Panel Paper: Medicaid Asset Look-Back Policy and the Elderly's Asset Holding Decisions

Friday, November 7, 2014 : 9:30 AM
Enchantment Ballroom A (Hyatt)

*Names in bold indicate Presenter

Padmaja Ayyagari, University of Iowa and Daifeng He, College of William and Mary
Consistent with the theoretical literature that means-tested welfare programs reduce individuals’ savings, anecdotal evidence abounds that the elderly transfer assets in order to qualify for Medicaid nursing home benefits. Such asset transfers have several implications for public policy and social welfare. Therefore, it is important to identify the extent to which Medicaid’s means-testing leads the elderly to transfer assets. Empirical evidence on this, however, is sparse. In this paper, we provide evidence that the elderly transfer large amount of assets in anticipation of Medicaid nursing home benefits.
We take advantage of an exogenous change in Medicaid eligibility rules related to asset transfers and nursing home use. In 2006, Medicaid tightened the look-back policy with two major changes. First, the look-back window increased from three years to six years. If an individual was found to have transferred assets below the market value during the look-back period, Medicaid would impose a penalty period during which it would not pay for benefits. Second, the penalty period starts when the person enters the nursing home and would otherwise be eligible for Medicaid nursing home benefits instead of the date of transfer. Individuals who expect to use Medicaid nursing home benefits in the future may respond to this policy change by decumulating their assets at a faster rate; in contrast, individuals who have a low expectation of applying for Medicaid nursing home benefits may be less likely to change their asset holding behavior.
Using data from the Health and Retirement Study (HRS), we examine whether this change in Medicaid eligibility rules affected the elderly’s asset holding decisions. Specifically, we hypothesize that this more stringent Medicaid policy led the elderly to decumulate their assets at a faster rate if they were at a higher risk of applying for Medicaid nursing home benefits. To measure risk we use answers to a 2004 survey question on the probability of moving to a nursing home in the next five years.
We find that married elderly at high risk of using nursing homes significantly decreased their asset holding after the policy change, relative to those with a low risk of using nursing homes. Specifically, relative to low-risk elderly, the total assets of high-risk elderly decreased about 100 thousand dollars during the period of 2006-2010, or 20%. The majority of the decumulation occurred with non-protected assets. In contrast, IRA, one of the protected asset categories, actually increased for the high-risk elderly in the post 2006 period.
Our results also suggest that single elderly decreased their asset holdings, though at a slower rate and these estimates are not statistically significant. We examine heterogeneous effects of the policy by various factors including asset levels, financial literacy, and financial planning horizon. Finally, we use the off-year HRS consumption data to examine whether the observed assets decumulation is accounted for by increased consumption or by asset transfer.