Medicaid ‘Spend Down’ Can Help Cover Nursing Home Costs, Experts Say

With nursing home costs averaging over $111,000 annually, financial experts recommend strategic Medicaid 'spend down' planning to help families qualify for coverage. However, eldercare specialists warn against attempting this complex process without professional guidance due to strict eligibility rules and potential penalties.

Federal health officials project that more than half of Americans over 65 will require assistance with basic daily tasks like bathing, dressing, or eating at some point in their lives, with some studies indicating this figure could reach two-thirds.

Despite this likelihood, very few older Americans carry private long-term care insurance. According to AHIP, a health insurance industry trade group, just 3% to 4% of Americans over 50 maintain active extended care policies. Medicare, the primary health coverage for seniors, typically doesn’t cover ongoing nursing home or assisted living services.

With the youngest baby boomers nearing their mid-60s, many families are counting on personal savings, family caregiving, or Medicaid, the joint federal-state program for low-income individuals. However, the first two approaches often fall short, while Medicaid qualification for residential care remains challenging due to strict income and asset requirements.

Long-term care specialists suggest considering a deliberate approach, particularly for middle-class families with moderate resources: systematically reducing assets to achieve Medicaid eligibility for nursing home or assisted living coverage more quickly.

This approach is called a Medicaid ‘spend down’ strategy.

To achieve Medicaid qualification for nursing home coverage, families must systematically and openly utilize a family member’s resources for legitimate expenses. Examples include using remaining assets to prepay funeral costs or purchase burial arrangements.

While intentionally lowering income and savings for Medicaid qualification may seem overwhelming, the alternative of unplanned long-term care expenses can rapidly deplete savings regardless. Assisted living and nursing home expenses often reach thousands monthly, typically forcing families to exhaust resources before receiving assistance.

Genworth Financial’s 2024 research revealed that home health aides average approximately $78,000 annually, while semi-private nursing home rooms cost roughly $111,000. This contrasts sharply with the median retirement savings of $200,000 for Americans aged 65 to 74, according to Federal Reserve data. An unexpected extended nursing home stay would consume these savings within two years.

‘There’s a reasonably high likelihood that you’ll need nursing care for a period of their lives, and there’s a good chance you may need it for a long period of time,’ said Eric Carlson, director of long-term services and supports advocacy with Justice in Aging, a national nonprofit legal advocacy organization focused on older Americans. Carlson has worked on these issues for 35 years.

Medicaid qualification for long-term or skilled nursing care typically requires low incomes and minimal assets, with specific limits varying by state. Most states require monthly income below $2,800 to $3,000. Individual asset limits generally cap at $2,000, excluding certain property like primary residences, vehicles, and personal belongings.

Given Medicaid eligibility’s complexity, eldercare professionals strongly recommend working with specialized advisors to ensure proper asset utilization and avoid accidentally disqualifying assistance applicants from Medicaid access.

For instance, families should avoid simply transferring assets from the care recipient’s accounts to family accounts to appear financially eligible. Medicaid applications typically include a five-year ‘look back’ review, where officials examine assets and accounts for improper transfers. It’s crucial to document expenses related to senior care costs, including out-of-pocket nursing home payments, medical bills, and personal necessities. Applicants may also use remaining assets for mortgage payments or debt reduction.

‘People shouldn’t be doing ‘do it yourself’ financial planning in these matters. It can create significant problems with a person’s estate,’ Carlson said. ‘You don’t want to wait until the day nursing care is absolutely necessary to make these sorts of decisions.’

Since Medicaid operates as a joint state-federal program, states manage these programs differently. New York residents whose income exceeds Medicaid limits can still qualify through an ‘excess income’ or spend-down program, deducting medical costs like doctor visits, prescriptions, or home care from income until meeting eligibility requirements. Once reaching that threshold, Medicaid covers additional care for the remaining month.

Similar ‘medically needy’ programs operate in over 30 states, enabling people with substantial healthcare expenses to qualify despite initially excessive income.

Carlson suggests utilizing resources like Justice for Aging, the Kaiser Family Foundation, and other eldercare advocates in local communities to navigate these challenges. Cities and states also provide Medicaid liaisons to guide families through the application process.

For those still years away from requiring nursing care, establishing long-term care plans remains essential, especially since most Americans will likely need such services eventually. One option involves purchasing long-term care insurance, typically acquired by individuals or families in their late 40s or early 50s. Monthly policies costing a few hundred dollars could eventually cover care expenses reaching tens of thousands annually.