Poor on Paper: An Overview of the Ethics and Morality of Medicaid Planning
Scenario 1: Judy worked as a schoolteacher since the age of 22. She scrimped and saved her entire life and retired at the age of 67. She continued to live within modest means, with the hope that one day she would be able to pass a tidy inheritance to her grandchildren. Now at age 70, she has been diagnosed with Alzheimer’s disease. Judy is devastated by the fact that her savings might be entirely depleted by the costs of future long-term care at a nursing facility.
Scenario 2: Anne also worked as a school teacher since the age of 22. She saved but never scrimped on herself. Each time she amassed enough money, she went on a ski trip or on a cruise. She always spent money to dress as fashionably as possible, often dined out, and frequently attended movies and shows. Now at the age of 70, she has been diagnosed with Alzheimer’s disease. Anne is concerned about the prospect of long-term care at a nursing facility since she is poor because of her wasteful ways.
The two people in the above scenario are in almost identical situations. Both made a living as teachers, and both were diagnosed with Alzheimer’s disease. With no family willing or able to care for them, they will almost inevitably need long-term care at a nursing facility. If Anne and Judy lived in many developed countries of the world, both would be able to receive 1) medical home care, 2) nonmedical home care, and/or 3) long-term institutional care as a universal right ( i.e. , not means-tested). But Anne and Judy live in the United States. Under the United States’ current scheme of health care for the elderly, only Anne, who has spent all her money throughout her life, will be able to receive long-term institutional care subsidized by Medicaid since she is both over the age limit and is poor. The reasons why she is currently poor do not matter. Judy, however, who has saved diligently her entire life, will not be covered by Medicaid since she is not poor. Nor will she be covered by Medicare as her illness is a chronic one that will last over an extended period of years. Thus, Judy’s only choices are 1) to spend down, that is to pay for the costs of a nursing facility, which will quickly deplete her savings and then apply for Medicaid since she will then be poor, or 2) to engage in Medicaid planning.
Medicaid planning has been defined in numerous ways, sometimes euphemistically, sometimes pejoratively. For the purposes of this article, Medicaid planning refers to the legal fiction of “rearranging assets” to make someone poor on paper so that he or she may qualify for Medicaid. The morality and ethics of Medicaid planning have been examined in the past and are still an issue today. This article explores the history of Medicaid, examines some of the various arguments both for and against the morality of Medicaid planning, and concludes by briefly inspecting long-term care solutions for elder care around the world. This article does not purport to answer the question of whether Medicaid planning is ethical, but rather explores the arguments and suggests an altogether different solution to the problem of long-term care in the United States.
Medicaid was initially developed by Congress in 1965 during the presidency of Lyndon B. Johnson, and during an era of civil rights reforms.1 A companion program, Medicare, was promulgated during the same congressional session.2 A main objective of Medicaid was to provide long-term health care for needy elderly and disabled persons.3 At the time of enactment, Medicaid was considered to be “first and foremost a program for the poor.”4 There is debate, however, whether Medicaid is still intended to be exclusively a program for the poor.
Medicaid planning soon followed the passage of Medicaid. As the requirements for Medicaid eligibility changed, so did the plethora of planning techniques.5 Currently, with legal assistance, people who are not in fact poor can make themselves appear poor on paper by methods such as transferring assets and by making purchases of items that are excluded from the determination of eligibility.6 Medicaid planning has created a debate among those who say that such asset “rearranging” is ethical and moral, and those who say that it is unethical and takes resources away from those for whom Medicaid was intended to provide for.
Ethics of Medicaid Planning
Ethics and morality are two distinct yet overlapping concepts in the world of lawyering. Ethics refers to an adherence to established canons, namely the Model Rules of Professional Conduct as adopted in the state of the lawyer’s practice.7 Morality, on the other hand, is the study of right and wrong and what ought to happen.8
There is disagreement whether Medicaid planning is ethical as well as whether it is moral. Since the model rules are delineated and limited in scope, there is less controversy with the ethics issue. Although there are particular situations and problem areas where ethical questions would be raised (as is true with many other areas of law), generally there is much support for the proposition that Medicaid planning is ethical.
