Medi-Cal and Asset Tests: Hit by Reality

 By Mark J. Warshawsky

Governor Gavin Newsom of California recently proposed reinstating the asset tests formerly used to determine eligibility for Medi-Cal health and long-term care benefits for disabled individuals and those aged 65 years and older. He is responding to the state’s large budget deficits, driven in part by an explosion of costs in the state’s Medicaid program over the last two years. Although the state Legislative Analyst’s Office claims that the increase in costs for seniors—three times higher than the estimates made when the legislation removing the asset tests was enacted in 2021—was unexpected, my own research in 2023, which focused specifically on long-term care, identified an obvious methodological mistake in the state’s estimates and projected such large increases.  Even with the reinstatement of asset tests, California’s Medicaid long-term care benefits apparently remain the most generous in the country and may still be inconsistent with federal law. 

Medicaid was designed as a jointly financed federal-state program to provide health care for the poor. It also covers nursing home care and, increasingly, home healthcare, particularly for the disabled and elderly. Eligibility for benefits for these groups is determined by a set of income and asset tests, which differ by state and have evolved over time but operate within a federal framework.

California has long taken a loose approach to eligibility, benefits, and other Medicaid rules. For example, under “Phase I” of the state’s 2021 reform legislation, its asset-test maximum for Medicaid eligibility was $130,000 for individuals (compared to the federal standard of just $2,000) and $195,000 for couples (compared to $3,000). In 2024, the state eliminated the asset test entirely.

California’s “look-back” period to identify and disallow strategic asset transfers aimed at gaining Medicaid eligibility is only 30 months, whereas federal law calls for 60 months. Moreover, California’s look-back does not apply if the applicant is not in a nursing home at the time of application. In contrast, federal law penalizes such transfers regardless of whether the person is institutionalized. California has also overlooked transfers of up to $12,000 in transfers to relatives per day—allowing individuals to shift as much as $4.4 million annually in order to pass the asset test when it was still in effect.

California also completely disregarded applicants’ net housing equity, which other states count as an asset if the value exceeds $730,000 (or $1,097,000 in some states). Retirement assets, including spousal retirement assets, were also excluded from consideration, unlike in most other states.

In California, estate recovery from deceased Medicaid recipients only applies to long-term care benefits, and only if the recipient had no surviving spouse. Recovery is limited to assets that pass through probate, effectively excluding retirement and insurance assets entirely, as well as many homes.  Despite the substantial wealth held in California—where median home values now reaching $910,000—the Medicaid program’s estate recovery efforts have lagged over the years, falling from $72 million collected in 2015 to just $17 million in 2020.

These legal shortcomings were either overlooked or approved by regulators at the Center for Medicare and Medicaid Services (CMS). California officials told CMS that the total disregard of assets would cost the federal government only $115 million annually. However, the state’s own budget showed an increase of 37,000 newly eligible individuals and a total cost of $400 million. My own rough calculation in 2023—based on data from the Health and Retirement Study and additional survey data on long-term care needs—suggested that the annual additional cost to Medicaid for long-term care benefits alone would be at least $1.2 billion, with more than 100,000 newly eligible individuals. Based on actual experience in 2024, the California Legislative Analyst’s Office now calculates a caseload increase of 112,000 enrollees at a total cost of $1.4 billion, split evenly between the state and the federal government. Note that these latter statistics include both health and long-term care benefits; the increases in costs from long-term care benefits, especially for nursing home care, is likely to emerge more gradually over time.   

So, hit by reality and ignoring the complaints of advocates oblivious to costs, law, and fairness, Governor Newsom is proposing to reinstate the $2,000/$3,000 asset limits on January 1, 2026, but apparently not otherwise toughen the asset-related Medicaid eligibility rules. He also proposes changes to eliminate Medicaid long-term care benefits for illegal immigrants, the workforce and quality incentive program, and the requirement to maintain a backup extended power system for skilled nursing facilities. In total, these changes would save $1.7 billion annually on an on-going basis for a program estimated to cost $194.5 billion in 2025-26—an increase of $15.5 billion from 2024–25. These and other changes are likely insufficient, but at least they are in the right direction.

https://www.aei.org/economics/medi-cal-and-asset-tests-hit-by-reality/