Some questions are awfully big. This is one of them. I can only skim the surface of the complex rules and benefits that fall under Medicaid, but I will give it a try.
Medicaid is federal money administered by the states to provide a variety of social services for the poor. For the elder law lawyer, most questions about Medicaid relate to whether an elder qualifies to have the government pay for long term care in a nursing home or similar facility. Medicaid is not Medicare. Medicare is health insurance that everybody gets when they turn sixty-five. Bill Gates gets it.
Medicaid is for the poor. At this writing, to qualify for Medicaid an elder must be sufficiently handicapped to need care in a facility, have less than $2,022 of monthly income, and have less than $2,000 in available assets. The figures in Medicaid calculations change frequently. The current ones can always be found here.
Medicaid planning is a strategic effort to make a person poor enough to qualify for Medicaid and thereby have the government pick up the cost of long term care. This normally involves spending enough of the elder's money to get assets below the $2,000, yet preserve the elder's standard of living as much as possible. The strategic spending of money to obtain Medicaid is called "spend down."
When calculating the value of assets owned by an elder, certain assets are not considered. These are exemptions. Depending upon circumstances, a house may be exempt, or a car. Money in the bank--over the $2,000 limit--is never exempt. Thus, one way to do Medicaid planning would be to use money in the bank to buy, pay-off, or improve an exempt asset. Sometimes assets can be turned into income.
Families often come to elder law lawyers with this request: mother wants to give her house and all her money to her kids ("she always wanted them to have it") and then have the government pay for her nursing care ("after all she paid taxes all these years") There are smart lawyers out there working for the state of Oregon whose job it is to make sure this doesn't happen. Here is the basic rule: YOU CANNOT GIVE AWAY YOUR MONEY AND THEN ASK THE GOVERNMENT TO SUPPORT YOU.
The exception to the basic rule is that you may be able to do it if you have quite a bit of money and a brave elder law lawyer. If the government doesn't challenge the strategy you win, hands down. If the government challenges the strategy and you win, the lawyer gets a good chunk of your cash for fighting the good fight. If the government challenges the strategy and you lose, the lawyer still gets paid and you don't get Medicaid.
The application of the basic rule can cause a lot of tension in families. Grandma is often an easy touch, willing to buy new cars for her unemployed kids and bail the drug-addicted grandchildren out of jail. It can come as a shock to the family, that Grandma has to quit handing out cash and use her money for her own care needs.
The answer to the question posed in the title to this entry is yes; Medicaid will pay for grandma's long term care. The first catch is that Medicaid will only pay if grandma cannot pay from her own money. The second catch is that grandma cannot make herself unable to pay for care by handing out cash to her relatives. Beyond that it gets pretty complicated.
I tell my elders when they come in and I see that they are not millionaires, "From now on you can give birthday and Christmas gifts worth up to $100 per person. Beyond that your ability to give away money is over. Write a will. Bake a cake, but don't give away money." Not only is this a good Medicaid strategy, it also lets them know which of the relatives are coming over because they really want to visit.