In a Georgetown Journal of Legal Ethics article Lisa Schreiber Joire analyzes the model rules, including Rules 1.1, 1.2, and 1.3 and concludes that Medicaid planning is ethical.9 Model Rule 1.1 requires attorneys to “provide competent representation to a client.”10 Joire argues that it is doubtful that representation would be “competent if it does not include counseling a client on a legal method of estate planning.”11 Model Rule 1.2 deals with the scope of representation.12 “Under this rule, attorneys should advise clients of all legal options, including the legal option of restructuring assets to qualify for Medicaid.”13 Pursuant to Model Rule 1.3, an attorney shall act with due diligence and represent a client with zealous advocacy within the bounds of the law.14 There is a conflict between representing a client diligently and not informing the client of a legal way to cover medical costs.15 “Therefore, the model rules dictate that if Medicaid estate planning is the best estate planning method for her client, a lawyer is bound to provide Medicaid estate planning advice.”16
At some point morality and ethics overlap. Model Rule 2.1 distinguishes the lawyer’s role as advisor from the lawyer’s role as advocate.17 The lawyer is an advisor when the attorney guides one in Medicaid planning.18 As an adviser, “lawyers may consider not only technical legal rules but also ‘moral, economic, social and political factors’ relevant to the client’s situation.”19 Thus, this portion of the rule segues into the discussion of whether Medicaid planning is moral.
Morality of Medicaid Planning
The reasons why Medicaid planning is undertaken (and who seeks to initiate it) often affect whether it is perceived as moral. For instance, as will be seen below, whether Medicaid planning is utilized to preserve an inheritance, to enhance an institutionalized person’s quality of care, or to protect a community spouse from impoverishment can all affect judgments of morality.
One argument in favor of Medicaid planning is that people want to leave money to their children and grandchildren.20 People do not scrimp and save their entire lives with the goal of ultimately depleting their savings on long-term care in a nursing facility. Additionally, the ability to leave an inheritance gives a person power. It enables a person to do “justice” by rewarding a “good” child with more money or punishing a “bad” child by giving him or her little or no money.21 In fact, people might not save in the first place or might start spending their assets earlier in life if they realize they will be forced to spend all their money on a nursing facility rather than being able to pass it on to their kin. One could even argue that Congress thinks people are entitled to pass on their wealth since, effective 2010, the estate tax is repealed.22 And in the years approaching that date, Congress has raised the estate tax exemption levels.23
However, one could counter that “Medicaid’s eligibility criteria were put in place to ensure that only the truly needy obtain benefits.”24 “[P]reserving peoples’ inheritances is not a compelling public interest that justifies diversion of resources away from the truly needy,”25 especially when there is concern that if Medicaid planning is left unchecked, it will soon bankrupt the system.26 Moreover, two acts by Congress indicate it does not necessarily think that people are entitled to pass on their assets. First, if Congress does not act, after 2010 the estate tax will automatically be reinstated. Second, pursuant to estate recovery rules, upon the death of a Medicaid recipient, the states are supposed to seek recovery of some of the Medicaid payments made for the decedent from the decedent’s estate.27
While there is support for the proposition that people have a right to pass on their inheritance, there is less justification for Medicaid planning when it is at the insistence of children who are trying to protect their inheritance. It is argued that Medicaid planning ceases to be justified if it is at the insistence of a child for an elder who is no longer competent, and the sole purpose is the preservation of inheritance money.28 The primary goal of elder law attorneys should be to improve the lives of clients.29 “Asset protection, alone, abandons the well-being of the living elder and, thus, is contrary to the purpose of elder law.”30 In short, Medicaid planning is justified only if the goal of bettering the elder’s life takes priority over protecting the elder’s assets.31
When one engages in Medicaid planning, protected assets may be used to enhance the quality of the institutionalized person’s life. With Medicaid planning, assets frequently wind up in the hands of spouse, children, or grandchildren. Often there is an implicit understanding among the parties that the money will be used to subsidize the institutionalized elder’s care. Medicaid provides only the bare minimum, if that. Money in the hands of family can be used to improve the institutionalized elder’s quality of care, and hence quality of life, by purchasing additional services such as more personal care through an aide. If Medicaid planning were not used, an individual’s money supply would quickly be depleted by the costs of the nursing facility. When one engages in Medicaid planning, the cost of nursing care is subsidized, leaving money that can be spent over time to supplement care. The downside to this is that the institutionalized person can be left financially vulnerable. Moreover, the institutionalized person can be the victim of a type of elder financial abuse in which there is no obligation on the part of the family to spend the money to enhance the elder’s quality of life, and the family may do with the money as it pleases.
