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LTC Bullet:

NY's Highest Court Opens Door to Further Medicaid Abuse

Friday June 16, 2000


***The following Bullet presents and analyzes a recent court case that may have profound consequences for the future of long-term care financing in New York and possibly elsewhere. In a nutshell, the New York Court of Appeals has further anesthetized the citizens of New York to the risk of long-term care by interpreting New York law in a manner which greatly expands access to Medicaid's long-term care benefits. Greater access to public dollars after the insurable event occurs will only make it more difficult for New Yorkers to appreciate and act on the need to plan ahead with long-term care insurance to ensure access to quality care at the appropriate level. The court case is complicated and this Bullet is rather lengthy. You may want to print it or save it to read later.***

NY's Highest Court Opens Door to Further Medicaid Abuse

David M. Rosenfeld, JD, MSW
Executive Director, Center for LTC Financing

On June 8, 2000, the New York Court of Appeals, New York's highest court, held unanimously in "Matter of Kashmira Shah" (available online in pdf format at that a guardian may engage in Medicaid planning on behalf of an incapacitated person in need of long-term care so that Medicaid will pay the bill. The court further held that the spouse of a Medicaid applicant can utilize New York's right of "spousal refusal" to obtain Medicaid benefits even when asset transfers for Medicaid planning would otherwise disqualify the applicant-spouse from receiving benefits.

The end result of the court's decision is that, at least in New York, a community spouse (whether or not in the role of guardian) has virtually unfettered power to transfer unlimited assets to himself or herself in order to artificially impoverish an institutionalized spouse who needs long-term care so that Medicaid will pick up the tab. The Court's ruling has broad ramifications for the future of Medicaid as well as the market for private long-term care insurance in New York and possibly elsewhere.

The Case

The Plaintiff, Kashmira Shah, was represented by attorney Ellice Fatoullah, a member of the National Academy of Elder Law Attorneys (NAELA). NAELA is the professional trade association of the Medicaid planning bar, i.e., the attorneys who artificially impoverish people to qualify them for Medicaid's long-term care benefits. NAELA itself submitted an amicus curiae (friend of the court) brief supportive of the Plaintiff's arguments.

In 1996, Bipan Shah was severely injured at a construction work site and lapsed into a coma. The following year, the hospital where Mr. Shah resided informed his wife, Kashmira Shah, that "absent an accepted Medicaid application" she and her husband would be responsible for payment when their insurance ran out.

At that point, Mrs. Shah executed a "spousal refusal" whereby, in New York, one spouse can refuse to help pay for the cost of the other spouse's care so that Medicaid will be forced to step in and pay the bill. According to the Court, "the [spousal refusal] device aids and facilitates the entitlement to such medical assistance." Mrs. Shah then commenced a guardianship proceeding in order to transfer all of her husband's assets to herself so that he would satisfy Medicaid's eligibility rules. The transfer, however, gave Mrs. Shaw resources in excess of the "community spouse resource allowance" which defines the amount of assets a community spouse can retain when an institutionalized spouse seeks Medicaid assistance.

A lower court subsequently approved Mrs. Shah as her husband's guardian and allowed her to transfer all of the assets out of his estate. The hospital and local department of social services had intervened in the guardianship proceeding to oppose the transfer. On an initial appeal, the transfer was upheld.

Just before the oral argument of this initial appeal, however, a settlement in a federal tort action brought on behalf of Mr. Shah against his employer apparently provided enough money to pay the hospital bills and avoid Medicaid altogether. But the settlement agreement provided that the amount of money that would actually be paid to the hospital depended on how the transfer of assets issue would be resolved on further appeal to New York's highest court--the New York Court of Appeals. In essence, the settlement proceeds would be used to pay for Mr. Shah's care only to the extent, if any, that taxpayers wouldn't pay the bill.

