Big Medicaid Eligibility News - Court Says Community Spouse's Post-DRA Annuity Is Available Resource

March 24, 2009 | Roger McEowen


When a married person enters a nursing home (the institutionalized spouse), Medicaid law requires the assets of both spouses (the spouse that remains in the marital home is termed the “community spouse”) to be taken into account in determining whether the institutionalized spouse’s “countable resources” exceed the maximum allowed for Medicaid eligibility.  But, to make sure that the community spouse has sufficient income, a portion of the couple’s assets are reserved for the community spouse’s benefits.  This is known as the community spouse resource allowance (CSRA), and involves a computation of all of the couple’s assets with one-half allocated to each spouse.  The half allocated to the community spouse is limited, but is not considered available to the institutionalized spouse.  Any excess amount is deemed available to the institutionalized spouse and must be spent down to a prescribed minimum before the institutionalized spouse is eligible for Medicaid.  But, is the value of an annuity purchased for the sole benefit of the community spouse to be considered in determining the institutionalized spouse’s Medicaid eligibility?  That was the question before the court in this case – the first published judicial opinion on the matter after the DRA amendments.

Here, the wife entered a nursing home in late 2004.  In mid-2006, her husband made an application for Medicaid benefits on her behalf – several months after enactment of the DRA.  Two weeks before the application was made, however, the husband used $131,500 of their assets to buy a commercial annuity.  Under the annuity, the husband was entitled to receive monthly payments of $2,917 for 48 months.  The husband was the sole beneficiary of the annuity, and the annuity was non-assignable and nontransferable.  But, if the husband were to die before the end of the 48-month period, the State would become the remainder beneficiary to the extent of any Medicaid benefits paid on the wife’s behalf with the balance of the annuity payable to the husband’s estate.  The state denied the wife’s Medicaid application due to excess resources being available to the couple, including the stream of annuity payments to the husband.  Combined with other income sources, the husband had a monthly income stream of approximately $8,000.  The annuity, by itself, was treated as an available resource with a value of $90,203 (based on an offer to purchase the income stream from the annuity).  When the annuity was combined with the couple’s other assets, the total amount exceeded the maximum CSRA (which is presently $109,560, but was lower at the time period relevant to the case) that the husband could retain while preserving the wife’s Medicaid eligibility.  On appeal, an Administrative Law Judge held that the DRA required the value of the income stream from the commercial annuity to be considered an available resource because it could be sold on the open market.  After exhausting administrative appeals, the matter moved to the judicial system.

Upon review, the court noted that before enactment of the DRA (which became effective on February 8, 2006) courts had reached different conclusions as to whether the purchase of a commercial annuity for the benefit of the community spouse was a proper way to spend-down resources below the CSRA in order to qualify the institutionalized spouse for Medicaid.  In addition, the court noted that it had previously ruled (prior to the DRA) that the purchase of an irrevocable commercial annuity under which periodic payments of income are made to the community spouse can be used to reduce the community spouse’s resources below the CSRA in order to qualify the institutionalized spouse for Medicaid.  But, the court stated, the DRA closed that loophole.  Specifically, 42 U.S.C. §1396p(e)(1) imposes an obligation on a Medicaid applicant to disclose any interest either the applicant or their spouse has in an annuity regardless of whether the annuity is irrevocable or is treated as an asset.  42 U.S.C. §1396p(e)(4) also specifies that a state is not barred from denying Medicaid eligibility based on income or resources from an annuity described in 42 U.S.C. §1396p(e)(1).  

The court noted that there were no published opinions interpreting the annuity provisions of the DRA, but that the Center for Medicaid and Medicare Services (CMS) – the agency within the Department of Health and Human Services with the responsibility of administering the Medicaid program – had issued a publication after enactment of the DRA noting that even if an annuity is not subject to a transfer penalty (as a transfer for less than fair market value), that fact does not exclude it from being counted as an available resource or as available income for Medicaid eligibility purposes.  CMS had also issued another publication in August of 2007 in which it stated that if the payee of an annuity can be changed, it is assignable and can be sold on the secondary market which makes the annuity a countable resource.  Because of the complexity of the Medicaid law, the court noted that the Congress had delegated to the CMS broad authority to determine Medicaid eligibility requirements.  Accordingly, the CMS publications were entitled to deference and, because they were consistent with the statutory language and legislative history behind enactment of the DRA, were persuasive.  

Accordingly, the court held that the DRA allows a state to consider the value of an annuity purchased for the sole benefit of the community spouse in determining whether the institutionalized spouse satisfies the resource limits for Medicaid eligibility purposes.  Consequently, the wife’s Medicaid application was properly denied.  N.M. v. Division of Medical Assistance and Health Services, et al., No. A-0828-07T1, 2009 N.J. Super. LEXIS 39 (N.J. Super. Ct. Feb. 26, 2009).    

Note:  The court did note that a federal district court, on January 22, 2009, had issued a memorandum opinion that reached a different conclusion on the same issue.  However, that opinion is not published and cannot be cited as precedent.  In addition, that court did not refer to the CMS publications construing the pertinent statutory language.