Understanding the Medicaid Look-Back Period: 14 Key Questions, Answered

Medicaid is an insurance program funded jointly by the federal government and individual states. It’s designed to provide health care coverage to low-income Americans who can’t afford the care they need on their own, as well as people with qualifying disabilities. With over 85 million people enrolled, Medicaid is currently the largest provider of single-source health insurance in the U.S. ^[01]

Medicaid’s eligibility requirements and coverage vary greatly from state to state, so where your loved one lives can affect their Medicaid eligibility, the benefits they’ll receive, and the potential penalty periods discussed below.

Who qualifies for Medicaid?

To qualify for Medicaid, a senior must meet several requirements:
Their income has to fall below a state’s Medicaid income limit, or their medical-related care costs must exceed their income.

• They must live in the state where they receive benefits.
• They must have a significant medical need.
• Their countable assets have to fall within the range determined by their state.

Because each state has its own requirements, it’s important to contact your state’s medical assistance office for more details, or to speak with an elder law attorney who can walk you through the nuances of your state’s unique program and application process.

In addition to meeting medical criteria, senior applicants must adhere to strict financial eligibility requirements both before applying for Medicaid and after they have qualified.

Even if a senior has limited resources and wouldn’t be able to pay for senior living or nursing home costs out of pocket, they may have countable assets or income that exceeds their location’s Medicaid requirements. These income requirements are typically based on earnings beneath 133% of the state’s poverty level.^[02] So, if the poverty line in your state is calculated at $15,000 of annual income, your income would need to be less than $19,950 to qualify for Medicaid.

Causes of Medicaid financial ineligibility

There are two main reasons seniors don’t financially qualify for Medicaid: their income or their assets (or a combination of the two). To meet the financial requirements, a person must carefully minimize or “spend down” excess funds.

If your loved one’s income is too high: Some states offer spend-down programs that can help seniors qualify for Medicaid. This means that a state lets people subtract their non-covered medical expenses — prescription drugs, health insurance premiums, deductibles, and doctor and dentist visits — from their monthly income until it’s at a level that qualifies them for Medicaid. Spend-down periods vary by state, and they can last anywhere from one to six months.^[03]

If your loved one has assets that disqualify them from Medicaid: Sometimes, even if a senior can’t immediately pay for long-term care, they might own assets like a home, land, or large amount of savings. Gifting assets or money can’t be part of a senior’s plan to qualify for Medicaid.

To make sure seniors don’t simply give their assets away to family and friends, the Centers for Medicare and Medicaid Services (CMS) reviews applicants’ financial histories over a “look-back period” of five years.

The Medicaid look-back period is a window encompassing the 60 months before a senior applies for Medicaid. During this period, the applicant can’t have gifted money or assets over a certain value to friends or family. If any gifting occurred for less than fair market value during this period, a senior will incur a “penalty period” of Medicaid ineligibility.^[04]

For example, if a senior applies for Medicaid on Jan. 1, 2024, they must not have gifted money or assets since Jan. 1, 2019, to be eligible.

Let our care assessment guide you

“The look-back period is often confused with the penalty period, which varies from state to state, and sometimes even from county to county,” says K. Gabriel Heiser, author of the book How to Protect Your Family’s Assets from Devastating Nursing Home Costs: Medicaid Secrets, a comprehensive guide to Medicaid eligibility planning.

A penalty period occurs if a senior applies for Medicaid and is otherwise financially eligible but has gifted assets or sold them under fair market value within the 60 month look-back period, meaning they’ll be disqualified from receiving Medicaid benefits for an amount of time calculated based on the value of the assets or money gifted or sold under fair market value.

The length of the penalty period is the same no matter which type of senior care your loved one wishes to use Medicaid to fund. While nursing homes are the only type of senior living facility entirely paid for by Medicaid, the Medicaid look-back period for home care, assisted living, and even doctor’s appointments lasts the same amount of time.

When does the penalty period start, and how long is it?

