Federal District Court Permanently Enjoins NJ From Imposing “Never Ending” Penalty For Gifts Made By Applicants For Services Under Medicaid Waiver Programs

Soon after the passage of the Deficit Reduction Act of 2005 (DRA), New Jersey’s Division of Medical Assistance and Health Services, the State Medicaid agency, took the position that the penalty period, or period of ineligibility for Medicaid, resulting from transfers made during the look-back period by applicants for home or community – based services under Medicaid waiver programs could not start until the applicant was actually receiving services because only then would the applicant be considered an “institutionalized individual” as required under federal law. The agency’s position meant that the penalty period would never begin because the transfer itself prohibited the receipt of Medicaid services. As a result, for the last few years every applicant for coverage under a Medicaid waiver program who made transfers during the look-back period was found forever ineligible for Medicaid. Since the penalty period could not start under the agency’s interpretation of the DRA but a penalty was imposed as a result of the transfer, the penalty period was “never ending”, and the applicant never became eligible for benefits.

A number of New Jersey applicants for waiver services who had made transfers after enactment of the DRA and who were denied Medicaid benefits challenged the agency’s interpretation, arguing that the actual receipt of services is not necessary to be an “institutionalized individual” and therefore the penalty period begins when the applicant would be otherwise eligible for Medicaid benefits but for the application of the penalty.

Several applicants for waiver services appealed their denials of benefits, and asked for a hearing before an administrative law judge (ALJ). In an April 9, 2008 decision, the ALJ issued a Summary Decision agreeing with the applicants’ interpretation. Calling the state’s construction of the DRA “tortured” and “strained,” the ALJ found that “petitioners’ applications seeking community-based waiver services are sufficient to classify petitioners as institutionalized individuals.” The ALJ went on to write that the state’s “interpretation would actually encourage placement in a nursing facility over less-costly waiver services and undermine the impetus for the DRA’s enactment.” The ALJ concluded that “[t]he plain meeting of 42 U.S.C.A. § 1396p(c)(1)(D)(ii) is clear and the [State’s] strained interpretation is conflicting, contrived and inconsistent with the statute’s legislative history.”

On September 3, 2008, the ALJ’s decision was reviewed by the Director of the State Medicaid agency who reversed the ALJ’s decision and upheld the State’s position and its “never ending” penalty interpretation of the DRA. (I previously blogged about the ALJ’s decision and the Director’s reversal here.)

Then things got interesting. Instead of appealing the Director’s decision to the Appellate Division of the New Jersey Superior Court, the usual route taken in administrative appeals, the applicants instead filed a federal complaint in the United States District Court for the District of New Jersey pursuant to 42 U.S.C. §1983. The plaintiffs / applicants claimed, among other things, that the State of New Jersey and affiliated agencies violated federal Medicaid law by failing to impose a penalty period against applicants who made transfers of assets and who applied for home – or community – based coverage under a Medicaid waiver program. In lieu of an answer, defendants filed a motion to dismiss Plaintiffs’ complaint, which was denied by the court on September 8, 2009.

Plaintiffs then filed a motion for a preliminary injunction, which was converted to a motion for summary judgment when the parties conceded that there were no issues of material fact outstanding in the case. The parties’ arguments can be summarized as follows:

Plaintiffs argue[d] that the plain language of this statute [i.e., 42 U.S.C. §1396p(c)(1)(D)(ii)] means that the penalty period should begin (1) the month after the assets have been transferred, or (2) the date on which the individual is eligible for medical assistance and would otherwise be receiving the assistance but for the application of the penalty period. Defendants argue[d] that the penalty period cannot start until an applicant is eligible for medical assistance and is actually receiving community-based waiver services.

Thereafter, on April 8, 2010 the district court issued a Memorandum Opinion. In its opinion, the court held that the “[d]efendants’ position is plainly an incorrect reading of the statute.” With that simple conclusion, the court ruled in favor of the plaintiffs and entered a permanent injunction against the state defendants.

The federal district court’s Memorandum Opinion is annexed here – Frugard v. Velez