This blog was part of an ongoing series of educational classes and attempts to summarize some of the ways Medicaid can affect your real estate deal. Nothing in this blog should be used in place of actual legal advice. Please contact an attorney specializing in elder care law or your local Medicaid agency.
MEDICAID VS. MEDICARE
Both programs were created around the same time, beginning with Franklin D. Roosevelt in the 1930s. One of the programs he explored was the National Health Insurance Program, which we still do not have today but which was the seed for Medicaid and Medicare. In 1965, President Lyndon B. Johnson passed Medicaid and Medicare with the social security amendments he pushed through. Though both programs officially began in 1966, Alabama didn’t receive access to Medicaid until 1970 (though it wasn’t actually called Medicaid until it was renamed in 1981).
The federal Centers for Medicare & Medicaid Services (CMS) set the core national rules, mandatory service requirements (such as hospital care and doctor services), and baseline eligibility groups. The federal government funds a large percentage of every state’s program through the Federal Medical Assistance Percentage (FMAP). This matching rate is based on a state’s average per capita income; wealthier states get a 50% match, while lower-income states received between a 70-76% match.
Medicaid is a state-run joint State/Federal health insurance program that provides hospital and medical coverage for people with low income
- Each state has its own rules about who’s eligible and what Medicaid covers
Medicare is a federal health insurance program for people age 65 or older
- It also covers some people younger than 65 with certain disabilities, permanent kidney failure, or amyotrophic lateral sclerosis (ALS)
Some people are eligible for both Medicare and Medicaid at the same time, but only Medicaid will place liens and demand repayment for services.
The bulk of Medicaid’s budget goes toward covering long-term nursing care, which averages between $7,000-$9,000/month in Alabama. Because they are providing services to those who cannot afford it, there is actually a mandate in the state law that says the State is required to seek reimbursement from patients aged 55 and older and have qualified for certain coverage such as long-term nursing home expenses.
Medicare is primarily used for those 65 and older and there is no income barrier or requirement to join. It covers hospitals, doctors, and prescriptions, but it does not cover all medical expenses including long-term care, which is why some people qualify under both plans at once.
If you encounter a client who says they are in a nursing home but Medicare is paying for it all, they may be mistaken. If it is a long-term stay, Medicaid is likely paying, and it is important for a Realtor to know this distinction since some of the costs of the client’s stay may be recouped and this will affect their financial situation when selling property.
Alabama’s Medicaid program is run by the Alabama Medicaid Agency and eligibility is restricted to the following:
- Low-income children up to age 19
- Pregnant women
- Seniors (65+)
- People with disabilities
- parents/caretakers with extremely low incomes
Childless, non-disabled adults are generally not eligible at all. Madison (17%) and Limestone (19%) Counties have some of the lowest Medicaid eligibility rates in the state, whereas Wilcox (54%) and Perry (52%) Counties have some of the highest.
~ 1.16 million Alabamians are enrolled in Medicaid (22.6% of the state’s population)
~ 60% of all children in the state are covered by medicaid
~ 50% of all enrollees in the state are children
~ 60-70% of all residents in Alabama nursing homes rely on Medicaid to pay for long-term care due to lack of funds
~ 70% of Medicaid’s funding comes from the federal government
~ 7 billion in federal/state money is spent on Medicaid every year
Studies have linked Medicaid access to lower mortality rates, better management of chronic conditions (such as diabetes and hypertension), and higher rates of preventative cancer screenings. Children who receive Medicaid are statistically more likely to graduate high school, attend college, earn higher wages as an adult, and rely less on future government assistance. The overall effect of Medicaid on society is generally positive when it comes to health.
PAYMENT RECOVERY
Medicaid provides many health services to those who would not be able to access or afford this care otherwise, but if those people do actually have any assets, such as a house, then what happens?
States are required to seek recovery under federal law for recipients who are 55 or older (or are permanent residents). Though their typical target for recoupment is those age 55 or older, they can also recoup from those younger than 55 as well. The state most often seeks recoupment for:
- Long-term care like nursing facility services
- Home- and community-based services
- Related hospital and prescription drug services
Medicaid uses two methods of recouping the massive costs associated with the services it provides:
- TEFRA Lien – a legal claim that state Medicaid programs can place a person’s home while they are alive and living in a nursing facility
- These liens are placed while you are alive and getting benefits. Your house is typically exempt from qualification for the Medicaid program, so if you do own a home they want to make sure that they are paid back once you sell it.
- MERP Claim – a federally mandated State-wide attempt to collect/recoup costs from a deceased person’s estate
- After a person dies, Medicaid can file a claim against the estate for repayment.
TEFRA – WHAT IS IT?
