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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 low-

income 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

was $206.6 billion, which does not include “informal care”,4 and the average Medicaid nursing

1 Schneider et al. (1999).2 “Dual Eligibles: Medicaid’s Role for Low-Income Medicare Beneficiaries”. (2005).3 Ibid.4Informal care is care provided by family or friends on an unpaid basis. 

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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

coverage is “contingent” insurance—contingent on an individual first spending almost all his

5 Swan. (2008).6 Brown. (2004)7 Bassett. (2007)8 Brown.(2004)9 Ibid.10 Kemper.(2005)

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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

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

11 Ibid.12 Miller. (2007).13 “Medically Needy Programs: An important source of Medicaid coverage”. (2003).

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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

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

14 Ng et. al (2010)15 Ibid.

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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

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 Review16 Schneider. (1999).17 O’Brien. (2005).

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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

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 18 U.S. Department of Health and Human Services.19 The New York Health Policy Research Center. (2009)20 Kemper. (2005)

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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

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.

21 Taylor et al. (1999)22 Basset (2004), Feinstein and Chih-Chin Ho (2001)23 Bassett. (2002).24 Burwell. (1995).

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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

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.

25 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.

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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

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)

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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

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

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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

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.

26 Lee. (2006).

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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 Long-

term Care Insurance so Small?” NBER: Working Paper 10782.

Burwell, B., WH Crown. (1995). “Medicaid Estate Planning: Case Studies in Four

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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.

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:

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Medicaid Eligibility: Transfer of Assets.”