Medicaid planning takes on a special sense of urgency when the goal is to preserve assets for a community spouse. Without Medicaid planning, both spouses’ assets would have to be depleted in order for the institutionalized spouse to qualify for Medicaid, and the community spouse would be left destitute. However, in 1988, Congress recognized that this was a problem and enacted the Medicare Catastrophic Coverage Act (MCAA).32 Pursuant to this act, once a spouse is institutionalized, a “snapshot” is taken of their resources and assets.33 A division of assets is made and the community spouse’s assets are deemed not to be available to the institutionalized spouse.34 Medicaid planning in this context benefits both spouses. The community spouse benefits from not having to be poor simply because his or her spouse needs long-term institutionalized care. Likewise, the institutionalized spouse benefits because the community spouse can use his or her money to supplement the institutionalized spouse’s care. The enactment of the MCAA has been cited as taking the Medicaid program beyond the borders of welfare.35
Health as a Commodity
Takacs and McGuffey take an unusual approach and argue that Medicaid planning is moral because in our economy health is a commodity.36 In the United States, long-term care and other health-related services are bought and sold on the open marketplace. A consumer is not going to offer to pay more money for something that could be received for less money. More specifically, a person is not going to use all of his or her savings to pay for the cost of long-term care at a nursing facility when the same service is available through government subsidy. “To suggest that purchasers of health care services should pay more than the minimum net cost to secure those services, merely because they have the resources to do so, is as absurd as criticizing wealthy persons for shopping at the discount store…. ”37 However, Miller criticizes the approach of treating health as a commodity and argues that in doing so, Takacs and McGuffey sidestep common objections to Medicaid planning.38
• Is Medicaid Intended to be Exclusively for the Poor?
Another interesting argument is that Medicaid planning is moral because the policies of the United States cause people to engage in it. Barnes and Phil go even further and argue that the reason the rules to qualify for Medicaid are so complex is because Congress did not intend for Medicaid to apply only to people who are poor.39 Barnes and Phil cite the Supreme Court case of Wisconsin Department of Health and Family Services v. Blumer, 534 U.S. 473 (2002), as recognizing that Medicaid is not a welfare benefit but an entitlement for a prudent middle class.40 “[T]he Court recognize[d] the fact that many elders who plan and apply for Medicaid are not destitute. .. [and] acknowledged that people who are not poor are the intended beneficiaries.”41
Obviously, the counter to this argument is that Medicaid was designed for the poor and is still intended to be a benefit program exclusively for the poor. Medicaid planning takes resources away from the intended recipients and, thus, is against public policy.42 When people who are not poor engage in Medicaid planning, they are stealing from other people who are truly entitled to benefits. Thus, those who can pay privately for long-term care have a civic duty to do so.43 In addition, repeated acts by Congress toughening the qualification requirements for Medicaid demonstrate that Medicaid is still intended to be an assistance program exclusively for the poor. Examples of these acts include the initial development of ineligibility periods, restriction on the use of certain types of trusts, lengthened penalty periods, and mandatory estate recovery rules.44 Also, in 1996 Congress made transferring assets in order to qualify for Medicaid a crime.45 In 1997, the law was changed to make advising persons to transfer assets a crime.46 However, on March 11, 1998, then-Attorney General Janet Reno announced that the Justice Department would not enforce the statute, and on April 7, 1998, the United States was enjoined from enforcing the provision.47
Long-term Care Insurance
Another argument against the morality of Medicaid planning is that it discourages people from purchasing long-term care insurance or saving to pay their own long-term care costs.48 However, some would counter that the costs of long-term care insurance are often prohibitive, and only wealthier people would be able to afford it.49 Moreover, many people do not like to think about the consequences of getting old and simply would not purchase long-term care insurance as a precaution. Saving for long-term care costs presents a similar problem. The cost of nursing facility care is extraordinary and savings can quickly become depleted.
