Protecting the Community Spouse’s Financial Security in Pennsylvania

The Pennsylvania Department of Public Welfare has finally been forced to conform to federal law regarding annuities. Administrative law judges had been rubber-stamping the local office’s decisions denying Medicaid where the spouses of nursing home residents had purchased annuities. Until recently, it was necessary to bring a court case to overturn the administrative decision. Now the tide has turned. In at least two recent decisions by administrative law judges, DPW was ordered to approve Medicaid despite the Community Spouses’ annuities. The Commonwealth’s hearing officers are now enforcing federal regulations.

Since 1989, federal law has been protective of the “Community Spouse” of a person in a nursing home. Special resource protections allow the Community Spouse to retain half of the “total joint resources” on the day the other spouse enters long-term care–the “snapshot”–up to a maximum of $113,640. 42 USCA § 1396r-5(c). Once eligibility has been achieved, the Community Spouse’s assets are no longer counted. 42 USCA § 1396r-5(c)(4).

The federal regulations also permit the Community Spouse to protect additional assets by converting them to irrevocable annuities. These qualifying annuities must be commercially available, irrevocable and unassignable. They must have no cash value and have been purchased at fair market value. All required payments must be paid within annuitant’s actuarial life expectancy and the Commonwealth must be named as beneficiary on death of annuitant in the amount of Medicaid payments.

There are two prongs of these spousal protection regulations:

An individual shall not be ineligible for medical assistance . . . to the extent that . . . assets were transferred to the individual’s spouse or to another for the sole benefit of the individual’s spouse, [or] were transferred from the individual’s spouse to another for the sole benefit of the individual’s spouse. 42 USCA § 1396p(c)(2)(B).

No income of the community spouse shall be deemed available to the institutionalized spouse. § 1396r-5(b)(1).

Transmittal 64 of federal regulations contains the sole-benefit test. It says that annuities are “usually purchased to provide a source of income for retirement.” It goes on to explain that “to avoid penalizing annuities purchased as part of a retirement plan . . . . If the expected return on the annuity is commensurate with a reasonable estimate for the life expectancy of the beneficiary, the annuity can be deemed actuarially sound.” State Medicaid Manual § 3258.9(B). http://www.cms.hhs.gov/Manuals/PBM/list.asp?listpage=2

Pennsylvania has been trying to curb use of this legal planning devise for many years despite clear federal precedent allowing annuities for this purpose. Department of Public Welfare treated irrevocable, unassignable annuities as “countable,” based on spurious reasoning, flagrantly disregarding legal precedent.

The U.S. Third Circuit Court held that an annuity which has been used to turn an asset into an income stream is not countable and the Community Spouse is neither obligated to share the distributions nor to offer the income stream for sale on a secondary market. James v. Richman, 547 F.3d 214 (3rd Cir. 2008). The Commonwealth Court of Pennsylvania had reached a similar result in a case where I represented the appellant. Ross v. Dept. of Public Welfare, 936 A.2d 552 (Pa. Commw. Ct.2007). The court held that the “DPW improperly considered Leonard’s income stream from an irrevocable and non-assignable annuity as an available resource based on the existence of a secondary market for such income streams.” Id. at 555.

In the wake of the series of losses that culminated with James, the Pennsylvania Department of Public Welfare concocted an argument that in the Deficit Reduction Act of 2005, Congress amended the Medicaid Act by explicitly permitting states to ‘deny[ ] eligibility for medical assistance for an individual based on the income or resources derived from an annuity.’ 42 U.S.C. § 1396p(e)(4). According to the Commonwealth, the DRA overruled the cases in which it lost its countability argument.

The sentence on which DPW relied did not overrule any case. The portion of the statute cited was artfully edited to support the Department’s position. The full sentence reads, “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).” 42 U.S.C. § 1396p(e)(4) (emphasis added). The U.S. District Court drove a stake through the heart of this rationale in Weatherbee v. Richman, — F. Supp. 2d —-, 2009 WL 161624 (W.D. Pa. Jan. 22, 2009). Still, the Department of Public Welfare continued to deny Medicaid where Community Spouses had purchased Medicaid-compliant annuities.

It now appears that DPW will conform to federal law regarding annuities. Until recently, administrative law judges rubber-stamped the local office’s Medicaid decisions concerning annuities. It was necessary to bring a court case to overturn the administrative decision. Now the tide has turned. In at least two decisions by administrative law judges, DPW was ordered to approve Medicaid despite the Community Spouses’ annuities. The Commonwealth’s hearing officers have gotten the message that federal law and precedent must be respected.

 

John B. Payne, Attorney
Garrison LawHouse, PC
Dearborn, Michigan 313.563.4900
Pittsburgh, Pennsylvania 800.220.7200
law-business.com
 
©2012 John B. Payne, Attorney
 
 

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