The penalty period doesn’t start on the date of the gift — it starts on the date the senior applies for Medicaid. So, if a senior gifts $50,000 to their adult child on Jan. 1, 2019, and applies for Medicaid on Jan. 1, 2023, even though four years have passed, their penalty period begins on the application date.

“Sometimes, people don’t know years in advance that they’ll need nursing home care sooner rather than later, so it’s incredibly important to know when gifts were made,” says Heiser. “It may be better financially to wait to apply for Medicaid until the five years are up than to apply and incur a lengthy penalty period.”

The length of a penalty period is determined by the state’s “penalty divisor,” which is explained in the following section.

What is a penalty divisor? How is it calculated?

The penalty divisor varies greatly from state to state, and it’s calculated using the average cost of long-term care in a senior’s place of residence. It’s used to determine the number of months of disqualification from receiving Medicaid.

The divisor is set by the state government and Medicaid bureau and is equivalent to the average nursing home cost in your loved one’s state or county.

The length of a Medicaid penalty period is calculated using a fraction in which the numerator is the value of the gift made during the look-back period and the denominator is the penalty divisor.

For example: In Alabama, the average cost of a nursing home is $6,800 per month.^[05] That number represents the penalty divisor.

If your aging parent who lives in Alabama gifted you $100,000 in January 2019, but they chose to apply for Medicaid on Jan. 1, 2023, the resulting penalty period would be $100,000 divided by $6,800, which equals 14.7.

Thus, the penalty period would be 14.7 months, and your loved one would be able to begin receiving Medicaid benefits in March 2024. Note that, because the gift was given four years before the Medicaid application was submitted, and the penalty period is over a year, your parent would have actually had to spend less out of pocket for nursing home care if they had waited until 2024 to apply.

Is it possible to reverse or undo a Medicaid gift penalty?

In certain cases, yes.

“In some states, to undo a penalty, all gifted assets have to be returned to the Medicaid applicant. In others, returning part of the gift can reduce the penalty period accordingly,” says Heiser.

Understandably, returning the value of a gift may not be possible. The recipient may have already spent the money or may not wish to return the assets in question.

Also, even if returning funds eliminates the penalty period, it often results in the Medicaid applicant having too many resources to qualify for Medicaid in the first place. However, it can give the senior the chance to spend down their assets properly while paying for care out of pocket.

“They can use part of the money to pay for a nursing home while spending down the rest,” says Heiser.

Is it possible to incur a Medicaid penalty once your loved one is already in a nursing home?

It’s rare, but possible, to become unqualified for Medicaid and have to complete the spend-down process again — even if your loved one has already qualified and used Medicaid funds to pay for nursing home care.

For example, this could happen if a loved one, after their relative died, is the beneficiary of a large asset or sum of money in the will. In this case, your loved one would have to pay for care out of pocket or use another resource until the spend-down was complete.^[06]

Nursing homes and Medicaid coverage can be complicated. You may want to consult with a qualified elder law attorney when you have questions.

The first step to avoiding penalties is knowing how they’re incurred. Understand which types of transactions cause penalties during the look-back period, which don’t, and safe ways to spend down without affecting Medicaid eligibility.

What transactions cause penalties during the look-back period? Which transactions don’t?

When seniors apply for Medicaid, they have to fill out a form that includes disclosure of any gifts over the past 60 months.

“Any gift more than a nominal value must be reported on the Medicaid application form and will result in a period of disqualification,” says Heiser.

While federal law allowed individuals to gift up to $17,000 a year without having to pay a gift tax as of 2023, Medicaid would still consider that gift a transfer of assets.^[07]

Disqualifying gifts include:

• Significant sums of money
• A senior’s home
• Cars
• Deeds to land
• Expensive possessions that could be considered investments, such as highly valuable jewelry either gifted or sold for less than their fair market value
• A large charitable donation

Gifts of a nominal value include:

• Birthday, wedding, or holiday presents
• Gifts of already-owned items

What transfers or gifts are exempt?

