Expanding Exemptions from Medicaid Estate Recovery in Illinois By

Expanding Exemptions from Medicaid Estate Recovery in Illinois

By Rebecca Rieckhoff, Ngeindaloh Smith, and Meghan P. Carter

February 16, 2022

Overview:

Under Section 1917(b)(1) of Title XIX of the Social Security Act, states are required to

seek recovery from the estates of certain Medicaid beneficiaries to recoup payments made for

long-term services and supports (“LTSS”) and related benefits.

States have discretion as to

whether to pursue recovery for other Medicaid services. While estate recovery for LTSS is

mandatory for some beneficiaries, there are some exemptions built into federal law, including

exemptions to estate recovery where the beneficiary has a surviving spouse, a child under age 21,

a child of any age who is blind or has a disability, or, in some circumstances, a sibling or child

who lived in the beneficiary’s home and provided care to the beneficiary. States must also

establish procedures for waiving estate recovery in cases where recovery would present an undue

hardship. Defining the parameters of these undue hardship exemptions is largely left to the

states.

The theory behind estate recovery may be to keep funds available for future Medicaid

beneficiaries, but in reality, these programs recoup only a small percentage of states’ Medicaid

LTSS expenditures. And this cost is high: estate recovery unduly burdens low-income families

and communities of color.

Recognizing the shortcomings of Medicaid estate recovery programs, the Medicaid and

CHIP Payment and Access Commission (“MACPAC”)

made several recommendations for

expanding mandatory exemptions to estate recovery on the federal level in its March 2021 Report

to Congress on Medicaid and CHIP.

In its report, MACPAC noted that Medicaid beneficiaries

with sizeable assets are more likely to engage in estate planning to legally shield those assets from

recovery.

Accordingly, most estate recovery comes from beneficiaries of modest means.

MACPAC also noted that state Medicaid estate recovery programs may also disproportionately

affect people of color.

Justice in Aging has similarly found that Medicaid estate recovery

42 U.S.C. § 1396p; see also 42 U.S.C. § 1396a, requiring that state plans for medical assistance comply with the

provisions of section 1396p.

Centers for Medicare and Medicaid Services, State Medicaid Manual § 3810. The State Medicaid Manual sets out

the outer bounds of state options for undue hardship exemptions, but states are left with significant discretion to set

their undue hardship exemption parameters.

MACPAC is authorized under 42 U.S.C. § 1396 to serve as a non-partisan legislative branch agency that provides

policy and data analysis and recommendations to Congress, the Secretary of the U.S. Department of Health and

Human Services, and the states on issues affecting Medicaid.

These recommendations are featured in Chapter 3 of MACPAC’s March 2021 report, Medicaid Estate Recovery:

Improving Policy and Promoting Equity, available at https://www.macpac.gov/wp-

content/uploads/2021/03/Chapter-3-Medicaid-Estate-Recovery-Improving-Policy-and-Promoting-Equity.pdf.

Id. MACPAC noted in its report that “[E]state recovery does not appear to be effective in recouping assets from the

estates of beneficiaries with substantial means. Instead, the modest average recovery amounts reported in our survey

and comments from stakeholder interviews suggest that states primarily collect from estates of modest size.” Id. at

92.

Id. at 73.

programs disproportionately burden lower income families and communities of color and erect

barriers to creating generational wealth through homeownership.

In recognition of the potential for estate recovery programs to unduly burden people of

lesser means, the MACPAC commissioners voted 15-1-1 in favor of a recommendation to

implement federal minimum hardship waivers, including waivers for income producing assets

(such as family farms, daycares, barbershops, and other family businesses), homes of modest

value, and estates that do not meet minimum cost-effectiveness thresholds. These hardship

minimums would supplement the existing carve-outs for estate recovery in federal law. These

recommendations are consistent with guidance the Centers for Medicare & Medicaid Services

(“CMS”) has issued to states regarding estate recovery waivers.

