineligibility appears to be different from, and possibly in addition to, any period of ineligibility required under 42 U.S.C. 1396(c). Thus, an individual applying for benefits who made a transfer within the lookback period could incur a period of ineligibility for transferring assets, be found criminally liable and be subject to fine and/or imprisonment, then be found further ineligible for benefits for up to one year, based on the criminal conviction.

Other Considerations

The ambiguity of the reach of the criminal provision results in a de facto increase in the civil penalty for transferring assets. Under current law, the delay in eligibility for those who transfer assets without receiving fair value is related to the amount of the gift on the premise that if the money had not been given away, it could be used to pay for nursing home care. The only way to assure protection from application of the criminal provision is to avoid applying for benefits during the look back period. Thus, the ineligibility delay becomes an absolute period of three (or in the case of trusts, five) years.

People who are lawfully eligible for Medicaid will be discouraged from applying. Those individuals with the best legal advice will be informed that the criminal intent standard is a high one for prosecutors to meet. For example, a grandmother who applied for Medicaid two years after giving her granddaughter $10,000 for college is unlikely to be found to have the requisite knowing and willful intent. However, many people applying for Medicaid cannot afford legal advice and are not well informed about their rights. These individuals will not know particulars of the criminal provision, only that they could go to jail if they gave away money then needed public benefits.

Nursing homes will use the criminal law to encourage people to pay privately, even when they are eligible for Medicaid. Nursing homes prefer residents paying at the higher, unregulated private rate. They often ask people to agree to pay privately for a specified period of time, regardless of whether they would be eligible for Medicaid during that time. Facilities may inform resident that if they apply for Medicaid and have made any gifts within the last three years, they could go to jail. Residents and their families will feel pressured to pay privately, even when they are eligible for Medicaid.

The focus of the criminal penalty is frail, old women. By its terms, the criminal provision penalizes the person transferring the asset. In most cases, this will be the owner of the asset, i.e., the individual applying for Medicaid for nursing facility care. The typical nursing facility resident is an 85 year old woman without a spouse needing help with several activities of daily living.

Existing penalties work. While the press has focused attention in recent months on the issue of people giving away money to become eligible for Medicaid to pay for their nursing home care, the meager data that exists on this subject supports the view that existing penalties are effective. The single study that has tried to quantify the practice was undertaken by the General Accounting Office in Massachusetts in 1993. The GAO found that 13% of all applicants in a one month period had transferred some assets without fair value; of those transactions, nearly 70% of the total value transferred was related to applications that were denied or withdrawn. In other words, the individuals who had transferred assets were not granted Medicaid eligibility.

Congress addressed the issue of improper transfers in 1993, by increasing existing civil penalties. At that time, after holding hearings, Congress amended Medicaid law to require states to increase the look-back for transfers to three, and in some cases, five years. The 1993 law also required states to increase the penalty for such transfers to an indefinite period of ineligibility for Medicaid, depending on the amount given away without value. If Congress believes problems still exist, it should hold hearings to identify the problems and consider other civil, rather than criminal, penalties.

E. Conclusion

At this point, TCSG does not feel it can draw conclusions or provide answers as to how the aging network should deal with the criminalization of Medicaid asset transfers. There are many experts in law and aging who feel the new language is so poorly written and its meaning so unclear, that it cannot and will not be implemented. There are also rumors that there may be an effort, when Congress reconvenes after the election, to repeal the new provision entirely. We will try to stay current on any and all developments and will be happy to share that information with anyone who contacts us.

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1 Eleanor M. Crosby & Ira M. Leff, Ethical Considerations in Medicaid Estate Planning: An Analysis of the ABA Model Rules of Professional Conduct, 62 Fordham L. Rev. 1503 (1994).

2 Ira S. Wiesner, OBRA '93 and Medicaid: Asset Transfers, Trust Availability, and Estate Recovery Statutory Analysis in Context, 19 Nova L. Rev. 679, 695 (1995). Note that these asset transfer rules may be waived if the State determines that ineligibility for benefits would create an "undue hardship." Id. at 700; 42 U.S.C.A. 1396p(c)(2)(D) (West Supp. 1996). In addition, some transfers, such as to spouses, are exempt. 42 U.S.C. 1396p(c)(2) (West Supp. 1996).

3 Wiesner, supra note 2, at 695.

4 Id. at 697.

5 Id.

6 The National Senior Citizens Law Center may be contacted by writing or calling: 1815 H Street, N.W., Suite 700, Washington, DC 20006; Ph: (202) 887-5280; Fax: (202) 785-6792.

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The Center for Social Gerontology, Inc.
A National Support Center in Law and Aging
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