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March 1989

The Medicare Catastrophic Coverage Act of 1988.

by Ecker, Robert L.

    Abstract- The Medicare Catastrophic Coverage Act of 1988 is discussed to illustrate the important new Medicaid provisions which were created to preserve the assets of the aged due to catastrophic illness, and to prevent complete spousal financial ruin.

The Medicare Catastrophic Coverage Act of 1988 (MCCA) expands the current Medicare Program to make it more comprehensive, although it still does not cover chronic care. It includes significant new Medicaid provisions which seem to provide substantial relief from spousal impoverishment and greater opportunities for preserving the assets of the elderly.

MCCA changes to Part A of Medicare, effective January 1, 1989, include hospital coverage for as many days as required with the payment of one annual deductible amount (between $564 and $580 in 1989) and coverage for up to 150 days per year of skilled nursing facility (SNF) care without the requirement of prior hospitalization and with copayments (about $20/day for 1989) required for only the first eight days of care. Under prior law, hospital benefits were limited to 90 days a year for each "spell of illness" plus a lifetime reserve of 60 days (which could only be used once) and 100 days of SNF care for posthospital recuperation. Beneficiaries were required to pay an in-patient hospital deductible ($540 in 1988) for each "spell of illness," as well as daily coinsurance charges for days 61-90 in a "spell of illness" ($135 in 1988), for the 60 lifetime reserve days ($270 in 1988), and for days 21 through 100 of SNF care.

MCCA also phases in coverage (generally beginning in 1991) for prescription drugs, subject to an annual deductible ($600 in 1991) and copayments (50% in 1990 and 1991, 40% in 1992, and 20% thereafter), and places a cap on charges for Part B Medicare benefits (which covers physician and medical equipment costs) so that beneficiaries will have to pay an annual deductible of $75 and coinsurance payments of 20% of the Medicare "reasonable" charges up to an indexed amount ($1,295 in 1990).

The costs of these changes will be borne primarily by the beneficiaries of the program (i.e., the elderly) through annual increases in the Part B monthly premium (i.e., an increase of at least $4/ month in 1989) and an income tax surcharge. For tax years beginning after December 31, 1988, individuals who are "Medicare eligible" for six or more months during the taxable year must pay an income tax surcharge ("supplemental premium") at an annual rate ($22.50 in 1989) for each $150 of federal income tax liability up to a maximum ($800 in 1989) for each Medicare eligible taxpayer. THe surcharge is not tax deductible, cannot be treated as an itemized medical deduction, and is considered a tax for estimated tax purposes (but not for purposes of any tax credits or the alternative minimum tax).

Under MCCA, a notice is required to be sent to all Medicare beneficiaries by January 31, 1989 explaining the new provisions as well as the limits of Medicare and Medicaid with regard to long term chronic care. In addition, companies that issue Medicare supplemental policies ("Medigap policies") in effect on January 1, 1989 are required to provide a letter to their policy holders describing the provisions of MCCA and their effect on such policies and must provide a uniform 30-day free-look period during which such policies may be returned for a full refund.

As a result of the changes to Medicare, it seems likely that companies currently issuing Medigap policies will develop new policies covering long-term custodial care, which is still not covered by Medicare. Therefore, accountants and attorneys will now more than ever be asked to review such policies and must consider their use in estate planning for the elderly.

MCCA also contains important new Medicaid provisions. While the income and resource limits for Medicaid eligibility remain the same, the allocation of income and resources between the institutionalized spouse and the community spouse and the rules regarding transfers of assets, including homesteads, have changed significantly.

Currently, as a result of the Medicaid rules, both for determining eligibility and in the treatment of income after eligibility has been established, the community spouse may become impoverished before the institutionalized spouse can qualify for Medicaid. A needy community spouse can only receive income from the institutionalized spouse so as to bring his or her income up to welfare limits and must sue the institutionalized spouse in Family Court for additional support.

Effective September 30, 1989, the community spouse will be allowed to receive more income from his/her institutionalized spouse so as to bring his or her total monthly income up to a maximum of $1,500/month. Spouses in need of income above the $1,500 limit will be able to request a Fair Hearing and plead that "exceptional circumstances" have put them in significant financial distress. Additionally, spouses can still sue in Family Court for additional support.

Also effective September 30, 1989, all resources, other than the couple's house and all household goods and personal effects, belonging to the institutionalized spouse and the community spouse, whether individually or jointly owned, must be totaled for Medicaid eligibility purposes. Each spouse will be allocated one-half share of the total, and the community spouse will be allowed to retain his or her one-half share up to a maximum of $60,000 (referred to as the community spouse resource allowance), without affecting the institutionalized spouse's Medicaid eligibility.

Notwithstanding these resource provisions, though, Medicaid will still limit attribution or "deeming" of income and resources of the community spouse. If the community spouse refuses to turn over assets or income in excess of his or her resource allowance, Medicaid cannot deny coverage to the institutionalized spouse. However, Medicaid will continue to be able to bring suit in Family Court against the community spouse for contribution.

With respect to the transfer of assets, MCCA requires states to adopt laws making individuals ineligible to receive benefits for a specified period, if such individual transfers assets within 30 months of being institutionalized. Also, transfer of the homestead by the institutionalized spouse will no longer be treated as an exempt resource and thus subject to the 30-month rule, except for a transfer to certain individuals including the community spouse and the institutionalized spouse's minor or disabled child. Thus, the restriction period for the transfer of assets has been increased from 24 months to 30 months, but only applies if the beneficiary receiving Medicaid is institutionalized. The period of ineligibility will be the lesser of 30 months or the number of months determined by dividing the value of the resources transferred by the average monthly cost of care in a nursing home. Transfers to the community spouse, though, are totally exempt from the 30-month rule as are transfers to the institutionalized spouse's disabled child.

These transfer provisions went into effect on July 1, 1988. However, as with the other Medicaid provisions of MCCA, it is unclear when New York will adopt the new federal rules and, once adopted, when such rules will actually be applied. Medicaid, in contrast with Medicare, is a joint federal-state program which requires implementation by state statutes.

The Medicaid provisions of MCCA make significant changes which must be understood when planning to qualify an individual for Medicaid. MCCA seems to remove all barriers to transfers between spouses aimed at creating Medicaid eligibility as well as for transfers to children, if the Medicaid recipient seeks home care. In addition, creation of a Medicaid Qualifying Trust remains a viable planning technique to protect and preserve family assets without affecting Medicaid eligibility.

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