CMS’ guidance notes that

undue hardship exemptions should be made for income-producing assets, homes of modest

value, and other compelling circumstances, consistent with the legislative history of Section

1917 of Title XIX of the Social Security Act.

Expanded federal exemptions, if adopted, would help to alleviate some of the hardship

Medicaid estate recovery programs impose on beneficiaries of moderate means, but states

already have the ability to implement these much-needed exemptions into their own estate

recovery programs. In fact, many states already provide undue hardship exemptions for homes of

modest value and for income-producing assets. States have also implemented exemptions to

recovery for estates that do not meet prescribed cost-effectiveness thresholds.

In recognition of the burden that estate recovery places on disadvantaged groups, and to

bring Illinois into alignment with MACPAC and CMS recommendations, as well as with the

actions of many other states, this paper recommends expanding the categories of state-

recognized Medicaid estate recovery exemptions.

Illinois should expand its existing undue hardship exemptions to include homes of

modest value and for income-producing assets. Additionally, Illinois should set a minimum cost-

effectiveness threshold for estate recovery actions, and not attempt to recover from estates that

are valued at less than $25,000. Finally, to ensure that beneficiaries who are eligible for these

exemptions understand their rights, Illinois should develop a more user-friendly notice process

and web-based interface where eligible heirs can learn about how to apply for these recovery

exemptions. And to ensure transparency, Illinois should publicly report on its estate recovery

activities.

Expanding Illinois’ Current Hardship Exemption Criteria:

Medicaid Estate Claims: Perpetuating Poverty & Inequality for A Minimal Return, Justice in Aging (Apr. 2021),

https://justiceinaging.org/wp-content/uploads/2021/04/Medicaid-Estate-Claims.pdf. Critiques of Medicaid estate

recovery have been made since the Federal government expanded required Medicaid recovery in 1996. Writing in

1997, Jon Ziergler noted that states should “do more to distinguish between well-off recipients who are simply

hiding assets and poor recipients who have managed to hold on to only a small core group of assets accumulated

over a lifetime such as their homes.” Jon M. Zieger, The State Giveth and the State Taketh Away: In Pursuit of A

Practical Approach to Medicaid Estate Recovery, 5 Elder L.J. 359, 386–87 (1997).

State Medicaid Manual at § 3810.C.1.

Id.

Illinois’ current Medicaid estate recovery exemptions are laid out in Ill. Admin. Code tit.

89, § 102.210. The state’s Medicaid estate recovery program is administered by the Illinois

Department of Healthcare and Family Services (HFS). Illinois has chosen to pursue estate

recovery for medical assistance paid out:

A. at any time for a permanently institutionalized recipient whose real property

is subject to the Department’s lien; or

B. except the costs of Community Care Program (CCP) services, prior to

October 1, 1993, for a recipient 65 years of age or older; or

C. on or after October 1, 1993, for a recipient 55 years of age or older; or

D. for Medicare cost sharing expenses (Part A and B premiums, deductibles,

coinsurance and copayments) made on behalf of persons described in 42 USC

1396a(a)(10)(E), when a request for payment of those expenses was received

by the Department prior to January 1, 2010. Requests for payment of

Medicare cost sharing expenses made after January 1, 2010 are exempt from

estate recovery.

Illinois defines “Estate” for Medicaid recovery purposes as “all real and personal property within

an individual’s estate as provided in Illinois probate law.”

Illinois recognizes the current federal

exemptions to estate recovery and, per federal requirements, defines an “undue hardship”

exemption. Under this undue hardship exemption, the state will waive its right to recover:

if pursuing recovery would cause an heir or beneficiary of the estate to become or

remain eligible for a public benefit program, such as SSI, TANF or Food Stamps.

The [state] may limit the scope of its waiver to that portion of the estate that the

heir or beneficiary would receive and pursue recovery against the balance of the

estate, if any. The [state] will not waive recovery despite undue hardship if

payment of the claims of other estate creditors that are equal or inferior in priority

to the [state’s] claim will exhaust the estate and defeat the purpose of the waiver.

