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Ginny Hodges
December 12, 2010
Final Capstone Proposal:
“Don’t Worry... I’ll Divorce You If I Get Sick!”
A Study on the Effect of Medicaid LTC Eligibility Rules on Divorce
Introduction
Medicaid is a government program in the United State that provides healthcare for
individuals, the elderly, and people with disabilities. However, it is much more difficult to
qualify for healthcare coverage through Medicaid than to qualify for healthcare coverage
provided by Medicare. While Medicare is an entitlement program with automatic coverage based
on eligibility, Medicaid is an entitlement program that is means-tested, providing an individual
with different levels of coverage based on their income and level of resources.1 Medicare is
typically considered the government assistance program for the elderly, but with significant gaps
in coverage, 2 Medicaid must shoulder the burden of long-term care (LTC) coverage for the lowincome elderly.
Medicaid is the only major source of assistance for LTC financing in the nation, paying 1
out of 2 nursing home care dollars.3 The total amount spent on LTC in the United States in 2005
1
Schneider et al. (1999).
“Dual Eligibles: Medicaid’s Role for Low-Income Medicare Beneficiaries”. (2005).
3
Ibid.
2
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was $206.6 billion, which does not include “informal care”,4 and the average Medicaid nursing
home rate what estimated to be $151 per day, or about $55,000 annually in 2006.5 The
Congressional Budget Office found that expenditures on LTC accounted for 8.5 percent of all
health care spending in the United States in 2004. Over the next 35 years due to rising medical
costs and the aging of the baby-boomer population, real LTC expenditures are expected to
triple.6 Estimates in 2004 indicate that about 11 percent of the elderly had purchased private
long-term care insurance to prepare for the future expectation of LTC, a decrease from the 15
percent of nursing home costs covered by 3rd party payers in the 1990s.7 Statistics show that the
combination of means-tested eligibility and secondary payer status of Medicaid create a crowd
out effect on private insurance. Brown and Finkelstein (2006) found that even in the absence of
market failures and an availability of fully comprehensive insurance policies at actuarially fair
prices, much of the population would still be unwilling to pay for private insurance.8
The phenomenon of the “implicit tax” on private insurance provides an incentive for
individuals to opt for Medicaid instead of investing in private LTC coverage. A large part of the
premium paid for a private insurance policy pays for benefits that simply replace benefits that
Medicaid would have otherwise provided.9 However, Medicaid is not intended to be insurance
that limits out-of the pocket expenditures, making it unusual by the normal insurance definition.
Instead, it is designed to be a safety net for those who run out of money to protect against an
unmet need for LTC. Therefore, Medicaid insures the combined risks of needing LTC coverage
and being unable to pay for it. 10 For those with moderate financial resources, LTC Medicaid
4
Informal care is care provided by family or friends on an unpaid basis.
Swan. (2008).
6
Brown. (2004)
7
Bassett. (2007)
8
Brown.(2004)
9
Ibid.
10
Kemper.(2005)
5
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coverage is “contingent” insurance—contingent on an individual first spending almost all his
financial resources, providing little protection for income, assets, living expenses, bequests, and
only partial protection for the financial resources of spouses. 11 Given the incentive structure that
Medicaid creates, the government is concerned that individuals will engage in “Medicaid
planning”, an estate planning technique in which individuals voluntarily impoverish themselves,
or “spend down”, in order to obtain Medicaid government health benefits. “Spend down” has
several variations and is highly controversial.12
There is extensive research on the use of asset transfers in the form of gifts and trusts by
the elderly to voluntarily “spend down” their assets to qualify for Medicaid LTC coverage.
