What Is Medicaid Spenddown, and How Does It Work

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As you age, there may come a time when you need long-term care. This care can be financially overwhelming if you don't have long-term care insurance, robust savings, or family support. Many turn to Medicaid, which consists of state-run programs that help people with low incomes pay for healthcare. Medicaid also covers long-term care provided at home and in institutional settings, such as nursing homes.

But it can be tricky to qualify for Medicaid and access its long-term care benefits. This is where a Medicaid spenddown can help. In practice, Medicaid spenddown means reducing your countable assets.

There's a lot of confusion and frustration about how Medicaid spenddowns work. Many rules apply, and those - like Medicaid programs - vary by state.

Below, we walk you through Medicaid spenddown basics, so you can understand the process.

What is the Medicaid spenddown?

If you need Medicaid coverage for long-term care - but your income is above the Medicaid threshold in your state - you can use Medicaid spenddown to qualify. This requires you to decrease your income through allowable expenses and, sometimes, asset reduction to a level low enough to fall at or below the Medicaid income threshold for your state.

Medicaid programs are run by states and territories, so spenddown requirements vary. Some states don't have an income limit, but your monthly income typically can't exceed the cost of nursing home care - either at all or by more than $200.

You must abide by Medicaid spenddown rules in your state to be approved for Medicaid and to continue coverage. Doing so can be complicated. That's why some applicants or their families hire a consultant or attorney to help them with the Medicaid spenddown process in their state.

Medicaid spenddown includes both income spenddown and asset spenddown. Let's look at the definition of each and how to meet those requirements.

Income spenddown

To be eligible for Medicaid, an applicant must meet certain income limits for long-term care. If their income exceeds the Medicaid eligibility treshhold for their state, they can "spend down" excess income on qualified expenses, which include:

• Health insurance premiums

• Hospital bills

• Medical expenses

• Physician copays

• Prescription medications

It's important to note that not all states and territories have the option to "spend down" excess income to qualify for Medicaid.

Asset spenddown

In addition to income limits, there are also asset limits to qualify for Medicaid long-term care coverage. These limits vary by state, so it's important to check the rules where you reside.

Having assets - even if they are over the Medicaid asset limit - does not automatically disqualify you for benefits. Not all assets are counted. For example, a primary residence and vehicle are exempt from the Medicaid spenddown asset test. However, a second vehicle or a vacation home do count toward the limit.

If all other eligibility requirements are met, you will have to spend down your assets until you reach the Medicaid asset limit set by your state of residence.

How does Medicaid spenddown work?

To reach your state's income and asset thresholds, you may need to spend down what is considered excess. Some states refer to spenddowns as medically needy or surplus income programs.

Each state sets an income limit for people to qualify as medically needy. In general, themedically needy pathway limits are less than $1,000 a month for an individual. The allowance is higher for couples. To qualify, you'll need to spend any income above the limit on medical bills and related expenses. Income in most states includes:

• Alimony

• Individual retirement account (IRA) distributions

• Pensions

• Social Security benefits

• Veterans Affairs (VA) benefits

• Work wages

Once you meet the income limit, you're eligible for Medicaid for the remainder of the spenddown period. That period can range from 1 to 6 months. A 1-month spenddown period, for example, means that you'd need to spend your excess income down to your state's Medicaid limit every month.

In some states, there is no medically needy pathway. But you still may qualify for Medicaid in these states by directing your excess income into a qualified income trust, known as a Miller trust or Medicaid income-only trust, and naming a trustee. Because the funds aren't yours anymore, that money doesn't count as your income. The funds in the trust can only be used for certain purposes, such as certain personal needs or spousal allowances.

Who qualifies for a Medicaid spenddown?

Not everyone qualifies for a Medicaid spenddown. Typically, people who need to qualify for Medicaid, but have income and assets beyond the state limits, are people ages 65 and older.

It's important to note that in some states, the Medicaid spenddown, or the medically needy program, isn't extended to all seniors. And even when it's offered to all seniors, Medicaid spenddown may not make you eligible for all Medicaid long-term care programs in your state.

What's the difference between income spenddown and asset spenddown?

