Federal Appeals Court Rules That Annuity Payments Made To The Spouse Of A Nursing Home Resident Are Not Countable By Medicaid

In Weatherbee v. Richman, 595 F. Supp. 2d 607 (W.D. Pa. 2009), the U.S. District Court for the Western District of Pennsylvania reversed the denial of Medicaid benefits to a nursing home resident (“institutionalized spouse”), holding that the income from an irrevocable, non-transferable, non-assignable, single premium, immediate annuity payable to the spouse of the nursing home resident (“community spouse”) was protected under federal law, specifically the Medicare Catastrophic Coverage Act of 1988, 42 U.S.C. §1396 et seq. (“MCCA”) MCCA provides that the community spouse’s income is completely protected and does not affect the Medicaid eligibility of the institutionalized spouse. In that regard, 42 U.S.C. § 1396r-5 provides that “no income of the community spouse shall be deemed available to the institutionalized spouse.” The Court also held that the state statute upon which the Pennsylvania Department of Public Welfare (“DPW”) relied in treating the income from the  annuity as an available resource was inconsistent with the treatment of annuities under MCCA, and therefore invalid. As a result, the Court entered an Order enjoining the Pennsylvania Medicaid agency from denying benefits to plaintiff on the basis of the annuity income paid to the community spouse. I previously blogged about the federal district court’s decision in the Weatherbee case here –Federal Court Again Rules That The Payment Stream From An Annuity Paid To The Spouse Of A Nursing Home Resident Is Not Countable In Determining The Nursing Home Resident’s Eligibility For Medicaid.

The State of Pennsylvania appealed to the U.S. Court of Appeals of the Third Judicial Circuit. On appeal, Pennsylvania argued, among other things, that (1) because the income stream from the annuity could be sold on the secondary market notwithstanding MCCA, the stream of income from the annuity was countable under the Deficit Reduction Act of 2005, 42 U.S.C. § 1396p(e)(4), which provides that “[n]othing in this subsection shall be construed as preventing a State from denying eligibility for medical assistance for an individual based on the income or resources derived from an annuity … .”; and, (2) the annuity purchased by the community spouse was properly regarded as a “resource” for purposes of Medicaid eligibility because the annuity itself could be sold, and was therefore a proper basis to deny Medicaid benefits.

The Third Circuit Court of Appeals disagreed, ruling that, with regard to the income stream:

[T]he changes brought about by the Deficit Reduction Act are not ambiguous and must be read within the larger context of the longstanding rule that community spouse income is not available to an institutionalized spouse. 42 U.S.C. §1396r-5. Therefore, contrary to the Department’s interpretation, §1396p(e)(4) cannot be regarded as a basis by which it may deny eligibility for benefits where the annuity otherwise complies with the law. In this case it is clear that the community spouse gave up a “resource” in exchange for a guaranteed “income,” as it is defined in 42 U.S.C. §1382a(2)(B).

The Third Circuit also ruled that the annuity itself was not an available resource under the Medicaid rules because Weatherbee’s non-transferable, non-assignable annuity could not be sold by the owner without breaching the annuity contract and incurring legal liability. According to the Court, an annuity is available under the Medicaid regulations only when the owner has the power to sell the annuity without incurring legal liability. As a result, the Court affirmed the judgment of the federal district court awarding Medicaid benefits.

Interestingly, the Weatherbee decision is stamped as “Not Precedential”. Based upon the Internal Operating Procedures of the Appellate Court 5.3, “Not precedential” means that the court has decided that the opinion only has value to the parties and the court below and has not circulated the opinion to the other judges of that circuit. Further, when a decision is “Not Precedential”, it is not issued as a slip opinion and is not binding on subsequent panels in the same circuit. The opinions are posted on the court’s internet website and, in the Third Circuit at least, unpublished opinions can be cited. In addition, Fed Rules of App Proc 32.1 states that a court “may not prohibit or restrict the citation of federal judicial opinions, orders, judgments, or other written dispositions that have been designated as ‘unpublished,’ ‘not for publication,’ ‘non-precedential,’ ‘not precedent,’ or the like.” A party who cites a federal judicial opinion, order, judgment, or other written disposition that is not available in a publicly accessible electronic database, the party must file and serve a copy of that opinion, order, judgment, or disposition with the brief or other paper in which it is cited.

Simply stated, we now have a decision from a federal appeals court, the Third Circuit’s decision in the Weatherbee case, saying that the community spouse’s income cannot be considered in determining the institutional spouse’s eligibility for Medicaid, and it is permissible to convert an asset into a stream of income using an annuity. Although the decision is “Not Precedential”, meaning that it is not binding on a subsequent panel of the Third Circuit, the decision still can be cited as controlling authority. Thus, though it is a strong decision in favor of Medicaid applicants and their spouses, the effect of a Third Circuit decision in Weatherbee which is “Not Precedential” remains to be seen.

