What is the Deficit Reduction Act?

By Sara Toor M.A. & Cameron Lindahl M.S.

The Deficit Reduction Act of 2005, also known as DRA, is a Federal law that grants states the ability to modify their Medicaid programs. This allows individual states to reform their Medicaid programs to fit with the present health care environment while maintaining federal guidelines. In short, it is a Federal law that is implemented in each state differently.

What were the Significant Provisions of the DRA? 

Asset Transfer Penalty for Institutional Medicaid
Institutional Medicaid refers to nursing home and hospital “alternative Level of Care (ALOC)”. Under this change, the look-back period was extended. Formerly, when individuals submitted application for Institutional Medicaid they had to also submit proof of assets for the past three (3) years and if individuals had any trust accounts they had to submit proof of assets going back five (5) years. The look-back period was only extended for non-trust asset individuals from three (3) to five (5) years.

The look back period does not apply to Community Based Long Term Care Services or to non- Long Term Care Medicaid Services. In addition, the look back does not apply to waivers.

A new transfer penalty rule was imposed as well. Any assets transferred for less than fair market value or gifted during the look back period, a Medicaid transfer penalty is applied. How long is the transfer penalty? Under the DRA, the way in which the transfer penalty is calculated remained the same.

(total amount transferred) / (monthly regional nursing home rate) = # of months ineligible for Medicaid coverage of institutional care

Prior to the DRA, the penalty period started the month after the date of transfer (this still applies to transfers made before February 2006). The most important change under the DRA is when the penalty period starts. Presently, under the DRA, the penalty period clock starts to run on the later of the date the assets are transferred or “the date on which the individual has already been admitted into institutional level of care and has applied for Medicaid and is financially eligible for Medicaid, except for the transferred assets (Bogart, Silva, Mayer & Frank, 2007).” The penalty period clock continues to run even if the individual leaves the institutional care facility such as a nursing home. The DRA did not make any modifications to the existing exceptions to the transfer penalty that vary from state to state.

Treatment of Annuities
Under the DRA, the way in which annuities are handled has changed to prevent sheltering of funds to heirs while an individual is qualifying for Medicaid Long Term Care Services. Medicaid applicants must report any interest in an annuity, annuities must name the state Medicaid office as primary remainder beneficiary or second after community based spouse/minor/or disabled child. If an annuity does not name the state in the correct position, the annuity will be treated as a transfer of assets for less than fair market value and the amount subject to penalty is the full purchase price of the annuity. In addition, the annuity must meet certain requirements as well such as the annuity is irrevocable, actuarially sound, non-assignable, and provides payments in equal amounts during the term of the annuity without any deferrals or balloon payments.

Life Estates
Under the DRA the purchase of a life estate interest in another individual’s home is treated as a transfer of assets for less than fair market value unless the purchaser lives in the home for at least one (1) year after the date of purchase. In addition, even if the purchaser/individual lives in the home for at least one (1) year and the purchase amount of the life estate exceeds the computed value of the life estate’s interest, then the difference is a transfer for less that fair market value and thus subject to penalty.

Notes & Loans
Under the DRA, notes, loans, and mortgages are considered a transfer of assets for less than fair market value unless they meet the similar conditions to that of annuities. Those conditions include the following:

  1. Repayment terms are actuarially sound.
  2. Payments made in equal amount without balloon payments.
  3. The note, loan, or mortgage does not allow cancellation of the debt upon the death of lender.

Hardship Waiver
The DRA created a hardship waiver that allows states to make an exception to a transfer of assets penalty in certain cases in which applying the penalty would negatively impact an individual’s health or life of an individual or when the penalty would deprive an individual of food, clothing, shelter, or any other necessities. Under DRA, a long-term care facility can apply for an undue hardship waiver on behalf of a resident if the facility has the resident’s permission to do so. There is also an option under some states that can elect to pay for an individual’s nursing home care for up to thirty (30) days while waiting for the outcome of the request for a undue hardship waiver.

Home Equity
Under the DRA, states cannot pay for Medicaid Long Term Care services for individuals whose equity interest in his/her home is over a certain limit. The cut off is $500,000.00 however, states can choose to increase it up to $750,000.00. There are also some exceptions to this if there is a spouse, minor, blind or disabled child living in the home. States also have the option to not apply this rule in cases that have a documented hardship.

Continuing Care Retirement Communities
Continuing Care Retirement Communities also known as CCRCs, require entrance deposits that are placed into an escrow account in which an individual does not have access to. Prior to the DRA, the entrance deposits were not considered countable resources for determining Medicaid eligibility. However, under the DRA, they are now countable resources when determining Medicaid eligibility.

Purpose of the DRA
According to CMS (Centers for Medicare and Medicaid Services), the purpose of the DRA is to ensure that long term care services are available to those individuals who need the services. In addition, CMS stated, “tightening Medicaid asset transfer rules discourages the use of such “Medicaid planning” techniques and makes it more difficult for individuals with the resources to pay for their own long-term care services to inappropriately transfer assets to qualify for Medicaid.”

Keep in mind that each state implemented the DRA differently so reviewing the above changes per the specific state’s Medicaid Policy Manual is recommended.

DISCLAIMER: The information provided by CPT Institute is for informational purposes only and is intended to be used as a non-legal guide prior to consultation with an attorney familiar with your specific legal situation. CPT Institute is not engaged in the practice of law or in rendering legal advice or counsel. No such legal advice or counseling is either expressly or impliedly intended. This form is not a substitute for the advice or counsel of an attorney. If you require legal advice, you should seek the services of an attorney. © 2018 CPT Institute All rights reserved.

Resources/Further Readings:




Bogart, V. J., Silva, D., Mayer, R. C., & Frank, E. (2007). Summary of changes to Medicaid in the deficit reduction act of 2005.