However, there is little research regarding the relationship between divorce, a mechanism to
transfer assets to ones spouse, and Medicaid LTC eligibility. Divorce is an extreme option for
individuals to voluntarily “spend down” assets to qualify for LTC Medicaid eligibility, in order
to protect a share of the couple’s assets in the hands of the healthy spouse. In 1988, the Federal
Government implemented spousal impoverishment provisions that allowed the spouse remaining
in the community to keep a minimum resource and income level. However, Federal law gives
states broad optimal authority to extend Medicaid eligibility to the medically needy population
beyond minimum standards, therefore there is a wide variation in state implementation of income
limits under the spousal impoverishment provision. In 2001, income limits for the spouse ranged
from $1,406 to $2,175 per month and assets limits ranged from $17,856 to $89,280, creating a
great discrepancy in the standard of living the healthy spouse is able to maintain across states.13
11
Ibid.
Miller. (2007).
13
“Medically Needy Programs: An important source of Medicaid coverage”. (2003).
12
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This paper contributes to the literature by providing the first empirical examination of the
effect of Medicaid spousal impoverishment rules on the probability of divorce, given an
individual’s expectation of entering into long-term care. I will analyze the impact of state
variations in maximum Medicaid spousal impoverishment rates for income and resources from
1992 to 2004 on divorce probability utilizing data from the Health and Retirement Survey.
Furthermore, the paper will examine the impact of age differentiation between the spouses and
the subjective probability of the healthy spouse to live and additional ten to fifteen years in
interaction with Medicaid LTC eligibility on divorce probability.
Background: “Spend down” and Spousal Impoverishment Rules
Medicaid has both federal and state components. The resulting variation among states’
budgets and coverage decisions adds to the overall complexity of public programs’ services and
spending within and across states. The system of providing and paying for LTC in the U.S.
reflects this federal-state shared responsibility.14 Eligibility for Medicaid LTC coverage is
generally automatic for the categorically needy (those receiving SSI federal cash benefits), and
35 states plus the District of Columbia have so-called “medically needy” programs, which cover
those who spend down their assets by incurring medical expenses and meet the state’s income
and asset requirements.15
The requirement of “spend-down” to qualify for Medicaid LTC coverage can be a serious
problem for married couples, as the healthy spouse may be impoverished by the costs of caring
for an ailing partner many years in advance of the healthy spouse’s death. In order to insulate the
spouse from the costs of caring for the unhealthy spouse, federal Medicaid law requires states to
14
15
Ng et. al (2010)
Ibid.
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apply a special set of income and resource rules in determining eligibility when one spouse is in
a nursing home and the other remains in the community. The purpose of these rules is so that
institutionalized spouses to receive Medicaid coverage for nursing facility care while leaving the
community spouse with sufficient resources and monthly income to avoid hardship.
The Kaiser Commission reviewed the major statutory and regulatory “pathways”
available to low-income elderly for full Medicaid coverage, and provides a break-down of the
spousal impoverishment methodologies. Spousal impoverishment rules are triggered when one
spouse enters nursing home care with the expectation of remaining for thirty days or more. At
the point of institutionalization or after admitted, if the the spouse applies for Medicaid LTC
coverage his or her means-tested eligibility will be determined based on resources and income:
Resource Test: All the couple’s countable resources are valued, and half the resources are
kept by the community spouse (subject to a minimum and maximum state allowance). Then, the
institutionalized spouse must reduce his or her resources to $2000 before qualifying for Medicaid
in most states.
Income Test: Community spouses must be allowed to retain a certain amount of monthly
income. If Social Security or pension income is not sufficient to reach the state-specified level,
income of the institutionalized spouse is reserved for the community spouse in the amount
necessary to make up for the shortfall.16
While the special rules allow married couples to set aside income and assets for a
community spouse, if the states sets the spousal impoverishment rate to the federal minimum
16
Schneider. (1999).
