Adapting to Means Testing

There are some things that we want everyone to have regardless of ability to pay, but providing them to everyone would be expensive. So we means test. A fancy college

may agree to meet 100% of demonstrated financial need, which means they examine your finances and charge you the sticker price or the most they think you can afford, whichever is less. This makes a lot of sense, at least initially, but then people start adjusting their lives in response to incentives.

Take Medicaid and long-term care. Medicaid will cover nursing homes, but only if you have exhausted your savings first. To discourage people from transferring their money to relatives to intentionally become destitute, Medicaid has complex asset transfer rules. Still, they only look back five years, which means that with planning this is still quite practical and many people do it.

As the amount of money involved starts to get large enough, it makes sense for people to plan farther in advance and do stranger things to qualify. Here are two that I think are quite uncommon now, but if current rules persist I expect to see more of:

• Intentionally destitute grandparents planning to go on Medicaid adopting their college-ready grandchildren. A few years ago I wrote a silly article on getting married to avoid having parents considered in college financial aid, and people pointed out in the comments that for the schools I was discussing marriage is not sufficient: CSS Profile still cares about parental income and assets. Adoption, however, is different: once you are adopted by your grandparents they are now your only legal parents. If they die, you're an orphan. Looking into adoption rules, it seems to me that adoption by grandparents generally just requires everyone involved to be OK with it.

• Affordable housing is typically structured with income limits: you are only eligible if you make below some percentage (30%, 60%, 90%, etc) of the area median income. Today there are not very many affordable units, but if programs like this were expanded as much as proponents advocate then it could make sense for people to intentionally keep incomes low until accepted. There are also some places that let you intentionally opt an existing unit into affordable status, which is especially open to misuse. (more)

If you start trying to figure out how to make a system that is robust to this kind of adaptation, what you end up with is something that looks a lot like the tax code. Which makes me think we should generally just approach this sort of problem with taxes: provide a basic version for free and raise taxes to pay for it. For example, Medicaid could remove means testing and pay a fixed amount towards the long-term care of anyone who needed it. In many cases (ex: food) distributing cash would likely work better. One advantage of structuring things this way is that you can set it up as an income tax instead of a means-tested price, avoiding a lot of the problems around asset transfers.

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