How Medicaid Reform Could Burn The Middle Class

Capitol Hill Republicans are about to do something experts once deemed impossible: end a middle-class entitlement. No, not Social Security or college loans, but a big chunk of Medicaid, the health-care program originally designed for the poor. That's quite a coup. But will the GOP still be celebrating in a few years?

Health-care experts warn that one consequence of the GOP's $182 billion Medicaid cut over seven years will be growing pressure on states to end a widely used middle-class ploy: juggling family finances to get Uncle Sam to pick up the tab for parents in nursing homes. Medicaid costs have ballooned as more affluent families find ways to tap the system. Today, 52% of U.S. nursing-home costs are covered by Medicaid at an average of $40,000 a year per patient. Many are once-prosperous seniors who become penniless on paper by legally transferring their assets to family members or to trusts. Then, when the oldsters need extended nursing-home care, Medicaid often foots the bill--as long as the transfers were done two years in advance, depending on state regulations.

UGLY CHOICE. But by slashing projected spending, Washington will force states to choose between allocating scarce funds to these middle-class elderly and their families, or to a growing population of poor children, pregnant women, and truly impoverished seniors. If that sparks a middle-class revolt, the brunt could be borne by the new crop of Republican governors. "There's not a single person in the middle class who can pay for a parent in a nursing home," grouses Atlanta's Democratic Mayor Bill Campbell. "This is absolutely going to backfire."

Indeed, the last time Congress tried to tackle the problem of financing long-term care, plans to create a program covering the cost of catastrophic illness were scuttled by affluent seniors who objected to higher premiums. This time, though, the backlash will come from their children as states crack down on asset transfers. A 1993 General Accounting Office study found that half of Medicaid recipients in nursing homes had hidden or transferred assets, with transfers averaging $46,000. And Oregon, in a single year, recovered $7 million from the estates of impoverished Medicaid nursing home patients who died while owning a home.

So far, Oregon is the exception. Most states are reluctant to aggressively hunt hidden assets from nursing home residents or to try to recover costs by attaching homes of dead Medicaid patients. But federal regulations allow states to rule nursing home patients ineligible for Medicaid for up to three years following bogus asset shifts. So with states sure to get less cash from Washington in the future, attitudes are changing. "We'll be looking under every rock to find that hidden money," promises one Midwestern state official.

COMING CRUNCH. States also are likely to push more innovative programs to encourage people to buy private long-term-care insurance, which can cost $1,800 to $4,000 annually for a healthy 70-year-old. Some states allow elders who have purchased a policy and then exhausted benefits to keep their assets and still receive Medicaid payments for future nursing care. The GOP would also make such insurance payments tax-free and may allow the tax-exempt use of 401(k) plan funds to buy insurance.

But the most creative alternatives may be overwhelmed by the coming budget crunch. Already, Hill Republicans have retreated from plans that could have forced spouses of nursing- home residents to spend more of their savings before qualifying for Medicaid. That's a preview of what GOP governors can expect when the great Medicaid money hunt begins in earnest--and the middle class starts to howl.