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required income and resource levels ($1,406 and $17,856, respectively (2004)), the healthy
spouse is left with hardly enough assets to assure financial security.17
Literature Review
If individuals “impoverish” themselves through asset transfer to qualify for Medicaid it
creates inefficiency and additional costs to the Medicaid program. The Deficit Reduction Act of
2005 (DRA) was signed into law by President Bush on February 8, 2006, and includes several
provisions designed to discourage the use of such “Medicaid planning” techniques and to impose
penalties on transactions which are intended to protect wealth while enabling access to public
benefits.18 The existence of thousands of internet advertisements for Medicaid planning services,
indicate that information is becoming more readily available to the public on how to protect ones
income and avoid involuntary “spend-down” to pay for LTC. A study by The New York Health
Policy Research Center in March of 2009 found that 7 percent of the average number of elderly
Medicaid enrollees in New York State was denied Medicaid LTC coverage because of asset
transfers that fell into the federally mandated “look-back period” of financial transactions.19 In
addition, Kemper et. al (2005) found that ten percent of those who eventually qualify for
Medicaid will have more than $100,000 in out-of-pocket expenditures.20 Critics of the Medicaid
incentive structure contend that middle-class elderly can preemptively give large gifts, or
establish trust, to preserve their assets to avoid government penalties and involuntary “spend
down”.
Limited empirical studies have been conducted on Medicaid estate planning and the
results have been inconclusive. Much of the research determines that there is little evidence that
O’Brien. (2005).
U.S. Department of Health and Human Services.
19
The New York Health Policy Research Center. (2009)
20
Kemper. (2005)
17
18
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the elderly in general transfer assets to gain Medicaid eligibility, suggesting that reforms
designed to curb asset transfer may produce only a small impact on Medicaid savings. Taylor et
al. (1999) found that approximately 4 out of 10 elderly individuals could potentially alter their
Medicaid eligibility status by establishing a trust, but fewer than 1 in 10 had a trust, and that
most of the trusts did not meet the Medicaid standard. The researchers also examined if
households gave large enough gifts to potentially alter their Medicaid eligibility, and found that
only 1 in 100 of the elderly gave gifts to children that would be large enough to qualify them for
Medicaid nursing home coverage.21 Other studies support the notion that Medicaid does not
distort the decisions of those with modest resources to alter their financial behavior.22
However, more recent research suggests that further efforts by the government to curb
Medicaid-induced transfers could yield savings in the program. Bassett (2007) found that the
higher the subjective probability of nursing home use, the more likely an individual is to make
asset transfers. The size of the transfers were greater at low and moderate levels of nursing home
entry probability and became smaller as the probability of nursing home entry increased. The
pattern suggests that the elderly make the conscience decision to protect their assets through
transfers, and once nursing home care is imminent, make smaller transfers to avoid penalization
for Medicaid eligibility. The authors suggest that they found a greater rate of transfers among the
elderly population than previous studies because they were able to explicitly focus on transfers
made by individuals before they became disabled or entered a nursing home rather than infer
activity from changes in asset levels after their health deteriorated.23
21
Taylor et al. (1999)
Basset (2004), Feinstein and Chih-Chin Ho (2001)
23
Bassett. (2002).
22
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Some research suggests that married couples partake in Medicaid planning at a higher
rate than individuals. Burwell and Crown (1995) estimated that 5% to 10% of unmarried
Medicaid LTC coverage applicants and 20% to 25% of married applicants transfer wealth to
qualify for Medicaid.24 Therefore, when an elderly individual has a healthy spouse to take into
account, he or she may be more likely to partake in Medicaid planning.
Theory and Model
No research has thoroughly examined the relationship between Medicaid LTC eligibility
and the probability of divorce. The conflicting results of past literature on Medicaid planning,
examining asset transfers done through gifts or trusts, provide an interesting backdrop to further
examine divorce as a possible mechanism of Medicaid planning. Results that show little
evidence of elderly Medicaid planning could suggest that government regulations and penalties
for asset transfers in a given “look-back period” are discouraging elderly individuals from
making asset transfers or establishing trusts. The imposed hardship of the trade-off between
facing a penalty period before you are allowed to receive Medicaid government assistance for
LTC if you transfer assets within a given look-back period, or having to involuntarily spend
down your assets before you are eligible for Medicaid, could instigate more “creative” strategies
to protect one’s assets and qualify for Medicaid coverage—such as divorce. Results that find
individuals transfer assets at a higher rate when their subjective probability of entering a nursing
home is higher (before they reach a point of near certainty of entrance), suggests that the elderly
are informed about Medicaid eligibility rules and alter their behavior in order to protect their
assets and guarantee they will qualify without a penalty period. Also, when nursing home care
probability becomes imminent, the individual cannot make large transfers without being
24
Burwell. (1995).
