Deficit Reduction Act (DRA) of 2005

On February 8, 2006, President George W. Bush signed into law the Deficit Reduction Act of 2005 ("DRA") which severely restricts Medicaid eligibility for many elderly by drastically changing the Medicaid asset transfer laws.

Changes in the Law

  1. Look Back Period

    The DRA increases the look-back period to five (5) years. Under the prior law, the look- back period was three (3) years for transfers to individuals and five (5) years for transfers to a trust.


    Processing time for Medicaid Applications will be even greater than it is now. Currently, it takes an average of one year before Medicaid approval is secured from a Medicaid agency. The increased documentation requirements will result in an even greater processing time and further delay in Medicaid approval. Reimbursement to a facility will take longer and many more residents will be carried "Medicaid-pending" for a far greater period of time.

    In addition, facilities should expect more denials of Medicaid applications as families will likely be unable to produce all required documentation dating back five (5) years and/or explain all transactions during that time period. It is anticipated that many more Reconsideration Applications and Fair Hearings will be necessary to secure approval of benefits, both of which result in further delay and greater cash flow issues for facilities.

  2. Penalty Period

    The DRA postpones the start date for a penalty period based on asset transfers. Under prior law, the penalty period commenced on the first day of the month following the date of the asset transfer. As such, nursing home residents maintained enough funds to private pay until the penalty period expired and Medicaid eligibility could begin. Now, the penalty period will not commence until the individual is otherwise eligible for Medicaid benefits but for the asset transfer, meaning that the individual must be residing in the nursing home and below the resource limit (currently $4,150) before the penalty period clock will begin to run.


    Individuals entering nursing homes will have neither private pay funds nor eligibility for Medicaid benefits. A senior who has transferred assets to children, made charitable gifts, etc. may not have access to those previously gifted funds and will be ineligible for Medicaid benefits for a period of months or years (depending on the value of the assets transferred) beginning on or about the date of admission to the facility. A health care facility is not likely to want to admit such a resident but, as this scenario will be very common, that will leave numbers of empty beds. Hospitals will have tremendous difficulty discharging such patients, as nursing homes will not want to admit such residents. If a nursing home has admitted such a resident, subsequent discharge will be very difficult as no other facility is likely to admit that resident and a safe discharge will be impossible.

  3. The Valuable House Rule The DRA provides that if a person has equity in a home exceeding $500,000, they will be automatically ineligible for Medicaid benefits. Individual states will have the ability to raise the threshold limit to $750,000. Under prior law, the homestead was an exempt asset and Medicaid benefits could be secured regardless of the value of a home in the community.


    This will again result in a large number of residents being ineligible for Medicaid benefits but also having no liquid assets to pay for their care. Individuals will be forced to sell their homes or reduce their equity by taking reverse mortgages or home equity lines of credit. This will likely result in several months and possibly years of delay in a facility securing payment, especially where families hold out for the highest sale price or title issues cause delay in closings. Facilities will be unpaid during the entire time while such matters are pending — again a cash flow problem for facilities.

Note: The Hardship Waiver

States are required to institute a process for seeking a hardship waiver where the transfer penalty will result in deprivation of medical care that would endanger the applicant's health or life. The new law permits nursing homes to apply for such a waiver on behalf of a resident. Facilities will need the consent of the resident or designated representative to pursue such a hardship waiver. However, the hardship waiver is only for hardship to the resident, not to the facility.

GDGC Solutions

GDGC concentrates in all areas of Elder Law and collections litigation. The firm handles complex Medicaid applications, Medicaid denials, reconsideration applications, Fair Hearings, Article 78 proceedings, estate litigation, guardianships and litigation in all courts throughout New York City and the boroughs, Nassau, Suffolk and Westchester counties.

GDGC can resolve Medicaid application problems and pursue appeals at all levels to secure Medicaid benefits on behalf of a resident and reimbursement to the facility. GDGC can also negotiate payment agreements, secure promissory notes or other secured transactions if appropriate, and litigate cases based upon breach of contract and/or fraudulent conveyances, as appropriate. GDGC can pursue claims against estates and petition for guardianship to secure Medicaid eligibility, sell real property, etc. As Elder Law practitioners, GDGC can approach each matter from both a litigation standpoint and an Elder Law position, providing more ways to secure payment to your facility.