PA Annuity - PA Care Management, Inc.

Medicaid Annuity Report

March 2008

-PCM-

The Pennsylvania lawyer’s trusted source for Medicaid Annuities

www.paannuity.com

-Quick Links-

James v. Richman Decision                                     Amended Annuity Provisions

Another Annuity Case Win for Community Spouses

Written By: Jeffrey A. Marshall , Esq., CELA*

A properly structured immediate annuity can be a particularly valuable investment in financial planning for long term care. An effectively timed and implemented annuity purchase may be all that is required to protect the financial security of a married couple from nursing home costs.

Under Federal law (the Deficit Reduction Act of 2005 or “DRA”), annuities are an approved method of protecting assets from spend-down requirements. Annuities are a particularly valuable planning option for married couples. A DRA-compliant annuity can convert otherwise excess resources into income that will enhance the long-term financial security of the community spouse.

Annuity planning is based on Medicaid’s distinction between resources and income. In determining eligibility for Medicaid benefits, a married couple^’s countable resources are pooled. If the total value is not within qualification limits, excess resources must be spent down. However, a community spouse can retain all of his or her income without affecting the Medicaid eligibility of the institutionalized spouse. (The community spouse is the non-institutionalized spouse who is not applying for Medicaid Waiver benefits).

The community spouse’s income is protected. The community spouse’s resources are not. This dichotomy creates the opportunity for the use of an immediate annuity. The community spouse spends any excess resources on the purchase a DRA compliant immediate annuity. The purchase of the annuity spends down the couple's excess resources to the level required for the institutionalized spouse to become financially eligible for Medicaid-funded long term care services. The cash that is converted to income is recouped over time as annuity payments are made to the community spouse.

Pennsylvania’s Attempts to Limit the Use of Annuities

In Pennsylvania , the Department of Public Welfare (DPW) has long sought to limit the use of annuities as a means of protecting resources for the community spouse. Current state policy is to allow a community spouse to purchase an annuity so long as the income it produces does not put the community spouse over the minimum community spouse’s income allowance.^{^[1]} However, legal authority for this limitation is lacking and DPW attempts to restrict the use of annuities in Medicaid planning have been consistently rejected by the Courts.

DPW has tried three approaches to justify its annuity limitations:

(1) Initially, DPW argued that the purchase of an annuity by a community spouse constituted a transfer of assets without fair consideration, (thus, resulting in a period of ineligibility for Medicaid). This argument was struck down by a Federal Court in 2001 in the case of Mertz v. Houstoun, 155 F.Supp.2d 415 (E.D. Pa. 2001).

(2) Trying another route, DPW unsuccessfully sought to claim that the income payments received by a community spouse were an available resource because they could be sold at a discount. In 2006, in a case brought by Marshall, Parker & Associates, a Federal Court struck down that argument in James v. Richman, 465 F.Supp.2d 395 (M.D. Pa. 2006). (DPW has appealed the decision in the James case to the Third Circuit Court of Appeals. A decision is expected in 2008).

Now a Pennsylvania State Court has joined the Federal Court in rejecting DPW’s argument that payments from an annuity are an available resource because they can be sold.

Ross v. DPW

When Pauline Ross entered a nursing home, her husband, David, transferred $418,026.66 in marital assets into a “Medicaid Qualified, Single Premium, Immediate Annuity.” The annuity paid David $10,211.83 per month from May 15, 2005 to September 15, 2008 . David purchased the annuity in order to make Pauline eligible for Medical Assistance-Nursing Home Care benefits.

On May 27, 2005 , David filed a Medicaid application on behalf of Pauline. The county assistance office and an Administrative Law Judge determined that the annuity was an available resource because companies exist that would pay a lump sum to David in exchange for his assigning to them the right to receive the monthly income.

David appealed to the Pennsylvania Commonwealth Court, which found in his favor. Ross v. DPW, No. 137 C.D. 2007, Slip Op. at 4 ( Pa. Cmwlth. Ct. , November 15, 2007 ).^{^[2]}

The Ross court noted that federal law requires that income and resources receive separate treatment. 42 U.S.C. §1396r-5. Income received by a community spouse cannot be deemed to be available to the institutionalized spouse. 42 U.S.C. §1396r-5(b)(1). The community spouse’s income does not affect the determination of whether the institutionalized spouse qualifies for Medicaid. [As authority, the Court cited James, 465 F. Supp. 2d at 398 (which quoted a United States Supreme Court case, Wisconsin Department of Health & Family Services v. Blumer, 534 U.S. 473, 480-81 (2002)].

The Ross court found that DPW’s attempt to treat David’s income from the annuity as an available resource was contrary to the plain language of the applicable federal law. It reversed the judgment of the county assistance office and Administrative Law Judge. It ruled that DPW could not treat the income stream from David’s irrevocable and non-assignable annuity as an available resource despite the potential existence of a secondary market for that income stream.

