When Medicaid decides whether someone is eligible for its nursing home benefits, it looks at the assets available to that person. One of its eligibility rules considers any gifts made
within 5 years of the Medicaid application to still "belong" to the applicant. This is to prevent people, who have too many assets to qualify for Medicaid, from simply giving assets away to their children or others and then claiming to Medicaid that they have no assets. That's why Medicaid is interested in where transferred money actually goes.
It sounds like this is the rule that Medicaid's concerned about when asking for information about where the money went that was taken out of your mother-in-law's bank account. If Medicaid determines that the money was a gift to your husband, then the money will still be considered part of your mother-in-law's assets and -- if the amount puts her over the Medicaid asset eligibility limit -- might delay her eligibility for nursing home coverage. The fact that your husband could transfer it back to her account in an emergency doesn't change things -- Medicaid's gift rule is intended to say, in effect, "Fine. This is an emergency. So, transfer it back."
The fact that your husband's name was also on the bank account might possibly change things somewhat, depending on where the money came from that went into the account. Money in a joint account can be considered as owned half-and-half by each of the named account holders. If Medicaid believes that half the money in the account truly belonged to your husband, then they might consider only half of the gift to your husband as counting against your mother-in-law's assets in deciding her eligibility.
In deciding this, Medicaid might look at where the money came from that went into the account. If all the money in the account came from your mother-in-law's personal sources -- her Social Security benefits and other money she had -- then Medicaid is not likely to consider that money as half-owned by your husband, and so would consider the money that went to the CD as having belonged entirely to your mother-in-law (and therefore is fully subject to the rule about gifts).