LTC Bullet:  Medicaid Annuity Abuse:  A Case Study

Friday, June 5, 2015

Bismarck, ND—

LTC Comment:  Some abuses of Medicaid LTC benefits beggar the imagination.  Here’s one, after the ***news.*** [omitted]


LTC Comment:  I’m in Bismarck, North Dakota to take a closer look at an egregious, though legal, abuse of the Medicaid long-term care safety net. 

First though, special thanks to Gene and Pamela Schmidt of thriving, tech-savvy SIA Marketing of Bismarck for hosting me.  Their exceptional LTCI brokerage works with agents throughout the USA but also maintains an excellent relationship with the local and state community, officials and regulators.  They hosted a meeting for me with Maggie Anderson, Executive Director of North Dakota’s Department of Human Services and several of her staff including the Department’s Medicaid LTC eligibility policy expert, the attorney who handles Medicaid estate recovery, the Home and Community-Based (HCBS) waiver specialist, and one of the lawyers who worked on North Dakota’s Medicaid-compliant annuity appeal, the topic of today’s LTC Bullet

Just a quick re-cap as we’ve covered the so-called Medicaid-compliant or Medicaid-friendly annuity problem several times before:  LTC Bullet:  Annuity Blues, 11/15/13 and LTC Bullet:  How to End Medicaid Annuity Abuse, 2/28/14, for example.  In their most common usage, these are plain vanilla single-premium immediate annuities (SPIAs) crafted to meet all the requirements for qualified annuities in the Deficit Reduction Act of 2005 (DRA ’05).  They must be immediate, irrevocable, nonassignable, nontransferable, pay out in roughly equal monthly payments over a period less than the life expectancy of the annuitant, be issued by a commercial insurance company, and designate the Medicaid agency as the primary beneficiary.  (See “Using Annuities in Medicaid Long-Term Care Planning” for more.)  SPIAs designed in that way can make people with a lot of money eligible for Medicaid LTC benefits immediately without any spend down.

Here’s the example that caught our attention in North Dakota.  DHS Director Anderson (interim at the time) wrote the following in reply to a Congressional inquiry that asked “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.”  (We highlighted this letter of inquiry from Congressman Charles W. Boustany, Jr., MD (R, LA) and others and gave examples of various states’ replies to its questions in LTC Bullet:  States Decry Medicaid LTC Loopholes, 1/11/13.)

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.

Outrageous, right?  This couldn’t possibly withstand thoughtful consideration, much less judicial review, certainly.  Wrong!  Here’s how it played out in court.

The Gestons and their Medicaid planning attorney challenged North Dakota Medicaid’s denial of Mr. Geston’s eligibility for nursing home benefits in District Court.  The District Court ruled that North Dakota’s governing statute “was more restrictive than, and preempted by, federal law and granted the Plaintiffs the relief they requested.”  So John Geston became eligible for Medicaid LTC benefits despite the facts described above.

Undaunted, North Dakota’s Department of Human Services appealed the case in the United States Court of Appeals for the Eighth Circuit.  Its brief, prepared by elder law attorney Stephen A. Feldman and other attorneys representing the Department, was brilliant.  We’ve posted it here so you can see.  It demolishes the plaintiffs-appellees’ case point by point showing the District Court erred (1) “by misconstruing applicable federal Medicaid law when it invalidated a North Dakota statute concluding the balance payable under a single premium immediate annuity was not a resource,” (2) “when it used Medicaid act provisions penalizing some annuity purchases by an institutionalized spouse as improper asset transfers to determine that a community spouse’s annuity was not a resource,” (3) “when it held N.D.C.C. §50-24.1-02.8(7)(b), which is consistent with the intent of congress, was more restrictive than and preempted by the federal law,” (4) “by failing to recognize that an annuity is a trustlike device and as such is a countable resource under Medicaid law,” (5) “by failing to recognize a non-qualified annuity is a resource and that the payments are comprised almost entirely of the return of the original premium comprised of countable resources,” and (6) “by failing to recognize that the anti-assignment provisions in the annuity are unenforceable as contrary to public policy under North Dakota law.”

How did the appeals court rule?  “The judgment of the district court is affirmed.”  Bottom line, the district and appellate courts in North Dakota, followed courts in other states, including Ohio and Connecticut, where Medicaid programs challenged and appealed the use of Medicaid-compliant annuities unsuccessfully.  Clearly, the problem of Medicaid-compliant annuity abuse is not going to be resolved in court.

So, surely the Centers for Medicare and Medicaid Services (CMS) is fighting the good fight to plug this leaky fiscal bucket.  After all, the federal government pays half the cost of Medicaid in North Dakota and much more in some states.  When asked for its help, however, CMS officials commiserated with the state, but explained that Medicaid annuity abuse was not high on its priority list.  It seems implementation of the Affordable Care Act (ACA, AKA “ObamaCare”) has consumed and continues to consume all of CMS’s resources.)

So, where does the situation stand?  Nothing will happen unless Congress takes action.  And on that front we do have some news that we reported to our “LTC Clippings” subscribers recently:

6/1/2015, “House Bill Would Make Income from Community Spouse's Annuity Available to Medicaid Applicant,” ElderLawAnswers


Quote:  “New legislation in the U.S. Congress would change the way income from a community spouse's annuity is counted for the purposes of Medicaid eligibility. The bill would make a portion of the income available to the institutionalized spouse.


LTC Comment:  Medicaid-compliant annuities allow affluent individuals to qualify immediately for LTC benefits without spending down their wealth.  They’re one of the biggest remaining Medicaid eligibility loopholes.  State Medicaid programs have fought them in court three times and lost.  I’m in North Dakota to study one such state’s strategy and to see what we can learn that might help to control this large financial leak from the welfare program.  The new proposed legislation described in this article is a positive development as Congress has hitherto taken little notice of the problem.

This bill if passed would make half the income from a Medicaid annuity available to offset the institutionalized spouse’s cost of care.  As North Dakota officials opined, it’s only half a loaf, but half a loaf is better than none.

We’ll leave this subject at that for now, but we will revisit it.  We’ll take a future look at a kind of annuity product that could help people in need of long-term care AND benefit Medicaid instead of crippling the safety net program.  Like Medicaid-compliant SPIAs, medically underwritten immediate annuities (MUIAs) help people with resources pay for LTC after an insurable event has occurred.  The difference is that MUIAs keep people off Medicaid and enable the welfare program to focus on its proper clientele:  the needy.  So, stay tuned.