The decision by the Third Circuit Court of Appeals can be found here – Weatherbee 3rd Circuit Opinion

UPDATED ON NOVEMBER 14, 2009: Readers may find this comment about the Weatherbee case by a Pennsylvania attorney on an elderlaw listserv instructive:

Advocates in circuits other than the Third Circuit should note that Federal Rules of Appellate Procedure 32.1 permits the citation of nonprecedential opinions. This is not limited to the Third Circuit.

While they are non-binding authority, nonprecedential opinions are generally viewed as persuasive. Well over 80% of the opinions issued by federal appeals courts are nonprecedential.

Also, note that Weatherbee involved a very narrow issue of whether the Deficit Reduction Act of 2005, 42 U.S.C. § 1396p(e)(4) gave the states the authority to disregard the long standing rule that the income of a community spouse is not countable by Medicaid in determining the eligibility of the institutionalized spouse. It would be kind to refer to this argument by the State of Pennsylvania as strained. One reason the Weatherbee Court may have felt it unnecessary to issue a precedential opinion on this minor point was that it recently covered the issue of community spouse annuities in the James v. Richman case. And James v. Richman is a PRECEDENTIAL opinion.

So go ahead and cite Weatherbee and be sure to cite James as well.

(I blogged about James v. Richman, 465 F.Supp.2d 395 (M.D.Pa. 2006), aff’d, 547 F.3d 214 (3rd Cir. 2008) here – Federal Court Ruling Protects Assets Of Elderly Nursing Home Resident For His Spouse)

ANOTHER UPDATE – NOVEMBER 16, 2009: Here’s another insightful comment about the Weatherbee case from a New Jersey attorney who specializes in elder law which was made on an elderlaw listserv:

The Weatherbee decision is important to the elder law bar because it demonstrates the willingness of federal courts to insist that state Medicaid agencies follow federal law. It’s important to the elder law bar because it confirms that the Deficit Reduction Act of 2005 (“DRA”) did not change the protections given to spouses through MCCA. In New Jersey, we are dealing with a state Medicaid agency that has failed to promulgate any regulations implementing the DRA. Our Medicaid agency often acts through policies that plainly violate federal law. Our Medicaid agency insists that there is a secondary market for all annuities, even if they are qualified, takes the position that promissory notes are “trust like instruments” despite the SSI law to the contrary, and counts transfers to people with disabilities unless the transfers are to a trust with a Medicaid payback provision. Our Medicaid agency says that if you made a transfer and applied for a waiver program you will never, ever be eligible for Medicaid. In Northern NJ, a decent nursing home costs $120,000 a year, a demential unit in an ALF is about $78,000 and the hourly rate for an aide is between $19 and 23 per hour. And as many of you know, the nursing homes in NJ insist on key money ranging from $50,000 to $100,000 and more to be admitted to a nursing home, even though that practice may be illegal. We have the highest property taxes in the country and a dearth of affordable senior housing. The ability to turn resources into a stream of income for the community spouse will permit a community spouse to continue to live near his or her family in his or her house. While it is probable that the Pennsylvania DPW will honor the Weatherbee decision in other cases, it will probably take a lot more litigation to convince NJ Medicaid that it must follow federal law.

YET ANOTHER UPDATE – NOVEMBER 17, 2009: The Weatherbee appellate court case has generated a great deal of discussion among elder law attorneys on the internet. Some of the comments I’ve read are particularly helpful in understanding the Weatherbee case. For example, here is one practitioner’s explanation of the the meaning and import of decisions, like that in the Weatherbee case, issued by the Third Circuit which are “Not Precedential”:

“Not Precedential” means that a court of appeals panel in the same circuit is not bound to follow the opinion and the opinion will not be published in the official West reporter. In Weatherbee, it’s immaterial, in my view, since the Weatherbee panel said “we’re following James v. Richman post-DRA”. James v. Richman IS precedential and, therefore, other appellate panels in the Third Circuit have to follow James and in all likelihood will follow Weatherbee as to the James decision’s application following the enactment of the DRA.

A state court is not bound by an interpretation of federal law at the district court or circuit level even if the opinion is “precedential” unless the opinion is issued by the U.S. Supreme Court. On issues of state law, federal courts ARE bound by an interpretation of the state court of last resort. Federal courts usually defer to decisions of intermediate state courts on issues of state law. Non-precedental federal court of appeals decisions may be cited in all federal cases. Whether such unpublished decisions can be cited in state courts depends on the state court’s rules for citing unpublished opinions.