Third Circuit Rules Medicaid Applicants’ Short-Term Annuities Are Not “Resources” Preventing Eligibility
In a long awaited decision on two consolidated cases analyzing coverage for nursing home care, the Third Circuit ruled that “short-term annuities” purchased by the applicants cannot be treated by the state as “available resources” that would delay or prevent Medicaid eligibility. The 2 to 1 decision by the court in Zahner v. Secretary Pennsylvania Department of Human Services was published September 2, 2015, reversing the decision (linked here) of the Western District of Pennsylvania in January 2014.
The opinion arises out of (1) an almost $85k annuity payable in equal monthly installments of $6,100 for 14 months, that would be used to pay Donna Claypoole’s nursing home care “during the period of Medicaid ineligibility that resulted from her large gifts to family members”; and (2) a $53k annuity purchased by Connie Sanner, that would pay $4,499 per month for 12 months, again to cover an ineligibility period created by a large gift to her children.
The Pennsylvania Department of Human Services (DHS) argued that the transactions were “shams” intended “only to shield resources from the calculation of Medicaid eligibility.” However, the majority of the Third Circuit analyzed the transactions under federal law’s “four-part test for determining whether an annuity is included within the safe harbor and thus not counted as a resource,” concluding:
Clearly, if Congress intended to limit the safe harbor to annuities lasing two or more years, it would have been the height of simplicity to say so. We will not judicially amend Transmittal 64 by adding that requirement to the requirements Congress established for safe harbor treatment. Therefore, Claypoole’s and Sanner’s 14-and 12-month contracts with ELCO are for a term of years as is required by Transmittal 64.
Further, on the issue of “actuarial soundness,” the court ruled:
[W]e conclude that any attempt to fashion a rule that would create some minimum ratio between duration of annuity and life expectancy would constitute an improper judicial amendment of the applicable statutes and regulations. It would be an additional requirement to those that Congress has already prescribed and result in very practical difficulties that can best be addressed by policy choices made by elected representatives and their appointees.
The her short dissent, Judge Marjorie Rendell explained she would have affirmed the lower court’s ruling in favor of DHS on the “grounds that the annuities … were not purchased for an investment purpose, but, rather, were purchased in order to qualify for benefits.” In addition, she accepted DHS’ argument the annuities were not actuarially sound.
However, the majority expressly rejected what the lower court had characterized as a “sniff test” on the issue of actuarial soundness, noting it “failed to cite authority for its imposition of a ‘reasonably related’ requirement or for its ‘sniff test.'” The majority expressed understanding of the “policy considerations” argued by the state and relied upon by the lower court for rejecting any attempt to accelerate Medicaid eligibility, but they also noted the existence of “countervailing policy considerations that weigh in favor of permitting short-term annuities like the ones used in this case.” In a footnote the majority opinion explained:
Shorter annuities make it possible for people with fewer assets to purchase annuities. Being able to purchase an annuity for multiple years requires a large upfront cost that aging, low-income individuals may not have access to….. The need to exercise caution is even greater when adopting a particular policy that places those who are already disadvantaged in an even worse position vis-à-vis more affluent members of society — especially because the text of the Medicaid Act does not support such a reading.
The Third Circuit’s ruling is especially interesting coming on the heels of what could be characterized as an “anti”- Medicaid planning decision issued last week by the Ohio Supreme Court. In explaining its decision, the Third Circuit made it clear that engaging in Medicaid planning, standing alone, is not grounds for rejecting eligibility for Medicaid:
Financial planning is inherent in the Medicaid scheme; annuities are not barred from the safe harbor, and the look-back period that considers gifts as resources for purposes of Medicaid assistance is of limited duration. Therefore, the definition of protected annuities is one best left to the policymakers in the legislative branch.
This case reflects “hot topics” in elder law. Undoubtedly, the Zahner decision will generate commentary and criticism by some.
The decision will also be of special interest to students (many of them now graduates) of my own law school, Dickinson Law, who had the interesting opportunity to hear practice sessions in advance of the parties’ oral argument before the Third Circuit in November 2014, and to brainstorm the case with attorneys who held opposing views. Special thanks to attorneys Kemp Scales and Rene Reixach, who travelled long distances to spend the day with our law students. This was a big win for them, on a hard-fought case.