Paying Back the State: Medicaid Estate Recovery Rules

Medicaid will often pay for nursing home care even for those who have assets they could use to pay for care. (For instance, owning a home won't usually prevent someone from qualifying for Medicaid.) But after a person's death, the state Medicaid program can try to collect the nursing home costs from the deceased person's estate.

In this way, you can think of Medicaid nursing home benefits as a kind of loan that has to be paid back after your death. This is called "estate recovery."

Below, we'll answer the following questions about Medicaid estate recovery:

• How exactly does Medicaid recover the costs of your nursing home care?
• What are the exceptions? When will Medicaid waive estate recovery?
• When can Medicaid take your house?
• Can you avoid Medicaid estate recovery?

What Is Medicaid Estate Recovery?

Since the 1993 Omnibus Budget Reconciliation Act, federal policy has required all states to try to recover the costs of certain types of Medicaid coverage provided during a person's lifetime. (42 U.S.C. § 1396p(b).) All money collected through estate recovery are used to pay for Medicaid services for other beneficiaries.

When you become eligible for Medicaid, your state must send you a written notice describing the state's right to recover Medicaid costs following your death.

But if you don't own any assets at the time of your death, your estate won't owe anything to your state for the Medicaid services it provided. Additionally, there are some other situations in which your state can't recover its costs.

When States Can't Recover Medicaid Costs

All states are required to recover Medicaid costs in certain situations. But in doing so, they must follow certain rules that prohibit recovery in some cases, including when you're survived by a spouse or dependent child. Your house also has special protections if certain people continue to live there.

When Your Assets Are Exempt From Recovery

Your assets are exempt from Medicaid estate recovery in the following situations:

• Surviving spouse. You have a surviving spouse, regardless of where your spouse lives.
• Minor, blind, or disabled child. You have a surviving child who is a minor (under 21), blind, or disabled, regardless of where that child lives.

States can try to recover Medicaid costs following the death of the recipient's surviving spouse, and about half of the states will.

When Can Medicaid Take Your House?

Medicaid can't take your house after your death in the following situations:

• Sibling caregiver. Your sibling lived in the home for at least one year before you entered a care facility (like a nursing home), continues to live there, and has an equity interest in the home (partial ownership of the home).
• Child caregiver. Your child lived in the home for at least two years before you entered a care facility, continues to live there, and can demonstrate that the care they provided delayed your placement in a nursing home.

Limit on Amount That Medicaid Can Be Recover From an Estate

Under federal law, states can't recover more than the total amount spent by Medicaid on an individual's behalf after age 55 or after an individual was permanently institutionalized.

Also, states can't recover more than the amount remaining in the Medicaid recipient's estate. What this means is that, if there's nothing in your estate (you die owning nothing), or if there's nothing left after paying any creditors that have priority over Medicaid (such as a mortgage lender), then the state won't be able to recover the cost of your care. So, your heirs won't be responsible for repaying the state using their own income or assets.

When Will a State Waive Recovery?

A state can "waive" estate recovery (decide not to try to collect repayment) if a home is of modest value or when the state determines it would be too expensive to try to collect repayment from the estate. Each state is allowed to establish its own rules on what is and what isn't cost-effective.

Undue Hardship Exception for Medicare Recovery

Your state might also decide to waive recovery if your heirs can prove that recovering Medicaid costs would cause an "undue hardship." In most states, an undue hardship is when your heirs have limited income, and the property in your estate is their only source of income, such as a family farm or business that generates a small amount of money. When the state notifies your heirs of the state's recovery rights (after your death), it must allow them an opportunity to claim an exemption from estate recovery.

Factors in Whether Your Estate Has to Pay Back Medicaid

Because each state runs its own Medicaid program, exactly how estate recovery works varies somewhat from state to state. And the amounts recovered by each state vary greatly too. For instance, some states will only try to take assets that are subject to the probate process, so if your house is a living trust, it wouldn't be subject to Medicaid recovery (more on this below).

Whether the state's Medicaid program pays directly for your health care costs or you have a managed care plan (involving a private insurance company) is also a factor.

Cost Recovery When Medicaid Pays for Your Care

Federal law requires all states to attempt to recover long-term care costs paid by Medicaid for those 55 and over, including the cost of:

• home and community-based health services (HCBS)
• nursing home services, and
• related hospital and prescription drug services.

So, if you're 55 or older and Medicaid pays these long-term care expenses for you, you can expect your state to try to recover the cost from your estate after you die.

