What is Medicaid?

What is Medicaid?

Medicaid, enacted in 1965, is means-tested health coverage for certain individuals who are aged, blind or disabled.[1] It is jointly funded federal-State program, administered by the States. It does not pay cash to a beneficiary. Instead, it pays medical providers for services rendered to eligible participants. Medicaid does not help everyone who needs assistance paying for healthcare. Coverage is limited to individuals who meet the eligibility criteria for specific classes of assistance. The class of assistance most often sought by individuals creating trusts relates to nursing home coverage or home health care.


To many, Medicaid is an enigma.[2] The program’s complexity surrounding who is eligible, what services are paid for, and how those services are reimbursed and delivered is one source of this confusion. Variability across State Medicaid programs is the rule, not the exception. In recent years, more and more States have implemented a variety of major program changes using special waiver authority. Income eligibility levels, services covered, and the method for and amount of reimbursement for services differ from State to State. Further, Medicaid is a program that is targeted at individuals with low income. However, not all of the poor are eligible, and not all those covered are poor.

For populations like children and families, primary and acute care often are delivered through managed care. Meanwhile, the elderly and disabled typically obtain such care on a fee-for-service basis. Nationwide, Medicaid finances the majority of long-term care services.[3] Such services include nursing home care and community-based services designed to support the elderly and disabled in their homes. Recently, some States have begun to integrate Medicare and Medicaid financing and/or coordinate acute and long-term care services for these populations.[4]

Gaining & Maintaining Medicaid

Like SSI, to gain or maintain eligibility for Medicaid, an applicant must be poor enough under the program eligibility rules. An applicants’ income and resources must be within certain limits. The specific income and resource limitations that apply to each eligibility group are set through a combination of Federal parameters and State definitions. Consequently, those standards vary considerably among States, and different standards apply to different population groups within a State. For many of those groups, States have permission under a special provision, Section 1902(r)(2), to use more liberal standards for computing income and resources than are specified within each of the groups’ definitions. Most States use Section 1902(r)(2) to ignore or disregard certain types or amounts of income or assets, thereby extending Medicaid to individuals with earnings or resources too high to otherwise qualify under the specified rules for that eligibility pathway.

As described in this document, a properly structured special needs trust (or supplemental needs trust) can be used to accelerate eligibility for public benefits. Other trusts can be used to achieve asset protection goals where planning begins well in advance of the need for public benefits.[5]


1. Medicaid was created in the same legislation creating the Medicare program, P.L. 89-97.

2. “The Medicaid Act is an enormously complicated program. The system is a web; a tug at one strand pulls on every other. Given this complexity, there are untold ways in which a state plan might fail to comply with the Act and the governing regulations.” Lewis v. Rendell, 501 F. Supp.2d 671 (E.D. Pa. 2007). The same, unfortunately, applies to Medicaid planning, balancing estate planning, retirement planning, tax planning and other goals, is an exercise in risk management, not risk avoidance. An initial problem is that medicaid uses different terminology from other programs. Although you might think of items having value as “assets,” the Medicaid program defines “assets”, with respect to an individual, as all income and resources of the individual and of the individual’s spouse, including any income or resources which the individual or such individual’s spouse is entitled to receive. 42 U.S. Code § 1396p(h)(1).

3. Long-term care refers to a wide range of supportive sand health services for persons who have lost the capacity for self-care due to illness, frailty, or a disabling condition. It differs from acute care in that the goal of long-term care is not to cure an illness that is generally of short duration, but to allow an individual to attain and maintain an optimal level of functioning over the long-term.

4. House Ways and Means Committee Prints, 108-6, 2004 Green Book, Chapter 15.

5. As discussed here, self-settled Medicaid trusts which are not special needs trusts do not facilitate eligibility unless the trust is irrevocable and there is no circumstance under which payment from the trust could be made to or for the benefit of the applicant. 42 U.S.C. § 1396p(d)(3)(B). A transfer of resources penalty is applied to any transfer to trust which precludes access to income or corpus within the 60 month look-back period.

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