Illinois should broaden this exemption. To require that an heir or beneficiary become or

remain eligible for public benefits in order to avoid estate recovery sets a very low threshold;

individuals who remain just above the cutoff for public benefits could still benefit significantly

from even a small inheritance. Per MACPAC, the most recent available data suggests that

average estate recovery is only $8,116. While this small average recovery may not make a

significant difference to the state’s budget, it can make a significant difference to a family living

just above the public benefits cutoff.

Illinois’ current hardship exemption is drafted too narrowly. Expanding Illinois’ current

estate recovery hardship exemption could help to decrease financial instability among the heirs

or beneficiaries of some deceased Medicaid beneficiaries. However, this reform alone will not

make a significant enough impact. In failing to also adopt other categorical exemptions to

Medicaid estate recovery, Illinois lags behind federal guidance from CMS and MACPAC and

likely pursues estate recovery from individuals who would significantly benefit from receiving

inherited assets. Adding new categorical exemptions to estate recovery, in addition to broadening

Ill. Admin. Code tit. 89, § 102.210.

Id.

the state’s existing undue hardship exemption, is an important step toward advancing social and

racial justice in Illinois.

Creating a Modest-Value Homes Undue Hardship Exemption:

Illinois should create a categorical undue hardship estate recovery exemption for homes

of modest value. This change would be in line with many other states who already recognize

such an exemption and would comply with CMS guidance.

In California, for example, the state

waives estate recovery where the homestead is of modest value.

In Texas, where the value of a

beneficiary’s home is less than $100,000

and the home would be inherited by siblings or lineal

heirs of the beneficiary, all of whom have a family income under 300% of the Federal poverty

level,

the state will grant a hardship exemption to recovery.

Virginia views the modest value

of a home as a special consideration when choosing whether to pursue estate recovery as well.

Michigan similarly will not pursue estate recovery against “the proportion of the value of the

[beneficiary’s] homestead that is equal to or less than 50% of the average price of a home in the

county in which the . . . homestead is located as of the date of the [beneficiary’s] death.”

Setting either an absolute minimum home value threshold (like Texas’s $100,000) or a

relative home value minimum threshold (like Virginia and Michigan’s 50% relative value

thresholds) for estate recovery against a Medicaid beneficiary’s home would bring Illinois in line

with the many other states who recognize the importance of passing along family homes. CMS

guidance supports creating an undue hardship exemption for homes of modest values, noting that

“a homestead of ‘modest value’ can be defined as fifty percent (50%) or less of the average price

of homes in the county where the homestead is located, as of the date of the beneficiary’s

death.”

The ability to devise a family home not only provides immediate housing stability for

heirs, but also can help those heirs to build intergenerational wealth and secure long-term

financial stability for their families.

Implementing an Income-Producing Assets Undue Hardship Exemption:

Many states include exemptions to estate recovery for income-producing assets. In Texas,

for example, the state will not pursue recovery where:

State Medicaid Manual at § 3810.C.1.

Cal. Welf. & Inst. Code § 14009.5. California has not created a definition for “modest value.”

As measured by the tax appraisal district value. Where the home’s value exceeds $100,000, but all other

conditions are met, the first $100,000 of the tax appraisal district value for the most recent tax year at the time of the

beneficiary’s death is exempt from estate recovery. 1 Tex. Admin. Code § 373.209.

1 Tex. Admin. Code § 373.209. Where not all heirs qualify for the hardship waiver, only the percentage of the

home that corresponds to the qualifying heir(s) share is exempt from recovery. Id.

Texas also offers other hardship exemptions, which function similarly to Illinois’ existing hardship exemption. 1

Tex. Admin. Code § 373.209.

12 Va. Admin. Code 30-20-141. In Virginia, a home of modest value means a home that is worth 50% or less of

the average or median price of homes in the county or city where the homestead is located as of the date of the

Medicaid beneficiary’s death. Id.

Mich. Comp. Laws Ann. § 400.112g.