The federal law also allows the states to try to recover regular Medicaid costs if they choose to do so, for Medicaid recipients under age 55. Some states, including Nevada, Alabama, and 30 other states, do use the estate recovery rules to recoup some or all of their regular Medicaid costs. Many states also will try to recover costs for individuals under 55 if they were considered permanently institutionalized when they received Medicaid services.

Medicaid Recovery of Managed Care Costs

In states with managed care programs, Medicaid estate recovery is based on the premiums the state paid to a private insurance company for your care, rather than the cost of the services you used. So, even if you didn't use certain services, you could still be subject to estate recovery if the state paid premiums on your behalf.

Over half of the states apply estate recovery to managed care premiums, but depending on the care you receive, not all of them try to recover the entire premium.

The state must try to recover the full premium if it would have been required to recover your costs if Medicaid had paid your care provider directly. But if certain services that the managed care program provided aren't subject to estate recovery requirements, the state might only try to recover the portion of the premium related to those services.

For example, if your Medicaid managed care plan paid for your nursing home and all related care (like hospital services and prescription drugs), the state would need to try to recover the amount of full premium. But if your Medicaid managed care plan also paid for services not subject to the recovery rule—like outpatient occupational therapy, for instance—the state likely wouldn't try to recover the portion of the premium covering those services.

How Do States Recover Medicaid Costs?

While individual state laws on estate recovery vary, they all boil down to two different ways that Medicaid can take your assets to recover costs paid for your care:

• recovering from your estate after your death, and
• putting liens on property you own.

Recovering From the Medicaid Recipient's Estate

The first method states will use to recover Medicaid funds is to seek repayment from the deceased Medicaid beneficiary's estate, after death. Each state defines the term "estate" differently, so the type of property Medicaid will go after varies from state to state.

About half the states, including California and Alaska, are fairly conservative about what they'll try to take, and will recover costs only from a deceased person's "probate estate." A probate estate includes only assets that must pass through probate (the legal process used to settle debts after someone dies and distribute what's left to their heirs). A probate estate doesn't include:

• bank accounts or retirement accounts with named beneficiaries
• houses and other property in a living trust
• real estate owned in "joint tenancy" (property owned by more than one person and that automatically passes to the other owner(s) when one owner dies), and
• any other property that avoids probate.

Other states use a broader definition of the term estate, which includes any assets an individual had legal title to or an interest in at the time of death—including property that bypasses probate.

To recover Medicaid expenses paid in states that use the probate definition of estate, the state files a claim in probate court against the deceased person's probate estate, similar to any other creditor.

A state that uses the more expansive definition of estate must inform the heirs of Medicaid's right to recover funds from the estate, as required by state law.

Lien on Real Estate Owned by the Medicaid Recipient

The second method states use for recovering Medicaid costs is to place a lien on any real property owned by the Medicaid recipient while that person is still alive.

If there's a Medicaid lien on your house, for example, when it's sold—either before or after your death—the state can collect repayment from the sale proceeds, the same as any other lien holder. But the state must remove the lien if you move back into your home before your death. (42 U.S.C. § 1396p(a)(3).)

States can't put a lien on a home if your spouse, minor child, or child with a disability lives there (and your house isn't considered a resource for Medicaid purposes).

Protecting Your Assets From Medicaid Estate Recovery

As mentioned above, if you have nothing left when you die, Medicaid won't be able to recover anything. So you might think you can simply give away everything to your family before you qualify for Medicaid. But that could delay your eligibility for Medicaid coverage.

Medicaid's asset transfer rules penalize you for giving away your assets within a certain lookback period before you apply for Medicaid (generally five years). If you give away assets during this period, Medicaid will delay your eligibility.

Putting your house in a living trust counts as a transfer of an asset, so putting it in a trust during the lookback period to avoid probate could incur a Medicaid penalty. You are, however, allowed to transfer your home to your spouse or to your child (if they're under age 21 or disabled, or if they're an adult and they helped you and lived in your home for two years before you applied for Medicaid).

If you have too many assets for Medicaid eligibility, you'll want to proceed very carefully, and will likely need the help of a professional estate planning attorney or financial advisor who specializes in Medicaid.

Proposals to Change Medicaid Estate Recovery Rules

Federal estate recovery rules were designed to help states recover some of the costs of long-term care for Medicaid recipients. However, some lawmakers and advocacy groups argue that the funds recovered rarely justify the recovery costs and that the program disproportionately burdens low-income families. Although bills have been introduced in Congress to amend these rules and lessen the impact on families, none have yet passed.