John A. Miller advocates a middle path between the present law and universal health care. He would continue means testing eligibility for long-term health care subsidization but the period would be limited to two years.50 After the period has expired, all elderly persons in need of long-term health care would be eligible for assistance without regard to their means.51 The theory is that most persons would pay for the costs of long-term care for a limited period, and more people would be likely to purchase long-term care insurance.52 The cost to the government would be modest because most nursing home stays do not last much more than two years and there would be weakened incentives for voluntary impoverishment.53 However, as medical procedures and medicines continue to improve, and as life spans continue to increase, it is not clear how well this method would work as it is likely that the length of nursing home stays will increase as will the associated costs. Moreover, it is not clear to what extent people would opt to pay the costs of long-term care for a certain period.
In many countries, long-term health care is a universal right. For instance, Austria, Canada, Denmark, France, Germany, Israel, Japan, the United Kingdom, and New Zealand provide medical home care (home nursing care) as a universal right and with no cost sharing.54 Australia, Sweden, and New Zealand provide universal home nursing care but with income-related or nominal co-payments.55 Unlike in the United States, Australia, Austria, Denmark, Germany, Japan, the Netherlands, New Zealand, Scotland, and Sweden also provide nonmedical home care (personal care/home help) universally with either no or low cost sharing.56 Likewise, institutional care is universal in Australia, Austria, Denmark, Germany, Japan, the Netherlands, and Sweden, and the cost sharing is either 1) a small percentage of the actual costs of the care, 2) a small percentage of the cost of insurance, or 3) income-related.57
The United States is currently the wealthiest country in the world. However, in the United States nonmedical home care and long-term institutional care are provided free of charge or at a low cost only to those who are deemed needy. Meanwhile, the majority of the so-called developed countries around the world provide these health care services universally as a matter of right. Whether Medicaid planning is ethical or moral should not even be an issue in this country because there should not be a need to engage in it. Rather, the United States should comport with the health care standards in the rest of the developed world, and Medicare should provide long-term health care as a right to all, regardless of need. So long as Medicare fails to provide long-term health care as a matter of right, one can make a good faith argument that Medicaid planning is justified under the current scheme as the next best alternative.
1 Alison Barnes & M. Phil, An Assessment of Medicaid Planning, 3 Hous. J. L. & Pol’y 265, 269 (2003).
3 John A. Miller, Voluntary Impoverishment to Obtain Government Benefits, 13 Cornell J.L. & Pub. Pol’y 81, 84 (2003).
4 Barnes & Phil, supra note 1, at 270.
5 Id. at 283-95.
7 Timothy L. Takacs & David L. McGuffey, Medicaid Planning: Can it be Justified? Legal and Ethical Implications of Medicaid Planning, 29 Wm. Mitchell L. Rev. 111, 112-13 (2002).
8 Id. However, many scholars fail to make this distinction in their writings and tend to use the terms interchangeably.
9 Lisa Schreiber Joire, After New York State Bar Association v. Reno: Ethical Problems in Limiting Medicaid Estate Planning, 12 Geo. J. Legal Ethics 789, 808-811 (1999).