“There are several unique situations in which a transfer is exempt,” according to Heiser. “There are circumstances where you can transfer a home, and, since spouses’ assets are considered jointly, you can also gift assets to a spouse.”

Both before and after entering a nursing home, seniors can transfer financial assets to these individuals without incurring a penalty period of Medicaid ineligibility:^[08]

• A spouse or, in some states, a domestic partner
• A trust for the benefit of a senior’s child who is blind or permanently disabled, per Medicaid’s definition
• A trust for the sole benefit of anyone under age 65 who is permanently disabled, per Medicaid’s definition

Some exceptions apply to the transfer of a home, as well. In addition to the individuals listed above, a home can be gifted to:

• A senior’s child under the age of 21
• A child who is blind or disabled, even if the home isn’t in a trust
• A sibling or relative who already holds an equity interest in the house, who has lived in the home within the year before Medicaid application
• A “caretaker child,” meaning a child who lived in the home caring for their aging loved one for at least two years before the date of Medicaid application

How can your loved one spend down “excess” countable assets without violating the rules of the look-back period?

There are ways for your aging parent to spend down their assets without violating the rules of the look-back period. Some are fairly straightforward, while others are more complex.

“Talk with a financial advisor or an elder law attorney,” says Heiser. “Every family’s circumstances vary, and you can save a lot of trouble by consulting with an expert in your area. Mistakes can have a long-term effect on your family’s finances.”

In his book, Heiser outlines many available legal strategies families can pursue to spend down their assets without incurring penalties. These include:

• Using funds to upgrade a home or pay for home renovations
• Buying a new car or trading in your old one
• Prepaying funeral or burial expenses (“This not only uses a significant amount of money — it also makes things easier for the family to not have to worry about planning and securing a funeral,” says Heiser.)
• Purchasing items for the home that wouldn’t count as investments (For example, buying a $20,000 diamond would count as an asset, while purchasing new, reasonably priced furniture would not.)
• Creating a personal service contract or “life-care contract” that prepays for future caregiving work
• Purchasing a Medicaid-friendly annuity (This can be done at any time.)
• Creating and funding an irrevocable trust (You must wait five years before applying for Medicaid.)
• Transferring a home using a “lady bird deed,” which is a life estate deed that allows the owner to maintain control of a property until they die, at which point the property automatically transfers to their chosen beneficiary without going through probate (This option is only available in some states.)

Put simply, because a senior doesn’t qualify to receive Medicaid benefits until the end of the penalty period, your family will have to find alternate ways to pay for nursing home care during the penalty period.

The median U.S. cost of a private room in a nursing home was $9,034 a month in 2021, while a semi-private room cost $7,908 a month, according to Genworth’s most recent Cost of Care Survey.^[09] Nursing homes are generally the most expensive housing option because of the high level of care they provide. They’re also the only senior housing type Medicaid covers in full.

It’s normal to feel overwhelmed when looking at the cost of long-term care. There are several programs and options your loved one can use to fund some nursing home care costs, including:

• Private funds. Your family may have to pay for nursing home expenses out of pocket, using income, savings, pension payments, or home equity.
• Medicare. In some instances, Medicare may cover up to 100 days of a rehabilitative stay in a nursing home. However, a senior must meet specific requirements to qualify. Outside these circumstances, Medicare doesn’t pay for room and board or assistance with activities of daily living (ADLs) in a nursing home. However, it may pay for certain aspects of medical care, such as injections, wound care, and medication.
• Veterans benefits. The Department of Veterans Affairs (VA) and Veterans Health Administration offer VA benefits and other programs that can help qualifying veterans and their families pay for nursing home care.
• Social security. Just like any other money, these benefits can be used at a senior’s discretion, meaning Social Security can be put toward monthly nursing home payments.

If your loved one is no longer able to age at home safely and you’re considering senior living options, reach out to one of A Place for Mom’s Senior Living Advisors. They can offer advice, schedule tours of local communities, and discuss options to fit your family’s budget and needs — all at no cost to you.