The purpose of Medicaid is to help low-income seniors pay for long-term care and medical care. For this reason, you may only qualify if you meet the stringent financial eligibility requirements.
Because the income and asset limits are so low in most states, most people do not meet the financial requirements without a bit of help. For many aspiring beneficiaries, “help” often comes in the form of spending down assets. While spending down assets is not illegal, the Centers for Medicare and Medicaid Services maintains strict rules for how and when individuals may engage in spend-down activities. If an applicant violates those rules, the CMS implements a Medicaid penalty period. AgingCare explains the Medicaid penalty period more in depth.
The Medicaid lookback period
Before you can fully understand what the Medicaid penalty period is, it may help to first to understand the Medicaid lookback period. To keep individuals from giving away all their assets and funds to friends and family, the CMS developed an intricate system for reviewing the monetary histories of all applicants. This system looks back a set number of months, which varies from state to state. The CMS refers to this period as the lookback period.
During the lookback period, which is typically 60 months, seniors may not transfer any funds or give away non-exempt assets for less than fair market value. If assets or funds change hands for less than FMV within the five-year period preceding the application date, the CMS may subject the applicant to a penalty period.
The Medicaid penalty period
If the CMS approves your application but then discovers you gifted or sold assets for less than FMV during the lookback period, it will render you ineligible to receive benefits for a certain number of months. The agency refers to this period as the Medicaid penalty period.
The duration of the penalty period is contingent upon the value of the assets you gifted or sold and your state’s penalty divisor. This figure refers to the average monthly cost of nursing home care. As of 2022, the Ohio penalty divisor is $6,905. To calculate the length of your penalty period, you would divide the value of the assets you gifted or sold by the penalty divisor.
For example, say you wrote a check to your child for $50,000 right before applying for Medicaid. Assuming you live in Ohio, you would divide $50,000 by $6,905, which would produce a quotient of 7.24. This means the length of your penalty period would be seven and one-quarter months.
The Medicaid penalty period can set you back considerably financially. For this reason, if you need to spend down assets, you should only do so after familiarizing yourself with the rules.