LTC Bullet:  Medicaid Planning—The Rest of the Story

Friday, February 7, 2014

Alpine, Texas—

LTC Comment:  We made progress combatting Medicaid estate planning over the years, but artificial self-impoverishment to obtain free long-term care is back with a vengeance.  Details follow.


LTC Comment:  You may recall those catchy radio commentaries by the late Paul Harvey in which he told an anecdote, paused for a commercial, and then returned with the “rest of the story,” a surprising, amusing or tragic twist on the lead.  Here’s the rest of the story about Medicaid planning.

Medicaid planning is the practice of divesting or sheltering assets to create a condition of supposed poverty sufficient to fall within the welfare program’s ostensibly stringent income and asset eligibility limits.

Medicaid estate planning includes many techniques to achieve that goal.  One can give away any amount of assets, or transfer them to an irrevocable trust, five years before applying for Medicaid.  Or use countable assets to buy exempt things such as an expensive house, business or car.  Or claim compensation for providing care to a parent, care that most people give for free out of love and personal responsibility.  Or convert wealth Congress meant to be spent down privately for care into uncountable income by means of an annuity.

Over the years, we’ve tried to discourage this abuse of the welfare safety net by affluent shirkers.  I wrote about the problem in a 1988 report for the DHHS Inspector General you can still read on the IG’s website here.  I proposed a simple solution:  let people keep most of their wealth and receive LTC from Medicaid if they want it, but make certain they pay it back out of their estates so their heirs do not “reap the windfall of Medicaid subsidies.”  (pps. 47-48)

Most of my recommendations in that long-ago report became law in the Omnibus Budget Reconciliation Act of 1993.  OBRA ’93 made Medicaid’s asset transfer restrictions longer and stronger and required states to recover from recipients’ estates.  The idea was to send good news and bad news to people with wealth who wanted to reply on public assistance.  They could access the safety net, but they’d have to pay it back.

Congressional intent in OBRA ’93 was to encourage people to plan responsibly for long-term care so they would not end up dependent on Medicaid with their legacies encumbered to reimburse the government.  It didn’t turn out that way.  Most states did not implement the new rules aggressively; the federal government did not enforce the stronger eligibility standards and mandatory estate recovery strongly; the media didn’t report the new liability consumers were supposed to face; and so the public went on ignoring LTC risk until they needed care leaving them dependent on Medicaid and with easy access to it.

Later attempts to discourage Medicaid planning also failed.  HIPAA ’96 made transferring assets to qualify for LTC assistance illegal.  But the “throw Granny in jail law” was repealed a year later by the BBA ’97 “throw Granny’s lawyer in jail” which proved unenforceable.  Finally the Deficit Reduction Act of 2005 (DRA ‘05) made some more progress by extending the asset transfer look-back period to five years, capping the home equity exemption for the first time, and attempting to discourage the use of Medicaid friendly annuities.

Have the decades-long efforts by Congress to preserve Medicaid as a safety net for the poor finally worked?  Read the following and judge for yourselves.

In “LTC Bullet:  States Decry Medicaid LTC Loopholes,” we highlighted responses from states’ replies to a Congressional inquiry about the problem of Medicaid planning.  One state’s reply was especially informative and we provide it here in full along with the question to which it responded.


4.   Do you consider Medicaid estate planning to be a significant problem that takes resources from the truly needy in your state?  Please explain and provide examples.

ND: Assuming that by "Medicaid estate planning" you mean the sheltering of assets to allow people with greater resources to become eligible to receive Medicaid, then yes. We have seen some extreme examples in North Dakota.

The Medicaid Act is very difficult to understand, making it easy to misconstrue its intent. The courts have recognized that the Act's "Byzantine construction makes it almost unintelligible to the uninitiated," "an aggravated assault on the English language," and "resistant to attempts to understand it." This has led to courts approving techniques employed to circumvent the intent of the Medicaid Act and expand eligibility far beyond those it was intended to serve.

Under current statutes and case law, married people are able to shelter nearly unlimited wealth. Recent court decisions are allowing for a more widespread use of asset sheltering strategies within the Medicaid system, with agents marketing products like annuities on the internet and attorneys advising clients on how to circumvent Medicaid rules and exploit them to their benefit. (Interestingly, single people are not able to shelter their assets in the same way.)

A striking example of aggressive asset sheltering strategies is seen in Geston v. Olson No. 1:11-cv-044,2012 WL 1409344 (D.N.D.2012) where one spouse had dementia and, it was apparent, would eventually need nursing home care. Shortly before going into the nursing home, the couple had liquid assets worth about $700,000, not including the home or car. They were over the Medicaid limit by more than half a million dollars. The community spouse, on advice of an attorney, sold the home the couple had lived in for years and bought one worth twice as much and sold the car they had and bought a brand new one worth three times as much. The car is completely exempt under Medicaid rules. The house also is completely exempt under Medicaid rules, as long as the community spouse lives in the house.

After successfully sheltering those assets, the community spouse took $400,000 cash, money that was available to be spent on the institutionalized spouse's care and instead, bought an annuity from their attorney, (an "investment" which essentially returns the premium with a very small return) in an effort to tie up the money to make the couple appear to have fewer resources. The annuity is irrevocable, non-assignable, and non-transferable.