10 Model Rules of Prof’l Conduct Rule 1.1 (2003).
11 Joire, supra note 9, at 808.
12 Model Rules of Prof’l Conduct Rule 1.2 (2003).
13 Joire, supra note 9, at 808-09.
14 Model Rules of Prof’l Conduct Rule 1.3 (2003).
15 Joire, supra note 9, at 810.
17 Model Rules of Prof’l Conduct Rule 2.1 (2003).
18 Takacs & McGuffey, supra note 7, at 113.
20 Joire, supra note 9, at 799-800.
22 Miller, supra note 3, at 99. However, it is also true that if Congress does not act, in the years following the exemption in 2010 the estate tax will automatically be reinstated.
24 See Takacs & McGuffey, supra note 7, at 133 (delineating eight common objections to the practice of Medicaid planning).
25 See Miller, supra note 3, at 98.
26 See Takacs & McGuffey, supra note 7, at 133.
27 Miller, supra note 3, at 87.
28 Timothy L. Takacs & David L. McGuffey, Revisiting the Ethics of Medicaid Planning, 17 Nat’l Acad. Elder L. Att’ys 29, 29 (2004). See also Michael A. Kirtland, Estate Planning for Protected Persons, 65 Ala. Law. 405, 409 (2004) (permitting transfers to the next generation for estate planning purposes when the transferer is incompetent is morally much more problematic than other types of Medicaid planning).
29 Takacs & McGuffey, supra note 28, at 29.
30 Id. at 30.
32 Barnes & Phil, supra note 1, at 292.
36 Takacs & McGuffey, supra note 7, at 117- 19, 151-158.
37 Id. at 153.
38 Miller, supra note 4, at 98.
39 Barnes & Phil, supra note 1, at 267.
40 Id. at 268, 294-298; Wisconsin Department of Health and Family Services v. Blumer, 534 U.S. 473 (2002).
41 Barnes & Phil, supra note 2, at 297.
42 Diana Conway, Cheating Uncle Sam for Mom and Dad; Why do so Many Otherwise Honest Citizens Think it’s OK to Take Medicaid Money They Don’t Deserve, Newsweek, Jan. 27, 2003, available at 2003 WL 8638229.
43 Tackacs & McGuffey, supra note 8, at 134.
44 See, e.g. John M. Broderick, To Transfer or Not to Transfer: Congress Failed to Stiffen Penalties for Medicaid Estate Planning, But Should the Practice Continue?, 6 Elder L.J. 257, 264-286 (1998) (exploring the history of asset transfer regulation).
45 Joire, supra note 9, at 801-802.
46 Id. at 802. See also New York State Bar Ass’n v. Reno, 999 F. Supp. 710 (N.D.N.Y 1998).
47 Joire, supra note 9, at 802; New York State Bar Ass’n v. Reno, 999 F. Supp. 710 (N.D.N.Y 1998).
49 See, e.g., Miller, supra note 3, at 88-91.
50 Id. at 84, 101-08.
54 Mary Jo Gibson, Steven R. Gregory, & Sheel M. Pandya, Long-Term Care in Developed Nations: A Brief Overview, AARP, Oct. 2003, http://research.aarp.org/health/2003_13_ltc_dv.pdf.
Joseph S. Karp is certified as an elder law attorney by The Florida Bar and the National Elder Law Foundation. He is the principal of The Karp Law Firm, P.A., which focuses on elder law, estate planning and administration, and real estate. Past president of the American Association of Trust, Estate and Elder Law Attorneys, he serves on the board of the Alzheimer’s Association of Southeast Florida.
Sara I. Gershbein graduated magna cum laude from the University of Miami School of Law (2005), where she was managing editor of the Law Review of Psychology, Public Policy and Law.
The column is submitted on behalf of the Elder Law Section, Christopher A. Likens, chair, and John Staunton, editor.