DPW’s Post-DRA Argument

(3) DPW is now pursuing a new argument in its attempt to place limits on the purchase of annuities by the community spouse. The annuities in both James and Ross were purchased prior to the DRA. The DRA enacted complicated new rules concerning the Medicaid effects of an annuity transaction. These rules apply to annuity transactions which occur on and after February 8, 2006. The main thrust of the DRA provisions is that all annuities must be disclosed and an annuity transaction is to be treated as a transfer of assets unless the requirements of the DRA are met.

The first case to arise in the post-DRA era is Weatherbee v. Richman, USDC Western District of PA Civil Action No. 07-00134.

When Theodore Weatherbee was admitted to a nursing home, his wife converted the couple’s existing deferred annuity into an immediate annuity. The $387,756 annuity purchase took place on November 29, 2006, which was after the effective date of the DRA. The new annuity provided Weatherbee’s wife with a payment stream of $4,423.47 per month over 107 months.

On February 28, 2007 , Weatherbee applied for Medical Assistance long term care benefits to cover the cost of his nursing home care. DPW determined that the payment stream from the annuity was an available resource to Weatherbee because the payment stream could be sold on the secondary market for cash.

DPW’s new argument in Weatherbee is that the DRA has modified Medicaid law to permit DPW to count the payment stream from an annuity as an available resource. This change, DPW suggests, can be found in 42 U.S.C. §1396p(e)(4).

§1396p of Medicaid law is entitled “Liens, adjustments and recoveries, and transfers of assets” and subsection §1396p(e) deals with disclosure of interests in annuities. DPW relies on 42 U.S.C. §1396p(e)(4) which reads as follows:

“Nothing in this subsection shall be construed as preventing a State from denying eligibility for medical assistance for an individual based on the income or resources derived from an annuity described in paragraph (1).”

DPW argues that this language in §1396p(e)(4) overturns Medicaid’s long established distinction between income and resources. According to DPW, the above language allows it to count the income from an annuity as a resource.

The Weatherbee case is currently pending in Federal District Court . In the opinion of this author, DPW’s new argument is strained. Section §1396r-5(a)(1), upon which DPW relies, appears to be directly superseded by the community spouse income and resource provisions rather than overturning them. The income and resource provisions are contained in a different section of Medicaid law, 42 U.S.C. §1396r-5. And 42 U.S.C. §1396r-5 specifically states that it supersedes any other provision of Title 42 that is inconsistent with its provisions. 42 U.S.C. §1396r-5(a)(1). Ross v. DPW, No. 137 C.D. 2007, Slip Op. at 4 ( Pa. Cmwlth. Ct. , November 15, 2007 ).

Although §1396p(e)(4) expressly limits its effect to “this subsection,” DPW is arguing that it overrides the long established spousal protection income/resource provisions found in a completely different section of Medicaid law (42 U.S.C. §1396r-5). On the other hand, 42 U.S.C. §1396r-5 specifically states that it supercedes any inconsistent sections of §1396. As a result, it seems likely that the community spouse will prevail again in Weatherbee.

Of course, anything is possible. Logic aside, DPW could conceivably prevail in its §1396p(e)(4) argument in Weatherbee. And DPW could get a reversal in the 3^rd Circuit Court of Appeals in James. But, for the moment, it seems more likely that DPW’s current attempts to impose its own state policy limits on the purchase of DRA compliant annuities by a community spouse are more likely to fail. In the meantime, counsel for married couples must decide whether to abide by the limitations in DPW’s policy guidance, or ignore them as unlawful.

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.

For more detailed information on how to use DRA annuities to benefit your clients, Pennsylvania attorneys may consult the PCM website, www.paannuity.com or contact PCM at 570-326-1890 or webmail@paannuity.com.

____________________________________________________________________

^{^[1]} See, Department of Public Welfare “Operations Memorandum – Annuities,” effective March 5, 2007 . This Operations Memorandum is available at http://www.paelderlaw.com/pdf/Annuities%20Draft%20Ops%20Memo.pdf.

^{^[2]} At this writing (February 2008), DPW has filed a petition for allowance of an appeal to the Pennsylvania Supreme Court.

*Attorney Marshall is Certified as an Elder Law Attorney by the National Elder Law Foundation under authority of the Pennsylvania Supreme Court. He is Managing Attorney of the Law Firm of Marshall, Parker and Associates with offices in Williamsport, Jersey Shore, Wilkes-Barre, and Scranton, PA. He can be contacted at webmail@paelderlaw.com.

*Attorney Parker is Certified as an Elder Law Attorney by the National Elder Law Foundation under authority of the Pennsylvania Supreme Court.

_____________________________________________________________________

PCM

Pennsylvania’s trusted source for Medicaid Annuities

49 East Fourth Street , Williamsport , PA 17701

570-326-1890

www.paannuity.com

webmail@paannuity.com

_____________________________________________________________

If you would like to be added or removed from our mailing list, please e-mail PCM at webmail@paannuity.com.

_____________________________________________________________

For further information, please contact:

Matthew J. Parker, Esq., CELA*    mparker@paannuity.com

Patti Jo Turner, BSEd          pturner@paannuity.com

PCM

49 East Fourth Street
Williamsport, PA 17701
570-326-1890

webmail@paannuity.com

* Certified as an Elder Law Attorney by the National Elder Law Foundation.