Beginning next year, it could become a criminal offense to evade the rules on transferring money to family or friends in order to qualify for government-financed nursing home care.

Tucked away in the fraud and abuse section of a health insurance reform bill that President Clinton signed in August is a provision that makes it a felony for a person to transfer assets less than three years before applying for long-term care benefits under Medicaid.Medicaid, the health care program for the poor, is jointly financed by state and federal governments. The program pays more than half of all the nursing home bills in this country and is one of the fastest growing segments of state budgets.

Medicare, the fully federal health care program for those 65 and older, generally does not cover nursing home bills. Nor do private medigap policies. That leaves only private funds, long-term care insurance or Medicaid to pay for nursing home care.

With nursing home bills averaging $40,000 year, many elderly people simply cannot afford to pay them and must immediately turn to Medicaid for help. Other people enter nursing homes as paying patients, but turn to Medicaid once they use up their savings.

But the concern is over the increasing number of middle- and upper-income people who, with the help of attorneys, arrange their finances so as to preserve the bulk of their assets for their heirs while becoming poor enough - at least on paper - to qualify for government nursing home payments.

Under current law, anyone who transfers assets within three years of applying for Medicaid can be denied benefits for a period of time. The new law, which takes effect next year, will make that kind of asset shifting a criminal offense, punishable by up to five years in jail and or a $25,000 fine.

There are differing opinions as to how the new law will actually affect the elderly, their families and their legal advisors.

"The intent is not to put Grand-ma in jail but to have a chilling effect on the Medicaid estate planning bar," said Stephen Moses, research director of LTC Inc., a private firm that designs and markets long-term care insurance.

"I don't expect anybody to be prosecuted under it," Moses added. But he hopes the mere threat of criminal prosecution will refocus the national debate on how to finance long-term care.

Ira Wiesner, president of the National Academy of Elder Law Attorneys (NAELA), whose members specialize in Medicaid estate planning, called the new law "unprecedented" and said it was decidedly the wrong approach to long-term care problems.

"Out of an inability or unwillingness to deal with the fundamental issue of society's need to take care of its citizens who suffer long-term chronic illness, the best solution they can come up with is putting seniors in jail," Wiesner said. "They are hurting the wrong people and they are not addressing the problem."

Moses of LTC Inc. believes the way to address the problem of long-term care is for people with money to take personal responsibility for their future. That means using their private savings or purchasing long-term care insurance (which his firm sells) to pay for their own nursing home bills, preserving Medicaid's scarce resources for the truly needy.

"It is very sad that it has come to the point that Congress concluded that it has to criminalize Medicaid estate planning," said Moses. "But I understand the anger and frustration of public policy makers who have been unable, despite 15 years of attempts, to constrain the flow of these funds to middle- and upper-middle-class seniors."

James Felman, a criminal attorney in Tampa, Fla., who analyzed the new law for NAELA at Wiesner's request, said he doesn't expect the government will ever get the chance to flex its muscle on this issue.

"I cannot imagine the federal government would have much interest in prosecuting a helpless old person," Felman said. The more likely targets, he said, would be the beneficiaries of an egregious case of asset transfer - for example, adult children who would inherit a nursing home patient's money, or the lawyers or financial advisors who set up the plan.

But Felman says the law is so poorly worded that he doubts it would survive a court challenge.

Felman explained that the law only applies criminal sanctions when someone is denied Medicaid benefits.