State Medicaid Manual at § 3810.C.1.

The estate property subject to recovery has been the site of the operation of a

family business, farm, or ranch at that location for at least 12 months prior to the

death of the decedent; is the primary income producing asset of heirs and legatees,

and produces 50 percent or more of their livelihood; and recovery by the State

would affect the property and result in the heirs or legatees losing their primary

source of income.

California, Georgia, and Michigan will not pursue estate recovery for property that serves as the

primary income source for an heir, including family farms and businesses.

Washington

similarly may waive estate recovery where the property subject to recovery is the sole income-

producing asset of an heir.

Virginia also gives special consideration to income-producing

assets, such as family farms and family businesses when evaluating whether to pursue estate

recovery.

Illinois should join the many states that recognize the value of devising income-

producing assets to heirs. Family farms, home-run businesses, and other income-producing assets

all offer heirs an opportunity to build on the efforts of prior generations and to achieve long-term

financial stability. The state may see small financial benefit to reclaiming an engine repair

business run out of a beneficiary’s garage or a small-scale family farm operation, but the cost

borne by the heirs denied the opportunity to realize the lifelong value of those assets is far

greater than any benefit to the state. Accordingly, Illinois should expand its exemption categories

to include income-producing assets, bringing the state in line not only with the many other states

already granting these exemptions but also with federal MACPAC and CMS guidance.

Implementing a Cost-Effectiveness Threshold:

Illinois should also introduce a clear cost-effectiveness threshold for Medicaid estate

recovery actions. CMS guidance supports states’ ability to create a cost-effectiveness threshold,

which stands apart from a states’ undue hardship exemptions.

Under CMS guidance, states are

allowed to adopt their own definition of cost effectiveness.

By setting a clear minimum value

for estate recovery, Illinois would be able to streamline administrative processes and avoid using

1 Tex. Admin. Code § 373.209.

California will not pursue estate recovery where the property to be recovered is “part of an income-producing

business, such as a working farm or ranch, and recovery of medical assistance expenditures would result in the

[relevant heir] losing his or her primary source of income.” Cal. Code Regs. tit. 22, § 50963; Georgia will grant an

undue hardship exemption where “the asset to be recovered is an income producing farm and sole income source of

one or more of the Heirs and the annual gross income is limited to $25,000 or less and is not merely rental income.”

Ga. Comp. R. & Regs. 111-3-8-.08; Michigan will grant “[a]n exemption for the portion of an estate that is the

primary income-producing asset of survivors, including, but not limited to, a family farm or business.” Mich. Comp.

Laws Ann. § 400.112g.

Wash. Admin. Code 182-527-2750.

12 Va. Admin. Code 30-20-141.

CMS notes that undue hardship exemptions for income-producing assets for heirs with limited incomes. State

Medicaid Manual at § 3810.C.1.

CMS has indicated that states “may waive adjustment or recovery in cases in which it is not cost effective for you

to recover from an individual’s estate. The individual does not need to assert undue hardship. You may determine

that an undue hardship exists when it would not be cost effective to recover the assistance paid. You may adopt your

own reasonable definition of cost effective.” Id. at § 3810.E.

Id.

time and resources to collect from estates that have very little recoverable value. Not only is this

in line with MACPAC and CMS guidance, but Illinois would also be following the model of a

number of other states which set out predefined cost effectiveness thresholds for estate recovery.

Illinois should look to those states as a model when drafting their own exemptions.

Massachusetts, for example, recently implemented a cost-effectiveness threshold for

estate recovery. Under this exemption, the state will not pursue recovery where the total assets of

the beneficiary’s estate are valued at $25,000 or less.

Georgia similarly has chosen to waive

any and all estate recovery claims against the first $25,000 of a Medicaid beneficiary’s estate.

Texas will not pursue estate recovery where an estate is valued at $10,000 or less, where the

amount of recoverable Medicaid costs is $3,000 or less, or where the cost involved of the sale of

the property would be equal to or greater than the value of the property.

