LTC Bullet:  How to End Medicaid Annuity Abuse

Friday, February 28, 2014

Alpine, Texas—

LTC Comment:  Medicaid-compliant annuities enable wealthy people to divest unlimited assets making them immediately eligible for Medicaid LTC benefits.  What should be done?



LTC Comment:  The problem of waste, fraud and abuse of scarce Medicaid resources is long-standing, wide-spread, and repugnant.  No worse misuse of the welfare program exists than so-called Medicaid-friendly or Medicaid-compliant annuities.  These special annuities enable the affluent to qualify easily for Medicaid’s expensive long-term care benefits without spending down their own resources as Congress intended.  They reduce public awareness of and demand for private LTC planning and financing alternatives, thus resulting in more people unprepared to pay for their own long-term care and dependent on public assistance. 

State Medicaid programs have litigated against the use of Medicaid annuities to dodge the program’s spend down rules.  But those lawsuits failed.  Courts have held that federal law precludes preventing the use of annuities in this way so long as the annuities comply with all other laws and regulations.  Appeals by some states to the Centers for Medicare and Medicaid Services (CMS) have not resulted in corrective action by administrative means.  It seems evident now that resolution will have to come in the form of an Act of Congress.  But, without strong public support, Congress is unlikely to tackle this politically sensitive issue.  Such action would eliminate a lucrative loophole used mainly by the same affluent constituents most likely to finance congressional campaigns.

Persuading Congress to act will require a systematic effort to identify, document and publicize the frequency and cost of Medicaid annuities.  The Center for Long-Term Care Reform has prepared the following proposal for a project to achieve those objectives. We invite our readers to forward this proposal to any company, organization, or foundation that might consider supporting this work.


How to Eliminate Fraud, Waste and Abuse
Caused by Medicaid-Compliant Annuities
a proposal by the
Center for Long-Term Care Reform
submitted to the [sponsor to be decided]

I.  The Problem

            Medicaid is a means-tested public assistance program, i.e., welfare.  Yet Medicaid is the principal funding source for long-term care (LTC) throughout the United States, not only for the poor, but for most Americans.  Medicaid’s basic LTC eligibility rules allow people with income below the cost of a nursing home—$82,855 on average as of 2013—to qualify.  Many large assets are exempt, such as the equity in a home and contiguous property up to as much as $814,000 and, without a dollar limit--one business including the capital and cash flow, one automobile, prepaid burial expenses, term life insurance, and IRAs.  Research shows that easy access to Medicaid’s LTC benefits by people with substantial assets after they already need care discourages early and responsible LTC planning and crowds out private LTC financing alternatives.

Further exacerbating this basic problem are Medicaid-compliant annuities which allow wealthy individuals to (1) shelter and divest virtually unlimited assets, (2) avoid Medicaid spend down requirements entirely, and (3) qualify for LTC benefits immediately.  Three recent U.S. Court of Appeals cases bearing on Medicaid-compliant annuities—Geston v. Anderson in North Dakota ($400,000 annuity), Hughes v. McCarthy in Ohio ($175,000), and Lopes v. Department of Social Services in Connecticut ($167,000)—have dramatically complicated this issue by reversing state Medicaid programs’ efforts to prohibit the abuse of Medicaid annuities.  Two national studies have estimated the cost of Medicaid-compliant annuities to the program at $1 billion (2003) and $200 million (2005) per year.  Whatever their actual cost, the use of Medicaid annuities to artificially impoverish affluent people in order to qualify them for public assistance violates the congressionally intended purpose of Medicaid which is to be a long-term care safety net for people in need.

II.  Substantive Proposal

            Closing the Medicaid-compliant annuity loophole would save the state and federal governments substantial amounts of money.  It would end a practice that discourages private long-term care planning and causes unnecessary Medicaid dependency.  Entreaties to the Centers for Medicare and Medicaid Services (CMS), which oversees Medicaid at the federal level, and court challenges at the federal district and appeals court levels have not curtailed the use of Medicaid annuities.  To resolve the problem will likely require action by the Congress of the United States.  The best way to encourage Congress to act is to make the public aware of the widespread abuse of Medicaid-compliant annuities and to encourage citizens and the media to call for statutory corrective action.  Toward that end, we propose to . . .

·   Research and document federal and state Medicaid LTC eligibility laws and regulations that encourage public assistance dependency for LTC.