The Tax Equity and Fiscal Responsibility Act of 1982. This act lets Medicaid help pay for your long-term care even if you own a home. If an individual enters a nursing home and Alabama Medicaid determines they are “permanently institutionalized” (not reasonably expected to return home), the state can place a TEFRA lien on the property pre-death. This lien sits on the title to your home and waits – it does NOT force eviction or sale – and acts as a claim against the property in the event that the home is sold or the owner dies. The lien is then payable upon any sale, transfer, or lease of the property.
The goal of this act was to allow people to keep their homes even while they were receiving Medicaid in the event that they were able to eventually leave the nursing facility and return home. This means that your primary home is an excluded asset when qualifying for Medicaid.
There are a few exceptions and exemptions that can prevent a TEFRA lien from being placed on the home:
- If there is a spouse residing in the home
- If there is a child under age 21, blind, or disabled residing in the home
- If there is a sibling of the Medicaid recipient who has an equity interest in the home, is currently residing in the home, and has been residing in the home for at least one year immediately before the date of the individual’s admission to the institution
- If a child of the Medicaid recipient is and has been residing in the home for at least two years immediately before the date of the recipient’s admission and has been residing there on a continuous basis since that time providing care
There are equity limits on the value of your personal home when applying for Medicaid, and having an equity of over $750,000 can disqualify you. An important thing to note is that if the recipient sells their home during their stay in a nursing facility, the TEFRA lien would immediately need to be paid off at closing, and then any proceeds the seller received would immediately disqualify them from Medicaid benefits until they have “spent down” their cash assets on medical bills and needs. Generally if the recipient has more than $2,000 in cash reserves they will be disqualified from Medicaid until they have “spent down” these cash reserves.
It is very important when you have a loved one going through the Medicaid process and you want to understand how that person’s assets could be targeted by Medicaid in the future that you speak to an attorney who specialized in the field.
MERP – WHAT IS IT?
The Medicaid Estate Recovery Program is the federal law requiring states to attempt to recover money from a deceased patient’s estate. In Alabama, this is done through the Alabama Medicaid Agency’s Notice of Probate System, which requires all representatives of estates to notify the State when the probate proceeding is opened. Once Medicaid receives this notice they have 30 days to file a claim against the estate. Filers must provide the deceased person’s full legal name, date of birth, date of death, social security number, probate court details, and case number.
Non-probate assets are generally safe from MERP claims, as this is just a claim on the actual estate – if you have assets that don’t pass through your estate, they will not be affected by this claim. How title is held is very important, as is the amount you sell it for – whether it is fair market value or not. If you are selling your house for less than fair market value, the Agency will need to review your sales price.
There are several options for satisfying the lien/claim:
- The family can pay the amount due in full after the Medicaid recipient has passed away and keep the property
- The family can sell the property and pay off the lien (can be completed prior to the recipient’s death or after) and keep the remaining proceeds
- A responsible party can sign a promissory note and make monthly payments to the Agency
- These payments have a maximum repayment plan of 48 months
- If they are a protected party they can apply for an exemption and continue to live there
- If a spouse continues to live in the property then the home is exempt during the spouse’s life, but Medicaid can collect on their claim after the spouse’s death
- They can risk ejectment or foreclosure
- Very rare
SCENARIO
A person loses a parent and goes to sell their parent’s house. They believe it is owned free and clear and expect to make good money when it sells. They find out there is a large TERF lien or MERP claim on the home and have to pay it off.
If your client is in this scenario, setting proper expectations is very important. Medicaid is a priority lien holder and there isn’t a way to avoid paying these liens in the long run. If your client is using Medicaid, it is important they know the difference between what Medicare covers and what Medicaid covers, and that they might be expected to pay some of these expenses back. It is always a good idea to have your client discuss probate avoidance and asset protection strategies with an attorney if you believe this could be a situation they have to deal with.
WILL MEDICAID FORECLOSE ON A LIEN OR CLAIM?
In short, it can, but it doesn’t usually have to. Typically Medicaid will just place the lien and wait as that lien is then secured to the property and the funds will be collected as soon as the property changes hands. Medicaid will never go after a surviving spouse, a surviving child under the age of 21, or a child of any age who is blind or permanently and totally disabled, so there is no risk of foreclosure or ejectment to these groups. A family can also apply for a hardship waiver to stop State action if they are not part of these groups. This can either completely halt State action or can help the family negotiate a lower payment to release the lien.
