Federal Appeals Court Rules Short-Term Annuities Are Not “Available Resources” Preventing Medicaid Eligibility

In a 2 to 1 precedential decision by the United States Court of Appeals for the Third Circuit reversing an earlier federal district court judgment, the court ruled that “short-term annuities” purchased by applicants for nursing home Medicaid cannot be treated as an “available resource” that prevent Medicaid eligibility. Zahner v. Secretary, Pennsylvania Department of Human Services, Docket Nos. 14-1328, 14-1406 (3d Cir., September 2, 2015) The United States Court of Appeals for the Third Circuit is a federal court with appellate jurisdiction over the States of Delaware, Pennsylvania and New Jersey, as well as the Virgin Islands.

Plaintiffs, Donna Claypoole, and Connie Sanner, are both nursing home residents. Each applied for Medicaid nursing home benefits shortly after purchasing a short-term annuity. Plaintiff, Anabel Zahner, passed away during the pendency of the lawsuit, and her claim is moot. The annuities were purchased to pay nursing home costs during periods of Medicaid ineligibility resulting from the parties’ large gifts to family members before the plaintiffs’ applied for Medicaid.  Donna Claypoole purchased an $85, 000 annuity payable in equal monthly installments of $6,100 for 14 months. Connie Sanner purchased a $53,000 annuity that paid $4,499 per month for 12 months. After plaintiffs applied for Medicaid, the Pennsylvania Department of Human Services (DHS) considered both annuities to be “resources” and calculated a new penalty period of Medicaid ineligibility for each plaintiff.

Claypoole and Sanner filed lawsuits in federal district court under 42 U.S.C. § 1983 against DHS arguing that DHS acted illegally by counting the amount of their respective annuities as an available “resource” for purposes of Medicaid eligibility. The cases were consolidated by the district court. The plaintiffs and DHS filed cross motions for summary judgment.  The District Court held that the plaintiffs’ purchases of the short-term annuities were sham transactions intended only to shield resources from the calculation of Medicaid eligibility. Plaintiffs appealed to the Third Circuit.

The Third Circuit reversed, entering judgment in favor of the plaintiffs. The majority opinion analyzed the annuities under the four-part test set forth in federal Medicaid law for determining whether an annuity is countable as a resource under Medicaid. Under the federal law, an annuity is a countable resource unless the annuity (1) names the State as the remainder beneficiary, (2) is irrevocable and non-assignable, (3) is actuarially sound, and (4) provides for payments in equal amounts during the term of the annuity, with no deferral and no balloon payments. If an annuity meets the four-part test, it is not countable in determining Medicaid eligibility.

The Court concluded that the plaintiffs’ annuities met the four-part test and were therefore not countable in determining Medicaid eligibility. Although DHS argued that the financial instruments purchased by the plaintiffs were not annuities because they were not purchased as investment products, but rather as a way to pay nursing home costs during periods of Medicaid ineligibility resulting from plaintiffs’ gifts to family, the Court noted that Congress, in crafting the four-part test for annuities, decided that all annuities which met the four-part test were excluded as countable resources under Medicaid even if purchased to pay nursing home costs:

[W]e do not believe that the annuitant’s motive is determinative….Although we are sympathetic to the concerns the dissent and DHS outline, Congress must resolve them. Absent legislative change, it is clear that “Congress has not revised the Medicaid statute to foreclose this option.” Morris, 685 F.3d at 928, 934 (a case involving annuities purchased for non-institutionalized spouses recognizing that “the district court’s concerns regarding the exploitation of what can only be described as a loophole in the Medicaid statutes[] [and] conclud[ing] that the problem can only be addressed by Congress.”). “It is not the role of the court to compensate for an apparent legislative oversight by effectively rewriting a law to comport with one of the perceived or presumed purposes motivating its enactment.”

The case is annexed here –  Zahner v. Secretary, Pennsylvania Department of Human Services

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Following the Third Circuit’s Ruling in the Zahner case referred to above, Pennsylvania’s Department of Human Services recently issued an Operations Memo providing guidance on how the state will evaluate the effect on Medicaid eligibility of  annuities purchased during the look-back period.   The Ops Memo #15-11–01, issued November 16, 2015, provides in part:

Prior to the Zahner decision, in order to be actuarially sound, an annuity had to have a payment term that was equal to the individual’s life expectancy.  If the annuity was either shorter or longer than the annuity owner’s life expectancy …, then the purchase price of the annuity was used to determine an ineligibility period for [Medicaid].

Effective immediately, due to the Zahner decision, the definition of “actuarially sound” has changed.  Annuities will now be considered actuarially sound if the annuity payment term is either short than, or equal to, the owner’s life expectancy.