Tags: Medicaid, Long-Term Care, Asset Holdings, Deficit Reduction Act, IRFRC
More from: Junhao Liu, Anita Mukherjee

This paper is about the financing of long-term care, which is a key issue now that people are living longer but remain financially vulnerable in old age. In the United States, social insurance remains a major payer of long-term care services, and in particular, the majority of nursing home care is paid for by Medicaid, which is a large social safety net program targeted towards those poorest. For context, current program expenditures of Medicaid are about USD 500 billion each year, of which 30% goes to nursing home and other long-term care services. Since Medicaid is a means-tested program and offers large benefits (nursing home costs are close to USD 100,000 each year), program officials worry that people may attempt to become eligible by transferring money to children and thus appearing to be less poor than they are. In an effort to reduce this type of behaviour, which has been observed in the past, policymakers have devised new penalties for asset transfers made to become Medicaid-eligible.

Understanding the extent of such strategic behavior is crucial for policymaking, especially in an era of Medicaid reform and rising costs of the program. In this paper, we offer new evidence on whether individuals strategically offload assets to become Medicaid eligible. We do this by leveraging variation in penalties associated with such behaviors brought about by the Deficit Reduction Act (DRA) of 2005. Signed into law in February 2006 by President George W. Bush, the DRA attempted to reduce “improper” financial transfers with two new rules. First, the look-back period on asset transfers increased from three years to five years, meaning that transfers made over a longer period were counted towards one’s countable holdings. Second, the DRA shifted the start of the penalty period from the time of improper transfer to the time of Medicaid application, generating a greater disincentive to engage in such transfers. Together, these penalties made it more difficult for individuals to “spend down” for Medicaid eligibility.

The challenge in assessing the DRA’s impact is that since it was enacted in February 2006, at first glance, the policy only enables a before-and-after analysis. Such analysis can be difficult to interpret due to the confounding effect of general time trends in asset holding behaviors. As such, we adopt a technique called “difference-in-differences” that leverages variation from survey data: we use the respondent’s self-assessed likelihood of requiring nursing home care as a proxy for treatment. Specifically, we hypothesize that individuals with high nursing home risk would alter their asset holdings in response to the DRA, while people with zero or low nursing home risk should form a useful control group by remaining unaffected. Directionally, if the DRA is effective at limiting strategic asset transfers, we expect that individuals facing high nursing home risk will reduce transfer activities.

We examine parent-to-child financial transfers as our key outcome. These transfers are easily made and difficult to detect, making them an ideal way to reduce assets if that is one’s goal. Using our difference-in-differences framework, we find that the DRA caused individuals with high levels of anticipated nursing home risk to reduce financial transfers to children on both the extensive and intensive margins. These effects are statistically significant and economically meaningful: we estimate a three percent decrease in the probability of making any transfer and a $1,700 total decrease in the amount of transfers. These results correspond to percentage changes of 10 and 40 percent, respectively. Our findings thus show that the DRA served to reduce strategic transfers from parents to children, as intended. Interestingly, we did not find any effect of the DRA on impacting other assets such as real estate holdings, which may be due to the backdrop of The Great Recession and the fact that home transactions are more difficult to strategize upon.

We then examine the extent to which these effects vary by different variables such as financial literacy, existing long-term care insurance, and Medicaid coverage through a triple-differences analysis. Interestingly, we find that even people with low levels of financial literacy respond to the incentives put in place by the DRA. This may not be too surprising given that long-term care expenses are significant and thus many people seek financial advice; additionally, because Medicaid is a social insurance program, there are extensive resources available to learn about its eligibility rules.

The aging population in the United States is growing and increasingly vulnerable with respect to health and income; recent research indicates that individuals are entering late-life with higher levels of debt while facing increased income and health inequalities [1, 2]. The Medicaid program is critical for even the high-income elderly [3] and is currently undergoing significant reform. Our paper adds to this literature by exploring the ways in which government policy impacts Medicaid eligibility for older Americans.

Medicaid is a program intended to serve the neediest, and many in our society’s elderly population are financially vulnerable and require care. Though we find evidence of strategic eligibility behavior, we should note that people attempting to qualify for Medicaid are in poverty and facing difficult decisions that are made worse by the extremely high nursing home costs in the US. Thus, our research also sheds light on how vulnerable people are to these long-term care needs.

The complete paper is available for download at:
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3165733.