Virginia regulations

provide that the state will not pursue estate recovery where it would not be cost effective to

recover from the estate, but has not set a threshold cost-effectiveness value.

The state weighs

the costs of staff time, litigation costs, expert witness fees, deposition expenses, travel expenses,

office supplies, postage, advertising, and publishing costs when performing a cost-effectiveness

evaluation.

Illinois should implement a cost-effectiveness threshold in line with Massachusetts and

Georgia, providing exemptions for estates worth less than $25,000. Creating a clear threshold

would provide a clean administrative framework for HFS. It would also ensure that the state is

not pursuing recovery at a net loss to the state and would ensure that families of modest means

are not bearing the majority of the weight of the state’s estate recovery program. It also shifts the

burden off the individual family to request a waiver and instead to the state to first evaluate

whether pursuing the estate would be worth the state’s resources. Establishing a threshold is fair,

efficient, and long overdue.

Expanding Available Information for Beneficiaries Subject to Estate Recovery:

States are required to provide notice to all Medicaid applicants explaining their estate

recovery policies.

However, providing clear and accurate information about estate recovery

exemptions when the state initiates the recovery process is important as well. As noted in a 2007

report on Medicaid estate recovery,

Public information on Medicaid estate recovery is essential to Medicaid

applicants, enrollees, and their families. Effective information and outreach can

heighten public awareness about recovery . . . Conveying clear information at the

outset about the recovery program, how it affects individual estates, and

procedures for review can minimize stress and decrease misperceptions. Clarity

130 Mass. Code Regs. 515.011. This exemption is in addition to Massachusetts’ hardship exemption, which

functions similarly to Illinois’ existing hardship exemption, codified in 130 Mass. Code Regs. 515.011.

Ga. Comp. R. & Regs. 111-3-8-.04.

1 Tex. Admin. Code § 373.215.

12 Va. Admin. Code 30-20-141. For estate recovery purposes in Virginia, “cost effective” means that “both the

dollar amount of the medical assistance payments (claim) and the value of the estate at least exceed the

administrative costs of recovery.” Id.

Id.

State Medicaid Manual at § 3810.G.1.

and readability of the information is particularly essential because Medicaid

enrollees and survivors may have modest education, lack legal representation,

have poor vision, or be under severe stress, any of which may affect their ability

to read and understand the information presented. Public information also can

help to ensure smooth operation of the recovery program and foster public

confidence.

In Illinois, current regulations note that “[t]he [state] will provide written notice to heirs

and beneficiaries known to the [state] of the opportunity, time frame and method to request a

waiver of estate recovery based on undue hardship.”

However, as of January 2022, the Illinois

Department of Healthcare and Family Services offers only one webpage related to estate

recovery which provides only that:

A claim may not be filed against your estate if recovery would cause an heir or

beneficiary undue hardship. To waive recovery, the heir or beneficiary must show

that the recovery would cause them to become or remain eligible for programs

such as Supplemental Security Income (SSI), Temporary Assistance for Needy

Families (TANF) or Food Stamps.

The webpage does not provide beneficiaries with clear information on how to apply for

exemption, nor does it provide beneficiaries with information about what materials they will

need to provide the state in order to prove qualification for exemption. Beneficiaries are merely

instructed to write to the Department’s Bureau of Collections for further information.

Many states offer brochures, websites, training materials, and toll-free telephone numbers

and some offer multi-lingual options for these resources.

Massachusetts, for example, has a

website dedicated to Medicaid estate recovery which explains in plain language the reasons for

the state’s recovery program and the process by which the state pursues recovery.

Applications

for waiver are available on the website in English and Spanish, along with English and Spanish

fact sheets and FAQs. California’s Department of Health Care Services offers a centralized

webpage providing plain language information on the state’s estate recovery program, links to

hardship waiver applications, a collection of online forms, an estate recovery brochure in English

and Spanish, and links to other related resources.

