Pre-DRA Annuities in PA

The Deficit Reduction Act of 2005, signed by President Bush on February 8, 2006, remains in effect, despite court challenges (See: US Dist Ct Dismisses DRA Challenge). The DRA made sweeping changes affecting state-administered Medicaid programs, and changed the ground rules for long term care financing. Medicaid will no longer be a viable taxpayer-funded strategy for people who fail to anticipate their long term care needs.

A comprehensive, detailed, & scholarly reference (72 pages, PDF format) about the DRA and its effects, dated April 17, 2006, authored by a panel of ten member contributing editors of the National Academy of Elder Law Attorneys, entitled "Analysis of Changes to Federal Medicaid Laws Under The Deficit Reduction Act of 2005", is available online here.

More specific to Pennsylvania is the excellent review & analysis by Attorney Robert C. Gerhard, III, of the DRA, as enabled in July, 2005, into Pennsylvania law by our Commonwealth's Act 42 of 2005. His article, updated June 6, 2006, entitled "Federal Changes in Medicaid Law and Pennsylvania Act 42", is found here.

Among many other changes, the DRA changed rules about what is considered an asset, or a transfer of an asset, when applying for Medicaid. Prior to the DRA, one often-used asset transfer technique was purchase of an actuarially-sound, commercial annuity, which was deemed made for "fair value" such that no transfer penalty could be applied.

This treatment was altered by Section 6012 of the DRA. It provides that buying an annuity would be viewed as a transfer of assets unless the state is named the remainder beneficiary of the annuity payments, up to the amount of Medicaid assistance ultimately provided by the state. In his explanation, Attorney Gerhard explained the limitations on annuities as follows:

Moreover, the DRA provides that the purchase of an annuity that fails to name the state as remainder beneficiary “for at least the total amount of medical assistance paid on behalf of the annuitant” is treated as a transfer for less than fair consideration and would therefore be subject to the transfer penalty rules. The law provides that the State must be named as remainder beneficiary in a second position behind the community spouse or minor or disabled child. The DRA exempts certain annuities from these requirements.

Specifically exempted are annuities purchased with the proceeds of certain retirement accounts and annuities that 1) are irrevocable and non-assignable; 2) are actuarially sound, and 3) provide for payments in equal amounts during the term of the annuity, with no deferral and no balloon payments made. Section 6012 applies to annuities purchased on or after the effective date of the Act.

Prior to the federal enactment of the DRA, in July of 2005, the Commonwealth passed Act 42, 62 PA. STAT. ANN. § 441.6, which added restrictions on annuities not then contained in the federal Medicaid Act.

Would Act 42 affect pre-DRA annuities?

On November 21, 2006, a federal court permanently enjoined the Pennsylvania Department of Public Welfare from denying Medicaid to an "Institutional Spouse" due to the purchase by the "Community Spouse" of an annuity. Attorneys Matthew Parker and Kevin Grebas of Marshall, Parker & Associates obtained that permanent injunction.

The Plaintiffs claimed that the Commonwealth enacted legislation – Act 42 -- that is inconsistent with federal law, which was relied upon in denying Medicaid assistance to the Institutional Spouse.

However, the Commonwealth argued that it was not relying upon Act 42 at all, but upon interpretation of regulations about pre-DRA annuities. The court accepted that limiting position:

[T]his case does not present the issue of whether Act 42, 62 PA. STAT. ANN. § 441.6, conflicts or frustrates the purpose of the federal Medicaid Act, and thereby would be preempted. * * *

Instead, this action is based upon Defendant’s alleged misinterpretation of the pertinent federal law regarding irrevocable actuarially sound commercial annuities. As such, this case requires the Court to apply or interpret provisions of the federal Medicaid Act in order to determine whether the remedies sought by Plaintiff are warranted. * * *

[A]s Defendant has disavowed any reliance upon Act 42, 62 PA. STAT. ANN. § 441.6, in denying Plaintiff Medicaid benefits, the Court will decline to issue a declaratory judgment that Act 42, 62 PA. STAT. ANN. §441.6, is preempted by the Supremacy Clause.

In addressing the specific annuity under scrutiny, which was purchased before enactment of the DRA, the court followed a prior federal district court decision in Mertz v. Houstoun, 155 F. Supp. 2d 415, 426-27 (E.D. Pa. 2001). That decision held that "available assets may become unavailable assets and not countable in determining Medicaid eligibility for the institutionalized spouse when an irrevocable actuarially sound commercial annuity is purchased for the sole benefit of the community spouse."

That decision also noted that court's "displeasure with this loophole in federal law, which essentially enables couples to achieve eligibility outcomes inconsistent with the “purpose of the MCCA and indeed the whole thrust of the Medicaid program which is to provide assistance to those truly in need.”

The court then decided as follows:

Consequently, the Court holds that Plaintiff has established actual success on the merits of his claim that he is being denied Medicaid assistance in violation of federal law. * * *

Also, the Court finds that it is in the public interest to grant Plaintiff’s request for a permanent injunction, as Defendant has denied Medicaid assistance to Plaintiff in violation of federal law, notwithstanding the fact that Plaintiff has effectively achieved a Medicaid eligibility outcome inconsistent with the “purpose of the MCCA and indeed the whole thrust of the Medicaid program which is to provide assistance to those truly in need.” Mertz, 155 F. Supp. 2d at 427. However, it is for Congress to close this loophole in federal law. Accordingly, the Court will grant Plaintiff’s request to permanently enjoin Defendant from denying him Medicaid benefits based upon the $250,000 annuity purchased by Mrs. James in September of 2005.

But, perhaps more importantly for the broader public, the court declined to address the viability of Pennsylvania's Act 42, as the Plaintiff had sought:

Consequently, notwithstanding Plaintiff’s contentions, this case does not present the issue of whether Act 42, 62 PA. STAT. ANN. § 441.6, conflicts or frustrates the purpose of the federal Medicaid Act, and thereby would be preempted. As such, declaratory relief is neither useful nor necessary to clarifying the legal relations in issue or affording relief to Plaintiff. Accordingly, the Court will deny Plaintiff’s request for a declaratory judgment.

The Memorandum Decision is found online here.

Thus, Act 42 still remains in effect. And so does the DRA.