How Does Medicaid Spend Down Work?

Summary
To be eligible for Medicaid Long Term Care, an individual must meet income and asset limits. Applicants with income or assets over those limits can “spend down” their excess money to become eligible. However, applicants are only allowed to spend down their income on Medicaid-approved medical goods and services, and they cannot just give away their money to reduce assets. Medicaid spend down can be complicated, and mistakes might result in a Medicaid denial or a period of ineligibility.

 

Spending Down Assets vs. Spending Down Income

Spending down assets or income to become eligible for Medicaid is fairly common. But there are some key differences between spending down assets and spending down income, most importantly:

  • Spending down assets happens before the application is submitted, while spending down income is an ongoing process.
  • Applicants can spend down on almost anything they want to reduce assets, but there are strict limitations on what applicants can spend down on when it comes to reducing income. Details on both are below.
  • All states allow asset spend down, while only certain states allow income spend down. However, states that don’t allow income spend down do have another option for people to reduce their income, which is also detailed below.

 

Spending Down Assets Overview

Here are some of the most important things to know about spending down assets to meet the Medicaid asset limit in your state and become Medicaid eligible.

The Difference Between Countable and Exempt Assets

Many of your assets will be counted when it comes to Medicaid’s asset limit, but not all of them. Some assets are exempt, or not counted.

The applicant’s primary home is usually exempt, although it must meet certain criteria in terms of its value. For more on home ownership rules, click here. Other exempt assets include:

  • Furniture
  • Appliances
  • Clothing
  • Personal items including wedding/engagement rings
  • Primary vehicle
  • Term life insurance policies valued below $1,500
  • Medicaid Compliant Annuities
  • Irrevocable Funeral Trusts

Countable assets include:

  • Cash
  • Bank accounts
  • Vacation homes or properties other than the applicant’s primary home
  • Mutual funds
  • Stocks
  • Bonds
  • Most life insurance policies
 Retirement accounts: IRAs and 401(k)s owned by the applicant (or their spouse) are countable assets in most situations, but it depends on the payout status and the state. For IRAs in payout status, the monthly payouts (or distributions) are counted against Medicaid’s income limit.

Types of Medicaid and Asset Limits

If an applicant has countable assets that add up to more than the Medicaid asset limit in their state, they can spend down those assets to reach the asset limit and become Medicaid eligible.

There are three types of Medicaid Long Term Care – Nursing Home Medicaid, Home and Community Based Services (HCBS) Waivers or Aged, Blind and Disabled (ABD) Medicaid. For individuals in most states in 2024, the asset limit for all three is $2,000. For married couples with both spouses applying, the 2024 asset limit in most states is a combined $3,000 or $4,000. For married couples with only one spouse applying for Nursing Home Medicaid or HCBS Waivers, the asset limit for the applicant spouse in most states is $2,000 and the asset limit for the non-applicant spouse is $154,140, due to the Community Spouse Resource Allowance (CSRA). The CSRA does not apply to ABD Medicaid.

Again, these limits can vary greatly by state. In California, for example, there is no asset limit. In Illinois, the asset limit is $17,500 for all three types of Medicaid Long Term Care. The limits can also vary by program, like in South Carolina, where the individual asset limit for Nursing Home Medicaid and HCBS Waivers is $2,000, but the individual asset limit for ABD Medicaid is $9,090.

Understanding the Look-Back Period

While Medicaid Long Term Care applicants who are over the asset limit can spend down their excess assets on themselves or their spouse to get under the limit, they can not just give away their assets or spend them on other people. To make sure they don’t, Medicaid uses the Look-Back Period.

In most states, the Look-Back Period is five years. This means that Medicaid applicants are required to provide financial documents going back 5 years from their application date that prove they have not given away any money or other assets.

Selling assets below fair or market value also violates the Look-Back Period, so it’s important to carefully document any large transactions you might make.

If state officials found you have violated the Look-Back Period in some way, your Medicaid application be denied and you will also be subject to period of Medicaid ineligibility that could last months or years. The length of the penalty is determined using the state’s “penalties divisor.” This divisor can vary by state, but many states divide the dollar amount of the violating assets (how far over the limit you are) by the average cost of care in the state to determine the length of the penalty.

How to Spend Down Assets

Medicaid Long Term Care applicants can spend down their excess assets in a wide variety of ways without violating the Look-Back Period or jeopardizing their eligibility. These ways include:

Paying Off Debt: Accrued debt such as credit card bills, vehicle loans and mortgages can be paid off as part of spending down to reduce assets.

Medical Equipment and Care: Assets may also be reduced by purchasing medical devices or services that aren’t covered by Medicaid, such as glasses, hearing aids, some prescription drugs, over-the-counter supplements, day treatment, drug and alcohol programs and other kinds of therapy. Transportation costs to and from medical appointments may also be allowed to reduce assets in some states.

Home Modifications: Repairing or upgrading the home to improve access and safety is another way to lower assets without violating the Look-Back Period.

Repairing or Selling Vehicles: Paying to fix a vehicle, for instance tuning up the engine or replacing the tires, is a Medicaid-approved way to spend down assets. Selling a vehicle at fair-market value to purchase a new one is also allowed.

Vacations, travel, experiences, etc.: You or your spouse can even spend down excess assets by going on vacation, traveling to visit family or just going to some concerts. What’s important to remember is that you can’t pay for other people’s vacations or concert tickets, or anything else for that matter. This would violate the Look-Back Period. Also, you shouldn’t purchase items like second cars, vacation homes or expensive jewelry as part of a spend down plan. These will likely be considered countable assets as far as Medicaid is concerned.

