Medicaid and Long-Term Care: The Effects of Penalizing Strategic Asset Transfers

Medicaid provides a critical source of insurance for long-term care, and individuals may strategically offload assets (typically to children) to meet the means-tested eligibility requirement. In this paper, we quantify the extent of such behavior using variation in the penalty for improper parent-to-child transfers induced by the Deficit Reduction Act of 2005. We estimate difference-in-differences models based on the hypothesis that only individuals with high levels of nursing home risk (high risk) will alter transfers because of the Act. We find that over a two-year horizon, high risk individuals reduced transfers to children on the extensive margin by 11 percent and that the average total amount of transfers decreased by $4,860. The results hold only for coupled respondents. We also conduct a triple-differences analysis to examine heterogeneity with financial literacy and find that even those with a low level of financial literacy responded to the penalty.