If you paid off your house, and it is worth more than $750,000, you can probably forget about ever getting Medi-Cal to pay for your nursing home bills.
In an effort to try to save money for taxpayers, Congress has struck a blow against the ability of people to leave their most valuable asset — the home — to their heirs. It’s a part of deficit reduction legislation that few people have noticed. But it could have a big impact in states like California that have high real estate prices.
Medicaid is the federal-state program that pays health bills for the poor. It’s called Medi-Cal in California. Regular Medicare doesn’t pay for custodial care in a nursing home or for the day-to-day bills of people who don’t have an acute illness but still can’t live on their own.
If your mother falls down and breaks her hip, undergoes a hip replacement surgery and goes into rehab in a nursing facility, Medicare pays the bills. But if she forgets where she lives, leaves the stove on and wanders because she has dementia, Medicare won’t pay the tab if she goes into a nursing home.
What typically happens is that people use their own money until they “spend down,” liquidating financial assets, to pay the nursing home bills, using everything down to about $2,000. Then they are poor enough to qualify for Medi-Cal, and the state takes over payment of the nursing home charges. Most nursing home residents start out using their own money, become impoverished and become eligible for Medi-Cal.
Previously, Medicaid eligibility took into account the value of stocks, bonds and checking accounts — assets that can be turned into cash quickly. But the home was off limits and not included in the calculation. All that has changed with a little-noticed provision of the 2005 Deficit Reduction Act, prompted by concern among some members of Congress about the prospect of baby boomers flooding onto the Medicaid rolls and the corresponding increase in costs.
There are about a million people nationwide in nursing homes now and 35 million Americans over age 65. The over-65 population is projected to increase to 78 million by 2030, a demographic shift that could bring with it a veritable flood of people moving into nursing homes.
The new law says home equity must be counted as a financial asset, for amounts in excess of $500,000. States can choose the amount, up to a maximum of $750,000. And California officials have indicated they will use the $750,000 figure when they put the law into effect in January 2007.
For the first time, the value of the home above $750,000 will be counted as a financial asset by Medi-Cal regulators, and current Medi-Cal beneficiaries with home equity beyond $750,000 will no longer be eligible for the program. Any first-time applicants for Medi-Cal also will have to meet the home-equity rules.
For middle- and lower-middle income people, whose only significant financial asset is a home, the new rules may prevent them from leaving a legacy for their children through the sale of the home.
The typical nursing home charges about $60,000 a year. The average patient is a very frail widow who enters at the age of 84.
Take this typical nursing home resident who enters a nursing home, uses her cash and financial assets to pay the monthly bills, and is now down to $2,000. But under the new law, she no longer qualifies for Medi-Cal because she owns a home that has increased in value from the $20,000 she and her late husband paid in 1952 to $850,000 today. She has to reduce the equity in her home by $100,000 and spend that money to pay the nursing home bills instead of having them paid by Medi-Cal. Presumably, she could borrow against the house to get $100,000, use that up by paying nursing home bills and then qualify again for Medi-Cal.
“It isn’t clear yet how this will work,” said Bonnie Burns, of the California Health Advocates, a not-for-profit organization based in Sacramento that counsels people on Medicare and Medi-Cal. Burns worries that “some insurance agents and estate planners have quickly realized the potential of using a home-equity conversion or reverse mortgages” for people who may not understand the complexities of these financial instruments. “There could be a perfect storm of sales abuses,” she said. A home equity line allows someone to borrow against the value of a home. Under a reverse mortgage, the homeowner gets a payment each month from the lender, instead of making a payment as in a regular mortgage. It is another way of tapping the equity.
“Imagine somebody suffering severe dementia in a nursing home who has to negotiate a loan,” said Michael McGuire, an elder law attorney in Lakewood.
But other sources say it is uncertain whether lenders would grant a reverse mortgage if the borrower is in a nursing home rather than in the house.
Until the state issues its regulation next year, the situation will remain murky. But for lots of people, it could jeopardize their ability to leave their home to their children if they have to pay nursing home bills. There are several potential alternatives.
Some might opt to downsize by selling the home — giving the excess equity value to their children — and move into a house or condo with a lesser value. Others will transfer the house to their adult children. But that assumes there is a good relationship between the children and the parent and that the children won’t be tempted to place the parent in a nursing home or other facility so they can put the house up for sale and walk away with $750,000.
The only thing certain is that many California residents with little cash but lots of home equity will have some hard decisions to make if they are faced with entering a nursing home someday.