Personal Care / Life Care Agreements: A personal care agreement is a contract between an individual who can not function independently and their caregiver. These kind of contracts allow seniors to pay in advance for caregiving, and spend down their assets in the process.

Medicaid Compliant Annuities: These annuities convert a large amount of money into a steady income stream. However, not all annuities are Medicaid compliant, and purchasing a non-compliant annuity would likely violate the Look-Back Period.

Irrevocable Funeral Trusts: Seniors can pay in advance for their funeral and burial expenses by purchasing one of these trusts. The purchase reduces assets without violating the Look-Back Period, but there is a dollar limit on the cost of the trusts, aka the amount of assets seniors are allowed to make exempt (up to $15,000 per spouse in most states).

 Keep the Receipts! If you plan on spending down assets to become eligible for Medicaid Long Term Care, make sure you save all of your receipts. You will need to submit them along with your Medicaid application to prove you have spent your assets in ways that do not violate the Look-Back Period.

Spending Down Income Overview

Spending down income is not as straightforward as spending down assets. First of all, not all states allow for income spend down. And in those that do, you don’t spend down to meet the income limit in your state. Instead, your “spend down” amount is calculated using your income and your state’s Medically Needy Income Limit. We’ll explain this, and other key points about spending down income, below.

Medically Needy Pathway Basics

Most states that allow for income spend down refer to it as the Medically Needy Pathway. It does have other names in some states, like the Medicaid Excess Income Program in New York, and the Medical Spenddown Program in Illinois.

No matter the name, the Medically Needy Pathway is essentially a way for seniors who have income over Medicaid’s income limit and who have high medical bills to become income-eligible for Medicaid.

In all states that allow seniors to use the Medically Needy Pathway (complete list below), it can be used for Aged, Blind and Disabled (ABD) Medicaid. But only some states allow it to be used for Nursing Home Medicaid or Home and Community Based Services (HCBS) Waivers.

How the Medically Needy Pathway Works

To become income-eligible for Medicaid with the Medically Needy Pathway, you or your loved one must “spend down” a certain amount of your income on certain healthcare expenses.

The amount of income you need to spend down (also known as a spend down amount) is calculated using your income and your state’s Medically Needy Income Limit (MNIL). In basic terms and in most cases, your spend down amount is your income minus the MNIL.

Each state also has a spend down period which can be anywhere from 1-6 months. You have to meet your spend down amount each spend down period to be eligible for Medicaid. So, it works like a deductible for insurance. Once you meet the spend down amount (aka your deductible), Medicaid (aka your insurance) will kick in and start covering expenses. Here’s an example:

In Pennsylvania, the MNIL is $425/month for an individual, and the spend down period is 6 months. Joe has $925 / month in income. So, his spend down for one month would $500 ($925 income – $425 MNIL), and his total spend down amount for Pennsylvania’s 6-month spend down period is $3,000. Once Joe spends $3,000 on Medicaid-allowed healthcare expenses, Medicaid will cover his expenses for the rest of the 6-month spend down period. When that ends, the process starts again and Joe will have to meet his $3,000 spend down amount again.

Allowable Healthcare Expenses to Spend Down

All states allow you to spend down income on Medicare payments and other kinds of health insurance premiums as part of the Medically Needy Pathway. All other allowable expenses depend on the state, but they can include:

  • Physician visits
  • Hospital services
  • Dental appointments
  • Eyeglasses
  • Prescription drugs
  • Prescribed medical supplies and equipment
  • In-home medical services
  • Physical, speech and occupational therapies
  • Chiropractor care
  • Transportation to and from medical services

Medically Needy Pathway States

As of 2024, the following states offer a Medically Needy Pathway: Arkansas, California, Connecticut, Florida, Georgia, Hawaii, Illinois, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Montana, Nebraska, New Hampshire, New Jersey, New York, North Carolina, North Dakota, Pennsylvania, Rhode Island, Utah, Vermont, Virginia, Washington, West Virginia and Wisconsin, as well as the District of Columbia.

Income Cap States

States that do not offer a Medically Needy Pathway are called Income Cap or Categorically Needy states.

In Income Cap states, Nursing Home Medicaid and HCBS Waiver applicants with income over the limit can use a Qualified Income Trust (QIT) to reduce their income and become eligible for Medicaid. QITs are also known as Miller Trusts.

The following states allow Nursing Home Medicaid and HCBS Waiver applicants and beneficiaries to use Miller Trusts to reduce their income and meet the state’s income limit: Alabama, Alaska, Arizona, Arkansas, Colorado, Delaware, Florida, Georgia, Idaho, Indiana, Iowa, Kentucky, Mississippi, Missouri (HCBS Waivers only), Nevada, New Jersey, New Mexico, Ohio, Oklahoma, Oregon, South Carolina, South Dakota, Tennessee, Texas and Wyoming.

You may have noticed that several states offer both a Medically Needy Pathway and the use of Miller Trusts. These states are Arkansas, Florida, Georgia, Iowa, Kentucky, Missouri and New Jersey.

How Do Miller Trusts Work?

Using a Miller Trust is fairly straightforward. The Medicaid applicant/beneficiary simply deposits their excess income (income above the state’s Medicaid income limit) into the Miller Trust on an ongoing basis, and they can qualify for and maintain their Medicaid coverage.

Miller Trusts used to reduce income for Medicaid eligibility purposes must have a trustee to manage the funds in the trust. This person can not be the Medicaid beneficiary. Miller Trusts used for Medicaid are also required to be irrevocable, which means their terms can not be changed once they are created. And the state must be named as beneficiary of the Miller Trust, meaning once the Medicaid beneficiary passes, all of the money in the Miller Trust will be given to the state.