·   Review the issue of Medicaid-compliant annuities and compile examples of annuities having been used in North Dakota, Ohio, Connecticut and other states to shelter or divest large amounts of assets.

·   Study all relevant court cases, including appeals, and identify necessary legislative changes to prevent the abuse of Medicaid annuities.

·   Interview attorneys who represented the state Medicaid programs in cases challenging Medicaid-compliant annuities and seek their advice regarding needed changes in the law.

·   Interview state staff who make, interpret, and implement LTC eligibility policy to determine and document the frequency of Medicaid annuity use and the amounts involved.

·   Seek advice from Medicaid directors and eligibility policy specialists, supervisors and workers with experience handling annuity cases regarding needed changes.

·   Interview Medicaid estate recovery staff on methods used in various states to discourage the use of annuities: what has worked where?

·   Travel to five or more key states to accomplish these reviews and interviews.

·   Review published research conducted by the American Public Health Services Association in 2003 that resulted in a potential savings estimate of $1 billion per year from closing the Medicaid-compliant annuity “loophole.”

·    Summarize, analyze and critique findings by Robert A. Levy, et al., for CMS in 2005 that estimated potential savings at only $200 million per year.

o  This research arguably underestimated potential savings by inadequate sampling, failing to consider moral hazard or the crowd out effect on private LTC financing and because the Deficit Reduction Act of 2005 (DRA ’05) later closed other Medicaid planning loopholes making annuities more attractive, frequent and larger.

o  This research appears to have a pro-annuity bias as the reviewers did not interview long-term care providers or insurers who are most impacted negatively by Medicaid annuities, but rather only consulted one annuity marketer and an elder law attorney representing the “industry” that benefits from Medicaid annuities.

o  This research did not review or cite sources in the voluminous Medicaid estate planning literature which widely advocates the use of Medicaid annuities to circumvent Medicaid spend down rules.

·   Document and publicize egregious examples of Medicaid-compliant annuities

·   Interview key state legislators and/or their staff to gauge their interest and willingness to fix the problem and seek advice on best strategy to do so.

·   Interview members of Congress and/or their staff to gauge interest in fixing the problem and to get advice on the best strategy.

·   Work with staff in Congress to develop proposed legislation to close the Medicaid annuity loophole.

·   Estimate the cost of Medicaid annuities to the Medicaid program.

·   Propose specific changes to federal and state law to fix the Medicaid annuity problem.

·   Publish articles through national and state think tanks identifying abuse of Medicaid-compliant annuities and advocating legislative action at the state and federal levels to close the loophole.

·   Publish op-eds in national and state-level media identifying abuse of Medicaid-compliant annuities and advocating legislative action at the state and federal levels to close the loophole.

To accomplish these objectives, we will contact Medicaid officials in the states most seriously affected by the Medicaid annuity problem.  Through them we will reach and interview the key front line staff who know the most about the issue.  We will also seek their advice and assistance in identifying and contacting their peers in additional states until we have reached and interviewed all state and federal officials with knowledge of and a concern for the impact of Medicaid annuities.  We will also contact and work cooperatively with staff of the State Policy Network affiliates in each state.  We anticipate that the research, report writing, and article and op-ed preparation and publication will consume approximately six months full time effort.

III.  Business proposal

Deliverables, within 26 weeks of the project start date, will include (1) a comprehensive report (at least 35 pages) that explains the problem of Medicaid annuities, documents the degree of the problem, and recommends solutions to achieve savings per annum of at least 1,000 times the cost of the contract; (2) distribution of electronic reports to all interviewees and respondents, (3) several newspaper op-eds in affected states, and (4) an article suitable for publication in a relevant professional journal.

Stephen Moses (professional bio attached or viewable here: will conduct all of the research and interviews for this project.  He has conducted many similar studies over the years.  Examples of his published articles and project reports are at and on the websites of many state and national think tanks, including the Cato Institute, the Pacific Research Institute in California, and the Manhattan Institute’s Empire Center for New York State Policy.

Total cost:  $75,000 plus reasonable travel expenses not to exceed $10,000.  Payable:  $10,000 upon signing; $10,000 upon submission of five monthly progress reports; and $15,000 upon submission of acceptable deliverables.

Respectfully submitted February 28, 2014 

Stephen A. Moses