A Cogent Justification of Short-Term Annuities

Guest columnist Michael McGuire, a highly-skilled and congenial California Elder Law attorney, offers this criticism of the rationale of the decision in Zahner v. Mackereth discussed in Third Circuit Perfidy. Mick explains that short-term annuities are legitimate tools in complying with the vagaries of Medicaid laws and regulations because they are accepted by the federal Medicaid agency, because they are financially beneficial for the state, as well as the Medicaid applicant, and because the judge’s distinction between short-term and five-year annuities is arbitrary. Here is Mick’s post:

In 2010, the organization of Medicaid Administrators wrote a letter to CMS [Centers for Medicare and Medicaid Services] pleading with them to ‘stop these sham’ annuities. The CMS has not changed its policies. No one has petitioned Congress to amend the DRA [Deficit Reduction Act of 2005].

The basic reasoning behind the DRA provisions, as has always been the case with annuities, is the conversion of offending assets into a stream of income is a win-win in the world of Medicaid. The claimant transfers assets, converts them into income, thereby reducing the amount of MMMNA [needs allowance] exemptions available to the community spouse. The State wins because more of the claimant’s income is assigned to the share of cost, thereby reducing the amount the State must pay every month for the Claimant’s expenses.

The community spouse wins, because the payout of the irrevocable annuity flows out the them in the form of monthly distributions. The ‘win’ is limited, however, by the fact that the community spouse may have lost some or all of the MMMNA. This is an actuarially ‘good bet’ for the State based upon how long people survive in nursing homes. Although the average stay is usually quoted as 34 months, that is skewed statistically to be a group comprised of patients that have survived 90 days. Most don’t make it.

I had an annuity case here in California, State went after remaining payments to beneficiary after Claimant died seven months into a three year contract. Week before trial, Judge stated the obvious, “This has nothing to do with policy. This is strictly about what the law says.” The AG [California Attorney General] folded and went home the day before the trial.

The decision here is about policy…5 years is OK, 4.9 years is not? No to 12 months, somehow 60 months “feels” right? The DRA wasn’t clear? CMS, Congress, Governor’s Conference, state legislatures do not have the ability or understand how to change regulations?

I can only speak based upon experience in California, but the DHCS really believes when they dump something in a manual, years go by, somehow their policies have morphed into law. They are specifically prohibited from that process, creating ‘underground’ regulations. In fact, they are provided with annual briefings from the Office of Administrative Law, the AG, warning them not to do that specifically.

When a court gets ’emotional’, looking for a rationale to satisfy its sense of how things should be, buys into a line of thinking that, as in California, a $70 Billion agency is being ‘gamed’, then the reasoning for something like stream-of-income vs. assets mutual benefits gets pushed aside.

Finally, to be truly insightful, exactly how many under 60 month annuities, totaling exactly how many dollars, adjusted for MMMNA reductions in all of those, caused the State to exactly pay how much in benefits that it should not have been ‘forced’ to pay by following the law, expressed as a percentage of the total LTC [long-term care] case load and expenditures during that period?

Now stand back and watch an AG’s head explode.

Michael McGuire
Attorney at Law
California Elder Law Center
5220 Clark Ave., Ste. 220
Lakewood, CA 90712
562-920-6100
mmcguire@calelderlaw.com
www.calelderlaw.com

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Dearborn, Michigan 313.563.4900
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