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The answer above is great...but it is more with respect to the "why" Medicaid has a financial "look back" as opposed to "how" Medicaid deals with this issue.

The answer as to how Medicaid actually deals with the 5 year look back is depends on the state in which you live. In New York, for example, the applicant is required to actually produce 5 years of financial records whereas in Florida the applicant is asked whether there have been asset transfers but is only required to provide 3 months of financial records (of course Florida reserves the right to request more if they so desire).

The "look back" is designed to protect the public interest as described above however federal law provides a "hardship" provision where it may not be possible for an applicant to "cure" any transactions that took place in the past.
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Medicaid is a federal/state needs based entitlement program (and very different than how Medicare & SS are done as they are federally structured entitlement programs).Because it is needs based what was done with assets in the 5 yr window prior to Medicaid application is central to qualifying. Medicaid is designed as a safety-net for low income who can show both financial and medical necessity for long term care. The monthly asset ceiling and how assets are dealt with after death is set by each state.

Because Medicaid is needs-based, doing a 5 yr look-back on the applicants assets is critical for the states to operate the program. If everyone was able to transfer all of our parents assets, empty out their accounts today, spend monthly retirement and SS on nonNH stuff and put them into a NH tomorrow paid 100% by the state the system couldn't afford it and they wouldn't have any NH to go to

Medicaid compliance is all about either doing planning OR spending your share until or unless you are impoverished. Medicaid gets to the heart of the issue of who should pay for long-term care -- the public through the tax-supported Medicaid program, or users of long-term care through their personal resources, including those remaining after death.
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