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penalized. Therefore, if the individual is married and it becomes certain that one spouse will
require LTC in less than three years25, they may choose an alternative approach to protect
themselves and their spouse from involuntary “spend-down”, such as divorce.
The underlying theory of my model is that in an attempt to qualify for government
assistance to pay for the medical costs of one spouse, a couple may obtain a divorce to protect
the livelihood of the spouse that remains in the community. The “divorce loophole” does not fall
under the government regulation “look-back period”, and if the subjective probability of entering
a nursing home is high, divorce could be a mechanism to transfer assets to the healthy spouse
without jeopardizing the eligibility of the ill spouse for LTC Medicaid coverage.
I will utilize a model similar to the probit model of Bassett (2002), replacing the binary
asset transfer variable (0=no asset transfer, 1=asset transfer) with a binary variable for divorce
(0=no divorce, 1=divorce). I will maintain the independent variable for the subjective probability
of becoming sufficiently disabled to qualify for nursing home care, based on responses to
questions concerning nursing home use expectations. In the HRS survey, respondents were
instructed to give a number from 0 to100, with 0 indicating absolutely no chance enter nursing
home in 5 years and 100 indicating absolute certainty of nursing home entrance in 5 yrs. The
other key variable I will include in the model is a variable for state spousal impoverishment
rules. I will first base the variable on the maximum income spousal impoverishment value of the
state, and then on the maximum resource spousal impoverishment value of the state (which has a
greater deviation). Finally, I will include an interaction term for subjective nursing home
The “look-back period” was established by OBRA 1993 legislation, allowing the government to review all financial transactions conducted by
individual in the past three years to determining eligibility for Medicaid LTC coverage. If an elderly individual or their spouse disposes of
personal resources (including housing) for less than fair market value within 3 years of applying for Medicaid, than the individual is subject to a
period of exclusion from coverage for nursing facility services.
25
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probability and the state impoverishment rule in order to discover if the two variables have an
entangled effect on the probability of obtaining a divorce.
Suggested Model:
D = B0 + B1 P(NH) + B2 SI + B3 P(NH) * SI + B4 X + E
D= Probability of Divorce (0=no divorce, 1=divorce)
P(NH)= Subjective Probability of Nursing Home Care within 5 years
SI= State Spousal Impoverishment Rules
1) State maximum allowance for spouse monthly income
2) State maximum allowance for spouse resources
P(NH) * SI = Interaction Term for the Subjective Probability of Nursing Home Care within 5
years and the State Spousal Impoverishment Rule
X= Other Variables Related to the Probability of Obtaining a Divorce (Demonstrated in past
literature)
1) Employment Status of Male Head
2) Education Level
3) Ethnicity
4) Religion
o Attend Religious Services
o Denomination
5) Age at Time of Marriage (above or below 20)
6) Remarriage
7) Indicators of Marital Happiness or Marital Unhappiness
8) Other
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Data Analysis
I will utilize data from all available waves of the longitudinal Health and Retirement
Study. Initially, the HRS was developed as two separate datasets, the “original HRS” and the
AHEAD survey. The “original HRS” was based on interviews conducted in 1992 of a nationally
representative sample of 7.702 households, each with an individual between the ages 51 and 61
years old living in the community (excluding institutionalized individuals), with follow-up
interviews in 1994 and 1996. The AHEAD survey interviewed a nationally representative sample
in 1993, 1995, and 1998 of 6.047 households, each with an individual who was age 70 or older
living in the community. In 1998, the two studies were integrated and the combined survey is
now referred to as the HRS and several age cohorts, representing birth years 1924 to 1930 and
1942 to 1947, have been added. The 1998 sample was reinterviewed in 2000, 2002, 2004, 2006,
2008 and is scheduled for follow-up interviews on a biennial basis.26
Based on the model of Lee et al. (2006), I will track elders who were not Medicaid
recipients during the base-line interview in 1993, but became Medicaid recipients during the
follow-up interviews. However, I will only look at couples whose marital status is “Married” at
the time of the base-line interview. In order to pair respondents with the state spousal
impoverishment rules, it will be necessary for me to request geographic information. (Therefore,
I am unable to provide any descriptive statistics at this time). As mentioned in the Theory and
Model section, I will utilize the subjective expectation nursing home entrance responses as my
independent variable to measure the probability of entering nursing home care in the near future.