The New York Court of Appeals, in its June 8, 2000 opinion, rejected the argument that Mrs. Shah, as guardian, should not be allowed to transfer resources in order to qualify her husband for Medicaid. The court also rejected the argument that New York's right of "spousal refusal" only applies to assets that the refusing community spouse already possesses and not to additional assets that could be transferred from the institutionalized spouse in order to shield them as well.

In holding that a guardian may engage in Medicaid planning on behalf of an incapacitated person, the Court relied on the "doctrine of substituted judgment" which permits a guardian to engage in acts that "a competent, reasonable individual in the position of the incapacitated person would be likely to perform . . . under the same circumstances."

Would a "competent, reasonable individual" transfer all his assets in order to have Medicaid pay for his care? Every judge on the New York Court of Appeals thinks so. The Court writes, "We agree with the common sense verity uttered by the [lower] Appellate Division that the transfer here was properly authorized because '[t]here can be no quarreling with the Supreme Court's [trial court's] determination that any person in Mr. Shah's condition would prefer that the costs of his care be paid by the State, as opposed to his family.'"

The court then rejected the argument that "spousal refusal" cannot be used, as was done here, to transfer and then shield an unlimited amount of resources. Instead, the court concluded that all of an institutionalized spouse's assets can be transferred to a community spouse and that the community spouse can simultaneously refuse to have those assets included in the Medicaid eligibility calculation. In support of its conclusion, the Court pointed out that the state can eventually bring a support action against the community spouse to repay the cost of care. Not persuaded by the difficulty of this recoupment option, the Court writes, "this right of 'spousal refusal' does not deprive the State of all opportunity to seek recoupment from a financially qualified community spouse. It just requires a reimbursement process to obtain resources from the community spouse after Medicaid benefits are paid, instead of an initial calculation stage that might limit the amount of Medicaid benefits to be provided."

Wrapping up its opinion with a crescendo, the Court quotes approvingly from the decision at the lower appellate level:

"'The complexities [of the law] * * * should never be allowed to blind us to the essential proposition that a man or a woman should normally have the absolute right to do anything that he or she wants to do with his or her assets, a right which includes the right to give those assets away to someone else for any reason or for no reason. * * * We would only amplify this by saying that no agency of the government has any right to complain about the fact that middle class people confronted with desperate circumstances choose voluntarily to inflict poverty upon themselves when it is the government itself which has established the rule that poverty is a prerequisite to the receipt of government assistance in the defraying of the costs of ruinously expensive, but absolutely essential, medical treatment.'"

The Fallout

Although it's easy to sympathize with the New York Court of Appeals' desire to help the Shahs, the Court's sweeping opinion may spell trouble for the Medicaid program and the marketability of long-term care insurance in New York and possibly elsewhere. Here's why.

Although Mr. Shah did not come to need long-term care as a result of one of the many chronic conditions of aging, most people eventually do. The problem then becomes how to pay for such care which can be ruinously expensive as the Court points out. Today, a healthy person is faced with a choice of either planning ahead with long-term care insurance, for example, or doing nothing, waiting to see if he or she gets sick, and then transferring the cost of care to taxpayers through the Medicaid program.

Why, then, would anyone pay premiums for long-term care insurance? First, Medicaid has a notorious reputation for problems with access, quality, reimbursement, discrimination and institutional bias--although New York's Medicaid program is better than most. Paying privately with long-term care insurance or otherwise is the best way to ensure top-quality care at the appropriate level. Second, Medicaid eligibility rules do restrict the amount of assets and income that a person or couple may have in order to qualify for the program. Although these restrictions can be circumvented with the help of a professional Medicaid planner, many people appreciate the fact that Medicaid is supposed to be a needs-based welfare program and they would prefer to take personal responsibility for their care if at all possible.

