Federal Court In Connecticut Holds That The Income Stream from An Annuity Is Not An Asset for Medicaid Eligibility Purposes

In Lopes v. Starkowski (U.S. Dist. Ct., Dist. Conn., No. 3:10-CV-307, August 11, 2010), the U.S. District Court for the District of Connecticut held that the State of Connecticut cannot treat the income stream from an annuity as an available asset for the purposes of Medicaid eligibility.

After John Lopes was admitted to a nursing home, his wife, Amelia, purchased a irrevocable, nontransferable, single premium annuity for $166,220.50. After the purchase, the remaining assets owned by the couple were below Mrs. Lopes’ community spouse resource allowance, which she was permitted to retain under the Medicaid rules. She received a letter from the annuity company saying that “neither the Annuity Contract, nor any periodic payments due thereunder can be cashed-in, sold, assigned, or otherwise transferred, pledged, or hypothecated.” Mr. Lopes applied for Medicaid. The state identified a potential buyer of the annuity’s income stream and directed Mrs. Lopes to attempt to sell the annuity. Mrs. Lopes refused, claiming that she was not legally obligated to sell the annuity income stream and, as a result, would not attempt to do so. The State of Connecticut then denied Medicaid benefits to Mr. Lopes. The State claimed that the income stream from the annuity was an available asset which could be sold on the secondary market.

Mr. Lopes filed a Complaint in the federal district court in Connecticut, seeking an injunction as well as damages and attorneys fees. Thereafter, Mr. Lopes filed a motion for summary judgment, and the State filed a cross-motion for summary judgment.

The U.S. District Court for the District of Connecticut granted Mr. Lopes’ motion for summary judgment, and denied the State’s cross-motion. The court held that the annuity company did not permit Mrs. Lopes to assign the income stream from her annuity, so it could not be characterized as an asset. The court further found that, even if the income stream were assignable, “it would be incongruent with the principles of [Medicaid law] to permit a state to characterize even an assignable income stream as an asset.” The court also noted that the Deficit Reduction Act does not require that states treat annuities as assets. The State of Connecticut was directed to approve Mr. Lopes’ Medicaid application, and Mr. Lopes was instructed to file a motion for attorneys fees and costs.

The case is annexed here in PDF format – Lopes v. Starkowski

UPDATED ON DECEMBER 20, 2011: The State of Connecticut appealed from the federal district court’s decision in favor of Mr. Lopes. On appeal, the Second Circuit Court of Appeals asked the U.S. Department of Health and Human Services (HHS) to submit an amicus curiae brief and to answer two questions: 1. What does the law say? and 2. What are the policy implications of deciding in favor of Mr. Lopes or the State of Connecticut?

In its amicus curiae brief to the Second Circuit which was recently filed, HHS said an income stream from a non-assignable annuity is not an asset. According to the federal government, “there is nothing on its face suspicious, illegal, or otherwise contrary to the policy expressed in the Medicaid provisions of the Social Security Act in treating an irrevocable and non-assignable annuity as the community spouse’s income rather than a resource attributable to the couple.” Commenting on the policy implications of a decision in favor of the community spouse, the agency noted that while Medicaid will undoubtedly pay more, this result is consistent with provisions of Medicaid statute designed to protect community spouses from impoverishment.

HHS concluded that “if the [Second Circuit] determines that Mrs. Lopes’ annuity is non-assignable, the district court’s decision should be affirmed.”

The HHS brief is attached here – Amicus Brief By The US Department of Health and Human Services

UPDATED ON OCTOBER 2, 2012: Today, the U.S. Court of Appeals for the Second Circuit upheld the district court ruling discussed above that Connecticut cannot treat the income stream from an annuity as an available asset for the purposes of Medicaid eligibility. Lopes v. Department of Social Services (2nd Cir., No. 10-3741-cv, Oct. 2, 2012) (I blogged about the Second Circuit’s decision in the Lopes case here.)