The study provides extensive demographic, health status, familial status, and other information
that will help to construct my control variables. For further analysis, I will also interact the age
26
Lee. (2006).
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difference between the ill spouse and the healthy spouse, and spouse responses about their
expectation of living for an additional 10 to 15 years, with the state spousal impoverishment
rules to discover more about the relationship between Medicaid LTC coverage eligibility and
divorce probability.
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References
Bassett, William F. (2007). “Medicaid’s Nursing Home Coverage and Asset Transfers”. Public
Finance Review: 35:414. http.pfr.sagepub.com.
Brown. Jeffrey R., Amy Finkelstein. (2004). “Supply or Demand: Why is the Market for Longterm Care Insurance so Small?” NBER: Working Paper 10782.
Burwell, B., WH Crown. (1995). “Medicaid Estate Planning: Case Studies in Four
States”. The Brookings Institution. 61-92.
“Dual Eligibles: Medicaid’s Role for Low-Income Medicare Beneficiaries”. (2005). Kaiser
Commission on Medicaid Facts. www.kff.org.
Factors Affecting the Likelihood of Divorce. http://mtsu.edu.
Kemper, Peter, Harriet Komisar, Lisa Alecxih. (2005). “Long-Term Care Over an Uncertain
Future: What Can Current Retirees Expect?”. Excellus Health Plan, Inc. Inquiry Journal
Vol. 42: 335-350. www.inquiryjournal.org.
Lee, Jinkook, Kim Hyungsoo, Sandra Tanenbaum. (2006). “Medicaid and Family Wealth
Transfer”. Gerontologist: 46(1): 6-13.
“Medically Needy Programs: An important source of Medicaid coverage”. (2003). Kaiser
Commission on Medicaid and the Uninsured. www.kff.org.
Miller, John A. (2007). “Voluntary Impoverishment to Obtain Government Benefits”. Cornell
Journal of Law and Public Policy. Vol. 13(81).
Ng, Terrence, Charlene Harrington, Martin Kitchner. (2010). “Medicare and Medicaid In Long
Term Care”. Health Affairs: 29(1): 22-28.
O’Brien, Ellen. (2004). “Medicaid’s Coverage of Nursing Home Costs: Asset Shelter for the
Wealthy or Essential Safety Net”.
Schneider, Andy, Kristen Fennel, Patricia Keenan. (1999). “Medicaid Eligibility for the
Elderly”. Kaiser Commission on Medicaid and the Uninsured. www.kff.org.
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Swan JH. (2008). “State Medicaid Reimbursement Per Diem Rates 2002-2007”. University of
North Texas.
Taylor, Sloan, Norton. (1999) “Formation of Trusts to Spend down Medicaid.”
The New York Health Policy Research Center. (2009). “Assessing Asset Transfer for Medicaid
Eligibility in New York State”.
U.S. Department of Health and Human Services. “Centers for Medicaid and Medicare Services:
Medicaid Eligibility: Transfer of Assets.”