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 article, 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 2‐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.