If your state offers the medically needy pathway, you can spend down your monthly income to meet its requirements. This means you can subtract the following expenses from your income:

• Non-covered medical costs, such as hospital bills

• Healthcare cost-sharing, such as Medicare premiums, copays, coinsurance, and deductibles

In addition to these income limits, most states have asset limits for Medicaid. So, you also may need to spend down your assets to qualify for coverage. If so, pay attention to your state's guidelines and what Medicaid considers a countable asset. Some items that don't count as assets for Medicaid's purposes are:

• Primary home

• One car

• Prepaid funeral expenses

• Personal belongings

• Term life insurance policies

Under your state's Medicaid rules, countable assets might include:

• Cash

• Checking/savings accounts

• CDs, stocks, bonds, and mutual funds

• Retirement accounts (unless in payout)

• Secondary residences, such as a vacation home or rental property

Allowable Medicaid spenddown items

If you're in income and asset spenddown mode, carefully track all of your medical bills and expenses. Any excess income or assets that are spent down must go toward qualifying bills or costs, which include:

• Health insurance premiums

• Doctor's visits and care as required by a healthcare professional, including home health aides, nurses, and therapists

• Past and current medical bills

• Prescription drugs

• Transportation to and from medical care and treatments

• Expenses for approved medical equipment and supplies, including hearing aids, eyeglasses, and prosthetics

• Expenses for approved improvements to your home, such as wheelchair ramps or stairlifts (chair lifts)

What are Medicaid's income limits?

Medicaid income limits and asset limits are determined on a state-by-state basis, within federal guidelines. In many states, income and asset requirements for institutional and home- and community-based services (HCBS) Medicaid are the same. Your limit may vary depending on your marital and application status.

Institutional/Nursing Home Medicaid Income Eligibility, 2024 (in most states)

Some states allow a non-applying spouse to hold assets and income that aren't counted for the applying spouse. For example, federal Medicaid rules allow a non-applying spouse or community spouse to have assets up to $154,140, which is called the community spouse resource allowance.

In addition, the non-applicant spouse may be eligible for spousal protection called minimum monthly maintenance needs allowance (MMMNA). This allows the applicant spouse to allocate part of their income to the non-applicant spouse, not to exceed $3,853.50 per month. The income of the non-applicant spouse cannot exceed $3,853.50, including the MMMNA amount.

What is the look-back rule, and how can you avoid it?

The Medicaid look-back rule prevents people from giving assets away below fair market value to fall below state thresholds. Typically, the state has a 5-year period to review your transactions, counting back from the date you applied for Medicaid.

If the state finds that you spent down improperly, you could face a time penalty. That would delay your eligibility for Medicaid.

To help you avoid penalties, check the rules in your state. There are exemptions and qualifying people to whom you can transfer assets without penalty.

What happens after your spenddown is met?

If you qualify for Medicaid after meeting the spenddown requirements, Medicaid will cover eligible long-term care expenses as outlined in your state's coverage guidelines.

Even though individuals living in Medicaid-funded nursing homes can have a monthly income as high as $2,829 in 2024 (in most states), they don't get to keep it all. They are assigned a personal needs allowance amount, ranging from $30 to $200 per month, which they can use to pay for expenses not covered by Medicaid, such as haircuts, clothing, vitamins, and more. All other income must go toward the cost of nursing home care.

Medicaid enrollees who receive long-term care at home are permitted to keep their monthly income up to a certain amount. This allows them to pay for expenses such as rent, utilities, and food, which are otherwise covered when a person resides in a nursing home.

What are the drawbacks of a Medicaid spenddown?

It may be hard to spend down your assets and stay within the Medicaid requirements in your state or territory. The rules and regulations can be very complex. If you don't spend down your funds properly, you could get hit with a time penalty. The penalty delays the date that you can begin Medicaid coverage for your long-term care.

What other planning strategies do people use to qualify for Medicaid?

Planning is a key part of qualifying for Medicaid when your income and/or assets are beyond your state limits and you need to reduce them to be eligible for long-term care coverage. Some strategies to consider may include:

• Spending on qualifying home and vehicle improvements for equipment that is not covered by insurance. For example, you might have a wheelchair ramp installed at your residence.

• Using funds to pay off your mortgage and credit card debt.

• Preparing a family caregiver or life care contract. You hire a family member to care for you and pay the fair market value for their services.

• Opening an irrevocable trust and transferring assets. You'll want to make sure this doesn't happen within the look-back period.

To develop a strategy that won't trigger a time penalty, consider working with:

• Financial advisers with Medicaid spenddown expertise

• Medicaid asset protection attorneys

• Professional Medicaid planners

Additional resources

Medicaid spenddown rules and qualifications can be complicated. There are several planning strategies to help you reduce your countable assets when applying for Medicaid to cover long-term care. Options for reducing countable assets include:

• Converting a lump sum of cash into a monthly income through an annuity

• Shielding assets in a Medicaid asset protection trust

• Purchasing an irrevocable funeral trust

Medicaid spenddown calculators can help you figure out the approximate amount of assets or income you must reduce to become eligible for Medicaid. It's important to conduct thorough research and/or consult an adviser to ensure you choose the options that are right for you.

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