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Medicaid Annuity Report

February 2009

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Court Rules State Policy on Spousal Annuities is Contrary to Federal Law

By: Matthew J. Parker, CELA*

January 30, 2009

The United States District Court for the Western District of Pennsylvania has ruled that Pennsylvania's Department of Public Welfare is prohibited from considering the payments from an immediate spousal annuity as an available resource for the purpose of the institutionalized spouse's Medicaid qualification. In Weatherbee v. Richman, 2009 U.S. Dist. LEXIS 4402, the spouse of a Medicaid applicant bought an irrevocable, non-assignable annuity that made payments to the community spouse over her life expectancy. In accordance with provisions found in the Deficit Reduction Act of 2005, the annuity named the Department of Public Welfare as primary beneficiary for all Medicaid benefits named to the spouse in the nursing home. The Department of Public Welfare denied Medicaid benefits on the theory that the payments from the annuity could be sold for a lump sum, despite language in the annuity contract that prohibited a transfer or assignment of the contract.

In rendering his decision, Judge McLaughlin relied heavily on the decision of the Third Circuit in James v. Richman, 547 F.3d 214 (3rd. Cir. 2008). Issued just 60 days earlier, the James case struck down the same theory by the Department with regard to an annuity that was purchased prior to the Deficit Reduction Act. The Third Circuit ruled that the Department's theory would contravene established principal in the Medicaid Act that the income of the community spouse, including that from an immediate annuity, was not to be considered available in determining the institutionalized spouse's Medicaid eligibility.

Even after the James decision, the Department of Public Welfare contended that the marketability theory had merit pursuant to language found in the Deficit Reduction Act. The Department contended that the Deficit Reduction Act permitted states to void language in the annuity contract that rendered the annuities non assignable. Pennsylvania passed legislation that purported to void the irrevocable, non-assignable language that the James court relied upon in finding that a spousal annuity represented an unavailable resource for Medicaid qualification. See 62 Pa. C.S. § 441.6(b).

Judge McLaughlin disagreed; finding the Department's interpretation of the Deficit Reduction Act was contrary to rules of statutory interpretation. He concluded that if Congress had intended to "ring the death knell" for spousal annuities, it would have expressly said so. Having found that Congress did not prohibit the use of spousal annuities post Deficit Reduction Act, Judge McLaughlin concluded that the Department's attempt to restrict the use of spousal annuities through state law was effectively pre-empted and consequently prohibited by provisions of the Medicaid Act.

While the Department of Public Welfare is expected to appeal the Weatherbee decision, a decision favorable to the Department would require the Third Circuit to alter its position in James. The use of spousal annuities in Pennsylvania may soon be in accordance with Federal law for the first time since 2005. Mr. Weatherbee was represented by Certified Elder Law Attorney Kemp Scales of Titusville, Pennsylvania, along with co-counsel Rene Reixach of Rochester, New York.

A copy of the Weatherbee v. Richman decision can be found at: http://www.paannuity.com/pdf/Weatherbee_District_Court_Decision.pdf

For years, PCM has been helping attorneys obtain the annuity products their clients need. PCM limits its services to Pennsylvania attorneys and their clients. PCM has been the lawyer’s trusted source for Pennsylvania compliant annuities throughout the Hurly era. Now, in the DRA era, it remains the premier source for fast, efficient, competent, trustworthy, Pennsylvania-specific annuity services.


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