07/11/2005

Avoiding Medicaid Abuse

By: T. Scott Gilligan, OFDA General Counsel

One of the principal driving forces behind preneed sales in Ohio is the Medicaid Program. Individuals who are in, or who anticipate going into, nursing homes are advised to spenddown their resources so they can qualify for Medicaid benefits. Of course, a legitimate way to spenddown assets is to pre-pay for an irrevocable preneed funeral contract. The funds that are placed in a trust or the insurance policy that is used to fund the preneed contract do not count as resources when Medicaid calculates if a person qualifies for benefits. Therefore, the purchase of a preneed contract helps an individual lower their resources in order to qualify for Medicaid assistance.

As the cost of Medicaid has soared and become a major drain on state budgets, federal and state governments have moved to crack down on fraudulent spenddowns of assets by individuals looking to qualify for Medicaid. Ohio has lagged in these efforts, but its budget difficulties will push it to become more and more aggressive to prevent Medicaid fraud.
Funeral directors will occasionally encounter situations where they have real concerns about the possibility of Medicaid fraud. For example, a family may seek to shelter a $50,000 insurance policy by assigning it to a funeral home in payment of an $8,000 funeral. Or, after a Medicaid applicant has died, a family member may seek to modify the $7,000 preneed funeral contract from a traditional funeral to a $1,200 direct disposition with instructions to refund the difference to the family member.

Set forth below are several scenarios and issues that OFDA members have faced and the guidance we have provided to them to avoid even the appearance of participating in Medicaid fraud.

An elderly consumer seeking to go on Medicaid assistance has planned a $7,000 funeral and wants to fund it by assigning a $25,000 insurance policy to the funeral home. Should the funeral home accept it?

No. This transaction could lead to two problems. First, the Ohio Department of Jobs and Family Services, which oversees the Medicaid program in Ohio, may suspect that the funeral home is participating in a fraud to shield the $25,000 policy from being considered as a resource. Since the $25,000 is over three times the price of the funeral, it could draw scrutiny from government officials.

The second problem will arise when the funeral is performed and the policy is paid off. Assuming the funeral home price is $7,000, what happens to the $18,000 excess? Who does the funeral home pay the excess to -- the estate of the decedent, the next-of-kin, or the alternate beneficiary of the insurance policy? Moreover, if the funeral home does return the excess to the family, it creates the assumption that the funeral home was part of a scheme to shield the excess $18,000 from Medicaid.

What alternatives are there for a funeral home when a Medicaid applicant wants to assign an insurance policy with a face amount that far exceeds the amount of the funeral bill?
The easiest solution is to have the family cash in the policy and use the proceeds to pay off the funeral. Of course, this typically means the consumer will take a financial "bath" since the cash surrender value of the policy may be a fraction of what the face value is. This alternative should only be used as a last resort.

A second alternative is to suggest to the family that the insurance policy not only be used to fund a preneed contract for the Medicaid applicant, but also for other members of his immediate family. Under Section 5101:1-39-32.2 of the Ohio Medicaid regulations, the resources of a Medicaid applicant can be used to purchase a preneed funeral for the applicant and any other members of his or her immediate family. According to the regulations, an individual's "immediate family" means parents, including adoptive parents, minor or adult children, including adoptive and stepchildren, siblings, including adoptive and stepsiblings, and the spouses of the immediate family members.

Using the example from the first scenario, the funeral home could accept the $25,000 insurance policy and use it to fund preneed contracts for the applicant and two or three immediate family members. In this way, the entire $25,000 is used for legitimate funeral expenses, the policy does not have to be cashed in, and there is no suggestion of Medicaid fraud.

Upon the death of his widowed mother, who was a Medicaid beneficiary, the decedent's only son directs the funeral home to modify the $7,000 funeral to a $1,000 direct disposition. He also insists that the funeral home pay the $6,000 excess to him since he is the next-of-kin. What should a funeral home do?

Because the son is the next-of-kin, he has the ability to modify the funeral arrangements. Moreover, since the funeral home will not provide a funeral worth $7,000, it cannot keep the excess funds. However, the funeral home should obviously be concerned that refunding $6,000 to the son could make it an unwilling participant in a Medicaid fraud.

To protect itself, the funeral home should take three steps. First, it should not return the excess funds directly to the son. Rather, it should make a check out to the decedent's estate. This will compel the son to go through Probate Court to negotiate the check.

Secondly, the funeral home should write a letter to the county office of Medicaid informing it that an excess amount was paid to the estate. This step is taken to eliminate any claim that the funeral home willingly participated in this apparent fraud. Finally, the funeral home should inform the son when he modifies the preneed contract that the funeral home will be alerting Medicaid and will be paying a check only to the estate. Oftentimes, when family members know that Medicaid will be informed of the refund, they choose to go ahead with the original funeral plans.

If the Ohio Department of Jobs and Family Services is alerted to the preneed contract refund, will they pursue it?

In 1995, Ohio instituted a Medicaid Estate Recovery Program. The purpose of the program is to seek reimbursement of Medicaid benefits from the estate of a Medicaid recipient. In the first seven years of the program, Ohio recovered $54 million from estates.

In order for an asset to be subject to recovery, it must be an asset that goes through probate. This is one of the reasons that we advise that all refunds resulting from a modification of a preneed contract be paid to the estate rather than to the next-of-kin. By paying it to the estate, it subjects it to probate court so that Medicaid may pursue it under the Medicaid Estate Recovery Program.

The other suggested step of notifying Medicaid when a refund is paid will also help the program recover these excess funds. By following these steps, Ohio funeral homes will be an important component in protecting the Medicaid program against abuse and fraud.

OFDA members with questions regarding this article can contact Scott Gilligan at (513) 871-6332.