Federal Court Holds Short-Term Annuities Purchased By Medicaid Applicants Constituted Improper Transfers Of Assets

A federal district court in Western Pennsylvania held that the purchases of single premium immediate annuities with short payment terms by applicants for Medicaid constitute improper transfers of assets even if the annuities otherwise comply with the federal Medicaid laws in all respects. Zahner v. Mackereth, Civil No. 11-306 (W.D. PA, January 16, 2014).

This decision involved three consolidated cases with similar legal issues but different facts. Each plaintiff in the three cases attempted to obtain eligibility for Medicaid by purchasing annuities, thereby reducing their countable assets. Each plaintiff argued that the reduction in assets made them eligible for Medicaid assistance.

In the first case, plaintiff Anable L. Zahner (“Zahner”), 77 years old, required medical assistance to continue living in the community and filed for Medicaid benefits to pay for needed services. As part of a strategy to attain eligibility for Medicaid while preserving assets for her family, Zahner purchased two single premium immediate annuities, the first in the amount of $30,000 providing for monthly payments of $507.25 over a 5-year term, and the second in the amount of $75,000 providing monthly payments of $4,199.58 over an 18-month term. Zahner’s application was denied as the agency treated the purchase of the annuities as a transfer of assets for less than fair market value.

The second case involved Donna C. Claypoole, 86 years old, who was a nursing home resident. Mrs. Claypoole transferred a total of $110,011 to her sons. Like Zahner, Mrs. Claypoole then purchased two annuities, the first a single premium immediate annuity for $45,000, providing monthly payments of $760.20 over a 5-year term, and the second a $84,974.08 single premium annuity which paid $6,100.22 per month for 14 months. One purpose for the annuity purchases was to pay for nursing home care during the period of ineligibility for Medicaid benefits caused by the asset transfers made by Mrs. Claypoole to her sons.

The third case involved Connie Sanner (“Sanner”) who resided in a nursing home. Sanner transferred $92,000 to her two children for no consideration. Sanner then applied for a single premium immediate annuity for $53,700 which paid $4,419.17 per month over a 12-month period. After purchasing the annuity, Sanner filed an application for Medicaid benefits.

In each case, the Pennsylvania Department of Welfare (DPW), which administers the Medicaid program, denied the Medicaid applications filed by the plaintiffs, holding that the purchase of the annuities was an illegal transfer of assets. As a result of the improper transfer, the DPW imposed a penalty, or period of ineligibility for Medicaid. Plaintiffs filed complaints in federal court, alleging that, because the annuities met all requirements of the federal Medicaid law, the purchases of annuities were wrongfully deemed to be transfers of assets for less than fair market value by the State. Plaintiffs sought declaratory and injunctive relief, as well as attorneys’ fees. Eventually, the cases were consolidated by the court.

All parties filed motions for summary judgment claiming there are no genuine issues as to any material fact. Each side asserted that it was entitled to judgment as a matter of law. The Court first found that the annuities with 5-year payment terms purchased by plaintiffs Zahner and Claypoole complied with federal law and, therefore, were not subject to the imposition of a penalty. The Court granted summary judgment in favor of plaintiffs in regard to the annuities with 5-year terms.

However, defendant DPW contended that the annuities purchased by plaintiffs with terms of 18, 14, and 12 months were too short to meet the requirements under federal Medicaid law. Based on their short terms, DPW considered them to be sham transactions. The Court agreed and granted summary judgment in favor of defendant in connection with these short-term annuities, holding that:

[A]n annuity must be actuarially sound and the term of the annuity should bear a reasonable relatedness to the beneficiary’s life-expectancy (but within the life expectancy of the applicant) to avoid penalty…. [However,] [i]t is our opinion that annuities written in the context of a Medicaid eligibility scenario should be written to satisfy the provisions stipulated in 42 U.S.C. § 1396p, as well as with a scrupulous eye towards achieving a legitimate, non-shelter, purpose or at least have the appearance of such an investment.

Thus, the Court granted summary judgment in favor of defendant with regard to the annuities purchased by plaintiffs with terms of 18, 14, and 12 months. Plaintiffs’ cross-motion for summary judgment was granted as to those annuities with 5-year terms. In all other respects the parties’ motions for summary judgment were denied.

The case is annexed here –  Zahner v. Mackereth

UPDATED ON SEPTEMBER 3, 2015: The plaintiffs appealed, and the he United States Court of Appeals for the Third Circuit reversed. 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. My blog post about the Third Circuit decision can be found here – Federal Appeals Court Rules Short-Term Annuities Are Not “Available Resources” Preventing Medicaid Eligibility

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