Medicaid – or medical welfare – payment for nursing home care is a hot topic of late. Nearly weekly this writer will hear from clients seeking to qualify themselves or a loved one for Medicaid. Because of the high cost of care and the unpredictability of the total outlay, they look for a way to quantify the need and limit exposure to this potentially devastating expense.

Sometimes they are truly destitute, or sometimes the cost of care would leave his or her spouse destitute. These are the kind of folks for which Medicaid was designed.

But sometimes they are moderately or even very well-off, and are seeking to shelter their estate and preserve an inheritance. While there is nothing wrong with these values and goals, our government has sought to build fences around the Medicaid program to eliminate the diversion of limited welfare funds to the intended recipients.

In order to ensure that welfare monies are spent on the poor, Congress has enacted laws to prevent artificial impoverishment – and thus artificial qualification for Medicaid – through strategic transfers of assets. The laws penalize transfers by disallowing Medicaid coverage for nursing home care after an applicant has made a transfer, usually a gift to a child or other loved one, in order to qualify.

In order to allow people to go about their affairs without constantly worrying about qualification for Medicaid, however, the laws have been limited in their applicability. Penalties only apply to transfers relatively close to the date of application for Medicaid. This allows folks to make usual gifts on special occasions, but seeks to limit gifts meant specifically to impoverish and qualify.

When these laws were enacted, transfers within 30 months of the application for Medicaid would cause disqualification, starting on the month of the transfer, for a number of months calculated as the amount of the transfer divided by $3,000, the private pay cost of care at that time. With amendments, the "lookback" period has been extended to 36 months, and the denominator of the fraction increased to $4,300. The lookback period for a transfer to trust is 60 months.

Enterprising financial professionals and attorneys have not failed to notice that one can still make transfers, as long as one makes the transfer beyond the lookback period. Thus, this writer’s clients often request help in transferring assets to children or trusts so that they can qualify for Medicaid after the lookback period has run.

A practical problem with the approach is that the hopeful future Medicaid recipient must usually end up really, truly poor for this tactic to work. Most of this writer’s clients retort that "I haven’t worked all my life to be poor. I’d rather take my chances."

Federal and state budgets are straining. According to a recent NPR report, more than 70 percent of Medicaid spending is for the elderly and disabled. More than 60 percent of long-term care in nursing homes is paid for by Medicaid.

No one knows what our elected representatives will do. What is certain, however, is that unless someone provides a radically new approach to the problem or its solution, the costs will continue to escalate faster than the growth in the economy.

Increasing taxes or printing money so the government can afford to pay for increased costs of care will depress economic growth in the long run – and, besides, "the government" doesn’t have any money. It’s all your money and mine that "the government" spends.

While the taxpayers are generally content to pay for long-term care for the poor, they are reluctant to pay for the same thing so that the middle-class can leave a larger inheritance to their children. Thus, Congress will have to pay for ever-more-expensive care with no new dollars in the budget.

To further restrict transfers, Congress is considering changing the rules. As reported in this column several months ago (Nov. 19, 2004), proposals to extend the lookback period to 72 months, begin the disqualification period on the date of application (instead of the date of transfer as under current law) and to decrease the denominator for the disqualification period fraction to the Medicaid pay rate (approximately half of the current fraction) have been bandied about.

Simultaneously, Congress and the states are encouraging people to take responsibility for the cost of their own care through offering tax breaks for long-term care insurance, both at the time of purchase and upon receipt of benefits. Thus, while directing us toward a private-industry solution, the government is increasing the penalties for voluntary impoverishment – the classic "carrot and stick." This does not seem to bode well for those hoping for an expansion of governmental programs.

Many financial professionals can provide information on and illustrations for long-term care insurance. The Feb. 16, 2005 column in this space provided guidelines for selecting a policy. Work with your financial professional to construct a policy that will meet your needs and fit within your budget. Take the worry out of long-term care.