Under a very well-crafted state statute that places limits on the amounts that can be put into these types of annuities, and a long line of state case decisions that allows the Department to count the annuity as an asset, eligibility was denied. The North Dakota Department of Human Services was sued in federal court under a civil rights action for denying Medicaid to this wealthy institutionalized spouse. Based on its interpretation of federal law and following existing federal case law, the Court ruled the annuity could not be counted as an asset. Thus, none of the actions could be considered a disqualifying transfer, none of the 'new' resources could be considered available, and none of the annuity income could be considered available to meet the long-term care needs.

The community spouse has successfully retained nearly all of the wealth the couple had before the institutionalized spouse went into the nursing home and the nursing home has not received one penny. The bill is nearly $100,000 and the couple wants Medicaid to cover it. The couple receives nearly $8,000 a month from pensions, social security, the annuity payments, and oil lease money. This couple is not needy and they are simply not who the Medicaid program was or is intended to cover. While North Dakota believes that reading the statutes as a whole and applying generally accepted rules of statutory construction would not allow these provisions to be used to shelter assets, courts are consistently reading certain sections of the Act to the exclusion of relevant others to allow applicants with extensive assets to become eligible for Medicaid by transferring assets from the institutionalized spouse to the community spouse.

In another case, a couple had nearly $600,000 available that could have been used for nursing home costs.  The 83-year old community spouse had beginning signs of dementia, and "invested" $340,000 (over 64 percent of the couple's net worth) into an irrevocable, nontransferable, non-assignable annuity on the advice of his attorney in an attempt to qualify the institutionalized spouse for Medicaid.

In another case, the day the institutionalized spouse entered the nursing home, the couple had more than $528,000. At that time, the couple represented to the nursing home that they intended to be "self-paying," and in fact, paid for two months of care. After learning of ways to exploit Medicaid laws, the community spouse purchased not one, but two annuities from their attorney after realizing the first one did not maximize the assets that could be sheltered. The community spouse bought a new home, a new car, an annuity for $220,000 and the next day, a subsequent one for $20,000, and then applied for Medicaid to pay the institutionalized spouse's nursing home costs.

In yet another case, a couple had nearly $400,000 the day one spouse entered the nursing home. An annuity for $125,000 was purchased to try to become eligible for Medicaid.

These scenarios are being duplicated around the state, with an increase in the sales of these types of annuities, and around the country in other states. Medicaid is not intended for people who artificially impoverish themselves by sheltering their wealth instead of using it to pay for nursing home care, but these are the people who are fighting for it and winning - at the expense of the taxpayers and those who legitimately need the assistance of the Medicaid program.

The North Dakota Department of Human Services argues that annuities like these should be treated as an asset available to pay the long-term care costs incurred by either spouse. It is simply a contractual right to receive income, an asset under state law. The annuity is not income, but a different form of asset; the cash is converted to another asset, the contractual right to receive income. The annuity pays the annuitants' own money back to them over time, similar to a certificate of deposit. Further, under state law, the contractual rights to receive money payments are presumed saleable. Despite the "irrevocable, non-transferable, non­ assignable" language of the annuity contract, a factors market exists where these annuities can be sold. If the annuitant makes a good faith effort to sell and finds no buyer willing to pay at least 75 percent of the fair market value of the payment stream of the annuity, an annuitant is able to defeat the presumption that the annuity is saleable. In that case, the annuity is not saleable and is not counted as an asset. This is how annuities were treated under North Dakota state law, until the Geston decision.

As the law currently stands, federal courts have misinterpreted federal law as prohibiting states from counting annuities as assets.  The problem is the courts are treating the annuity as community spouse income (which cannot be deemed available under Medicaid law) instead of treating the annuities as assets-which are available and countable under Medicaid law.

Something should be done quickly before these practices become commonplace. Changing the federal law to clarify that these annuities are assets or to allow states to determine how to treat these annuities as assets would be a significant first step in helping states determine the appropriate limits of eligibility for the Medicaid program. This would help ensure that Medicaid funds would be used by states for those who are the intended recipients rather than being diverted to subsidize those who can and should pay for their own care.


LTC Comment:  North Dakota appealed the court decision that allowed the use of annuities to shelter hundreds of thousands of dollars immediately before accessing Medicaid LTC benefits.  Eight more states supported North Dakota’s appeal with amicus briefs.  But the Eighth Circuit Court of Appeals rejected the eloquently argued and documented appeal on September 10, 2013.  Its decision leaves North Dakota and other states helpless to prevent such egregious abuses of the Medicaid safety net.

That’s the rest of the story . . . but not the end of the story.

It’s clear the Centers for Medicare and Medicaid Services (CMS) will not act to close the annuity loophole.  The problem has been brought to CMS’s attention many times.  Nor will the courts act, believing they are constrained by the impermeable federal Medicaid statute.  The solution will have to come from Congress, but despite efforts in the House of Representatives, the problem remains and grows as more and more states report the abuse of Medicaid annuities.

What’s needed is to make the public aware of this profligate misuse of their hard-earned tax dollars.  We propose to (1) gather examples of egregious Medicaid annuities from state Medicaid programs around the country, (2) write articles and op-eds exposing these abuses, and (3) engage the support of interest groups representing the needy and others who would benefit from discouraging the abuse of Medicaid.  By shining the light of public scrutiny on this problem, Congress can be persuaded to fix it.  That’s what happened with OBRA ’93 and DRA ’05.  It can happen again.