At least Medicaid was a welfare program before the New York Court of Appeals got a hold of it. The Court's opinion in "Matter of Kashmira Shah" essentially obliterates the needs-based nature of the Medicaid program in New York by declaring that the right of "spousal refusal" supersedes Medicaid's eligibility rules. It's important to note that the Court's conclusion is not limited to situations involving a spouse who is also a guardian, as is the case here. The Court makes a general statement that "the right of 'spousal refusal' . . . essentially permits avoidance of these [Medicaid] resource allowance rules and limitations." Under the Court's analysis, every married couple in New York can shelter an unlimited amount of resources and get Medicaid to pay the bill as long as one spouse refuses to contribute to the other's cost of care. And since there's no look-back period for asset transfers between spouses, no advance planning is necessary!

The Court is essentially telling New Yorkers not to worry about long-term care because Medicaid is for everyone, regardless of financial position. Although people need to plan ahead to ensure access to quality care at the appropriate level, actions like the Court's blind the public to this need by making Medicaid seem the obvious choice. Can you see it now? Frail seniors being counseled to get married so that one can refuse to help the other! Think it won't happen? Think again. Medicaid planners already encourage couples, some of whom have been married more than 50 years, to get divorced as a last ditch tactic to qualify one spouse for Medicaid benefits. Sham marriages would just be the latest technique to circumvent the rules and intent of the program.

The Court's opinion, especially the sections quoted above, reveals a palpable hostility toward the Medicaid program and the people who try to enforce its rules. In fact, the opinion is peppered with comments and language that characterize Medicaid officials as a bunch of whiners. Further, the Court's concluding diatribe is no doubt intended to send a strong message to policy makers that Medicaid eligibility should be expanded. And if they won't do it, this Court will.

Unfortunately, the Court's decision to tread into public policy waters without an understanding of long-term care financing may literally drown New York's Medicaid program. The Court's naivete is most glaring it its statement, quoted above, to the effect that it's just common sense that anyone would prefer to have his care paid for by the state rather than his family. This is simply not true for all the reasons mentioned earlier. The Court's decision to empower guardians to act on this false assumption is nothing short of scary.

Moreover, how will an already overburdened Medicaid program fare when the number of applicants swells as a result of this Court's decision? Too bad the Court didn't consider the financial consequences of its decision ahead of time. Or did it? The Court explained that where the right of "spousal refusal" is exercised, the state can simply recover the cost of care from a "financially qualified" community spouse. But what happens when the community spouse subsequently transfers his or her assets to another family member or into a trust and is no longer "financial qualified" to pay back the state? Does the Court honestly believe that an attorney who counsels someone to exercise his or her right of "spousal refusal" won't also help place any transferred assets beyond the reach of Medicaid?

Yet, the Court's endorsement of "spousal refusal" poses a threat even more ominous to the future of Medicaid. This is especially true if the Court's analysis is adopted outside of New York where Medicaid is not nearly as generous. The "spousal refusal" option allows people to ignore the possibility of needing expensive long-term care, transfer any eventual burden to the taxpayers, and risk only paying back the amount of money spent by Medicaid-- which is less than it would cost to pay privately up front. The Medicaid reimbursement rate is typically lower than the private pay rate and often fails to cover even the cost of providing care. While this may sound like a great deal, it's likely overuse will further cripple a struggling long-term care delivery system that is already starving for more private dollars to offset Medicaid losses. More than ten percent of nursing home beds nationwide are in bankruptcy, in part, because of overreliance on insufficient public reimbursement. Now here comes the New York Court of Appeals to make matters worse.

After the ruling, attorney Fatoullah told the New York Times that the Court's decision "will ensure that people who are incapacitated and in need of long-term medical care will be able to dispose of their assets and qualify for Medicaid just as other ailing people are able to do now. 'The court is basically allowing an incapacitated person to do what a competent person can do.'" ("Court Orders Medicaid Care Despite Assets," New York Times, June 9, 2000).

When will this country get serious about reform that will create the necessary incentives for people to plan ahead for their long-term care? When will we reduce the burden on our public programs so they can provide high quality care to the truly needy? How much more abuse can our current financing system handle before it collapses? We can only hope that this New York Court of Appeals decision is a wake up call for progress.