LTC Bullet: Medicaid Planning—The Rest of the Story
Friday, February 7, 2014
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 BULLET: MEDICAID PLANNING—THE REST OF THE STORY
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
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
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
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
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
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
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
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.