Finally, in Illinois, there is a dearth of public information about how estate recovery

functions. Medicaid estate recovery has been called “Medicaid’s Dark Secret.”

To advance

equity and justice in the estate recovery process, the state must publicly report on its estate

Erica F. Wood & Ellen M. Klem, Protections in Medicaid Estate Recovery: Findings, Promising Practices, and

Model Notices, ABA Commission on Law and Aging, AARP Public Policy Institute, 6 (2007)

(http://www.canhr.org/reports/2007/2007_07_medicaidprotections.pdf).

Ill. Admin. Code tit. 89, § 102.210.

See Illinois Department of Healthcare and Family Services, HFS 3419B Property Liens & Estate Claims,

available at https://www2.illinois.gov/hfs/info/Brochures%20and%20Forms/Brochures/Pages/HFS3419b.aspx.

Wood & Klem, supra note 34 at vi.

Massachusetts Medicaid Estate Recovery, https://www.mass.gov/info-details/massachusetts-medicaid-estate-

recovery.

Estate Recovery Program, https://www.dhcs.ca.gov/services/Pages/TPLRD_ER_cont.aspx.

Rachel Corbett, Medicaid’s Dark Secret, The Atlantic (Oct. 2019),

https://www.theatlantic.com/magazine/archive/2019/10/when-medicaid-takes-everything-you-own/596671/.

recovery activities so the public can serve as a check on how the program is operating. Further,

the state must provide more consumer-friendly, comprehensive information to beneficiaries and

their heirs about how estate recovery operates and hardship exemptions. Not only should the

state provide multilingual plain language explanations of the program and the process for

applying for exemption, but the state should also provide accessible contact information for state

agents to assist individuals impacted by the estate recovery program and an online portal for

submitting applications and questions. The state must provide clear, accessible resources, and

information about its estate recovery activities, for the amendments to the estate recovery

program urged here to achieve their aim.

Conclusion:

Medicaid stands alone among federal benefit programs in requiring that states recoup

program funds from beneficiaries’ estates. Data suggests that state Medicaid estate recovery

programs primarily collect from beneficiaries of modest means, disrupting the opportunity to

build intergenerational wealth through home ownership. Meanwhile, beneficiaries with the

knowledge and resources to secure legal estate planning services are often able to avoid estate

recovery. The impact of estate recovery on individual beneficiary’s families can be significant,

but the aggregate effect of these collections for the state is minimal. In Fiscal Year 2019, for

example, Illinois recouped no more than 0.83% of its fee for service LTSS Medicaid spending

through estate recovery.

Federal law gives states significant discretion in granting estate recovery exemptions.

Expanding the available exemptions in Illinois will help to alleviate the heavy burden borne by

Medicaid beneficiaries and their families, and will help to narrow the race wealth gap in the state

by allowing more beneficiaries to pass on their homes and other probate assets. Adopting these

exemptions would also bring Illinois in line with guidance from MACPAC and CMS regarding

Medicaid estate recovery, which recognize the need to protect beneficiaries of limited means and

preserve opportunities to secure intergenerational stability.

Illinois should exercise its discretion to expand the recognized exemptions to estate

recovery for Medicaid services. By expanding the current economic hardship exemption,

implementing undue hardship exemptions for homes of modest values and income-producing

assets, and establishing a minimum cost-effectiveness threshold, the state can minimize the

burden of Medicaid estate recovery on low-income people and communities of color.

Additionally, by improving clarity of information and resources provided to heirs subject to

estate recovery proceedings, the state can ensure that beneficiaries deserving of and qualified for

recovery exemptions will be able to secure them.

Medicaid Estate Recovery: Improving Policy and Promoting Equity, Chapter 3 Medicaid Estate Recovery:

Improving Policy and Promoting Equity, MACPAC, (2021), https://www.macpac.gov/wp-

content/uploads/2021/03/Chapter-3-Medicaid-Estate-Recovery-Improving-Policy-and-Promoting-Equity.pdf, at

table 3E-1.