PROBATE AVOIDANCE AND ASSET PROTECTION STRATEGIES
There are a few ways to legally avoid Medicaid estate recovery:
- Avoid probate all together
- Deed – Joint Rights of Survivorship
- When the first spouse dies, the property will immediately convey to the surviving spouse outside of probate and therefore outside of Medicaid’s control
- Deed – Life Estate
- This allows you to earmark your assets to go to certain people upon your death, but also grants you permission to stay in the property until you die
- This also works as an automatic conveyance like the Joint Rights of Survivorship Deed
- Trust
- Must be irrevocable (removed your control of the asset) and created by a professional who understands Elder Care Law and Medicaid
- Deed – Joint Rights of Survivorship
- Avoid Medicaid all together
- Long-term care insurance
- Hybrid policies – life insurance with long-term care riders
- Pay cash for long-term care
- Delay enforcement or transfer
- Use protected/authorized parties who can take advantage of an exemption or hardship waiver
There have been discussions in recent years about whether folks aged 50-70 should start slowly giving away their assets to family and friends in order to maintain generational wealth while still qualifying for government benefits when the time comes. If you wait until you are incapacitated and need to immediately enter into a nursing home, you have waited too long – the five-year look back period will apply to you; if you gave away your assets more than five years prior to your entry into a nursing facility then they will not apply toward your eligibility.
5-YEAR LOOK BACK PERIOD & PENALTY PERIOD
By default, Medicaid has a strict financial audit of the 60 months preceding your application. This is to ensure you have not hidden or given away all your wealth in the attempt to have the State pay for your care. Any asset can be looked at in this period – real estate, cash, vehicles, investments, etc. Their goal is to ensure all of these assets sold during this period were sold for fair market value – if they believe anything was sold for less than fair market value then it will immediately be considered an “uncompensated transfer” and triggers a penalty period. This is a period of Medicaid ineligibility where you cannot access benefits. Their reasoning is that if you had sold your asset for fair market value then you could have paid for your medical care during this period of time. The standard calculation to determine the period of Medicaid ineligibility is
Value of gifts ÷ State Penalty Divisor = Months of Ineligibility
The 2026 Divisor is $8,200 per month, which is the average monthly cost for private paying nursing home care.
For example:
- Three years before they enter a nursing home, parents gift a $165,000 house to their child
- $165,000 ÷ $8,200 = 20.12
- The result is a 20-month penalty period where the parents do not qualify for Medicaid coverage
The idea in the above scenario is that the parents could have sold that house for fair market value and received $165,000 in cash to pay for their medical bills. This also applies if the parents do sell their house, but they sell it to a family member or friend for less than fair market value (for example, the home is worth $300,000 but they give their family member a discount and sell it to them for only $135,000) and gift them the remaining equity. This would also result in a situation where the parents would have had that additional $165,000 to pay for medical bills if they had sold for fair market value and would also result in a 20-month ineligibility period.
QUESTIONS
How do they verify that the money has been spent down?
If you sell a house, there is a settlement statement involved, so there is a clear record of how much money you get and if a TEFRA lien is being paid off then that will be notated on the settlement statement. Once we get past the TEFRA payment, we have a final number indicating the proceeds the client is getting at the closing table. I imagine that would have to be turned in to Medicaid as proof of assets once you sell so that Medicaid is aware of how much money you get. I’d speculate that you would then have to turn in receipts to Medicaid indicating what services you have paid for up to the point where you have less than $2,000 in your account. Medicaid has a 5-year lookback period and an audit system they frequently use to make sure you are not gifting away your money and are in fact using it for medical expenses.
Can you only use your home sale proceeds for medical reasons?
The technical rule is going to be that if you have ongoing medical expenses and you have cash, you have to use that cash to pay for medical expenses. Everyone has other necessary expenses in life such as food and utility payments, so I’m sure there are other qualifying items you can spend this money on, but I’m not very familiar with this part of the process so it would be recommended that this question be brought to a Medicaid representative.
How does Medicaid know how much your house is worth? Do they order an appraisal?
My opinion would be an appraisal or they could request comps from multiple Realtors. The appraisal would happen years after the actual sale, but the appraiser would be able to pull numbers reflective of the fair market value at the time of the sale.
Is the lien based on the fair market value of the home?
No, the lien is based on the amount for services rendered, so whatever Medicaid has paid out on behalf of the recipient. If the lien is more than fair market value of the home, they will still place that lien in the hopes that there is another asset that might cover that portion. If you are thinking about the penalty period, the penalty is based on the gap – so if you sold your home for less than fair market value you wouldn’t be penalized for the full fair market value of the home, you would be penalized based on the gap between fair market value and what you actually sold it for.
If you have any questions about Medicaid affecting real estate or have a client currently dealing with this scenario, please reach out to an attorney specializing in elder care law or Medicaid planning, or the local Medicaid agency.
Medicaid Lien Q&A: https://medicaid.alabama.gov/documents/7.0_Providers/7.1_Benefit_Coordination_3rd_Party/7.1.8_Property_Liens/7.1.8_Lien_FAQs_Updated_5-3-24.pdf
Alabama Medicaid Website: https://medicaid.alabama.gov/content/7.0_Providers/7.1_Third_Party/7.1.8_Property_Liens.aspx
